Tax Avoidance and Tax Evasion
Most entrepreneurs do not fancy paying taxes although paying taxes is the mandatory responsibility of all income maker under the legislation in Singapore.
“Tax avoidance” are usually used in a way “tax evasion” does in the business circle (especially by those does not have tax background), they are of highly distinctive in nature. If you are unsure, tax avoidance is legitimate (although it isn’t something making the tax authority happy) while tax evasion is a crime that attaches heavy consequences (Also see Tax Laws in Singapore All Expats Should Know About).
Tax Avoidance Arrangement
A tax avoidance arrangement in most cases entails a setup that is man-made, contrived or has little or no business ground and is structured to obtain an edge in tax position that is not initially designed by the tax authority (IRAS). In layman terms, this is the “tax loop-hole” that most business owners favour, especially for its “legality”.
Tax evasion on the other hand is a criminal offence which is done by deliberate reduction of the tax payer’s tax liability or claiming of tax credits or refunds via inappropriate measures such as submitting claim for expenses that does not exist, non-reporting of chargeable income, and even forgery of documents.
Despite tax avoidance is not illegal in Singapore, the government is smart enough to maintain an ultimate weapon as a counter measure to tax avoidance arrangements by including anti-avoidance provisions in Section 33 of the Singapore Income Tax Act (Also see A Short Guide to Corporate Taxing in Singapore).
Section 33 confer the tax authority (or the Comptroller of Income Tax) the right to disregard and make necessary adjustments to arrangements which are carried out with the core aim of tax avoidance and not for bona fide commercial reasons. For instance, some businesses owners set up private limited companies every 3 years and transfer the business from the old to the new just to enjoy full tax exemption and such arrangement has absolutely no commercial ground.
Genuine commercial transactions that were carried out without the intend of any tax avoidance is beyond the realm of Section 33. For situation where corporates and individuals were granted tax exemptions and concessions under certain tax provisions, Section 33 does not come into play, assuming the transaction is authentic and there is no contrivance exists to exploit such tax benefits intended by the tax authority.
IRAS has provided some examples that helps clarify to the tax payers and have segmented into broad categories including but not limited to the below:
- Round-tripping of funds – Some business owners trade internationally might be claiming the source of fund as capital nature and transfer amongst different countries to disguise its real nature;
- Setting up of various entities for the same business with the sole purpose of exploiting the tax regime – This is similar to the example mentioned earlier where new company is set up every 3 years;
- Changing the business entity type to run business for the only purpose of obtaining tax advantage – This is always seen when a sole proprietor decided to run their business using private limited company when they determine that the corporate tax rate is lower than what they are paying in their capacity as an individual; and
- Attribution of income that is not at arm’s length and this is one of the hot topics under the transfer pricing.
Again, the act is targeted to counter only tax avoidance schemes and is not designed to interrupt the tax implications of genuine commercial dealings.
For the reason above mentioned, it is crucial to conduct appropriate tax planning (Also see Understanding the Singapore tax system) to ensure the business does not cross the line and not acting in contradict to the law. Transactions took place should be exclusively for commercial reasons and tax avoidance is not its only intention.
Contact us today if you are seeking taxation service in Singapore so we can assist to devise tax strategies that suit your organisation best.