• Limited Liability Company vs Partnership: Which is the Right Choice for Your Business?

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    Singapore has multiple business types to choose from when incorporating, but two of the most common business types are:

    • Limited liability company
    • A partnership

    Limited liability companies are also considered a private limited company or PLC. But, for the purpose of this article, we’ll be using “limited liability company,” or “LLC.”

    Legal Identity Differences Between an LLC and a Partnership

    Legal identities are very important because if a company has its own legal identity, it is separate from its shareholders and directors. An LLC is advantageous because a separate legal identity is given to these businesses.

    What this means is that the entity can:

    • Enter into legal relationships
    • Sue or be sued
    • Hold property
    • Enter into contracts

    All of these points will occur in the name of the company. In most cases, an LLC will have up to 50 persons that have shares. A partnership often occurs between 2 and 20 members. Partnerships are a concern because they’re not a legal entity.

    What does this mean?

    Partners have unlimited liability. If a business fails to pay its debts, the partners may be held liable to satisfy the debts. But, even in a partnership, the firm can sue or be sued in the firm’s name. The main difference is that liability will fall on the partners rather than the separate legal entity that is the limited liability company.

    Shareholders in an LLC are only liable for the investment in the company – not for the company’s debts.

    Note: A partnership is different from a limited liability partnership, or LLIP, which limits the partner’s liability to his or her investment into the business.

    Continuity and Transferability of an LLC and a Partnership

    Business continuity and transferability is another question of concern. Partnerships are allowed to continue and transfer as long as the partners agree that it will. Paperwork should be in place that allows for the partnership to exist even if a partner drops out of the venture or dies.

    Perpetuity and succession of an LLC is irrespective of the partners, shareholders or directors of the business.

    If a shareholder, partner or director die in an LLC, the continuance of the business is not an issue. Transferring of shares is also very straightforward, and the transfer will not impact the daily operations of the LLC.

    Raising Capital Questions and Concerns

    LLCs have the benefit of being a legal entity, and these businesses will be viewed favorably by banks when it comes to lending and raising capital. An LLC comes with credibility. Partnerships will have a harder time receiving financing for their operations.

    Partnerships are often limited to the contributions of their partners.

    So, if the partners have already exhausted all of their personal contributions, it will be very difficult to raise capital.

    Private finances are often needed, especially in the initial stages of the partnership’s operation.

    Taxation of an LLC vs a Partnership

    Taxation of an LLC will be imposed on profits, and a tax rate of below 9% is imposed up to SGD 300,000. Tax rates are capped at 17% for all profits above the SGD 300,000 threshold. Partnerships will be taxed differently.

    Partnerships will be taxed on the profits that are distributed among partners.

    Tier-based, the income from partnerships will be taxed based on the personal income tax rate.

    Responsibilities and Expenses of an LLC vs a Partnership

    A partnership has a low cost of registration, and it’s an easy entity to setup. Two or more persons with an idea may start with a partnership because they’re:

    • Easy to manage
    • Easy to administer
    • Quick to set up
    • Less administrative duty intensive

    Annual filing requirements are required for an LLC, and there’s also a higher registration fee. You'll find that there are also requirements for:

    • Annual accounts
    • Annual general meetings
    • Tax returns

    Partnerships may be formed without the use of an accountant or law firm, but it’s ill-advised to form an LLC without professional assistance. The initial set-up of an LLC is vital to the business’ ongoing operation.

    Professionals, such as accountants, will be able to manage all of the complex responsibilities of an LLC.

    An LLC may be a complex structure, especially compared to a partnership in terms of responsibility and maintenance, but they also offer flexibility and power. Limiting the liability of the shareholders is a major benefit, and this is often one that leads to a new business being formed as an LLC.

    The flexibility and advantages of the LLC are often enough for owners to deal with more complex maintenance of the business.

    Partnerships also have to worry about a discontent partner giving notice for the dissolution of the partnership. This is a major concern for all partners because it can cause substantial losses and concerns for all partners involved. Partnerships are often only chosen in a limited number of situations.

    Oftentimes, partnerships are not recommended, although they do have their place in limited scenarios.

  • Understanding Permanent Establishment in Tax

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    Globalization has led to the question of trade and investment suffering from double taxation. Policy discussions are ongoing, discussing the harmful impact of aggressive tax planning and have led to discussions of double taxation agreement, the cornerstone being permanent establishment.

    Double taxation has led to companies engaging in tax avoidance schemes, often complex in nature, to avoid paying taxes in a resident state and in a state where profits are received.

    Double taxation agreements (DTAs), often entered into as a political tool or gesture, can also harm a country’s revenues. Agreements with the United States can cost billions in losses annually. The Netherlands may have lost as much as €770 million in 2011 alone due to agreements with developing countries.

    Tech giants, such as Facebook, Google and Apple, also funneled money through international headquarters to avoid a “physical establishment” in countries that have higher tax rates.

    The issue, which led to Apple and Google owing $600 million to Italy, has led to the European Union planning to revise their rules on Permanent Establishments.

    What is a Permanent Establishment?

    Businesses that operate outside of their resident country, or country in which they are a resident, are required, in many countries, to still pay taxes in their resident country. Even when the operations are based in another country, the resident company wants to receive taxes from the income made.

    DTAs are such that source countries and resident countries have taxing rights.

    Permanent establishment (PE), as pertains to DTAs, helps put in place a threshold for the taxing source. For example, let’s assume the following:

    • State A is the resident country
    • State B is the source company (non-resident)

    A company earns revenue from State B, and State A and B have a DTA in place. Under the DTA, there may be a threshold for how much a company is taxed by State B and State A.

    Thresholds for taxation will be dependent on the DTA that’s in place.

    What a PE does is a few things:

    • Limits taxing at the source State
    • Sets minimum limits on the nature of the activity

    Let's assume that a PE is formed, when in accordance to the DTA, if a company has been operating in State B for a period of 6 – 12 months.

    A company, signing a new contract, may have to operate in the non-resident state for a period of eight months. This means that the DTA would consider the operations to be a permanent establishment, meeting the threshold in the agreement.

    The non-resident country will want an allotment of taxes as a result.

    But the company doesn’t want to pay these taxes. Complex avoidance strategies may be put in place, and now, the company has formed three different entities. All of the three entities will work on the project for no more than three months at a time in an effort to avoid further taxation.

    The state where the operations took place may not realize that the contract has been split in such a way that it’s designed to reduce or avoid the PE definition.

    Under the example above, and it happens frequently, the company will pay less taxes while still operating in a non-resident state.

    When a DTA is formed, it’s important that the definition of a permanent establishment is clear and concise. Both states must understand and consider the implications that the PE definition will have on the agreement.

