Singapore: First company and its director to be convicted of abusing tax exemption scheme
Steel Forming and Rolling Specialists Pte Ltd (“SFRS”) was convicted of tax evasion by making false entries in its income tax returns for the Years of Assessment 2005 and 2006. The total amount of profits under-reported was $1,356,000. The company’s managing director, Mr Gan Oh Boon was also convicted of his role in assisting the company to evade tax.
The principal activities of SFRS are the manufacturing of pressure vessels and steel structures for use on ships.
Investigations revealed that SFRS set up 6 related companies in late December 2004 to abuse the tax exemption scheme for new companies under section 43(6A) of the Income Tax Act.
Investigations also revealed that there was no work or services performed by the 6 related companies for SFRS. The 6 shell companies had no employees except for the SFRS directors themselves. Nevertheless, SFRS included fictitious expenses amounting to $1,622,000 in its audited statements of accounts for the years 2004 to 2006. These comprised 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. SFRS consequently under-reported its profits by the same amount of $1,622,000 in its income tax returns for the Years of Assessment 2005 to 2007.
Although the 6 related companies had reported the various fees as their income, each company paid a negligible amount of tax as the first $100,000 of their chargeable income was exempted from tax under the tax exemption scheme. Therefore, SFRS had abused the tax exemption scheme and used these 6 shell companies to lower its own tax liability.
The tax exemption scheme under section 43(6A) of the Income Tax Act, which took effect from Year of Assessment 2005, was introduced to support entrepreneurship and encourage growth of local enterprises. Newly incorporated companies can enjoy a tax exemption on the first $100,000 of normal chargeable income (excluding Singapore dividends) for the first 3 consecutive Years of Assessment from the year of incorporation. Starting from Year of Assessment 2008, newly incorporated companies can claim a further 50% exemption on the next $200,000 of normal chargeable income (excluding Singapore dividends).
The company’s managing director, Mr Gan Oh Boon assisted the company to evade tax and authorised the abuse of the tax exemption scheme.
Investigations revealed that SFRS’ auditor, Mr Chng Chor Tong, had advised Mr Gan Oh Boon to set up new companies and charge expenses in the books of accounts of SFRS in order to make use of this tax exemption scheme. Mr Chng Chor Tong and his sole proprietorship, CT Chng & Co., was involved in the entire process of SFRS’ tax evasion – registering the 6 companies, preparing the management agreements between SFRS and the companies, creating invoices to support the fictitious expenses and making audit journal adjustments to post these expenses to the final audited statements of SFRS’ accounts.
Mr Chng Chor Tong was the first practicing certified public accountant in Singapore to be convicted of tax evasion. He was convicted on 28 April 2009 of evading tax on his income from his sole-proprietorship, CT Chng & Co, and was sentenced to 6 month’s jail and ordered to pay a penalty of $75,200.52. In addition, he paid $200,000 for compounding his offence of abetting one of his clients in the commission of a tax offence.
Investigations also revealed that SFRS’ managing director, Mr Gan Oh Boon had omitted employment income in the form of benefits-in-kind, made up of hire-purchase instalments for his private car and his other private expenses paid for by SFRS.
Mr Gan Oh Boon was convicted of negligently making incorrect returns by omitting benefits-in-kind amounting to $405,335 for the Years of Assessment 2004 to 2006. SFRS was also convicted of negligently giving incorrect information about Mr Gan Oh Boon’s tax liability by omitting the said benefits-in-kind from his Form IR8A for the same Years of Assessment.
SFRS and Mr Gan Oh Boon were first charged in court on 16th January 2009 for 10 charges each. This morning, SFRS pleaded guilty to 2 charges under section 96(1)(b) and 3 charges under section 95(2)(b), and Mr Gan Oh Boon pleaded guilty to 2 charges under section 96(1)(b) and 3 charges under section 95(2)(a). The remaining charges were taken into consideration for sentencing. For the 5 charges, the Court
i) Sentenced SFRS to a fine of $24,000 and ordered it to pay a penalty of $988,933.58.
ii) Sentenced Mr Gan Oh Boon to a total of 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.
