Often professional services are provided through companies. Typically, a company would employ an individual who would provide professional services to the company’s client/customers/patients. We understand that the Comptroller of Income Tax (“CIT”) has been scrutinising such business structure arrangements with a view to determining if such arrangements are tax avoidance arrangements. Where the CIT concludes that this is the case, the CIT would seek to counteract any tax savings arising from the arrangement and may seek to impose a penalty.
A. Tax Saving
A company may qualify for several tax advantages as follows.
Start-Up Tax Exemption (“SUTE”)
The SUTE applies to newly incorporated companies. For qualifying companies, in the first three years following incorporation, the first $300,000 of chargeable income would enjoy exemptions from tax (first $100,000 fully exempt; next $200,000, exemption of 50%).
Partial Tax Exemption (“PTE”)
The PTE scheme applies to all companies; under the scheme, the first $10,000 of chargeable income enjoys 75% exemption from tax, while the next $290,000 enjoys 50% exemption from tax.
Lower Rate of Tax (“Tax Rate Differential”)
The top marginal personal income tax rate is 22%, compared to the corporate income tax rate of 17%.
Corporate Tax Rebates (“CTR”)
Companies were offered corporate tax income tax rebates of 20%-50%, capped at $10,000- $30,000 from YAs 2013 to 2019.
Taking Advantage of Tax Savings
We have come across three common methods of taking advantage of the tax savings listed above:
1) Incorporating a company to take advantage of SUTE/ PTE, CTR and the Tax Rate Differential;
2) Incorporating more than one company to take advantage of SUTE/PTE and CTR more than once; and
3) “Re-incorporating” a company to take advantage of SUTE for another three years.
B. Increased Scrutiny by the CIT
Recently, it appears that the following corporate structures have attracted the attention of the CIT:
1) Single doctor providing medical services through one or more companies;
2) Single doctor providing freelance (locum) services at different clinics/ hospitals through one or more companies;
3) Single doctor providing different medical services (e.g. consultation, sale of medicine, medical procedures in Hospital X, medical procedures in Hospital Y), with one company set up for each service;
4) “Re-incorporation” of company every three years; and
5) Restructuring of business such that a doctor provides medical services through a company (with no change in business).
C. Considerations of the CIT
We understand that the CIT would generally consider/examine the following factors (among others) in determining if there is tax avoidance:
(i) Reasons for setting up the various companies;
(ii) Whether the activities carried out by the business entities are consistent with reasons given;
(iii) Distinction in business operations, processes and people functions of the companies;
(iv) Reasons and extent of change in business locations and decision making processes;
(v) Whether separate employees are engaged to support the activities of the separate companies; and
(vi) How income is attributable, before and after setting up of new companies.
In particular, the CIT seems to have applied the FAR framework when assessing business structures.
F: Function Performed
– e.g. provision of medical services, sale of medicine
A: Assets Owned
– e.g. treatment bed, furniture, medical equipment,clinic premises
R: Risk Assumed
– e.g. business risks such as litigation risks due to accidents that may happen in the clinic, personal risks such as litigation risks due to medical negligence
Essentially, the CIT will examine if there is a distinction between the companies and entities and whether there are genuine commercial reasons for the different companies and entities. Where there are genuine commercial reasons for the business structures and this can be justified to the CIT, the CIT would not take the view that there was tax avoidance.
Conversely, where a medical practice is carried out through several companies and entities and there is no discernible reason for so carrying out this arrangement, the CIT may regard the arrangement as a tax avoidance arrangement.
D. Powers of the CIT to Counter Tax
Avoidance
Generally, the CIT is empowered under section 33 of the Income Tax Act (Cap. 134, 2014 Rev. Ed.) (“ITA”) to make any tax adjustments where he is of the view that the purpose or effect of any arrangement is directly or indirectly to avoid, reduce or alter the incidence of any tax payable. Further, the CIT has indicated that where he is of the view that the arrangement is very aggressive from a tax planning perspective, the CIT apart from seeking to impose additional tax, may seek to impose a penalty under section 95 of the ITA for income under declaration/ wrongful claim of expenses and/or section 96 of the ITA for tax fraud.
E. What You Should Do
Taxpayers should ensure that where there is tax savings from a business structure, every aspect of the structure will need to be commercially justifiable, otherwise there is a risk of the structure being impugned by the CIT.
Any questions?
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This article is written by Liu Hern Kuan from Tan Peng Chin LLC and was originally published as a client update.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.