Company director jailed for GST fraud

What happened?
Tang Ee Boon (“Tang”), 32, the managing director of V-Teb Services Pte Ltd (“V-Teb”) was convicted of GST fraud amounting to $327,837.49 and was sentenced to 12 months' jail. Tang was brought to court for 21 charges of making inflated and false claims of GST refunds for the period 1 Jan 2004 to 30 Jun 2007.

Rule
GST-registered businesses can offset the GST they pay on their purchases (input tax) against the GST they collect from sales (output tax), and pay the net difference to IRAS. If a business incurs more GST on purchases (input tax) than it collects from sales (output tax), it can claim the difference as GST refund from IRAS.

What went wrong for Tang's ploy?
V-Teb provides cleaning services locally. By nature of his business, the company is not expected to claim GST refunds.

However, IRAS’ tax auditors noted a pattern of submitting increasing amounts of GST refund claims in the GST returns on a frequent basis. IRAS actually verifies the value of V-Teb’s taxable purchases with the alleged suppliers.

What did Tang get for his mischiefs?

Tang pleaded guilty to a total of 14 charges of evading GST,

• comprising three charges of understating output tax,
• eight charges of overstating input tax, and;
• three charges of making false entries in V-Teb’s GST returns.

In addition to the jail term, the court also ordered Tang to pay a penalty of $983,512.47, which is three times the amount of GST undercharged.

Source - www.iras.gov.sg - Edgar basically paraphrase/paragrapg the original article.

What can I do with trade loss, unabsorbed capital allowance and donations?

I have summarised the article by Mr Clement Tan Kai Guan entitled "Order of Claiming Qualifying Deductions - Maximising Tax Benefits" published in Singapore Accountant, June 2010.

Question - When a taxpayer incurs a trade loss for the current year and has current year unabsorbed Capital Allowances (CA) and approved donations, what options does he have with regard to the utilisation of these qualifying deductions?

Answer

1. Prior to YA2003, you can ONLY carry forward the current year unabsorbed CA, losses and donations for setoff against his future years' taxable profits.

2. With effect from YA2003, group relief option was introduced.
Loss making Singapore incorporated companies are allowed to transfer their current year qualifying deductions to other profitable member companies of the same group.

3. From YA2006, the carry-back clause was introduced.
Any person carrying on a trade, business, profession or vocation may carry back his current year unabsorbed CA and losses, subject to a maximum of $100,000, for setoff against his Assessable Income (AI) for the immediate preceding year of assessment.
Note - Donations cannot be carried back under the loss carry-back option.
(Edgar - In the case of carry-back, there is the possibility of tax refund by IRAS on tax paid on previous year's profit.)

4. In February 2009, the carry-back option was enhanced.
The amount allowed to be carried back is increased to to $200,000 and extending the period of
carry-back from the current 1-year period to a 3-year period.
The enhanced carry-back relief system is only applicable to unabsorbed CA and unabsorbed losses relating to the YA2009 and YA2010.

Rule - Which to apply first?
Group relief first, then carry-back and carry-forward.
CA first, then trade loss.

- Transferred out CA to group companies
- Then transferred out trade loss to group companies
- Lastly transferred out Approved Donations to group companies" height
- Assume Company A first, the Company B
- Any leftovers from Group Relief, then Carry-back.
- Any leftovers from Carry-back, then Carry forward.

Clement made a simple but interesting observation.
He asked us to ensure that the trade loss be used to offset profit before exemption in excess of $300,000 first, if possible. This is due to the partial exemption.

Example - For YA2009 (ie. 18% tax rate), we have Company A with $200,000 profit and Company B with $380,000 profit. Both companies have $80,000 trade loss carried forward. Compare tax payable before and after applying the trade loss of $80,000 for the two companies.

• Company A to pay $10,350 after deducting trade loss or pays $17,550 without deducting trade loss. The trade loss of $80,000 would save $7,200 for Company A.
• Company B to pay $26,550 after deducting trade loss or pays $40,950 without deducting trade loss. The trade loss of $80,000 would save $14,400 for Company B.
  

