Category Archives: Article

Accounting records and systems of control:

1. Every company shall cause to be kept such accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair financial statements and any documents required to be attached thereto to be prepared from time to time, and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited.
2. The company shall retain the records referred to in subsection (1) for a period of not less than 5 years from the end of the financial year in which the transactions or operations to which those records relate are completed.
3. The records referred to in subsection (1) shall be kept at the registered office if the company or at such other place as the directors think fit and shall at all times be open to inspection by the directors.
4. If accounting and other records are kept by the company at a place outside Singapore there shall be sent to and kept at a place in Singapore and be at all times open to inspection by the directors such statements and reforms with respect to the business dealt with in the records so kept as will enable to be prepared true and fair financial statements and any documents required to be attached thereto.

Electronic Records for Tax Purposes:

1. You do not need seek approval from IRAS to keep your records in an electronic format for tax purposes.
2. However, you need to ensure that proper internal records are put in place to ensure the integrity, completeness, accuracy, availability and reliability of the electronic records, including all transactions executed electronically

SINGAPORE:

Singapore’s banking space is entering into a new phase with the introduction of Digital Banks. MAS is planning to issue up to 5 new licenses to applicants, who will add value to banking sector and the economy. MAS has received 21 applications, 7 for full digital bank licences and 14 digital wholesale banking licences. The applicant must provide a five-year financial projection of the proposed digital bank, showing a path towards profitability.

Applicants need not have a track record in banking, the MAS said. It noted the new competitors would encourage existing banks to continue improving their digital offerings. Customers who have digital bank accounts transact online- either via their mobile devices or computers. Digital banks tend not to have physical branches, which means that customers engage with the bank mainly through e-mail, online chat or phone calls.

MAS has put in place the safeguards as regulators usually require of digital banks; a track record of running a business, a clear value proposition, compliance with the same regulations as traditional banks and an exit strategy so that in the event of business failure, they can be wound up with minimal risk to depositors of the financial system.

Digital Banking is an extension of all internet, e wallet payment methods and internet banking presently in place. Digital bank expectations are to provide services to unmet, unbanked or underbanked customers. The greatest selling point of digital banking is convenience and lower fees.

Digital Bank contender wants to meet the needs of tech startups including blockchain or crypto related businesses, online businesses and entrepreneurs from co-working spaces which they consider disconnected from the banking system.

MAS plans to issue 2 digital full bank licences under which a wide range of financial services can be provided and deposits taken from retail customers. These are controlled by Singaporeans. Foreign companies are eligible if they form a joint venture with a local company. Applicants for full bank licences have to be Singapore-based and controlled by Singaporeans. The full digital bank requires an initial paid up capital of S$1.5 billion.

Digital wholesale bank applications can be majority owned by foreign entities. Digital wholesale banks take deposits from SMEs and other non-retail segments. The application for a wholesale bank licence is open to both Singapore and foreign players. For such applicants, the minimum paid-up capital is S$ 100 million. They can open and maintain business deposit accounts for SMEs and corporates, wholesale bank licences that are limited to non-retail clients target millennials and small and medium-sized enterprises. When the restricted digital bank first commences operation, it will be subject to an initial deposit cap of $50 million. Generally the deposits will be allowed only a small group of depositors such as business partners, staff related parties and selected customers.

DBS, OCBC and UOB

The Three major banks in Singapore have internet banking as the extension of retail banking and both DBS and UOB have started to provide Digital banking as an extension of their banking eco system. DBS launched digibank, a revolutionary mobile-only bank, which is branchless, paperless and signatureless, in India and Indonesia during 2016 and 2017, respectively. It is doing well in both markets, and today, they have over 2.5 million digibank customers in India and about 600,000 digibank customers in Indonesia. DBS bank is exploring and extending digibank to other markets where they have a limited physical presence. Digi Bank (digital bank in India) lets customers open accounts at designated places across the country, such as popular coffee chain Café Coffee Day. They need only their Aadhaar card, which contains the user’s biometric information.

