IRAS Guidance on Tax Avoidance Arrangements

On 9 September 2024, the Inland Revenue Authority of Singapore (IRAS) formalised its existing Circular on “Incorporation of Companies by Medical Professionals and Relevant Tax Implications” into an e-Tax Guide.

Background

IRAS has observed a growing trend of high-income individuals seeking to avoid taxes by setting up companies to receive their personal service income, to take advantage of the lower corporate income tax rate and corporate tax exemptions and rebates.

There were also cases where the set-up of a company was supported by commercial reasons, but the remuneration paid to the individual performing the bulk of the services was not aligned with the market value of similar services. This resulted in an over-attribution of income to the company, and an under-attribution of income to the individual.

To educate taxpayers on common mistakes and appropriate tax treatments, the e-Tax Guide provides case studies to illustrate common business arrangements that may give rise to tax avoidance concerns and lays out IRAS’ approach in dealing with such business arrangements.

Although the e-Tax Guide focuses on medical professionals, the principles in the e-Tax Guide apply generally to all business arrangements that constitute tax avoidance.

Tax Avoidance

IRAS’ position is that while it is taxpayers’ prerogative to determine the structure of their businesses, obtaining a tax advantage cannot be one of the main purposes of the chosen arrangement. The act of structuring one’s business into an arrangement which has very few or no bona fide commercial reasons, and which provides substantial tax reduction, is tax avoidance.

A tax avoidance arrangement normally involves an arrangement that is artificial, contrived or has little or no commercial substance. Such an arrangement is typically designed to obtain a tax advantage that is not intended by Parliament.

Common Arrangements in Tax Avoidance 

Some examples of tax avoidance arrangements observed by IRAS include:

• the shifting of income derived mainly from one’s personal efforts or skills to a company
• the artificial splitting of income through the incorporation of multiple companies to benefit from multiple sets of tax exemptions and rebates
• the artificial re-incorporation of the same business every three (3) years to take advantage of the Start-up Tax Exemption Scheme
• attribution of income between company and individual not aligned with economic reality, and
• changing the business structure from sole-proprietorship/partnership to company for the sole purpose of obtaining a tax advantage.

IRAS' Approach to Determining Tax Avoidance

IRAS adopts the following 3-step approach laid out by the Court of Appeal in Comptroller of Income Tax v AQQ [2014] SGCA 15:

1. IRAS will consider whether, objectively, an arrangement falls within any of the three (3) threshold limbs of section 33(1) of the Income Tax Act 1947 (ITA) such that the taxpayer derived a tax advantage. IRAS will examine the arrangement to determine whether there has been a reduction in tax liability by comparing it with the original arrangement, or an alternative that is simpler or more straightforward. The taxpayer is deemed to have derived a tax advantage if the objective of the arrangement was to:
   
   • alter the incidence of any tax which is payable or which would otherwise have been payable
   • provide relief from any liability to pay tax or to make a tax return, or
   • reduce or avoid any tax liability imposed or which would otherwise have been imposed.
2. If a tax advantage had been derived, IRAS will consider whether the taxpayer may avail himself of the statutory exception in section 33(7). To do so, the arrangement must have been carried out for bona fide commercial reasons (“bona fide commercial condition”) and must not have had as one of its main purposes the avoidance or reduction of tax (“main purpose condition”). Both conditions must be satisfied.
3. If the taxpayer cannot avail himself of the statutory exception in section 33(7), IRAS will ascertain whether the taxpayer has satisfied the court that the tax advantage obtained arose from the use of a specific provision in the ITA that was within the intended scope and Parliament’s contemplation and purpose, both as a matter of legal form and economic reality within the entire agreement’s context.

Consequences of Tax Avoidance

Where IRAS is of the view that the taxpayer has arranged his business with an intention to avoid tax, IRAS will apply section 33 to negate any undue tax advantage obtained by the taxpayer.

Depending on the case facts, any, or a combination, of the following three (3) outcomes may occur:

1. The company structure would be disregarded and all income initially attributed to the company would be taxed in the individual’s capacity. Corporate tax assessment(s) will be revised to zero and assessments will be raised on the individual.
2. In the case of income splitting, income attributable to the same operation would be consolidated to be taxed under one company. Tax assessments for the companies will be consolidated under one company.
3. If the key personnel of the company is not adequately remunerated, the market salary benchmark, if available, or the cost-plus method will be applied to determine the arm’s length amount due to the key personnel. The remuneration of the individual will be adjusted accordingly. A corresponding deduction will be allowed to the company for this adjustment.

From Year of Assessment (YA) 2023, a section 33A surcharge is applicable if an arrangement falls within the provisions of section 33 and IRAS makes an adjustment to counteract the tax advantage. The surcharge is computed based on 50% of the tax or additional tax arising from the tax adjustment made under section 33.

As a result of the consolidation, there may be changes to the goods and services tax (GST) obligations of the taxpayer’s company(ies), e.g. they may be liable for GST registration.

Any government grants previously disbursed to the taxpayer’s company(ies) may be reviewed and adjusted accordingly if it was uncovered during IRAS’ review that the taxpayer’s company(ies) does not meet the qualifying conditions for these grants.

Conclusion

Taxpayers should examine their business arrangements to ensure that they are commercially justifiable and not set up mainly to avoid or reduce tax. Taxpayers who come forward voluntarily, in a timely manner, to correct their errors before the errors are uncovered in an audit, can qualify for penalty reduction under IRAS’ Voluntary Disclosure Programme.

Source:

• IRAS website: Getting individuals to comply
• IRAS e-Tax Guide: Incorporation of companies by medical professionals and relevant tax implications
• GIP v The Comptroller of Income Tax [2024] SGITBR 2
• Wee Teng Yau v Comptroller of Income Tax and another appeal [2020] SGHC 236
  

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Disclaimer

This article should be used as a general guide only. No reader should act solely upon any information found in this article. We recommend that professional advice be sought before taking action on specific issues and making significant business decisions. Crowe Singapore expressly disclaims all and any liability to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of the above article. While every effort has been made to ensure the accuracy of the information contained herein, Crowe Singapore shall not be responsible whatsoever for any errors or omissions in it.