Moral of story - use the deductions for entity with profit in excess of $300,000 in the current year of assessment or keep for use in future years instead.

Lessons from Raffles Town Club's appeal

nearing completion?

In yesterday's Today, it was reported that Raffles Town Club (RTC) has lost its arguments in the Court of Appeal on the following:-

• failed to obtain tax deductions for the costs involved in leasing its land and in constructing the clubhouse on the ground that $108 million cost of acquiring the land from the State and the $91.4 million incurred in building the clubhouse were capital in nature and therefore
  not eligible for tax deduction;
  
• secondly, it failed to have its membership fees taxed over 30 years, the life span of the club (this is an interesting attempt in defining the timing of revenue recognition and consequently, timing of taxability);
  
• thirdly, it failed to secure relief for YA2001 from the tax department for the $53.28 million in damages it had to pay members after it lost the 2005 class action suit filed by several thousand members who claimed the club had falsely led them to believe they were part of an exclusive establishment and;
• lastly, it failed to secure tax deductibility for the $2.34 million that RTC paid for geomancy fees.
  

Consequently, RTC is liable to pay tax for the Years of Assessment 1998-2003 on the full amount of $526.14 million it collected from its 19,000-odd members who had paid $28,000 each to join.

I have quoted verbatim the learning points from Justice Phang's concluding remarks:-

• "Where ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax."
  

• "Accounting and tax have different objectives in mind. Financial accounting is intended to provide information regarding firm performance to the market place while taxable income is prescribed by the government to meet budgetary needs ... Regardless of how persuasive accounting evidence is, the prerogative still lies with the court to decide whether a particular item should be regarded as income that has accrued for the purposes of liability to tax."

• He pointed out that while accounting treatment focuses on the balance sheet, "taxation requirements are centred on the profit and loss accounts, so that the distinctions between revenue and capital, which are vital for tax purposes, may be lost in the accounting treatment".
  

• Concluding, he said: "I am also of the view that the present case turns on how well-established tax principles and tax law would apply rather than on the correct treatment of the items brought to tax."
  

Budget 2010 - Productivity and Innovation Credit

It was announced in Budget 2010 that a Productivity and Innovation Credit (ie.“The Credit”) will be available for 5 years for Year of Assessment (YA) 2011 to YA 2015. The Credit will provide significant tax deductions for investments in a broad range of activities along the innovation value chain.

On such activities is investing in automation. Of course, IRAS defines "automation" as costs incurred to acquire "prescribed automation equipment" (e.g. laser printer, modem).

You would be entitled to 250% allowance for the first $300,000 of qualifying expenditure, 100% allowance for the balance expenditure.

Example: Laptop costs $2,000
Capital Allowance under the Credit = 250% x $2,000 = $5,000.

Taxpayer can either claim $5,000 as capital allowance in its tax return or opt to convert such capital allowances in respect of Laptop into a cash grant. The cash grant is computed at 7% of the capital allowance under the Credit ie. $350.

Question - Why the flexibility for you to choose to claim or to convert?
The simple answer is taxpayer should claim if it could help to save on paying 17% corporate tax and you should covert to cash if there is very little or no tax payable eg. for new company with exempt income.

Current Tax Trends

Here are the current tax trends and their respective consequences as observed and explained by Lor Eng Min and Ang Lea Lea of Ernst & Young Solutions LLP:-

a) Increased information sharing among tax authorities of different countries
Businesses with operations over several countries would have to be careful in ensuring consistent information being given to the various tax authorities.
[Edgar - The same attitude should be adopted in providing information to various departments within a tax authority.]

b) Tax authorities sharpen their focus on large companies.
As many governments have incurred budget deficits in 2009, enhancing tax revenue collection could be a priority. By focusing on large companies, a significant portion of revenue could be collected very quickly while sending a signal to the rest of market to comply.
[Edgar - Given the advancement in technology and information availability, tax authority now has the ability to drill down and cross reference on companies, big and small.]

