Tax Avoidance and Tax Evasion

Tax Avoidance and Tax Evasion

1. What is Tax Avoidance ? 

   The term “avoidance” is defined as an arrangement of a taxpayer’s tax affairs in compliance with the law to reduce the incidence of tax. So long as no provisions of the law are violated and transactions are bona fide, tax avoidance is justifiable.

   The test to apply here is whether the primary purpose of the transaction is to avoid tax. If so, it would be caught under s.140 of the Income Tax Act 1967, in which the Director General has the power to disregard or vary the transaction.

   For a better understanding of this topic, you may refer to the case law as follow:

   Case Law: [Yeoh Eng Hock Holdings Sdn Bhd v KPHDN (2011) ]

   The company provided its directors a sum of money by way of interest-free loans with no terms of repayment. Monies were placed in Fixed Deposits under their individual capacity, thereafter, returned to the Company as and when required. The scheme allowed the Company to avoid paying corporate tax on the interest income. The Court ruled in favour of the IRBM as it lacks any commercial rational.

2. What is Tax Evasion ?

   The term “evasion” is defined as the action of evading or escaping by artificial or contrivance, escape, dodging, prevarication, shuffling, excuse or subterfuge. Tax evasion is both immoral and illegal.

   For a better understanding of this topic, you may refer to the case law as follow:

   Case Law: [Cleanseal Pte Ltd (2002) MSTC 7435]

   An action of evading or escaping tax. In a case before the Singapore Court, a taxpayer created false invoices for the purchase of equipment. This is an action with the intent to evade tax.

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