Tax avoidance occurs only in some situations

I refer to the report (Timely for Iras to shut tax loophole, Oct 23).

Tax avoidance imposes a burden on society as it shifts the fiscal burden to other taxpayers to bear.

It should not be tolerated, and it is a welcome move by Inland Revenue Authority of Singapore (Iras) to clamp down on this.

However, tax avoidance only occurs in limited circumstances where an arrangement is done without an authentic commercial purpose or has one of its main purposes the reduction of tax.

This means that doctors or dentists who set up companies solely for genuine commercial purposes, such as limitation of contractual liability, and who receive market rate remuneration do not fall within the ambit of tax avoidance.

Doctors or dentists who incorporated a company to carry on their practice in years of assessment where the difference between the highest marginal personal tax rate and the corporate tax rate were insignificant or even the same (such as in 2003 and 2004) may well be able to prove that the arrangement was not tax motivated.

This is because they may be able to show that any tax savings would be significantly offset against the cost of maintaining a company.

It is crucial that even if the arrangement constituted tax avoidance, Iras is only entitled to counteract any tax advantage obtained or obtainable by the taxpayer under the tax avoidance arrangement.

Therefore, in tax avoidance cases that capitalise on the difference between the corporate tax and personal income tax rates, Iras should only penalise the taxpayer on the underpaid tax caused by this differential and not more.

Taxpayers should be aware of their right to appeal to the Income Tax Board of Review, a judicial body set up by the Ministry of Finance.

Vikna Rajah