c) Shorter filing deadlines
In Singapore, the interval between filing of tax returns and the financial year end of company has been reduced substantially. If your company's year end is Dec 31, 2009, you are to submit your Form C in Nov 2010. [Edgar - Secondly, companies are encouraged to submit Estimated Chargeable Income. Failing which, the authority may present its own preliminary assessment and tax is payable within a month.]

d) Timely and voluntary disclosure requirements
Incentives in term of lighter penalty are explicitly stated to achieve the above.

e) Transfer pricing documentation and Advanced pricing arrangements
Given complex costing and pricing issues between entities in a group, the Group is encouraged to seek a formal understanding on any inter-company arrangement with tax authority.

Reference - Singapore Accountant, Jan 2010.

Gan Oh Boon and Tax Exemption Scheme

A businessman, Gan Oh Boon, warmly embraced the idea from Chng Chor Tong, his auditor, of spreading the profits from his steel forming and rolling business over 6 new companies set up in 2004.

Law - The law exempts new companies from paying tax on the first $100,000 of chargeable income and partially exempted for the next $200,000.

Modus operandi
Company A signs management agreement with each of the 6 shell companies. The profit from Company A is evenly distributed to 6 companies by fictitious expenses (valued $1,6mio) with no work or services performed by the 6 shell companies for Company A.

The fictitious expenses were "correctly named" and comprised of commission fees, technical consultancy fees, marketing consultancy fees, engineering consultancy fees and management fees.

The said fees were for the work and services purportedly performed by the 6 shell companies. Even though these fees were reported as income by the respective shell company, the overall tax burden has been reduced substantially for the Years of Assessment (YA) 2005 to 2007.

What went wrong for Mr Gan in applying the law?
The tax exemption scheme under section 43(6A) of the Income Tax Act, which took effect from YA 2005, was introduced to support entrepreneurship and encourage growth of local enterprises.

But in my humble interpretation, the 6 shell companies are basically shells with no independent employees and resources carrying out its own economic activities.

You can't just create companies to distribute the profits around!!!

What are the punishments?

• For the company, a fine of $24,000 and a penalty of $988,933.58.
• For Mr Gan Oh Boon personally, 2 weeks of imprisonment and a total fine of $8,000.
• In default of payment of the fine, the default sentence would be 6 weeks of imprisonment.
• He was also ordered to pay a total penalty of $988,933.58. In default of payment of penalty, the total default sentence would be 34 months of imprisonment.

Windfall tax on bankers' bonuses

was here last weekend

Britain and France have decided to impose a windfall tax on bankers' bonuses.

Under the new one-time tax, any bank operating in Britain must pay a tax of 50% on all discretionary bonuses of more than GBP25,000 (SGD$56,500) paid between now and April 5 next year. Banks attempting 'avoidance schemes' by postponing bonuses would face further, unspecified punishments. As the bonus payouts are mostly contracted, the banks are obliged to pay. Nobel prize-winning economist Paul Krugman supports the idea.

So what could these fat cat bankers do?
Firstly, they can fly out of Europe to anywhere else such as Asia. They can then do whatever they are doing in Europe but do it in Singapore or Hong Kong instead.

Or secondly, they can stop calling themselves "bankers". The windfall tax is on bankers' bonuses and not cleaners'. Perhaps the bankers can call themselves cleaners and they get to keep their bonuses after deducting a nominal income tax. A small humiliation with full pockets.

Top chefs in hot soup?

Some top hotels in Singapore are now without their respective chefs in their Chinese restaurants. They have been summoned to Corrupt Practices Investigation Bureau (CPIB) to "assist" in investigation of accepting bribes from a seafood provider.

