I read with great interest the report on tax avoiders (Iras recovers $10m from high-earning tax avoiders; Oct 15).

From my understanding, tax avoidance occurs where a business arrangement is entered into for the main purpose of avoiding or reducing tax.

Where tax avoidance is found, the Inland Revenue Authority of Singapore (Iras) may disregard the arrangement and impose tax as if the arrangement did not exist.

The arrangement continues to exist for all other legal purposes.

In Comptroller of Income Tax v AQQ (2014), the court ruled that generally, a business arrangement would be considered tax avoidance if its main purpose was to avoid or reduce tax; and it was not carried out for genuine commercial reasons.

One must look at the subjective motive of the taxpayer in entering into the arrangement and the subjective consequences that the taxpayer intended to have as a result. In other words, did the taxpayer knowingly enter into the transaction with a main (and not merely a secondary) purpose of avoiding tax?

The court also noted that similarly structured transactions may be taxed differently depending on whether the taxpayer had actually intended to avoid tax.

Thus, regardless of the arrangement entered into, a taxpayer who personally and genuinely did not have tax avoidance as his main purpose should not be penalised by Iras, even if he derives a tax benefit from the arrangement.

There are a variety of non-tax reasons for a taxpayer entering into an arrangement. Tax avoidance may not be a main purpose.

Simply because an arrangement falls within one of the listed examples in the article does not necessarily mean that there must have been tax avoidance.

Liu Hern Kuan