Tax Investigation of Tax-Evading Business Owners in Singapore

What is Tax Evasion? 

Tax evasion occurs when a person intentionally seeks to reduce his or her tax liability or obtain undue tax credits and refund by providing the tax authority, the Inland Revenue of Singapore (IRAS), with inaccurate or incomplete information.

Tax evasion under the Income Tax Act 

An individual can be said to be evading tax under the Income Tax Act if he or she:

1. Wilfully misrepresents tax reporting, such as by under-reporting or not reporting all assessable income;
2. Claims tax deductions for expenses that do not qualify for tax deductions (e.g. private motor car expenses, inflated payments to related parties of the company); or
3. Overclaims any expenses that were not incurred (e.g. creating fictitious invoices, inputting false entries, claiming relief for phantom employees).

Tax evasion under the Goods and Service Tax (GST) Act

An individual can be said to be evading tax under the GST Act if he or she:

1. Claims input tax on fictitious purchases; or
2. Omits output tax charged on local taxable supplies.

Difference between tax evasion and tax mitigation

It is important to note that tax evasion is distinct from tax mitigation. While tax evasion makes use of illegal methods to avoid paying proper taxes, tax mitigation uses legal means to reduce tax obligations of the taxpayer.

Tax mitigation involves legitimate tax planning that arises out of genuine commercial transactions. This can include directly providing accommodation to employees instead of giving a taxable housing allowance, or the non-remittance of foreign income.

Refer to our other article for more information on tax evasion in Singapore.

What is Tax Investigation?

IRAS will conduct investigations to determine if any tax offences have been committed. The investigation may cover issues on Corporate Company Income Tax, GST and other tax types administered by IRAS.

Such tax investigations can be triggered either by:

• IRAS’ internal information; or
• An informer.

Under the current tax evasion system, informants of tax evasion may be rewarded (upon his/her request) with 15% of the tax recovered, with a cap of $100,000, if the information or documents provided leads to the recovery of tax that would otherwise have been lost.

How is a Tax Investigation Conducted? 

A tax investigation may take place in the following manner:

Tax investigators from IRAS may first make a surprise visit to your business premises to ask for your accounting records, source documents and other relevant documents. Simultaneous surprise visits may also be made to your residence and to the premises of your tax agent or representative and any relevant third-parties.

These officers will identify themselves with their authority cards (indicating their full names and the legislative powers they can exercise), and provide you with a letter stating the purpose of the visit and what is required of you.

During the surprise visit, tax officers may search persons found on your company’s premises for evidence. Interviews may be made with you, your family members, your staff, your tax agent or representative, your suppliers and any relevant third-parties.

Tax officers may also inspect, copy and take possession of the books, records, data and documents, and download relevant information from all electronic storage media, where necessary.

Any of such data/information and items obtained may be:

• Preserved as admissible evidence in court.
• Verified with third-parties such as other government agencies, banks and financial institutions and foreign tax authorities.

What happens if I’m not present at the premises during the investigation?

Even if you are not present at the premises during the tax investigation, the tax investigators will still proceed with the investigation.

If the tax investigators are unable to access the premises after stating their authority and purpose and demanding such entry, they are authorised to break open any doors or windows, or use any other reasonable means, to gain entry for the purpose of investigating any tax evasion offences.

Will I be able to run my business during the investigation?

You will still be able to continue running your business during the investigation. However, as tax investigations have to be conducted on your premises, some disruption to your business operation is to be expected.

Tax officers will generally aim to capture 80% – 100% of the electronic data on the premises within 2 to 3 working days for critical systems to minimise disruption to your business operations.

Beyond this period of time, IRAS may continue to seek other relevant information from you and the people around you.

What are My Obligations During a Tax Investigation? 

Your main obligations during the tax investigation are to:

1. Cooperate with IRAS
2. Provide access to your company’s premises; and
3. Provide any information that IRAS requests for.

1. Cooperate with IRAS

While the tax investigation will be undertaken with or without your voluntary cooperation, your conduct and level of cooperativeness will be taken into consideration for the appropriate course of action to be taken during the investigation, as well as the outcome of the investigation.