United Overseas Bank has kiosks in Thailand where customers can authenticate their identities to open an account with its digital bank TMRW. They need to upload a picture of their citizen identity card and fill in details on the bank app as part of the registration.

OCBC is the only one that does not have a prime digital bank and it has been using technology to facilitate services such as robo-investment advice and instant online account opening for SMEs.

FORECAST OF DIGITAL BANK BENEFICIARIES

The GIG workers, SMEs and the foreign workforce may be well served by digital banks. Digital banks with information on individual digital records can make use of their digital foot print to come up with alternative credit scores for these borrowers.

1. a) GIG Economy Workers:

Ant Financial, an affiliate of the Alibaba Group in China, made use of individuals’ transaction data with Alibaba to compute a private credit scoring, the Zhima credit. Using both online and offline information, including social media interactions, the Zhima Credit updates a person’s credit rating continuously. This has helped the GIG Economy workers to obtain credit facilities by a different method of approach.

1. b) SMEs:

Alternative credit rating can also be applied to small and medium-sized enterprises (SMEs), especially start-ups that have less than three years of operations. Banks are often reluctant to lend such companies due to the lack of collateral and their young credit history. With sufficient working capital, these firms can face liquidity problems in the short run despite having sound business prospects in the long term.

1. c) FOREIGN WORKERS:

The third group who may benefit from digital banking are foreign workers in Singapore.

SOUTH KOREA:

Kakao Bank, affiliated to the country’s popular social media and mobile gaming company Kakao, managed to get two million customers in less than two weeks after it has launched in July 2017, and now has about nine million, equivalent to one-quarter of South Korea’s working population. Kakao Bank, South Korea’s first digital bank, opened a quarter of a million accounts within the first 24 hours of its launch. In its first week, it lent the local currency equivalent of US$232 million (S$312 million) and took US$245 million in deposits. Months later, the country’s second virtual bank-K Bank- accepted 35,000 accounts on day one. By 2018, Kakao Bank and K-Bank were both reporting quite significant net losses, according to the Korea Federation of Banks. The Korean experience is a reminder that the journey to profitability for virtual banks is likely to be long and difficult.

ASEAN:

While Singapore, according to the World Bank, has a bank account penetration rate of about 98 per cent, the rest of the region is mostly under-banked.

In Myanmar, about 74 per cent of the population lack a formal bank account. Indonesia, the region’s most populous nation, has an unbanked rate of 66 per cent, while the rate in Vietnam is 69 per cent, and in the Philippines, 65 per cent of its people have no bank accounts.

MALAYSIA:

Malaysia’s Central bank announced to issue up to five licenses to new online banks offering either conventional or Islamic banking under a proposed licensing framework.

Malaysia has said it protects bidders, whose equity is controlled by local companies and maintain RM 100 million (S$ 33 million) in capital initially and ramp that up to RM 300 million later.

UK:

The UK requires new banks to present a plan setting out their business viability and how they will make money. But digital banks in the UK have been more focused on acquiring customers than generating profits. In the UK, it can be as low as GBP 5 million (S$8.6 million) as the minimum capital requirement for setting up a digital bank.

Customers who want to sign up for an account with Britain-based Monzo can download the start-up’s app and provide a photo of a valid identity document such as passport or driving licence and record a short video of themselves.

As UK-based digibank Starling Bank Said in a statement: “While they can copy our features, they cannot copy our cost base.”

Britain’s digital app-based banks that are attracting moneyed urban millennials Monese. During early 2000 Estonia born entrepreneur NORRIS KOPPEL arrived in Britain and spotted a major gap in UK banking foe newly arrived foreigners who have trouble in opening bank accounts. MONESE serves those shunned by big banks. During the 5 years of operation, they have expanded 31 nations in Europe with 2 million customers.

‘Goldman Sachs’ digital bank called ‘MARCVS’ (refer the US leading para) quickly gathered more than 130b in deposits in the UK by offering some of the highest interest available, helping to drive up costs particularly the smaller banks that do not have access to cheap deposits from current account holders.

