Every government around the world attempts to use its tax system to build up the country’s revenue while also strengthening the country’s economy. Singapore is no exception to this, and with Budget 2019 approaching, the Singaporean government has been considering its options to do so amidst a volatile international tax landscape. All tax systems in the world, including Singapore’s, lie within a complex global framework marked by political, social, and most importantly, economic change. However, because governments only have limited capacity to raise taxes in their respective tax jurisdictions, they must frequently seek alternative methods to increase revenue. Tax authorities around the world have also begun to encourage taxpayers to become more tax-compliant by including material related to taxation within their corporate governance frameworks.
The International Tax Landscape
In a traditional tax system, taxes are paid once on any profits made in the country where the corresponding business transactions were conducted. However, times have changed, and because of the evolution of the digital economy, taxable profits are now often separate from the location of the related business activity. Other issues that are currently shaping the international tax landscape are retaliatory measures, unfair tax competition, and aggressive tax reforms. Companies must properly navigate these potential pitfalls to reach the best possible outcomes in terms of both profits and tax compliance. Errors in this regard may result in problems such as double or triple taxation, violation of national or international laws, or irreparable damage to the company’s reputation.
The issues related to tax compliance can be divided into three general categories. The first of these regards anything related to tax fraud. Tax fraud is defined as an offense in which an individual or business entity deliberately submits false information to the relevant tax authorities in order to reduce the amount of tax required to be paid. Thus, tax fraud is any instance of attempting to cheat the tax authorities with the intent to avoid paying the complete tax obligation. Examples of tax fraud include the claiming of tax reliefs for which one is ineligible, tax evasion, misreporting income, and the concealment of taxable assets and income from tax authorities. A taxpayer commits tax fraud when the taxpayer deliberately avoids paying tax debt, does not report all income received, or prepares and files a false tax return. Unless the failure to pay the relevant taxes is regarded as having been intentional, an entity is usually not deemed to have committed tax fraud. Tax fraud is an extremely serious crime and is a completely illegitimate form of tax planning.
Other issues related to tax compliance have to do with legitimate tax planning. Legitimate tax planning takes place when a taxpayer makes arrangements to minimize the amount of tax to be paid. Unlike tax fraud, legitimate tax planning is legal, hence its name. In legitimate tax planning, taxpayers ensure compliance with tax laws and attempt to benefit from government-sponsored incentives by using methods which are completely legal. However, although such methods may be legal, they are not necessarily devoid of any risks. For example, in some cases the laws governing legitimate tax planning may be rather vague. This often leads to questions regarding a tax planning scheme’s legality. Many ordinary citizens and even governments incorrectly consider some legal tax planning to be in violation of existing tax laws. Several characteristics make a tax planning scheme more likely to be though of as illegal. Among them are the following: if there are guaranteed returns for little or no risk, if there are secrecy or confidentiality agreements, if tax-exempt entities are closely involved, or if the scheme has a high level of complexity.
The third category is that of tax planning with unintended outcomes. In such instances, tax plans are made according to current tax laws but do not reflect either the current corporate environment, the intent behind the relevant tax laws, or both. These plans often lead to outcomes that the policymakers did not plan for, as they did not expect the circumstances that led to such outcomes to have taken place. This is by far the most complex category to deal with because in many cases, determining the original intent behind the tax laws is extremely difficult, if not outright impossible. The involvement of international forces and competing interests add yet another important layer to such issues.