What is the modus operandi?
Top chefs are king of their mountain ie. kitchen, in the hotels. They dictate what to buy and from who in the name of ensuring quality for their top Chinese restaurants. Suppliers have to show their appreciation for a more than amicable business relationship by showering them with "love" and "attention" in the form of gifts and money.

How did CPIB got a sniff of these violations?
CPIB was notified by Inland Revenue Authority of Singapore (IRAS). IRAS is investigating a seafood supplier on tax evasion. IRAS found some computer files with payout information in computers seized from the seafood supplier.

So the next time when you are eating sharkfins, fish maw, scallops in these expensive restaurants, you are not sure whether they are really "clean" or not.

Tax spies and top income bracket

Mr Ooi Boon Jin, head of international executive services at KPMG, made this observation in today's BT. He said, "Our study has recorded a general decline in top personal income rates over the past seven years, but for 2010 we are seeing indications that a reversal may be on the way."

A reversal in falling tax rates in attempt to drive tax collections to pay for the trillions of stimulus packages implemented over the last 12 months.

In another development reported in today's BT, Mr Mochamad Tjiptardjo, the new tax chief since last month, said, "(Indonesia) must boost tax revenues significantly to meet the government's ambitious target in a country where tax evasion has been routine."

How does he plan to do it? Among the many initiatives, he intends to send "tax spies" to places to gather evidences of Indonesians have stowed their ill-gotten gains and evading taxes.

So if you are a high income earner, it is time you seriously review your tax residency status if you have not.

KPMG illustrated that a Singapore tax resident would pay top personal tax rate of 20% if and if their next chargeable income exceeds SGD$320,000 or USD217,317/-. If you are a Malaysia tax resident, you would have the honour of paying the top personal income tax rate of 27% at a significantly modest annual income of USD28,470/-.

Enhanced Loss Carry Back - Priority issue

Rule - A company that has assessable income for a particular YA may be eligible to offset the income with losses carried forward from a prior YA as well as losses carried back from a subsequent YA.

Consider this scenario. There could be loss carried forward from YA2006 available to offset the
assessable income of $80,000 in YA 2007 in addition to the loss carried back from YA2009.

Question - What should the priority of offset be? Should it be carry forward first, then carry back, or vice versa?

Answer - Based on section 37E(1) and (17) of the Income Tax Act, the losses brought forward would be deducted first.

Transfer pricing in retro - 2006

a portrait

Back in July 2006, the Inland Revenue Authority of Singapore (IRAS) organised its first transfer pricing conference in collaboration with several renowned tax and business consulting firms, including PricewaterhouseCoopers (PwC).

Over 600 executives and tax practitioners attended the half-day forum titled: Transfer Pricing in Singapore – What you need to know.

It officially signalled IRAS's intention to focus resources in this area in the coming years. In future postings, I will attempt to provide the latest update on this front.

In 2006, Mr. See Jee Chang, IRAS’s Director for International Tax/Tax Policy & Ruling, highlighted two areas that require further clarification.

• One area relates to the current practice of not requiring interest on intercompany loans.
• The second relates to the common practice of charging a 5% profit mark-up for intercompany services.

At that preliminary stage, IRAS did not provide any detailed guidance but only signalled that related party loans involving foreign entities may be subject to adjustments.

With regard to intercompany services, IRAS mentioned that while a 5% mark-up may be accepted for routine services, the arm’s length principle may imply higher mark-ups for non-routine, value-added services.

Transfer pricing in taxation

In management accounting, transfer pricing is a topic which addresses the issues with regard to determining a price for the transfer of goods and services between two divisions in a decentralised set-up.

In taxation, transfer pricing relates to the following areas:-

• When entity A sells goods on credit to entity B and the receivable remains outstanding beyond the normal credit term - Entity A may be deemed to have provided interest-free funding to entity B.

• Entity A and entity B are related. Entity B uses entity A's accounts department as its accounting resource. How much should entity A charge entity B? IRAS is prepared to accept a 5% mark-up on the basis that this has been a practice commonly adopted by related party service providers in Singapore as remuneration for providing routine support services. Other mark ups are acceptable. subject to arm's length principle.

