IRAS has recently issued a guidance and advisory to all medical professionals that conduct their medical practice through companies. It is not unusual that commercial entities are attracted to conduct businesses through corporatisation via companies due to the friendly corporate tax regime in Singapore. And it is a also well known fact that Singapore is a business friendly regime both for its interconnectivity to the ASEAN/globally, financial stability, strong compliant and transparent tax system, which are key factors attracting not just the foreign investments into Singapore but also local entrepreneurship and startups, a motivation for incorporation not unique to local medical practitioners (see article on “What so great about the Tax system in Singapore for Singapore resident companies?” March 20, 2019). However, where the motivation of corporatisation of a business (from a sole proprietorship or partnership) is solely or substantially driven by tax incentives and precedes the commercial motivation, one runs the risk of a tax avoidance presumption, or what some some called aggressive tax planning that attempts to meet the legal form but not the intent of the law. It is not unreasonable for a sane man to be attracted by the attractive tax rates of company vs a sole proprietorship or partnership and plans his business to maximise the tax benefits from a commercial structure see article on “Personal vs Company income tax” dated March 29, 2019). The problem is when such arrangement or structure is artificial, contrived or has little commercial substance but only to derive a tax benefit, then that will draw the eyebrows of the tax regulators. A setup of a company or any arrangement should naturally be done out of a commercial motivation as it is in fact a bona fide business setup for entrepreneurship and risk taking. Any business which is setup with the sole motivation for tax benefit is clearly not sustainable, non-commercial and against the intent of the law which IRAS has the power under s33(1) to ignore the artificial structure and restate it back to its original structure. There is a limitation for any law enactment to clearly spelled out what are the specific instances of such an intent bearing in mind that these will evolve beyond the pace of law setting and it will always be a catch-up. The wide power of the s33(1) anti-avoidance section in ITA would then provide a background of the whole intent of the ITA and give IRAS far reaching powers to lift all tax avoidance structure intended to outsmart the law.
We have seen the tax office moving with the changing times and business complexity, starting to perform its reviews on verticals, i.e. education providers, real estate agents, professionals i.e. lawyers, doctors etc. So it is of no surprise that a more extensive and broader review on medical professionals will be sooner rather than later be conducted as part of IRAS systemic review of the business compliance of overall tax regime.
As outlined in our earlier article on 17 April 2019, “4 tax mistakes to avoid for medical practitioners“, a broader ground sensing review had been conducted by IRAS for over 20 doctors and dentists earlier this year, which laid out the ground work for a more structured and extensive review. This later advisory is a extension following the initial findings of the earlier broader review and has far wider implications not just for the medical professionals but also for the wider professionals which have incorporated or are thinking about incorporating its businesses. Of the 4 common tax mistakes listed in the earlier article, almost all 4 (excluding one on incomplete revenue reporting) have been reiterated in this latest advisory as what IRAS would likely take a closer look on its tax implications.
We have also seen the tightening of the tax incentives particularly the full startup tax exemption (SUTE) in YA2020 $300k to $200k as well as the partial tax exemption for all tax resident companies (see article on “The impact on Company income tax on the change of full and partial tax exemption from YA2020” June 25, 2019). All but done to recalibrate the tax regime with the changing time and development of the nation perhaps also with the intent to dilute the attractiveness of the tax benefits to ensure a lesser motivation to drive tax benefits vs entrepreneurship taking. Putting the main commercial motivation more forthright vs tax benefits.
It would then make sense that medical professionals running practice through companies should start to perform a preliminary review of its business model, operations, risk management and transfer pricing including remunerations to doctors with its accountants to see if there are any key contentious areas of concerns that IRAS would be reviewing on. As the areas of IRAS review may vary on a case by case basis depending on the commercial structure and intent at the point of incorporation and post incorporation as well as the subsequent functions performed by the companies vis-as-vis the doctors (or owners) may change along the way, one should note that every review of each company is a separate review and unique in its own. However, there are some key areas that that medical professionals can look into as a quick sense of whether there it is a sustainable commercial setup beyond just a legal structure for corporate tax benefits:
- Business model:
What is the reason that the company was incorporated in the first place ? Was it just a change in legal structure from a sole proprietorship or partnership to a company or is there a commercial intent to take it beyond a one to 2 man professionals practice. Is there a change in business model, management, operations or risk-taking that allows the business to take it beyond its key man ?