INDIA:

The Steering Committee on Fintech has submitted its report to the finance ministry with recommendations on allowing the operation of Virtual Banks (Digital Banks) easing KYC procedures, implementing fintech to prevent fraud and incentivizing Non-Banking Financial Companies (NBFCs) to increase lending to the agricultural sector.

AFRICA:

M-pesa, a branchless banking service, has provided mobile payment services in countries such as Kenya since 2007. With more than 38 million users in African countries, it has been touted as a gateway for households to gain full access to financial services in a safe and cost-efficient manner.

HONG KONG:

The Hong Kong Monetary Authority received more than 50 applications and ended up giving out eight licences and the digital banks are in operation, since then.

The Monetary Authority has issued guidelines. Digital Banking in Hong Kong are affiliates of ALIBABA GROUP HOLDING, XIAOMI CORPORATION, and a consortia let by Standard Chartered Bank, we lab, the city’s first online micro lender. The authority expects HK $300 million (S$52.2 million) as the minimum capital for digital banks.

CHINA:

The Digital Bank history in China are as follows.

In China, MY Bank, which is backed by tech giant Alibaba, has served more than 16 million small businesses, 80 per cent of them first-time borrowers. Its biggest rival WeBank, backed by Tencent, which also runs the WeChat super-app, made more than 100 million loans in its first five years of business, most of them micro-loans ranging from US$150 (S$200) to US$30,000.

US:

Digital Bank are in place at US and the experience are stated below.

JP MORGAN CHASE shut during 2019, its millennial focused banking app service FINN after a year of operation; analysts say there was duplication in FINNs service with the bank’s existing offer. FINN could not attract customers even though they offered higher interest rates.

The experience of GOLDMANSACH’s is different. The digital only virtual bank is named after MARCUS GOLDMAN, went out with market beating rates. (Its is called MARCUS).

VARO MONEY

Headquartered in San Francisco, Varo Money during the year 2018, it became the first mobile bank in the USA to secure preliminary approval for a national bank charter – a significant hurdle to overcome for a challenger bank looking to make a nationwide impact.

SIMPLE

Simple was founded in Brooklyn, New York during the year 2009 and provides a mobile checking account with features like quick payments between friends and family also using the app. Users can also access automated budgeting tools, which enable customers to save for personalised savings goals or everyday bills and expenses. The account is provided with a Visa debit card, which can be used to access cash for free.

SoFi

Based in San Francisco, SoFi – short for ‘social finance’, the fintech primarily offers loan products with dedicated refinancing offers for students, personal loans and homebuyer plans, but has also moved into the spending market with its SoFi Money deposit account. This account is linked to a Visa debit card, and offers users up to 2.25% APY savings on deposits, with no unexpected bank fees charged.

New York-based Bank Mobile has checking accounts aimed at students and young people as well as savings accounts, credit cards, personal loans and student loan refinancing. The mobile checking accounts are linked to a Mastercard debit card, pay 1% APY on balances up to $15,000 (£11,580), and feature tools like instant spending notifications, a free ATM locator and in-app cheque deposits.

CHIME

Based in San Francisco, Chime, more than three million people have decided to give Chime’s mobile checking account a try, attracted by the various personal finance tools available, including early access to paychecks, spending notifications and instant in-app locking of the linked Visa debit card if lost or stolen.

EUROPE:

Digital Banking is now firmly entrenched as a part of everyday life in Europe, a Mastercard survey shows, with security and convenience the most important factors for people looking to manage their money online or through their phones. Nearly two thirds use banking apps from traditional providers but one in five now use digital-only banks.

Meanwhile 66% say that the biggest advantage of going digital is that it saves time, and 65% cite ease of use. A similar percentage think the demand for mobile will increase because it makes transactions simple and convenient.

More than half of those surveyed say they would consider switching to a digital bank. However, with traditional banks offering more digital services, an increasing number of respondents say that they will stay with their provider.