    Source States are often the beneficiary of a wider agreement, wherein a wider range of situations for a permanent establishment exist. The Source States may not benefit from a narrower permanent establishment definition because it will often reduce the State’s right to tax the company.

    There are reasons why a state may agree to narrower agreements aside from a lack of understanding.

    For example, perhaps the state is willing to concede with less taxation rights on the basis that Foreign Direct Investment will increase, covering the potential loss in revenue.

    Conventions and Permanent Establishments

    There are model conventions in DTAs resulting in an agreement, despite differences in wording, offering similar provisions. OECD, UN and United States proposals on conventions have led to this similar wording being adopted in DTAs.

    States have a right to follow these recommendations fully, or the state can choose to make changes as needed.

    Initial Definitions of a Personal Establishment

    Under the models, and they are different, the personal establishment is determined under the “place of business test.” The requirements often fall under:

    • Existence of a place of business
    • The place of business must have a degree of permanence, but that permanence doesn’t need an attachment to the soil
    • Operations are through a fixed place of business

    Following these criteria, you’ll also find sections that include examples of what a PE may consist of and the minimum period of time that is required for a permanent establishment to be triggered.

    It's important to mention that “operations are through a fixed place of business” means that the company employs workers in the State. These workers may not be independent of the company.

    Exclusions in activities will also be listed in a third section, and this means activities that may provide little or no income.

    UN, OECD and US models, while having significant similarities, vary greatly primarily due to the minimum time that constitutes a PE. For example, under the OECD model, it would require a company to operate in a state for 12 months to be considered a PE.

    UN models establish a PE after just a six-month period.

    Resident and non-resident states will be greatly impacted, depending on the model adopted, because it may mean a significant drop in tax revenue. OECD models are also lacking information on what happens if a company operates in a non-resident country past the PE definition.

    UN models, in this case, are more thorough and may provide a better framework for a DTA to follow.

    Each model also has its own definition of “auxiliary” activities. The benefit of each model must be considered so that the DTA is as thorough as possible. There are also differences between the UN and OECD models as pertains to:

    • Consultancy business provisions for the duration test
    • Specific anti-abuse clauses
    • Preparatory or auxiliary activities

    The result is that DTAs become a complex agreement wherein multiple editions may be signed that cover different policies appropriately. Contracting States may decide that it’s best to adopt several DTAs to provide better overall provisions and tax benefits.

    Duration tests are often the most important part of a PE, and contracting states may decide to update their agreements or use different agreements with different contracting states.

    Extractive Industry Impacts and Permanent Establishment

    Defining a permanent establishment is key to enforcing a DTA, but it may be difficult to define a PE because there are different triggers. As we’ve learned, there are different means in which a PE can be established based on the adopted model convention.

    Questions exist in business industries where fragmented work may count towards PE establishment.

    Multiple parties may operate in extractive industries, and these parties may be commonly owned. Fragmented activities may exist in one common project, but there’s the question of whether or not these fragmented activities should be lumped together.

    When lumped together, this may create a PE, which may or may not be beneficial.

    Contract splits, which are often utilized as a means of avoidance, also occur in extractive industry operations. Should these activities be grouped together, too?

    There's also the consideration of investor-State contracts.

    Joint operating agreements may exist within these contracts which will trigger different PEs, and subcontractors may also trigger a PE despite only being called in for short-term work. It's a complex web of legalities that can lead to more questions than answers for businesses.

    Tax administrators will need to monitor work closely in order to correctly develop a timeline of work and ensure that the definition of a PE is properly established.

    Companies have also been known to call in several companies to split the work among. These companies may be subsidiaries, and the companies may shift profits around in such a way that they avoid PE and are able to maximize profits.

    Avoiding taxes at source benefits companies, but it also lowers revenue in the source countries where operations took place.

    Extractive services are such that different stages are likely to trigger permanent establishment. States often require companies in this field to establish a presence in the region.

    Subcontractor Issues and Concerns

    Subcontractors are a vital part of the workforce, and it’s not uncommon, despite the industry, for subcontractors to be called into a project. These professionals will often only work for a short-term period, and the skills that they offer are highly specialized.

    Electricians, for example, may be subcontracted to work on a defense building.

    These individuals operate on their own terms, so they may or may not trigger a PE. Companies, in an effort to avoid triggering a PE, will subcontract in such a way or structure operations to avoid threshold establishment.

    Subcontracting companies, which may be closely related, may also be called in for profit shifting, or to shift profits from a company that has met the PE threshold to a company that does not meet the threshold.

    Since the two companies are closely related, and they may even have the same owners, this provides a direct benefit in terms of revenue.

    Resident states will often negotiate longer PE thresholds, and this will generate higher tax revenue for the resident state. Larger entities with higher operations may request longer PE thresholds because the state that they’re coming to an agreement with is smaller in size and less beneficial of a partner.

    The Republic of China, known for its large economy, has an 18-month threshold with their agreement with the Government of Ukraine. Ukraine loses out on revenue as a result of the poorly agreed upon DTA.

    Loopholes exist that allow companies to shift profits, and this is what Google and Apple did when they setup their bases in Ireland. The companies knew that Ireland had lower taxes than Italy, for example, so it made economic sense to shift profits.

    The penalties paid were small in comparison to the profit made, and it is likely, although not certain, that the two tech giants knew the potential fines or penalties would be far lower than the savings potential.

    It's a risk-reward basis for these companies, and the BEPS project, from the OECD, aims at helping governments find solutions to the growing profit shifting problem.

    Base erosion profit sharing is a major issue facing many of these models, and it’s an issue that will continue to exist, although the area does have room for improvement. OECD’s Multilateral Convention is a promising solution that will allow the adoption of specific clauses by States that will prevent the avoidance of PE.

    Anti-fragmentation rules are especially important and are the focus of many solutions because of the widespread use of fragmentation to avoid thresholds.

  • Deduction of Interest Expenses s14(1)(a)

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    BML v Comptroller of Income Tax [2017] SGHC 118 revolves around the interpretation of s 14(1)(a) of the Act on the deduction of interest expenses upon money borrowed for capital employed in acquiring income.

    Case Facts to Consider

    BML, the appellant, owns and operates a mall. The appellant's transaction in October 2004 came into question when the company assigned its rental income rights to a special purpose vehicle. The goal of creating the special purpose vehicle is to provide security for a loan.

    A facility agreement was made with the appellant borrowing $520 million, or the market value of the mall.

    The appellant utilized $170 million to refinance previous borrowings, and the remaining balance of $350 million was "lent" to shareholders. The money lent to shareholders was provided as interest-bearing loans.

    BML essentially converted their equity-based vehicle into a debt-based vehicle by issuing fixed rate subordinated bonds through a capital reduction exercise.

    The appellant then went on to claim deductions for the shareholder bond interest expenses. Deductions were claimed for the years between 2005 and 2009.

