IRAS nabs 279 high-income earners over sham arrangements to pay less tax

SINGAPORE – The taxman has caught 279 high-income earners to date for using sham arrangements such as setting up private companies to receive their income to avoid paying more tax.

Out of this group, it was disclosed in Parliament on July 7 that the Inland Revenue Authority of Singapore (IRAS) had probed 124 cases from 2021 to 2025 and clawed back $49 million in additional tax. All but one of these cases involved taxpayers extracting profits as tax-exempt dividends or interest-free shareholder loans.

Unlike tax evasion which is a crime involving hiding and falsifying income, tax avoidance by channeling funds through various arrangements is not an offence but these moves can result in additional taxes and surcharges being levied if there is no real purpose for these transactions other than paying less tax.

Cases involving such taxpayers were highlighted recently when the High Court dismissed the bid of three doctors to challenge the decision of IRAS to levy more taxes on their total incomes.

Some of these errant taxpayers thought they could avoid the higher personal tax rate – 24 per cent for those with income exceeding $1 million – by channeling the bulk of their earnings to their companies, because corporate profits are taxed at just 17 per cent here.

After-tax profits can be declared as dividends and paid to shareholders, who do not have to pay personal income tax on them.

These private outfits paid even less corporate taxes in reality, because companies enjoy various concessions aimed at spurring growth and entrepreneurship.

But instead of using profits to expand business and hire more employees, these high-income earners merely used the structure to channel “tax-exempt” dividends and even non-genuine “shareholders’ loans” to themselves.

To deal with these taxpayers, IRAS took action under Section 33 of the Income Tax Act, which empowers it to disregard or vary any contrived arrangement and claw back the taxes that should have been paid.

In the recent dispute, the doctors challenged IRAS’ decision to conduct further tax assessments on their dividends and shareholders’ loans they had paid to themselves from 2013 to 2018 through various private companies they had set up.

But the court upheld IRAS’ move to strike down their contrived schemes, finding that the doctors’ companies were mainly used as a conduit to pay less tax.

For instance, one of the doctors claimed to earn only $5,000 and $6,000 a month from his companies, but had received dividends and shareholders’ loans totalling over $12 million over the six years.

With its now court-sanctioned action, IRAS can proceed to view the dividends and loans as part of the doctor’s own income and tax him accordingly.

In a statement to The Sunday Times, IRAS said it takes a firm view on artificial or contrived arrangements that are put in place to avoid tax.

“Self-employed professionals, like all taxpayers, are expected to ensure that their tax affairs reflect the commercial and economic reality of their arrangements,” it added.

With effect from the year of assessment 2023, those caught for using contrived scheme to avoid taxes will have to pay a 50 per cent surcharge on the amount they should have paid.

This penalty is similar to that imposed on real estate investors who use sham agreements to avoid paying the additional buyer’s stamp duty (ABSD) when buying more properties.

This means that if the total additional tax payable is $200,000, the errant taxpayer will have to pay a $100,000 surcharge, or $300,000 in all to IRAS.

In many of these cases, those caught claimed their accountants or lawyers had advised them on the schemes.

On such excuses, IRAS said that taxpayers remain responsible for their tax affairs, and should exercise caution when engaging tax agents and relying on advice they receive.

“Tax agents are expected to provide advice that is consistent with Singapore’s tax laws. For errant tax agents, IRAS may refer matters of professional misconduct to the relevant professional bodies empowered to take disciplinary action,” it added.

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