• In the third situation, entity A and entity B are utilising a service provided in a cost pooling arrangement. Issue here is the way the costs are allocated between the entities.

ACCA F6 - Discussion with Examiner

Below is my interpretation of what was discussed in today's meeting with the Examiner.

Generally computation ie. greater than or equal to 60% of total marks.

Question 1
Only 21% has >15 marks based on sample.
There are more parts to this question.
And this change in question structure is apparently the main reason for the generally poor overall performance of F6 students.

Question 2
56% achieved more than 11 marks based on sample.
The peculiar exceptions below were the killers ie.
- spousal transfer
- tax concession on royalty income of an author
- accrued income concept
- unable to compute net rental income

Question 3
less than 1% achieved more than 11 marks (Shocking!!!!)
Limited Liability Partnership is almost a sure thing for the coming exam.
Students unable to appreciate that past relevant deductions > than contributed capital.

Question 4 - GST
Part (a) and (b) were on GST. Part (c) - not GST.
Examiner said at least 10 marks will be assigned to GST in the exam.
Students unable to address pre-commencement expenses.

Question 5
51% scored more than 11 marks.

Other comments
Students did well in June 2008 exam but did very badly for Dec 2008 exam.
Warning to students - Order of set-off must be correctly stated in the utilisation of Capital Allowances/Losses/Donations.
Budget 2009 will not be examined in June 2009 exam.
Try to find out about tax-on-tax, tax reimbursement and tax allowance for the coming exam.

ACCA P6 Meeting with the Examiner

The following is my interpretation of what was discussed in the meeting the Examiner this afternoon.

What was done well?
- Knowledge - particularly in personal income tax, recent tax changes and withholding tax (but lacking in mitigation of liability under witholding tax).
- Approach & structure - students are observed to be attempting the more "approachable" questions in Part B first, then Part A. (Statistically from a worldwide basis, questions should be attempted in the order as per numbered ==> otherwise perform badly)

What was not done well?
Students failed to plan their time and answers. How?
Massive download of unnecessary info into the answers.
Don't produce rote answers.
Don't do unnecessary calculations.
Unable to structure answers to "advisory" questions.
Students should "tailor" their answer to the requirements of each question.
Poor performance on GST in all three sittings under the new syllabus to date. (wink! wink! study harder in this area)

What to focus on?
Need to know the technical details under F6 being foundation knowledge to P6.
Answer all parts of the questions. Address each paragraph in the question.
Focus on command words.
"What you intend to write must be to earn marks"

Other comment
Do the students have enough questions to practice? The old Paper 3.2 is different from current P6.
When the question asked for "a five-year period", students only need to do one calculation for 5 years and NOT five single-year calculations.
P6 questions are on multi-tax type basis.

In the last sitting, there was someone who scored "zero" mark despite having written pages after pages. Why? The person spent the time copying the exam questions word for word twice into the answer script.

Students do not seem to under the meaning of "business undertaking".

Tax cases are examinable. But the participants had a very vigorous discussion on where to get the details of the tax cases.

Tax Deferment Scheme

What is the Scheme about?
Inland Revenue Authority of Singapore (IRAS) allows taxpayers with GIRO arrangement to defer income tax instalments for 3 months, from May 2009 to July 2009.

I thought IRAS was in the same helpful mode as per Budget just presented earlier ie. delaying its collection of current tax payable due to IRAS.

But which 3 months are we talking about? May, Jun and July 2009!!! For these months, we are actually paying tax in ADVANCE ie. for YA2009. They are actually not due until we receive our Assessment after we report our income on April 15.

So IRAS, are you really helping us to alleviate our financial burden? I don't think so.

Bottomline - You are not defering tax on money I owe you but rather you are defering on tax I am not due to pay you.

Singapore Budget 2009 - My budget chats

Dear Friends,

Happy 'Niu' Year to you.