    The Comptroller of Income Tax disallowed the deductions incurred through Shareholder Bond interest expenses. The Comptroller's decision was upheld, with the appellant appealing the decision to the High Court.

    The Board's Stance and the Basis of the Appellant

    The Board's decision, in summary, suggests that there was no link between rental income, which is how the appellant makes money from the shopping mall, and the interest that was paid to Shareholder Bonds.

    The Board suggests that the interest was not used to provide the mall with further income. Instead, the interest was derived from the intent to provide shareholders with a return for their interest in the company.

    As per the board's stance, there was not a substitute in financing which would justify the appellant's deduction of the interest.

    The entire basis of the case, from the standpoint of the appellant, was that the Comptroller misinterpreted s 14(1)(a) of the Act. Basis for the argument stems from the following:

    • The Comptroller doesn't have the authority to determine if interest paid is deductible

    The governing test under s 14(1)(a) came under question as well the Act's wording of:

    • Any sum payable by way of interest

    The question of the case is whether or not the interest paid by the appellant should be deductible. Both parties disagree over whether the Comptroller has the authority to decide on interest being payable under "capital employed in acquiring the income."

    The Comptroller asserts that there must be a direct link between money borrowed and income acquired.

    Andermatt Investments Pte Ltd v Comptroller of Income Tax [1995] 2 SLR(R) 866

    Andermatt Investments is the leading case in the interpretation of s 14(1)(a). The case, used to interpret the Act, involves an investment company that wanted to purchase a property owned by another company.

    Shareholders of Andermatt included the Wan family.

    Wan Holdings, owner by the Wan family, owned the property in question. Andermatt purchased all shares of Wan Holdings.

    The acquisition of the property was problematic because Andermatt purchased all shares in Wan Holdings, effectively making Andermatt vested in the property. Andermatt's purchase of Wan Holdings was then to be satisfied by drawing down on an overdraft facility.

    The investment company wanted to deduct the interest payable against the property's rental income.

    High Court's Decision on BML v Comptroller of Income Tax [2017] SGHC 118

    The case was dismissed by the High Court, meaning the appeal was thrown out. Dismissal was based on the following facts:

    • The Comptroller has the discretion, in accordance with s 14(1)(a), to determine whether the requirements for a deduction are satisfied. The High Court, in effect, also claims that a direct link should be made between income produced and money borrowed under the s 14(1)(a) governing test.
    • The mall's rental income and interest paid on shareholder bonds could not be established, meaning that there was no direct link between the two.
    • The Court decided that it will not intervene unless the appellant can prove that irrelevant considerations were made in the Comptroller's decision to not allow the deduction.

    The High Court's decision is that the Comptroller's determination and the decision of the Board were reasonable.

    The Court concluded that the mall was already owned and under the control of the appellant and generating rental income prior to the bond issuance. The issuance of the bond was found to neither change the rental income of the mall, nor change the ownership status of the mall. The restructuring, at the admittance of the appellant, was to restructure capital holdings in the firm and not due to financing needs or the desire to generate more rental income.

    Direct links for deductions allow for a fair and just way for companies to deduct interest payments. The case points to a direct link requiring more than a balance sheet. Companies, as in the case of the appellant, could make changes to their capital structure whether or not a loan was needed and related to income produced.

    The loan and bonds given to shareholders wasn't required to produce income and did nothing to help enhance the appellant's assets.

    Rather, there was no link established between the shareholder bonds and the income produced.

    A number of factors, following the ruling, will need to be established for companies to make a deduction on interest paid. First and foremost, the link between the interest paid and income produced will need to be tangible and factual.

    The Comptroller, under Section 14(1)(a) and the ruling now, without a doubt, has discretion over how much, if any, deduction should be allowed.

    Loan capital replaced by equity capital isn't entirely bad, and there are circumstances wherein deductions can be made. The appellant's case is a bad example of loan capital replaced by equity capital, but if the circumstance revolved around an old loan being replaced by a new loan, deductions would be allowed.

    Taxpayer intent isn't enough to prove a direct link between income produced and money borrowed.

    Intention does remain relevant in the tax code, but it doesn't provide a direct link.

  • Process and Effects of Compulsory Winding Up

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    There are many reasons to wind up a company. Maybe your company has ceased business activities, or maybe you're looking to minimize tax liabilities. In these two cases, voluntary winding up is possible. However, there are also two other ways to wind up a company: creditor's voluntary winding up, and by an order of the court.

    Members' Voluntary Winding Up

    Companies winding up voluntarily can only do so if it is still able to pay its debt in full within 12 months of commencing the winding up. Company directors will be required to make a statement to this effect once the winding up process is complete.

    When a company chooses the members' voluntary winding up, the shareholders will appoint a liquidator to file the necessary notifications under the Companies Act and wind up its affairs.

    No originating summons is filed in court in the case of a voluntary wind up. The Accounting and Corporate Regulatory Authority handles this instead.

    Creditors' Voluntary Winding Up

    What happens when a company is insolvent, or unable to pay its debts? In this case, the company can only be wound up through a creditors' voluntary winding up or by an order of the court.

    If the company's Directors decide that the company cannot continue operating, due to its liabilities, a meeting must be called with the creditors to appoint a liquidator. In this case, the Directors make no declaration of solvency, which is required with a members' voluntary winding up.

    It's possible that a members' voluntary winding up may transition to a creditors' voluntary winding up if the appointed liquidator forms the opinion that the company cannot pay its debts in full within the required time period.

    Compulsory Winding Up

    There are also cases when companies may be compulsorily wound up via an order of the court. The court may be petitioned to obtain such an order.

    There are many reasons why a company may be wound up compulsorily.

    • The company is not able to pay its debts.
    • The company, through a special resolution, has resolved that it should be wound up by the court.
    • The court decides that it is just and equitable for the company to be wound up.
    • The Directors acted in their own interests in regards to the company's affairs rather than in the interests of the company as a whole.
    • The company is being used for an unlawful purpose.
    • A creditor has a claim against a company for more than $10,000, has served a written demand requiring the payment, and the debt was not paid within three weeks.

    A Real-World Example of Compulsory Winding Up

    Take, for example, the case Companies Winding Up No 192 of 2016, Summons No 5094 of 2016. In this particular case, which also highlights the importance of replying to tax income, the judge ordered the defendant to be wound up.

    A petition for the order was filed by the Comptroller of Income Tax on grounds that the defendant was unable to satisfy its debts. The defendant's business was in the management and investing of property.

    In 2014, the Comptroller sent a letter to the defendant stating that the gains from the sales of two properties by the defendant is taxable. The Comptroller provided the defendant with reasons for the position as well as "proposed revised tax computations" for the years of assessment between 2011 and 2013.

