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Singapore's Global Marine Boiler and Engineering Pte Ltd (GMBE) has been convicted of tax evasion for under-reporting profits amounting to S$780,152 (US$615,718) for the Year of Assessment (YA) 2008. GMBE was ordered to pay a penalty of S$421,282.08 (US$332,488) and a fine of S$8,000 (US$6,313.83).

GMBE supplies, manufactures and repairs marine equipment and engines. It is the second company to be convicted in court for evading tax through abuse of tax exemption scheme for new start-ups under section 43(6A) of the Income Tax Act. In Oct 2009, Steel Forming & Rolling Specialists Pte Ltd (SFRS) became the first company to be convicted for abusing the tax exemption scheme.

Investigations revealed that GMBE set up four shell companies in December 2006 for the purpose of abusing the tax exemption scheme for new start-ups.  The four companies had no employees except for the directors themselves. There was no work or services performed by the four companies for GMBE.

Nevertheless, GMBE included fictitious expenses amounting to S$780,152 (US$615,718) in its audited statements of accounts for the year 2007, purportedly as management fees, commission, labour and service charges paid to the four shell companies.

Although the four companies had reported their income based on the fees purportedly charged to them, each company paid a negligible amount of tax. This is because the first $100,000 (US$78,922.9) of their chargeable income was exempted from tax under the tax exemption scheme.

Through setting up four shell companies and including fictitious expenses in its accounts, GMBE had artificially lowered its profits by S$780,152 (US$615,718) and evaded income tax of S$140,427 (US$110,829 )for the YA 2008.

IRAS has detected cases where shell companies have been used to take advantage of the tax exemption scheme for new start-ups. These companies have no business activities and have few or no employees. Their accounts usually show relatively few transactions and low capitalisation.

The abuse of the tax exemption generally takes the following forms:

• Allocating the income of a profitable company to a few shell companies.
• Charging fees or expenses to an existing profitable business without any bona fide commercial reasons.

The effect of these forms of arrangement is an overall reduction of tax for the profitable company and the shell companies.

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