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.
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.