- Business operations:
What are the functions performed by the company – supporting manpower/medical manpower, contract management, place of business, managing of office and medical equipment, level of expertise of supporting manpower e.g. dispensing of medical supplies, pre-consultation checks, the extent of nature of work perform by the supporting clinical staff etc ? Who and how are these functions performed vs before incorporation ? Is the business continued to be driven mainly by the key reputation or expertise of the doctors or are there some substantial operations being performed by the company and what are the type and level of support provided by the company to the doctors ?
- Risk management
How did the company provide risk management to the business, e.g. is the company well capitalised, manages, owns and utilises substantial assets necessary to the operations and uses it in the production of income, or manages the contractual risks of the business in relation to the workplace, employees, customers and suppliers. Just a mere risk warehousing of limited liabilities of corporatisation from sole proprietorships/partnerships is not good enough (to a tax point of view) to be accepted as a good commercial reason by the tax office. This must goes beyond the legal structure of limited liabilities. The Company must be performing substantial operations with proper segregation of duties by employees, employee management, stewardship function by the board or directors, proper control oversight on management override, transparent and arms’ length transactions, workplace and safety management as well as credit control on customers and suppliers’ contract management. Does the shareholders undertake any entrepreneurship risks ?
4. Transfer pricing
Are the doctors fairly remunerated for the services that they provided and are the remuneration of the doctors in line with what is the market remuneration ? Are all other payments to the other persons employed by the company done at arms’ length e.g. employees i.e. nurses, receptionist as well as related parties (i.e. relatives, spouses, children, parents etc). It is important that fair remuneration is provided to the doctors in the form of salaries. Where the business intent of running the medical practice through a company with clear commercial reason as well as the main purpose condition cannot be substantiated, it is critical that the amount of fair remuneration paid within the company helps to address the presumption of tax avoidance of shifting of income from the individual doctor to the company. If there is no material difference in the tax liability assessable under company vs individual, then there cannot be said of any tax benefit that one derives from having a corporate structure. It would be less of a relevance to prove whether one’s main purpose of such an arrangement is driven by tax advantage as there is no reduction in tax liability as such. As there are difficulties for a company to justify its remuneration by providing market salary benchmarking as market comparable or any other alternative methods , IRAS has addressed this by providing a general cost plus marked up % for doctors practising in corporatised medical practice whom are also the shareholders and directors. A guidance markup of 10% and 15% on the total cost base (include doctors’ salaries but exclude all private expenses) for specialist and general practitioner respectively for the company on providing the support services. The residual profit after deducting the total costs + the 10% or 15% markup will be deemed to be the the fair market remuneration of the individual doctor (“deemed market remuneration”). IRAS may make adjustment under s33(1) of ITA (for tax avoidance) for any excess of this deemed market remuneration over the individual income previously declared under individual doctor. This is the excess which would otherwise be taxed under the higher individual income tax bracket but shifted to the company tax structure for tax benefit.
Unless clear “bona fide commercial reasons condition” and “main purpose condition” (relating to the 4 key areas discussed above) can both be satisfied to invoke s33(3)(b) exception to s33(1) tax avoidance section, it is unlikely IRAS would consider any deviations to the deemed market remuneration approach. Failing the above bona fide and main purpose test, the last option is to evaluate whether if there is any tax advantage derived, and if so, is such tax advantage within the intended purpose and scope of the Parliament enactment to encourage enterprise risk-taking under s43(6) and s43(6A). However, it is quite remote if risk-taking for entrepreneurship under risk management in the above 4 headings is not satisfied that it would miraculously meet this last option.
So the best option is to go through its business model and operations and assess the potential tax impact if applicable as each individual medical practice is unique and has to be evaluated on its own. Most of the time, it is difficult to spell out in detail an arrangement that is contrived for tax advantage, but relatively easy when you see one. We will look into some of the interesting real case study of such innovative structures that s33(1) would be intended to address. see “A look into some of the interesting tax avoidance structures caught under s33(1) ITA” November 19, 2019.
A look into some of the interesting tax avoidance structures caught under s33(1) ITA November 19, 2019
The impact on Company income tax on the change of full and partial tax exemption from YA2020 June 25, 2019
4 tax mistakes to avoid for medical practitioners April 17, 2019
Director’s remuneration – What should I know about this as a SME owner ? April 1, 2019
Personal vs Company income tax March 29, 2019
What so great about the Tax system in Singapore for Singapore resident companies? March 20, 2019