For example, if you voluntarily cooperate with the tax officers, IRAS may choose not to prosecute you for tax evasion. Instead, it may deal with the matter through a stern warning, a composition or a lower charge (see below for further details).

2. Provide access to your company’s premises

Tax officers have the power to have full and free access to your premises, records, data and documents for the purpose of conducting investigations.

It is an offence to hinder or obstruct the officers in carrying out their duties. If convicted, you will be liable to a fine up to $10,000 or to imprisonment for a term up to 12 months, or both.

3. Provide any information that IRAS requests for

You are required to provide any information and documents that IRAS requests for. It is important that you provide complete disclosure of all relevant facts within 21 days of IRAS’ request, and ensure that all the information that you provide is true and correct.

False statements or information provided can result in a criminal investigation with a view to prosecute you.

Will I be Arrested If My Business is Under Tax Investigation? 

You will not be arrested by virtue of the fact that tax investigations have been conducted into your business’ affairs. However, tax investigators have the power to arrest:

1. Individuals suspected to have committed the offence of tax evasion, especially in light of the evidence that surfaced during the tax investigations; and
2. Anyone who obstructs the seizure of evidence.

How Long Might a Tax Investigation Last? 

Under normal circumstances, a tax investigation may take 15 to 24 months to complete. The length of the investigation is dependent on:

• The scope of investigation;
• The complexity of the matter; and
• Your level of cooperation during the investigation.

What Happens After a Tax Investigation? 

Upon the conclusion of the tax investigation, the tax authorities will usually meet with you to discuss any findings uncovered during the investigation. Further, findings and tax assessments will be finalised at this meeting.

If any tax irregularities have been uncovered, you will be given an opportunity to explain them.

You may wish to engage a lawyer at this point to ensure that your rights are protected and that you understand the options available to you. This may be especially important if IRAS chooses to prosecute you for tax evasion (see below).

What May be the Outcomes and Penalties from a Tax Investigation?

There are 4 possible outcomes that may arise from the tax investigation:

1. Prosecution 

Where IRAS can establish a preliminary case that you have committed any offence, it may consider initiating court proceedings to prosecute you and/or any abettors for tax evasion or tax-related offences.

The main offences are tax evasions and serious fraudulent tax evasions under the Income Tax Act, and GST Act.

Tax evasion under the Income Tax Act

Any person who wilfully with intent to evade or to assist any other person to evade tax by:

• Omitting any income, which should be included, from an income tax return; or
• Making any false statement or entry in any income tax return; or
• Giving any false answer to any question or request for information made in accordance with the Income Tax Act,

shall be guilty of an offence. Upon conviction, he shall:

• Pay a penalty of 3 times the amount of tax which has, or would have, been undercharged, if the offence had not been detected; and
• Be liable to a fine up to $10,000 or to imprisonment for a term up to 3 years, or both.

Serious fraudulent tax evasion under the Income Tax Act

Any person who wilfully with intent to evade or to assist any other person to evade tax by:

• Preparing, maintaining, or authorising the preparation or maintenance of, false books of accounts or records;
• Falsifying or authorising the falsification of any books of accounts or records; or
• Making use of any fraud or authorising the use of any fraud,

shall be guilty of an offence. Upon conviction, he shall:

• Pay a penalty of 4 times the amount of tax which has, or would have, been undercharged, if the offence had not been detected; and
• Be liable to a fine up to $50,000 or to imprisonment for a term up to  5 years, or both.

In July 2019, two company directors received jail terms and total penalties of more than $1 million for assisting the company to evade taxes for 5 consecutive years.

The first director was charged for tax evasion under the Income Tax Act for inputting fictitious expenses into the company’s tax returns, while the second director was charged with serious tax evasion under the Income Tax Act for preparing false invoices and payment vouchers which supported the fictitious expense claims.