    The defendant was given a deadline of 8 January 2015 to inform the Comptroller of any objection. The defendant failed to respond by the deadline, so the Comptroller proceeded with the revision of the tax assessments.

    The defendant was sent a letter stating the additional assessment as well as Notices of Additional Assessment. The notices state the amounts of $672,319.32 and $458,682.01 for 2013 and 2011 respectively were to be paid by 21 February 2015 as additional tax.

    The notices also gave a two-month deadline from the date of the notices to object to the additional assessments.

    No payments were made before the deadline. Between 20 April 2015 and 28 March 2016, tax officers made calls to the defendant requesting payment. Letters and emails were also sent between 21 July 2015 and 29 January 2016.

    The defendant had arranged to make payments through associate companies via cheque for part of the owed payments. Together with penalties, the defendant owed more than $1 million. Most of the additional tax remained unpaid.

    The Comptroller sent a demand dated 5 July 2016, which stated that the defendant owed $1,131,130.25. The demand stated that if the defendant did not make a full payment within three weeks that the Comptroller would commence winding up proceedings against the defendant.

    No further payments were made. The defendant claimed to have been dealing with health issues and other business-related matters, and for these reasons, did not respond to the statutory demand.

    The Comptroller filed the application to wind up the defendant on 7 September 2016.

    The court ultimately ruled that the defendant was unable to pay its debt to the Comptroller, and the court may order the winding up of the defendant under the Companies Act. The judge ordered the costs to be taxed and paid to the Comptroller out of the defendant's assets.

    The Effects of a Compulsory Winding Up Order

    When the court winds up a company compulsorily, the winding up is deemed to have commenced at the time the Originating Summons was presented. Once the winding up has commenced, the Directors of the company have no power to carry on business operations. The assigned liquidator then takes control over the company.

    Within two weeks of the winding up order, the secretary and directors of the company must deliver to the liquidator a statement of the company's affairs. This statement contains the details of the company's liabilities and assets, and it also allows the liquidator to carry out an investigation into the company's affairs.

    After the winding up order is made, no action can be taken against the company without the leave of the court. Unless the court orders otherwise, any transfer of company shares or disposition of company property shall be void.

  • Can a Foreigner Register a Sole Proprietorship in Singapore?

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    Singapore's sole proprietorship means that one person or one company owns a business. The business can have no partners, and the owner has the ultimate say in the complete running of the business.

    The sole proprietorship can have its own name so long as the name isn't:

    • Restricted
    • Reserved
    • Identical to another entity
    • Undesirable

    Sole proprietorship requires that the owner of the business notify the Registrar of the following:

    • The business' principal place of business
    • Any place where business is performed

    Homeowners can even be allowed to conduct small-scale operations in residential premises. This is where the question of whether or not a foreigner can register a sole proprietorship occurs.

    Can a Foreigner Register as a Sole Proprietorship in Singapore?

    Singapore, unlike many other countries, does allow foreigners to register a sole proprietorship within the country. There are certain rules and regulations that must be met for a foreigner to legally have a sole proprietorship:

    • A local resident must be appointed as an authorized representative of the company.
    • The manager, who is a resident of Singapore, must be at least 21 years of age.

    This is the key most important thing for all foreigners that want to own their own business in Singapore. The local resident will remain an authorized representative, while the owner resides outside of Singapore.

    In the event that the owner does reside within the country in the future, the local representative can be removed by the company.

    Foreigners can also opt to reside in Singapore and open their business. This is a very stringent process, and as such, it's recommended that all owners who want to manage their company's operations and be present in Singapore seek approval from the MOM first.

    How to Register a Sole Proprietorship

    Singapore uses the BizFile system for all business registrations. An application must be sent through the electronic filing and information retrieval system to be properly filed. Before registration can occur, there is some preparation that must take place.

    The preparation which is required is only valid for citizens or permanent residents in Singapore.

    Foreigners will not need to conduct this preparation, which includes:

    • Topping off Medisave accounts

    Business owners, or potential business owners that want to register their business, have one of two main options to do so:

    1. BizFile. The BizFile system requires the register to have a SingPass or CorpPass. The owner will be required to provide an application with their endorsed consent via the BizFile system.

     

    1. Registered Filing Agent. A registered agent can include a corporate secretarial firm, accounting firm or law firm. The agent will submit and complete the online application on behalf of the owner. This option will provide the guidance of a professional with experience registering a business in Singapore. This is an optimal choice for ensuring that all of the requirements to start a business are met and the paperwork is approved.

     

    Business registration will require a fee that is subject to change. Fees, at the time of writing this article, are:

    • $15 for a name application fee
    • $100 for a 1-year business registration
    • $160 for a 3-year business registration

    Singapore's system is very quick, and a business may be registered as quickly as 15 minutes after the registration fee is paid. There are circumstances where the registration can take 14 days to 60 days to complete if the application needs to go to other government agencies for approval.

    For example, the Ministry of Education's approval will be needed if a business owner wants to build a private education institute or school.

    A registered filing agent will be best able to help you determine what agencies may need to approve the registration and provide a better overall estimate of the registration approval time.

    Quick Facts When Registering a Foreign Sole Proprietorship

    Sole proprietorship in Singapore differs in many respects than other countries. These quick facts will help familiarize you on how sole proprietorships work:

    • Sole proprietorship is not a separate legal entity.
    • Owners are accountable for all of their business liabilities.
    • Profits are treated as income for the business owner
    • Sole proprietorships cannot register another business firm
    • Annual tax returns and audits of accounts are not required, as profits are taxed as personal taxes
    • Investment in sole proprietorship is limited
    • Renewal of the business is required annually

    Running and operating the business is easier when the owner resides in the country. This allows for a tighter control of the business' operations, but it's not a necessity under current laws.

    Foreigners are welcome to start and run their business in Singapore. The country's tough stance on corruption is a major bonus, and Singapore has been ranked as the easiest place to setup a business.

    Singapore has a competitive economy, and the diversity of culture, architecture and languages makes this a top destination for business owners.

    Singapore is also a safe, clean country with an efficient transport system and an education system that meets all international standards.

  • Understanding Customer Accounting for GST

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    Singapore has enacted customer accounting changes, for certain goods, that will go into effect on 1 January 2019. The new changes have been enacted in an attempt to deter fraud schemes and maintain Singapore's identity as a low-fraud country.

    Sellers often hide the GST collected, and businesses in the supply chain will claim input tax in common schemes.

    Items commonly used in schemes include: software, mobile phones and memory cards.

    Understanding Customer Accounting

    A taxable supply includes the sale of goods and services that does not include:

    1. Precious metal investments
    2. Residential properties
    3. Financial services

    All other items are subject to GST. Businesses in Singapore are required, by law, to charge and account for GST. Input tax claiming conditions allow businesses to claim GST paid for local purchases and goods imported.