CONCLUSION:

Facebook announced plans for its own blockchain-based digital currency called Libra, and others may follow. Even Central banks of some countries are becoming more interested in launching their own national digital currencies. These developments could threaten the business models of traditional banks and, indeed, even digital-only banks, who are not operating globally.

Countries like Singapore with great infrastructure and digitally transformed economy with the introduction of Digital bank will become a smart city nation. The issue of Cyber security prevention of Money laundering and countering terrorism financing are of big issues to be considered by the digital bank operators.

1 INTRODUCTION

The Government has announced Supplementary Budget Support Packages for both self-employed individuals and companies, which are badly affected during the Covid-19 and the continuous economic contraction. The economic growth forecast for 2020 is reduced to -4% to -1%. The details of the relief packages amounting to 54.6 billion dollars, including announced in the Budget 2020 for companies and self-employed individuals, are as follows:

• Self-employed persons’ income relief

Self-Employed Person Income Relief Scheme, which will disburse $1,000 a month for nine months and cash payments of $3,000 in May, July and October this year to help them in this time of economic uncertainty.

• Self-employed include taxi and private-hire car drivers, real estate agents, media and art freelancers, and sports coaches.
• Lower-wage workers, including self-employed ones, will get a $3,000 cash payout under the Workfare Income Supplement scheme. To qualify for the scheme, citizens must be 35 and older and earn a gross monthly income of not more than $2,300 among other criteria.
• The Self-Employed Person Income Relief Scheme (Sirs), will be open to those who earn a net trade income of no more than $100,000, live in a property with an annual value of no more than $13,000 and do not own two or more properties. They must also have started self-employment on or before March 25 and must not earn any income as employees. If they are married, they and their spouse together must not own two or more properties, and the spouse’s assessable income must not exceed $70,000.

• Lost Jobs or Income can apply for aid from April 1, 2020

• Those who have been financially affected by the Coronavirus outbreak through losing jobs or income will be able to apply for a one-time cash assistance of $500 from April 1.
• From May 1, those who are eligible will receive $800 a month for three months, if they commit to receiving employment and training support from Workforce Singapore and the Employment and Employability Institute (e2i).
• Those who are already receiving ComCare Assistance, will not be able to apply for either the temporary relief fund or the Covid-19 support grant.

• Temporary Bridging Loan Programme

The temporary bridging loan programme will be available for enterprises across all sectors from April 1.

1.3. Temporary Bridging Loan Programme (Cont’d)

Businesses can take a loan of up to $5 million under the programme, an increase from the previous $ 1 million cap. All eligible enterprises can apply for the programme till March 31 next year.

• SME Working Capital Loan

The SME Working Capital Loan, helps small and medium-sized enterprises (SMEs) in all industries access financing for cash flow. The maximum loan quantum has been raised to $1 million, up from the $600,000 cap. The Government will work with participating financial institutions to defer principal payments for one year on loans under these two schemes, if businesses ask for it.

• Enterprise Financing Scheme

The Enterprise Financing Scheme – Trade Loan, which supports enterprises in areas like the financing of short-term import and export needs, will be enhanced for one year from April 1. The maximum loan quantum is doubled to $10 million and the Government’s risk-share has been increased to 80 per cent. Interest rates for loans taken under the programmes are subject to assessments by participating financial institutions. Monetary Authority of Singapore is working with banks and insurers to see how they can help businesses and individuals facing cash flow problems with their loan obligations and insurance premium payments. Details will be announced by the central bank and the industry at a later date.

• Tax Payments deferred

Businesses and self-employed people will be granted a three-month deferment on income tax payments to ease their immediate cash flow concerns. All companies with corporate income tax payments due in April, May and June will have them deferred automatically for three months. Payments will be collected from July. This move is in addition to the 25 percent income tax rebate, capped at $15,000, announced for companies, for Year of Assessment 2020 that was announced last month in Budget 2020.

• Wage Credit Scheme

The Wage Credit Scheme, enhanced in last month’s Budget, co-funds wage increases for Singaporean employees earning a gross monthly wage of up to $5,000 – an increase from the previous ceiling of $4,000. The Government is funding 20 per cent and 15 per cent for 2019 and 2020 qualifying wage increases, respectively. Businesses will receive two schemes by October this year.