Tax evasion under the GST Act

Any person who wilfully with intent to evade or to assist any other person to evade tax by:

• Omitting or understating any output tax in any GST tax return;
• Overstating any input tax in any GST tax return;
• Making any false statement or entry in any GST return, claim or application;
• Giving any false answer to any question or request for information made in accordance with the GST Act;
• Preparing, maintaining, or authorising the preparation or maintenance of, false books of accounts or records;
• Falsifying or authorising the falsification of any books of accounts or records; or
• Making use of any fraud or authorising the use of any fraud,

shall be guilty of an offence. Upon conviction, he shall:

• Pay a penalty of 3 times the amount of tax which has, or would have, been undercharged, if the offence had not been detected; and
• Be liable to a fine up to $10,000 or to imprisonment for a term up to  7 years, or both.

In October 2019, the director of an IT company was sentenced to 4 weeks’ jail and a penalty of $147,795 for GST evasion. He had wilfully with intent assisted the company to fraudulently claim GST refunds of $77,230 by overstating input tax on a GST form.

2. Composition

In certain cases, IRAS may permit you to pay a sum of money (also known as a “composition sum”) in lieu of prosecution and conviction in court for that offence. Depending on the severity of the tax offence, this composition sum can amount up to 400% of the additional tax payable.

If you accept the composition and full payment of the composition sum, no further prosecution action will be taken.

3. Stern Warning

In some cases,  IRAS may issue either a conditional or unconditional stern warning to you in lieu of court prosecution.

When a conditional warning has been issued, the prosecution is withheld for a period of time (typically 1 to 3 years), during which you undertake to not commit any other offences.

If you do not commit any offences during this period of time, no further action will be taken in respect of the case.

4. No Further Action

Where IRAS finds no evidence of wrongdoing, such as in cases where the irregularities arise from technical interpretations, it may close the case and take no further action after the appropriate tax adjustments have been made.

How to Reduce the Risk of Tax Investigation 

To reduce the risk of tax investigation, these are some measures that you can consider putting in place in your company.

It is important to note that companies may be penalised for errors in their tax returns, regardless of whether they had any intention to evade taxes.

Ensuring that accurate financial records are maintained and taxes are filed on time

Under the Income Tax Act and the GST Act, companies are required to keep proper business records for at least 5 years to allow IRAS to review them if needed. These business records include all accounting and business records, source documents such as contracts, invoices, payments and receipts that substantiate all transactions, bank statements and payment evidence.

Further, it is necessary that you ensure that annual taxes (income and GST taxes) are filed on time. The annual filing due dates for income tax are 30 November (for paper filing) and 15 December (for e-Filing). For GST, the annual filing due dates is 1 month after the end of the accounting period covered by GST returns.

By ensuring that accurate financial records are maintained and company taxes are filed on time, it reduces the chances of incorrect tax returns and consequently, the risk of tax investigations.

Consider voluntarily disclosing any past tax evasion behaviour to IRAS

If you had previously wilfully evaded taxes, you may consider voluntarily disclosing such behaviour to IRAS.

Under the Voluntary Disclosure Programme, if you voluntarily disclose to IRAS past actions involving a wilful intent to evade taxes, you may receive a lighter penalty compared to if IRAS had discovered your actions of its own accord.

To qualify for reduced penalties, the taxpayer must:

• Make the voluntary disclosure accurately and completely;
• Make the voluntary disclosure in a timely and self-initiated manner, i.e. before IRAS starts querying into your taxes;
• Cooperate fully with IRAS to correct the errors made; and
• Pay or make arrangements with IRAS to pay the additional taxes and the penalties imposed (if any), and honour such arrangements until all payments are made.

Once the disclosure is made, you may have your offence compounded at a reduced penalty rate of 2 times (as compared to the maximum of 4 times if IRAS discovers your actions of its own accord) in lieu of prosecution.

However, if you do not ultimately qualify for the Voluntary Disclosure Programme, IRAS may charge you in court for your tax evasion offences.

Seek the assistance of a corporate secretarial firm 

Finally, you may wish to seek the assistance of a corporate secretarial firm with expertise on compliance and regulatory matters.

Such firms generally provide a wide and expansive range of services, including ensuring that proper records are kept for tax purposes and that annual taxes are filed on time.

This will help to ease your administrative burden by preventing tax returns from being filed incorrectly, and reducing the possibility of tax investigations.