    Customer accounting accounts for output tax.

    The customer, under customer accounting, must account for output tax. Suppliers shift the accounting responsibility to the customer in these circumstances. The customer must be:

    • GST-registered
    • Be the person purchasing the prescribed goods
    • Must be purchasing the goods during the course of business

    Under customer accounting, the responsibility to account for GST is shifted to the registered customer. This form of accounting does not allow the supplier to charge or collect GST when the sale is subject to customer accounting.

    Suppliers are required to report the supply in their GST returns.

    In the event that both non-prescribed and prescribed goods and services are rendered at the same time, the GST exclusive sale value is only used when the supply exceeds $10,000. Customer accounting doesn't apply, regardless of value, to non-prescribed goods or services.

    Suppliers will be required to provide a tax invoice to GST-registered customers that shows, as the supplier, you have not collected GST on the supply. The invoice must also indicate that the customer has the responsibility to account for GST on the supply.

    Customers benefit from the new accounting rules, which allow them to claim the input tax for the purchase. Input tax is allowed to be claimed when the purchase was for business use and the manufacturing of a taxable supply.

    Relevant Supply of Prescribed Goods and Customer Accounting

    The prescribed goods allowed under customer accounting include: off-the-shelf software, memory cards and mobile phones. Local sales of prescribed goods require customer accounting when the goods are purchased by a GST-registered customer for business purposes.

    Customer accounting is only applicable when the GST-exclusive value exceeds $10,000 per invoice.

    Customer accounting is not applicable to non-GST registered customers. That is, if a supplier sells mobile phones, memory cards or off-the-shelf software to a non-GST registered customer, customer accounting does not apply.

    Instead, the supply will be standard-rated.

    Goods that are exported to overseas customers will have zero-rating if it satisfies the conditions. When the conditions for a zero-rating are not satisfied, the supply of the goods must be standard-rated.

    Suppliers that receive goods from customers for a relevant supply will account for GST chargeable. In this case, you as the supplier, receiving goods from a supplier as a GST-registered customer, will be able to claim input tax on the purchase.

    Customer accounting does not apply in the event that the supply of the prescribed goods is an excepted supply.

    Definition of Mobile Phone                               

    A mobile phone, under customer accounting, is a phone that:

    • Uses a cellular network to receive and transmit spoken messages
    • Is a device with a screen size of 17.5cm or smaller measured diagonally

    Even if the device meets the definition of a mobile phone, there are instances wherein the mobile phone is excluded from customer accounting. Exclusions occur when:

    • The phone is purchased from an approved mobile service provider with whom the purchaser has a service plan or mobile subscription.
    • The plan doesn’t involve collecting advanced payments.
    • The mobile phone supplier also provides the plan.

    Definition of a Memory Card

    Memory cards are considered a device that uses flash memory data storage. These devices are used for the storing of digital information and excludes any drive that has an integrated USB interface.

    These devices do not include:

    • Portable external hard disks
    • Thumb drives

    Devices that fall into this definition may include:

    • Memory sticks
    • SD Cards

    Definition of Off-the-Shelf Software

    The definition of off-the-shelf software is one that is arduous, and where:

    • The software is stored on a compact disk or similar medium
    • The software has a license key or product key on the physical packaging

    Software preloaded on a computer or hardware is excluded. For software to meet the condition of off-the-shelf software, it must not be customized in any way for the customer. Software in this case may include video games, console games, accounting software, anti-virus software, and downloads from the Internet.

    Software downloaded from the Internet that does not come with a license key or product key is not considered off-the-shelf.

    Backup copies of software is also not considered off-the-shelf software.

    GST-Registered Supplier Requirements When Making a Relevant Supply

    Suppliers are allowed to check if a customer is GST-registered through the IRAS website: http://www.iras.gov.sg. Customer accounting is applicable when the goods fall within one of the three categories above, and are sold to a customer under the following:

    • $10,000 is spent in a single invoice
    • GST-registration is valid

    Invoices must be supplied when a relevant supply to a customer is made. The invoice must contain the following additional information:

    • Information pertaining to the customer being required to pay GST
    • The amount of GST to be paid

    For example, the invoice may contain the following wording:

    • Customer to account for GST of $100 to IRAS

    Of course, the language should be discussed with a legal professional or accountant that can ensure the wording is up to standard.

    Suppliers should only collect GST-exclusive price for prescribed goods when a relevant supply is made. In this case, the invoice should not display the price including GST. Sales which include additional supplies which may fall under zero-rated or standard-rated may provide a separate invoice for the relevant supply.

    A separate invoice will make it easier to understand the output tax and clearer for the customer.

    Suppliers are not allowed to charge GST on a relevant supply. Suppliers ought to make sure that their accounting software accounts for the new requirement. Tweaks or new software may be required to account for the 2019 changes.

    GST-Registered Customer and Relevant Supply Requirements

    When prescribed goods exceed $10,000, customers must supply their GST registration number to a supplier that is GST-registered. Customers must alert the supplier if they're making a purchase of the prescribed goods for non-business use.

    The supplier, in the above scenario, would have to apply the standard-rate and charge on the sale.

    Suppliers have the legal right to ask customers to supply, in writing, documentation that states that they're purchasing prescribed goods for non-business use.

    Customers, under the new customer accounting rules, will take on the burden of accounting for GST on their supplier's behalf. The GST-exclusive price will be provided in the total value of standard-rated supplies box, or Box 1 on the form.

    The GST amount will be input into the output tax due box, or Box 6.

    Customer accounting is a way for ensuring accountability when sales are made and to lower instances of fraud. The new accounting method will go into effect in a year, so there is plenty of time for business to account for the changes.

  • Why Forensic Accounting is Important in the Interconnected World

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    Accountants are able to get an intimate look at a company's books. When an accountant is tasked with auditing the books or doing a company's taxes, the accountant is often able to uncover accounting fraud.

    But the field has since moved in a new direction.

    There was a time when an external audit was a specialized area of the field, where evidence was gathered and an assessment of financial statements were made. The widespread corporations of today require a lot more diligence than corporations in the past.

    Worldwide corporations today sell items in every country.

    The world is connected, meaning different accounting approaches need to be implemented across a corporation. It's a tedious task for accountants, and it allows for fraud to occur. Complexity grows as a business grows, and financial crimes may even go undetected in many circumstances.

    What is Forensic Accounting?

    Forensic accounting's demand is higher than ever before. Fraudulent activities are on the rise, and the complexity behind the fraud requires a specialized skillset to unravel. White-collar crimes have spurred a demand in forensic accounting.

    These accountants are hired by financial institutes, credit card companies and large corporations.

    Forensic accountants are also seen in the public sector, working with law enforcement agencies to help detect financial crimes.