• Job Support Scheme – Wage subsidies

The basic cash grant of 25 percent of wages under the Jobs Support Scheme applies to all Singaporean and Permanent Resident employees.

1.8. Job Support Scheme – Wage subsidies (Cont’d)

Firms in the food service sector, including hawker stalls, will receive higher support, at 50 per cent of wages. Firms in the aviation and tourism sectors – which are the worst hit by the Covid-19 outbreak – will receive 75 per cent of wages. The support will apply to the first $4,600 of gross monthly wages per local employee, which is the median wage in Singapore. Gross monthly wages include employee contributions to the Central Provident Fund (CPF). Employers will receive payouts in three tranches, at the end of May, July and October. This help also last for nine months, until the end of this year. They do not need to apply for the scheme, as it will be computed based on their CPF contribution data.

• Skills Future training support to be extended to all sectors

From May, all employers who send their workers for selected training programmes can receive additional support from Skills Future Singapore funding. They will receive enhanced absentee payroll support at 90 per cent of hourly basic salary, capped at $10 per hour.

• Student Loan

The Government will freeze all government fees and charges for one year, starting from next month and ending March 31 next year. It will also suspend all loan repayment and interest charges for graduates who have taken government loans for university and polytechnic studies, starting from June and ending May next year.

• Private Bus Operators

Private Bus Operators will be granted a one-year road tax rebate. Operators will also be granted a nine-month waiver of the Class 2 Bus Service Licence fee. Those who have paid the fee for this year will get refunds of about $750 each. A six-month waiver of parking charges at government-managed parking facilities will be granted. Self-employed operators can apply for an income relief scheme. Those eligible will receive $1,000 a month for nine months.

• Enhanced Property Tax Rebates

Non-residential properties will be granted an enhanced rebate for property tax payable for the period Jan 1, 2020 to Dec 31, 2020. These properties include:

1.12. Enhanced Property Tax Rebates (Cont’d)

• 1.13. Making Companies/Firms more resilient

• Up to 80% of the cost of investing in technology like automation will be covered for firms under the productivity solutions grant.
• Up to 90% under the enterprise development grant, which help firms upgrade, innovate or venture overseas.

These two enhancements will last till the end of the year.

• 1.14. Individuals, firms can defer payment of property and business loans

MAS and the banking industry aim to offer relief to households and firms that may find themselves tight on cash during the downturn.

• House owners can apply to their bank or finance companies to defer repayments for their property loan until 31^st Dec 2020.
• Individuals can also apply for their insurers to temporarily stop paying premiums in their life and health insurance plans for six months.
• SMEs, subject to conditions, can apply to their lenders to defer principal amounts on secured term loans until Dec 31, 2020. SMEs can also apply to their insurers to pay in instalments their Company’s general insurance premiums (e.g. property, trade credit, vehicles).

Monetary authority of Singapore in short form called MAS regulates and issue licenses for financial activities business in Singapore. Various forms of licenses are issued for companies engaged in fund management, investment, securities, debts, research and development of financial products, and raising capital as venture capital companies.

Crypto currencies are not regulated by the Monetary authority of Singapore (MAS) as they are not legal tender. Crypto exchange, crypto custodian services are seeing growth. Beijing’s support for block chain technology and Facebook’s upcoming move into financial services with its proposed Libra currency have shown interest in the token economy. Bitcoin is the world’s most valuable crypto currency are there are more than 3000 types of cryptocurrencies in the market.

There are digital tokens and utility tokens in circulation. Utility tokens can be used to purchase products or services offered by the companies that issued them. Parliament in Singapore has passed a new law during Jan 19 that will put more payment services, such as digital payment tokens and merchant acquisition under the ambit of the MAS and comes under the payment services Act, which will come into force early 2020.

