A fine line between tax planning and tax avoidance
Last updated on 18 September 2024
The saying goes, “‘Tis impossible to be sure of anything but death and taxes”. Based on this certainty, many companies look to reduce their tax burden. However, some measures companies and business owners take may run afoul of the law. There is a fine (but clear) line between tax planning and tax avoidance.
The Inland Revenue Authority of Singapore (IRAS) and the Comptroller of Income Tax (CIT) can raise additional assessments if the taxpayer is found to have avoided tax. In recent years, IRAS has stepped up enforcement for tax avoidance, and this trend seems likely to intensify.
According to provisions in Section 33 of the Income Tax Act 1947 (ITA), setting up company in Singapore or entering into specific business arrangements may constitute tax avoidance, even if these actions are technically legal. Provisions in the Act allow the CIT to impose up to a 50% surcharge on the additional tax payable if the taxpayer is found to have avoided tax. Previously, the CIT was only allowed to claw back the payable taxes.
For example, a Singapore company incorporation by a person may be deemed tax avoidance if the main purpose of setting up the company is to avoid or reduce the tax payable. To further illustrate, if a person whose tax rate is higher than 17% (the corporate tax rate) sets up a company to funnel his income into the company, pays himself a lower compensation and collects dividends (tax-free after paying 17% corporate tax) resulting in lower taxes paid by the individual, he and the company can be assessed for tax avoidance. This principle also applies to transactions between companies. However, bona fide business transactions, such as business restructuring for commercial reasons, do not constitute tax avoidance.
Common examples of tax avoidance arrangements cited by IRAS include:
(a) channelling income derived mainly from one’s personal efforts or skills (e.g. an employed doctor) to a company;
(b) artificially splitting of income through the incorporation of multiple companies (e.g. same customer paying to multiple companies for services performed by one company);
(c) setting up a company with the same business to take advantage of the start-up tax exemption; and
(d) the attribution of income between company and individual is not aligned with economic reality (e.g. paying the individual below market rate compensation so that the individual pays lower individual income taxes).
There are a host of tax incentive schemes, such as those for fund and fund managers that companies can take advantage of without contravening the provisions for tax avoidance in the ITA. Accounting firms in Singapore that provide fund administration and incorporation services in Singapore can help business owners structure their business operations to take advantage of these schemes.
Contact us today if you would like help to restructure and transform your business to take advantage of the various tax incentives and grants assistance schemes.