    The difference between a mainstream accountant and one that focuses on forensic accounting is that the forensic accountant:

    • Analyzes financial information
    • Evaluates financial information
    • Develops intelligence

    These accountants are involved in cases that involve:

    • Embezzlement
    • Money laundering
    • Illegal activity

    A forensic accountant will help resolve court disputes by analyzing and extracting information from a company's accounting records and books. The role of a forensic accountant also involves their ability to clearly communicate financial information to their superiors and judges when involved in a trial.

    These professionals may also be hired by corporations that want a trained professional to control their finances and ensure that no crime has occurred in the organization. Large corporations will have accountants on staff to help detect:

    • Money laundering
    • Misappropriation of funds

    A growing problem includes the funding of terrorism through fund misappropriation and money laundering.

    Interconnectivity in today's business world requires these highly skilled professionals to provide investigations across borders and increases the time it takes for investigations to be completed. Cultural difficulties and regulatory differences within countries requires the forensic accountant to communicate differences, address cultural concerns and even linguistic concerns.

    Rapid changes and expansion of businesses have led to the necessity of accountants having to be digitally savvy.

    These professionals will need to interpret large data sets in the big data world. Data analysis is becoming a fast requirement due to the vast volume of data available. Tech savvy criminals are, more than ever before, turning to technology to help cover up their fraudulent activities.

    Singapore's White-Collar Crimes and Forensic Accounting

    Singapore, a global financial center, remains vigilant against crime, and has introduced the world's first financial forensic accounting qualification in Southeast Asia. The Institute of Singapore Chartered Accountants announced in September 2017 the ISCA Financial Forensic Accounting Qualification (FFA).

    The application for the qualification is available from March 2018 onward.

    The ISCA states that Singapore has 1,000 forensic professionals working across a variety of sectors, including:

    • Banking
    • Insurance
    • Law enforcement
    • Public and private sectors
    • Monetary Authority of Singapore

    ISCA's qualification for forensic accounting professionals focuses on four main areas:

    1. Accounting methodology and investigation approaches
    2. Digital forensics
    3. Financial crime compliance and investigation
    4. Practical workshops

    Response to white-collar crimes as well as data analytic and cyber response will also be part of the certification. Banking and financial center investigation will be a part of the certification, too.

    Singapore has a statutory requirement that extends to all professional accountants. Accountants are required to report any suspicious transactions to the Suspicious Transaction Reporting Office (STRO).

    The STRO is part of the Commercial Affairs Department of the Singapore Police Force.

    Accountants in Singapore face the serious threat of criminal liability for not complying with reporting requirements. The STRO is crucial of accountants that know or suspect money laundering or potential terrorist financing and do not report the incident.

    Fines and jail sentences are possible when non-compliance is proven.

    Accountants may also be removed from the professional registrar if it's found that they failed to report to the STRO.

    Forensic accountants are, now more than even before, an important part of keeping Singapore safe from terrorism. The country is facing an extreme threat of terrorism, which remains at its highest level in recent years.

    Singapore has been targeted in the past, with accountants contributing to the safety of the country by uncovering money laundering and the funding of terrorism.

    A report from 2016, titled "Mutual Evaluation Report," was issued by the FATF. The report recommended the strengthening of many service-related businesses through the use of accounting. A focus was put on legal firms, corporate service providers and accounting firms, which are often involved in money laundering as outlets that help form shell companies.

    The report claims that accountants working for these service providers need to take the appropriate measures and due diligence to curb fraud.

    The International Federation of Accountants (IFAC) also released a report in February 2017 that linked professional accountant roles to combating corruption. The report found that accountants, working alongside stakeholders and other professionals, helped produce favorable scores for the global measure of corruption.

    Singapore remains one of the world's lowest countries for corruption. The Transparency International report, released in 2016, ranked Singapore as the 7th-lowest country in terms of corruption.

    Professional accountants are cited as a main reason for the country's low corruption figures, with ISCA members rising by 7,000 since 2012 from 25,000 to 30,000+.

    Forensic accounting's popularity and necessity is expected to continue to rise as white-collar crimes become more sophisticated and common. Accountants will also look to deepen their skillset and become certified in forensic accounting to better help their careers and lower the risk of fraud within their employers.

    The reputation of Singapore as a country that aims to lower corruption depends on the country's accountants to detect and combat fraud within multi-national countries.

  • What Grants are Available for a New Start Up Company in Singapore?

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    • Posted by admin
    • 12 February 2018
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    One of the biggest challenges start-ups face is acquiring the capital they need to move forward with their operations. Fortunately, government agencies in Singapore provide equity finance schemes and cash grants for eligible startups to help new firms raise capital.

    SPRING SEEDS

    SPRING SEEDS, or the Startup Enterprise Development Scheme, offers equity financing options to local startups with innovative ideas and products.

    As the investment arm of SPRING Singapore, SPRING SEEDS matches investments made by a third-party investor, with a limit of $2 million. The equity is distributed between the investor and SPRING SEEDS in proportion to the amount of money invested.

    To be eligible, a startup must meet the following requirements:

    • Have at least $50,000 in paid-up capital
    • Be incorporated as a Private Limited company for less than five years
    • Have identified a third-party investor
    • Have high-growth potential with scalability
    • Be able to prove substantial intellectual and innovative content

    Investors must be able to contribute to the growth of the startup, and have the management experience as well as the business network to value-add to the startup. Investors must also be prepared to invest at least $50,000 in each startup.

    ESVF Scheme

    The Early Stage Venture Fund (ESVF) scheme first launched in 2008, and is administered by the National Research Foundation, or NRF.

    NRF works with venture capital firms to co-invest on a 1:1 basis. These investments are made in early-stage tech companies that are based in Singapore.

    Venture capital firms that take advantage of this scheme have the option of buying out NRF's share within a five-year period. Firms are required to pay back NRF's capital with interest.

    NRF invests $10 million on a matching basis to seed venture capital firms that invest in Singaporean startups.

    PIC

    The Productivity and Innovation Credit, or PIC, is an initiative launched by the Revenue Authority of Singapore. Under the scheme, businesses can take 400% tax deduction up to $400,000 or a 60% cash pay-out up to $100,000 for investments in productivity improvements and innovation.

    PIC covers six activities:

    • Registration of IP
    • R&D
    • Acquisition or leasing of prescribed automation equipment
    • Acquisition and unlicensing of IP
    • Approved design projects
    • Employee training

    To be eligible for PIC, startups:

    • Must carry active business operations in Singapore
    • Must meet the three-local-employee rule if opting for the cash payout

    Financial Sector Technology and Innovation Scheme (FSTI)

    The FSTI scheme was launched by the Momentary Authority of Singapore (MAS) as a way to support innovation. The Authority has made a commitment to spend $225 million over a five-year period as part of the initiative.