FININANCIAL INSTITUTION DIRECTORY: BANKING ACT, INSURANCE ACT, SECURITIES AND FUTURE ACT, FINANCIAL ADVISERS ACT, PAYMENT SYSTEM (OVERSIGHT) ACT and PAYMENT AND SETTLEMENT SYSTEMS (FINALITY AND NETTING) ACT are the main acts to regulate all the financial services industry in Singapore. Before you set up a co., to carry out any financial services you are going to engage make the appropriate application to seek the approval and to obtain license from MAS. The license issued by MAS will carry all the required conditions to carry out your business in Singapore.

Financial Institutions Directory- a list of financial institutions regulated by the Monetary Authority of Singapore (MAS) and the activities they are authorized to provide- are listed in the directory. You can visit the website. https://eservices.mas.gov.sg/fid

REGISTER OF REPRESENTATIVES: a list of individuals who conduct activities regulated by MAS. The list is available on the MAS website – https://www.mas.gov.sg

INVESTORS ALERT LIST: MAS started the alert list during the year 2004 to help consumers assess investment opportunities, so that they could make more informed decisions. Consumers perceive wrongly that these entities or people are licensed or regulated by MAS and there are safeguards in place. MAS will also de list after an unregulated person or entity has obtained the requisite license. MAS receives information about unregulated people or entities based here or overseas that offer investment opportunities targeting local customers.

A list of persons and entities that are unregulated and may have been wrongly perceived as licensed authority by MAS- The list is available on the MAS website https://www.mas.gov.sg/ial

Source: Business Times
Article Date: 21 May 2020
Author: Liu Hern Kuan & Vincent Ooi

Some professionals have been incorporating one or more companies in an attempt to gain tax advantages.

For the past few years, high-earning professionals such as doctors and dentists have been in the spotlight as the Inland Revenue Authority of Singapore (IRAS) intensified its investigations to uncover tax avoidance attempts.

In 2018, two articles in The Straits Times described how some professionals were incorporating one or more companies in an attempt to gain tax advantages. The issue was the difference between the highest personal income tax rate of 22 per cent and the corporate tax rate of 17 per cent, which provided an opportunity for tax arbitrage. The Start-Up Tax Exemption Scheme and Partial Tax Exemption and the availability of corporate tax rebates (typically announced during the Budget) also contributed to making incorporating one or more companies more attractive.

Since the articles were published, many professionals have attempted to justify their structures and arrangements to the IRAS, arguing that they were not engaged in tax avoidance. An article in BT (“Shining a light on tax avoidance,” Nov 17, 2018) expressed our views on when an arrangement may be regarded as tax avoidance. While the IRAS has helpfully provided guidance to medical professionals on this, many questions regarding the law in this area remained. The line between permissible tax planning and tax avoidance was arguably unclear; and in many cases, it was no easy task to determine whether there had in fact been tax avoidance.

In the recent case of GCL v Comptroller of Income Tax, the Income Tax Board of Review (ITBR) laid down several principles that may help clarify the legal position here. The case is a very significant one as it addresses head-on several important questions about professionals incorporating companies and tax avoidance. We caution that none of our comments is intended to be taken as legal advice and that, especially in the context of tax avoidance, cases often turn on very specific facts. Nevertheless, it may be useful to look at the GCL case.

INCORPORATED A COMPANY

The salient facts of the case are as follows. In GCL the taxpayer, a dentist, was employed by Yco, an orthodontic clinic, and was paid a market rate salary for dental services rendered by him. He incorporated a company, XCo with himself as sole director and shareholder. He then resigned his employment with YCo; and in his place, XCo entered into a service agreement with YCo, where dental services were provided by XCo to YCo. The services were in fact provided by the taxpayer, who treated patients at YCo’s premises. YCo would pay service fees to XCo. X Co would then pay dividends and a salary to the taxpayer.

The Comptroller of Income Tax (CIT) regarded the income earned by XCo to be that of the taxpayer’s and imposed tax on the taxpayer on an individual tax basis. The CIT’s view was that the taxpayer, by incorporating and providing services through XCo, was involved in tax avoidance.

