Resources

October 2024
By Medinex Specialist Centre Team

IRAS issued an e-Tax Guide on 9 Sep 2024 targeted at the Incorporation of Companies by Medical professionals and Relevant Tax Implications. (Check video above)

This guide explains the concept of tax avoidance and its legal consequences for Medical professionals and it provides case studies to illustrate common business arrangements in the medical industry that may give rise to tax avoidance concerns. It also lays out IRAS’s approach in dealing with such business arrangements.

The guidelines and accompanying examples in this e-Tax Guide are not meant to be exhaustive. The Comptroller of Income Tax (“CIT”) may update this e-Tax Guide with new guidelines and new examples of arrangements, where necessary. Review the full e-Tax Guide here.

We have summarized the pertinent points for you through the following questions:

Q1: How does IRAS define tax avoidance?

The latest e-Tax Guide by IRAS was published on 9 Sep 2024.

The following are the broad considerations that the Comptroller of Income Tax (CIT) would regard as having the effect of tax avoidance within the meaning of section 33(1) of the Income Tax Act (ITA):

(i) Shifting of income derived mainly from one’s personal efforts or skills to a company;
(ii) Artificial splitting of income through the incorporation of multiple companies;
(iii) Artificial re-incorporation of the same business; and
(iv) Attribution of income or profit not aligned with economic reality e.g., is the Medical professional receiving an arm’s length remuneration?

Many Medical professionals in private practice earn income which is largely derived from the provision of their personal services. IRAS has, through its audits, observed medical professionals incorporating one or more companies to manage their practice and receive this income.

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Q2: How does IRAS determine if tax avoidance has taken place?

Based on the e-Tax Guide published on 9 Sep 2024, IRAS adopts the Three-Step Approach.

Step 1: Consider whether an arrangement prima facie (i.e. first impression) falls within any of the three threshold limbs of section 33(1) namely,

• To alter the incidence of any tax which is payable by or which would otherwise have been payable by any person;
• To relieve any person from any liability to pay tax or to make a return under this Act; or
• To reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act.

Step 2: If such a tax advantage had been derived, consider whether the arrangement have been carried out for bona fide commercial reasons (‘bona fide commercial condition’) and if one of its main purposes the avoidance or reduction of tax. (‘main purpose condition’)

Step 3: Ascertain whether the taxpayer has satisfied the court that the tax advantage obtained arose from the use of a specific provision in the ITA that was within the intended scope and Parliament’s contemplation and purpose, both as a matter of legal form and economic reality within the context of the entire arrangement.

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Q3: What is considered an arm’s length remuneration?

A doctor may consider using either one of the following methods to determine if there has been an arm’s length attribution of income/profit between the company and himself/herself:

Option 1: Market Salary Benchmarking – remunerating the doctor based on his/her contributions
Market Salary Benchmarking attempts to determine the due amount of remuneration that doctors should be paid using available comparables.

Option 2: Cost Plus Method – attributing profits to the company based on its value-add
As a result of the difficulties ascertaining the market salary benchmark for doctor/owners, an alternative used is the cost-plus method, to be applied on the company. It is derived from transfer pricing methodology, a tax concept conventionally used to determine arm’s length pricing between related parties.

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Q4: What are the three possible outcomes in the event of Tax Avoidance?

If the CIT is of the view that there was tax avoidance, section 33 of the ITA will be invoked to vary the arrangement. Depending on the case facts, any, or a combination, of the following three outcomes may occur…

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