    The goal is to attract financial institutions that will establish innovation labs in Singapore and to support technology infrastructure.

    Under the FSTI is a sub-scheme known as FSTI-Proof of Concept, or POC. Through the POC, MAS provides funding for up to 50-70% of qualifying costs (maximum of $200,000) for up to 18 months. This support is available for financial institutions in Singapore as well as IT providers working with Singapore-based FIs for early-stage development of solutions to industry problems.

    Capabilities Development Grant (CDG)

    The Capabilities Development Grant offers financial assistance to startups and SMEs in building their capabilities in 10 key business areas, including:

    • Business excellence
    • Service excellence
    • Branding and marketing
    • Human capital development
    • Standards adoption
    • Enhancing business processes for productivity
    • Product development
    • Financial management
    • Intellectual property
    • Business model transformation

    To be eligible for this grant, startups must be registered and operating in Singapore and have at least 30% shareholding. The startup must also have at least $100m in annual sales turnover or have at least 200 employees.

    Business Improvement Fund (BIF)

    The Business Improvement Fund is available to all businesses registered in Singapore that are launching projects with a tourism focus and are run by the Singapore Tourism Board (STB). The goal of the fund is to drive innovation in the tourism industry, and to redesign business models and processes to improve competitiveness and productivity.

    Funding will be awarded based on the STB's analysis of the merits and scope of the project.

    SME applicants can receive up to 70% of qualifying costs, while non-SME applicants can receive up to 50% of qualifying costs.

    Building Information Model Fund (BIM)

    The BIM fund is designed to encourage the adoption of BIM collaboration in the built environment industry. Eligible companies can apply for up to $30,000 in funding to subsidize the cost of software, hardware, training and consultancy.

    The fund is open to construction companies registered in Singapore that are also registered with one of the following:

    • Accounting and Corporate Regulatory Authority Singapore
    • Building and Construction Authority
    • Board of Architects
    • Professional Engineers Board Singapore

    MRA Grant

    The Market Readiness Assistance (MRA) Grant is designed to help cover up to 70% of the costs to cover the identification of business partners, overseas set-up and promotion in overseas markets.

    To qualify, the startup must have a global HQ in Singapore and have an annual turnover of less than $100 million.

    Innovation and Capability Voucher (ICV)

    The ICV is an easy-to-use voucher that's valued at $5,000 and encourages start-ups to develop their capabilities. The voucher can be used for consultancy services to help the startup improve their core business operations in the following areas:

    • Productivity
    • Innovation
    • Financial management
    • Human resources

    Each SME or startup can obtain up to eight vouchers. No project should exceed six months. Each project must also be complete before the next application.

    Angels Investors Tax Deduction Scheme (AITD)

    The AITD scheme was launched for approved angel investors who commit at least $100,000 in a qualifying startup. Angels receive a tax deduction of 50% of the investment after the two-year holding period. Eligible investments each year will be subject to a cap of $500,000 and the maximum tax deduction will be $250,000.

    All of these grants and schemes are available to qualifying startups in Singapore. The goal is to promote innovation and growth, which will ultimately help improve Singapore's economy. The application process for most grants is simple and straightforward, and information can be found on the respective Authority's website.

  • The Difference Between Liquidation and Strike Off

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    A Singapore company may decide to shut its doors for a variety of reasons, but winding down operations can be a lengthy, complex process. The amount of time it takes to shut down the operation will depend on how well the company has been administered and managed as well as the method chosen to close down.

    Liquidation (also known as Members Voluntary Winding Up) and strike off are the two primary options when closing a business in Singapore.

    What is Liquidation?

    The Directors of a company can voluntarily put the business into liquidation. Members voluntary winding up occurs when a company is solvent and the Directors believe the company can pay its liabilities and debts within 12 months of starting the winding up process.

    The company must first appoint a liquidator, who will be responsible for winding up affairs and file all required notifications under the Companies Act. All available assets will be realised and distributed amongst Shareholders.

    In order to go this route, Directors must sign an affidavit declaring that they have made a full inquiry into the company's affairs and believe that all debts can be paid in full (along with statutory interest) within a certain period of time.

    The declaration must also include an up-to-date statement of the company's liabilities and assets.

    In order to be effective, the declaration must be made no more than 5 weeks before the liquidation and must also be filed with the Registrar of Companies within 15 days of commencing the liquidation.

    The Director of the company may face imprisonment or a fine if the company cannot pay its debt in full within the specified period of time.

    Liquidation also requires a special shareholders resolution, which must be filed with the Registrar of Companies within 15 days and advertised in the Gazette within 14 days of the adoption. During the special resolution, shareholders must approve the liquidation and appoint at least one liquidator.

    The liquidation commences once the resolution is passed. At that point, the company exists purely for the purpose of winding up. The business may continue operations, but only to benefit of the liquidation.

    With voluntary liquidation, Directors lose power and the transferring of company assets must be sanctioned by a valid liquidator.

    What is Strike Off?

    A company may also choose to close down using the strike off method. Under this method, a company may apply to ACRA to strike its name from the Register under the Companies Act (Section 344).

    The ACRA may choose to approve the application if it believes:

    • The company is not carrying out business, and
    • The company can satisfy the criteria for striking off

    In order to qualify for striking off, a company must meet the following requirements:

    • Must not have any outstanding tax liabilities with the IRAS.
    • Has not started business operations since incorporating, or has ceased operations.
    • Does not have any debts owed to government agencies.
    • No employers' CPF contributions owed to the Central Provident Fund Board.
    • Have written consent from the majority of shareholders for the winding up.
    • No involvement in court proceedings inside or outside of Singapore.
    • No debts owed to any government agency.
    • Cannot have outstanding charges in the charge register.
    • Does not have current or possible liabilities or assets.

    If a business incorporates and remains dormant, it may be approved for striking off. The company must submit a letter stating that the company:

    • Has not had a business transaction since incorporating.
    • Has not opened a bank account, or the bank account has been closed.
    • Has not held an AGM, or the first AGM is not due.

    If a company provides its last audited accounts, the accounts must not show any liabilities or assets. If there are liabilities and assets shown, the company must be able to prove that the assets have been disposed of and liabilities have been waived or settled.

    A strike off application can be submitted by the company's Director, a professional firm or the corporate secretary using an online application.

    How Long Does the Process Take?

    Once the application has been submitted, the ACRA will process it within five business days. If approved, a letter will be sent to the company's registered office address, the IRAS and to the company's officers at their residential addresses.

    If there is no objection within one month of sending the letter, the ACRA will publish the company's name in the Government Gazette.

    If there is still no objection after three months, the ACRA will publish the company's name again and the name will be struck off the register. The Final Gazette Notification will include the date of the strike off.