The Singapore Budget 2009 has been touted as bold. I do agree with this labelling to a big extent.

I have placed my comment at AccountingWithEdgar blog. My latest entry is my views on Dr Basant Kapur's idea to roll back GST to stimulate Consumption.

So please have a read through and share with me your views and comment too.

Gongxi to you!

Suggestion to IRAS

where was i?

There is a significant difference in value placed on a gardener and a household servant in the computation of taxable benefits granted to an employee.

Current laws

• For a gardener, it is $35 per month or actual wages paid by employer, whichever is lower.
• Whereas for a household servant, it is based on the actual wages paid by employer.

Refer - www.iras.gov.sg/irasHome/page03.aspx?id=3638

Perhaps the "discrepancy" could be due to:-

• the gardener's thingy has been around since the British colonial days where expatriates stayed in bungalows with gardens groomed by gardeners getting $35 salary
• the household servant is a more recent phenomenon
• or is it that gardeners are part-timers who come around once a while to touch up on your garden

Whatever it is, I am just trying to cheekily explain the "discrepancy" in IRAS' valuation of a gardener as compared to a household servant.

So can I advise expatriate employees (if there is any left) to ask their employers to hire "gardeners" who can do household chores to effectively lower your taxable employment income? :)

Your IR8A

The Inland Revenue Authority of Singapore (IRAS) encourages all employers to join the Auto-Inclusion Scheme for Employment Income. It is a scheme where employers submit their employees’ income information to IRAS electronically.

The employment income information will be shown on the employees’ electronic tax return and automatically included in their income tax assessments.

Well if things go according to plan as above, all parties involved ie. employer, employee, IRAS and the mother Earth will be all happy.

But what happen when there has been an error or omission in the employer's submission?

For any omission/error in the Form IR8A, the penalties for any tax understated are imposed on the employer for a failure to report.

However, penalties may also be separately imposed on the employee for failure to report in his personal tax return. You can't argue with IRAS that the mistake was committed by your employer.

Remember you are the person who finally submit the return!

Gold farmers?

Who are they?
Players who repetitiously slay virtual monsters in online games in order to earn virtual "gold" and "equipment". Such winnings could be sold for real money offline.

Some of them could do so well at this that they are able to hire "employees" to run errands such as buying lunches/drinks and collecting money from buyers from all over Singapore.

Are the taxman interested in the income?
Definitely yes. Korea National Tax Service taxes these farmers up to 40% on their profits. China authority arrived in Oct 2007. Singapore's IRAS said such income is definitely taxable.

But I wonder who in Singapore with this vocation has actually declared and paid taxes on their income? If you had, please share with the details.

Why is it taxable?
Under Tax 101, we learned the "badges of trade". Of the six badges, these two would nail the farmers ie.

• frequency or number of similar transactions by an individual
• the essence of a profit seeking motive

Now I got to go check on my children playing on their computer games!!

Source - yesterday's ST pp 2

What is a business' commencement date?

I am duly notified today that IRAS has issued a directive in an attempt to define a business' commencement date.

What is the definition of the business' commencement date?
It is only when the business has established its profit-making structure and started its
first commercial activity that it can be regarded as having commenced operation.

What is profit-making structure?
No specific definition. It depends on the nature of the business. IRAS has however provided several examples in the directive.

If you were runnning a supermarket, it commences business when it opens its door and offers its goods for sale to the public. It is definitely not the date of opening ceremony.

For a manufacturing entity, it is the date the entity is in a position to start its first commercial production.

The start date for a hotel is simpler. It is the day it receives the certificate of registration.

A property developer seems to be getting a rough deal. The business commences when it buys its first piece of land or building for sale.

For a set up to provide professional service, it is deemed to have started business when it is ready to commence marketing activities. So if you are still in the midst of hiring staff and putting your office together, you have not started your business yet.

In case of doubt, you can always write in to IRAS for assistance.