Singapore is one of the tax haven countries in the world with many preferential tax policies such as tax exemption and reduction program for startups, partial tax exemption program (PTE), annual tax refund, tax exemption for foreign investors, foreign income, double taxation treaties, etc.
These programs are launched to encourage foreign investors and promote entrepreneurship. However, many businesses have been established to abuse these tax exemption schemes and not for the sake of actual commercial business.
With these businesses, IRAS (Inland Revenue Administration of Singapore) will not hesitate to act when such abuse is exposed.
Abuse of the tax exemption scheme includes:
- Allocating the income of an existing profitable going concern to a few shell companies so that the chargeable income of each shell company is within the threshold for tax exemption
- Charging fees/ expenses to an existing profitable going concern by shell companies without any bona fide commercial reasons
The shell companies claim tax exemption on the income they receive from the profitable going concern, while the latter claims tax deduction on the fees/ expenses paid to the shell companies.
These shell companies do not carry out any activities or significant activities and have no or few employees. Their accounts usually show few transactions and low capitalisation (usually at $2).
These forms of arrangement result in an overall net reduction of tax for the profitable going concern and the shell companies.
In addition to the above plan to abuse the tax exemption program, there are a number of other popular tax exemption schemes in Singapore such as:
- Abusive Foreign Trust Schemes
- International Business Corporations (IBC)
- False Billing Schemes
IRAS takes a serious view of companies that are set up to abuse this scheme. As at 31 Jan 2021, more than 300 companies have been audited for possible abuse of the tax exemption scheme for new start-up companies. This has resulted in total tax recovery and penalties of more than $25 million!!!
Tax evasion/ fraud is a criminal offense punishable under the law and the Court imposes severe penalties for such offenses. Businesses or individuals who engage in abusive tax arrangements such as setting up shell companies to take advantage of the tax exemption scheme for new start-up companies or individuals who assist others with abusive tax arrangements should disclose such abuse immediately. IRAS will treat such disclosure as a mitigating factor when considering the penal charges.
Auth. Alice Mac