    The entire process can take five months to complete.

    Objections

    Interested persons can lodge an objection to the striking off of the company through Biz File.

    If a person suspects a company may file for striking off, he or she may lodge a Notice of Intention to Lodge Objection to Future Striking off Application. The notification is valid for one year. If the company submits an application within that time frame, the objector will be notified.

    A Lodgement of an Objection against Striking Off may also be filed by an interested person. In this case, the ACRA will halt the striking off process and send a notice to the company. The company will have two months from the filing of the objection to clear the matter.

    If the matter is cleared within the time frame, the objector must file a Clearance of an Objection to Striking Off to allow the ACRA to continue with the process. If the matter is not resolved, the application will lapse, and the company will have to submit a new one.

    Companies that have been struck off can be restored within 15 years of the striking off. Restoration requires a court order.

    Liquidation vs. Strike Off: What's the Difference?

    Liquidation and strike off are two very different processes for closing a company.

    With liquidation, the company's Directors must be able to prove that the company can fulfill its debt obligations in full within one year of liquidation. There are no such requirements with the striking off method, but that's only because the company cannot have assets or liabilities to begin with.

    Another difference between these two methods is the time frame. The striking off method can take significantly longer to complete – around five months – and objectors can complicate the process.

    Either method can be complex and lengthy. A professional can help move the process along and act as a guide as the company winds up.

  • What is Sales Suppression Technology (SST)

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    Taxpayers should comply with their tax obligations, but a select few taxpayers engage in tax evasion and fraud. These practices can lead to billions of lost revenue annually, putting strain on both the economy and other taxpayers.

    Sales Suppression Technology: The Basics

    Tax fraud can happen in a variety of ways, but sales suppression is one of the most common methods of tax evasion. SST can be complex, or it can be as simple as not reporting income. Cash businesses, such as a restaurant that may have high cash volumes, may fail to record some sales.

    Cash isn't as easily tracked as payments done through credit or debit cards.

    Electronic sales suppression technology has also come into existence. Fraudsters will go through great lengths to not pay all of their taxes. Electronic suppression will:

    • Alter transaction evidence

    Electronic suppression can alter cash or credit transactions without leaving any evidence of the alteration behind. Transactions can also be under reported through various means, such as cancelling the transaction after it occurred.

    Lack of proper data makes it impossible for tax authorities to assess a business's proper tax requirements.

    Electronic Sales Suppression Tools

    Editing accounting books or pocketing cash transactions is easier to spot than electronic suppression methods. Technology makes it easier to commit tax fraud, and there are two primary tools that are being used in electronic SST:

    1. Phantomware

    Phantomware is software that the fraudster installs in a cash register. The software is not easily accessible, and is accessed by the owner or installer of the software through a hidden menu. Operating in the background, the software will capture the transaction data before it's logged into the cash register.

    For example, a customer pays $50 for goods:

    • Phantomware logs the data before it's registered
    • Phantomware holds the data until the business owner goes through the menu

    Phantomware can manipulate the sales after a transaction. The $50 sales may be logged as $30, allowing the owner to effectively skim $20 off the proceeds untaxed.

    1. Zappers

    The presence of Zappers is also becoming more common. Zappers are external programs or devices that connect to the cash register. External programs, accessed online, are a popular choice for Zappers.

    Much like Phantomware, Zappers allow for transaction records to be manipulated.

    Phantomware and Zappers pose a problem for tax authorities because the cash registers do not have the Phantomware or Zappers shown. Manuals will not disclose the presence of these tax evasion systems.

    Hidden away, these systems can:

    • Alter sales amounts to be lower
    • Delete entire sales records

    Zappers have been created as sales suppression as a service. What this means is that the business owner can use a foreign Zapper to control sales. These Zappers operate over the Internet and pose even more problems for tax authorities because they can:

    • Delete transactions
    • Replace sales data
    • Alter transactions

    Foreign Zappers are so sophisticated in nature that the business owner can use them to crash a hard drive. Service providers, offering the tax evasion service to the business owner, are oftentimes out of the jurisdiction of the tax authority.

    Business owners that engage in fraud can hide their involvement in the tax evasion because it's difficult to attribute the actions to the owner.

    Data Recording Technology

    Data recording technology is a main tool in the fight against sales suppression. The technology records all sales data immediately and securely as the transaction occurs. If the power goes out, the data remains safely preserved.

    These tools are called by many names, all meaning the same thing:

    • Fiscal memory device
    • Sales recording module
    • Fiscal control unit
    • Fiscal device

    Data recording technology can come pre-built into the cash register or it can be installed into an existing cash register. These same tools often send data directly and automatically to tax authorities. Cash registers send the data directly to server systems in either scheduled transfers or real time.

    Automatic data transfer allows tax authorities to assess and audit data remotely.

    Data recording technology plays an integral role in many economies:

    • Belgium has an 8% increase in restaurant sales reported
    • Hungary's VAT revenue increased by 15%
    • Rwanda's VAT revenue increased by 20%
    • Sweden's income tax revenues are estimated to grow by €300 million

    Businesses also benefit from this form of technology. Business owners are often victims of employee theft, which involves many forms of sales suppression. Tools that share, record and store data also reduce the risk of audits.

    Governments also benefit from data recording. Quebec is a prime example. The province reduced the time it takes to audit a restaurant from 70 hours to a mere 3 hours thanks to the province's sale recording module.

    Quebec has now been able to increase the number of inspections to 8,000 per year, up from just 120. Audits are now being done remotely, too. Businesses no longer need to suffer from production loss due to copying hard copy documents. Businesses also suffer from fewer business interruptions and less time lost.

    Costs in Fighting Sales Suppression Technology

    Sales suppression technology can be prevented, but it's a costly endeavor. Easy implementation, effectiveness and affordability are key to fighting sales suppression. Costs are decreasing over time, with many off-the-shelf solutions being utilized.

    Business owners or manufacturers can use these solutions to integrate the data recording technology into their cash registers.

    Several factors go into the cost of integration:

    • Point of sale system type
    • Degree of modification required
    • Size of the market

    Costs can range from €30 - €1,000 or more, depending on the factors above. Tax authorities will also suffer from immense costs to enforce implementation. Authorities will also need to determine their own technical responsibilities resulting in costs, including:

    • Certifying cash registers
    • Inspect modifications
    • Remote access costs
    • Transaction data costs

    Tax authorities can also opt to use data analytic tools that can detect unusual data being sent to tax authorities. These tools would use pattern recognition to be able to detect any anomalies or unusual activity.

    Sales suppression technology is becoming more sophisticated and complex, but data recording technology is leading the fight against this form of tax fraud. Easy installation, costs and adaptation are key to ensuring that tax authorities can fight back against tax fraud.

Copyright 2018