The ITBR ruled that the setting up of a company to provide services and receive service income was not by itself, tax avoidance. However the remuneration received by the taxpayer from XCo was significantly low and constituted tax avoidance.

The reasoning of the ITBR is important: the ITBR accepted that the test for tax avoidance may, very generally, be broken down into two parts. It is first necessary for the CIT to first establish that there is an arrangement that would produce a tax advantage. In this first part, the predication principle must be applied. If, applying the predication principle there is tax avoidance, then the analysis proceeds to the second part: the taxpayer must show that the arrangement was carried out for bona fide commercial reasons and did not have, as one of its main purposes, the avoidance or reduction of tax. Crucially, the first part of the test is objective in nature (in that the actual motives of the relevant persons are generally not to be considered) and the second part, subjective.

For the first part, the “predication principle” states that if an arrangement is objectively capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then it is not a case of tax avoidance. The significance of GCL is this: Professionals may be relieved to know that the ITBR held that the use of a company to carry out a dental practice is a common and widely used set-up, not inherently a tax avoidance arrangement. Thus, incorporation of a professional practice to carry out a profession is not, in itself, capable of constituting tax avoidance.

In GCL, as the ITBR found on the first part of the test alone that there was no tax avoidance, strictly speaking, it did not need to consider the second part of the test. However, it helpfully provided guidance on this issue, stating that it found that the taxpayer’s reasons for incorporation (facilitating future expansion of the business, the potential ease in obtaining financing and the limitation of business risk and liabilities) are natural benefits of operating a business in an incorporated entity and would constitute bona fide commercial reasons. It is noted that the test here is a subjective one, and depends on the intentions of the particular taxpayer at the point of incorporation.

While incorporation alone may not be sufficient to constitute tax avoidance, the ITBR held that the lower salary paid to the taxpayer after incorporation was tax avoidance. The taxpayer’s work was largely the same before and after incorporation. (It will be recalled that before incorporation he provided dental services under his employment with YCo; after incorporation, he provided services through XCo).

However, on the level of remuneration received by the taxpayer from XCo, the taxpayer conceded that his remuneration was based on his personal upkeep and maintenance requirements. The lower salary after incorporation thus effectively reduced his tax liability. The ITBR therefore ruled that this arrangement could not be explained by reference to ordinary business or commercial basis, and the taxpayer was unable to establish that the lower salary had been paid for bona fide commercial reasons.

ARM’S LENGTH TRANSACTION

The ITBR noted that as the taxpayer was the sole director and shareholder of the company he incorporated, section 34D of the Income Tax Act would require that he was to be paid an arm’s length salary by the company. “Transactions not at arm’s length” are those made between related parties whose terms differ from those which would have been made had the parties not been related. In such cases, the “arm’s length” price may be used to recalculate the taxable profits. So in GCL, the arrangement to pay the taxpayer a lower salary constituted tax avoidance. The same arrangement would have also fallen foul of the arm’s length principle, had the CIT chosen to invoke that provision.

The CIT also argued that the “personal exertion principle” originating from New Zealand law would apply to tax the income received by XCo in the hands of the taxpayer. The “personal exertion principle” provides that income from personal exertion should accrue to the natural person and cannot be assigned or diverted to another person, such as a company. The ITBR made it clear that this principle has no basis in Singapore tax law, and should not be applied in Singapore as well.

In summary, the GCL case has provided some much needed clarity on what constitutes tax avoidance. Professionals will now be better able to ensure that their business operations are structured in a manner that does not constitute unacceptable tax avoidance. Specifically, while professionals can incorporate companies with which to conduct their businesses, they must be careful not to pay themselves an artificially low salary.

The writers are from Tan Peng Chin LLC. Liu Hern Kuan is head of tax at the law firm; he was previously the chief legal officer of the Inland Revenue Authority of Singapore for 10 years. Vincent Ooi is an associate at the firm and a lecturer at the Singapore Management University (SMU) School of Law. The views are the writers’, and do not represent those of Tan Peng Chin LLC or SMU.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.