A Growing Trend in IRAS’ Audit and Investigation: What Should Taxpayers Do?

As reported in our Year End Audit and Tax Compliance Circular for Financial Year (“FY”) 2009, Inland Revenue Authority of Singapore (“IRAS”) has taken the position that taxpayers must continue to devote sufficient resources to ensure their tax compliance is completed in a timely manner. Taxpayers should also ensure that their tax returns are correctly prepared in accordance with the provisions of the tax legislation. At the same time, they should maintain proper records and documents in support of their tax returns filed with IRAS.

In early 2009, IRAS issued the Voluntary Disclosure Program (“VDP”) Circular with the aim of helping a number of taxpayers who might be ignorant or negligent in terms of their tax reporting obligations. Since the official launch of the VDP, taxpayers have been encouraged to come forward in a timely manner to disclose errors and/or omissions made in their tax returns. In such cases, penalties due to incorrect tax returns may be reduced, on a discretionary basis, by IRAS. It should be noted that the VDP applies to income tax (including withholding tax) and Goods and Services Tax (“GST”) and it does not apply to tax evasion. In Singapore, tax evasion is a criminal offence punishable under the law.

In FY 2008/09, IRAS focused on taxpayers in the food & beverage industry, real estate agents and property owners with rental income. We believe that IRAS will be focused in allocating more resources to its tax audit and investigation program going forward, with the possible result that taxpayers in other industries may potentially become the subjects of audits and investigations by IRAS.

As part of its efforts in educating the public and encouraging more taxpayers to participate in the VDP, IRAS has also taken active steps in publishing landmark cases on its website to highlight the manner in which certain taxpayers had attempted to evade taxes and the penalties imposed on such taxpayers after successful prosecution by IRAS.

An example will be highlighted below.

Successful Prosecution on Steel Forming and Rolling Specialists Pte Ltd (“SFRS”) and Mr. Gan Oh Boon

In one recent tax evasion case, SFRS was convicted of tax evasion by making false entries in its income tax returns for the Years of Assessment (“YAs”) 2005 and 2006. The total amount of profits under-reported was SGD1,356,000. Mr. Gan, SFRS’ managing director, was also convicted of his role in assisting SFRS to evade tax.

During IRAS’ investigation, it was found that SFRS set up six related companies in late December 2004. However, these were shell companies without any employees and economic substance. SFRS included fictitious expenses in its audited accounts for FYs 2004 to 2006, which included commission fees, technical consultancy fees, marketing consultancy fees, engineering consultancy fees and management fees which were purported to be fees charged by these shell companies. It was also revealed that the principal reason for effecting this scheme was to take advantage of the tax exemption scheme for new companies, as the first S$100,000 of chargeable income earned by new companies is exempt from income tax for the first three consecutive YAs from the year of incorporation. IRAS took the position that SFRS abused this tax exemption scheme and used the six shell companies to lower its own tax liability. Mr. Gan was also found to be assisting SFRS to evade tax as he authorized the abuse of the tax exemption scheme.

SFRS was fined an amount of SGD24,000 by the court and was also ordered to pay a penalty of SGD988,933.58. Mr. Gan was sentenced to a total of 2 weeks imprisonment and given a fine of SGD8,000. The in-default imprisonment term for failure to pay the fine would be 6 weeks imprisonment. Mr. Gan was also ordered to pay a total penalty of SGD988,933.58. In default of the payment of penalty, the total in-default sentence would be 34 months imprisonment.

What should taxpayers do when they are in doubt?

Taxpayers should conduct a review of their tax returns and declarations periodically. If they are in doubt with regard to the accuracy of their tax returns and declarations, they should seek professional advice immediately before the time limit to make a voluntary disclosure to IRAS under the VDP lapses. Before making the VDP, taxpayers should carefully consider the facts to be disclosed to IRAS and the facts that are to be disclosed should preferably be supported by documentary evidence. Our Tax Practice Group has successfully assisted a number of our clients in participating in the VDP and we have also successfully negotiated reduced penalties for our clients. When seeking advice from tax professionals, taxpayers should be aware of the difference in roles between tax accountants and tax lawyers in Singapore. Under Singapore law, communication between taxpayers and tax lawyers is protected by legal professional privilege and/or litigation privilege, as the case may be. However, there is no such equivalent privilege for tax accountants.