We adopt a risk-based approach of identifying compliance risk and prioritising and tailoring specific compliance programmes. We focus on improving the compliant behaviour of taxpayers who pose a higher risk of non-compliance.
It is important to us that apart from identifying taxpayers who have made mistakes in their tax returns, we educate taxpayers on their tax obligations and how to comply, and identify tax laws, policies and processes so we can continuously simplify the tax system.
On this page:
Up and Coming Compliance Focus for Companies:
IRAS will focus compliance efforts on these areas:
- Classification of income and expenses by companies enjoying tax incentives
- Related-party transactions and allocation of development cost by real estate developers
- Income declaration by companies whose principal activities are that of tutoring services or tuition agencies.
Back to Top
Past and Ongoing Compliance Focus for Companies:
IRAS continues to focus compliance efforts on these areas:
- Timely filing of corporate tax returns
- Accurate filing of income and expenses, especially by family own and managed companies
- Abuse of tax exemption scheme for new companies
- Claims of capital allowance and industrial building allowance
Back to Top
Timely Filing of Corporate Tax Returns
Currently, about 81% of the corporate taxpayers file their tax returns on time. Companies have at least 11 months (for companies with accounting year ending December) or up to 22 months (for companies with accounting year ending January) to prepare and file their returns. This is a reasonable period for a company to fulfil its filing obligations.
Given that the statutory record-keeping period has been reduced from seven to five years, and that filing of tax returns is an annual obligation, it is imperative that companies file their tax returns promptly to ensure timely finalisation of their tax and financial matters.
To help companies file Form C on time and avoid paying penalties, we have:
Back to Top
Accurate filing of income and expenses, especially by family owned and managed companies
As at March 2012, the IRAS has audited 799 family owned and managed companies. Of this number, 351(44%) were found to have errors in their tax returns. In all, the Comptroller of Income Tax has raised $16.5 million in additional taxes and $3 million in penalties.
Analysis of our audit findings shows that family-owned/managed companies, which also tend to be small to medium in size, do not pay sufficient attention on maintaining proper controls and accounting records, resulting in under-declaration of income and excessive or unsubstantiated claims of expenses. Family-owned/managed companies refer to companies with shareholdings and directorships comprising combinations of husbands, wives, parents, children and siblings, etc
From past experience, IRAS has observed that there are several issues that companies often overlook when handling their tax matters. By highlighting the common mistakes made by corporate tax taxpayers, we hope that taxpayers will be able to avoid making these mistakes when filing their tax returns. For instance, we have made available a checklist to serve as a guide to help family-owned / managed companies avoid making common mistakes on their claims for tax deductible expenses.
IRAS will also
- Issue more focused enquiries during our examination of returns
- Issue self-review letters and checklists as part of our education efforts so that family owned and managed companies can self-review their past returns
- Identify “high-risk” companies and increase audit focus on these companies
Back to Top
Abuse of tax exemption scheme for new companies
IRAS has observed a number of cases where shell companies have been used to take advantage of the tax exemption scheme for new start-ups and not for genuine commercial reasons.
These shell companies do not carry out any activities or significant activities and have no employee or few employees. Their accounts usually show relatively few transactions and low capitalisation (usually at $2).
As at March 2012, 93 companies have been audited to check for possible abuse of the tax exemption scheme for newly created companies. This resulted in a tax recovery of $803,014 with penalties amounting to $823,288.
Back to Top
Claims of Capital Allowance (CA) and Industrial Building Allowance (IBA)
Capital allowances are given in place of depreciation and other capital expenditure, which are not deductible for income tax purposes. If your company carries on a trade or business, your company can claim capital allowances on expenditure incurred on the provision of "plant and machinery" for use in the trade or business.
IRAS has conducted a review of the CA/IBA claims for selected companies. From our review, we observed that some companies have claimed CA on certain capital expenses which do not qualify for CA. Examples of such capital expenses are designer's fees on renovation, flooring, electrical/light fittings, motor vehicle (S-plate private passenger car), fountain and water features and sports surfaces and structures. We have since highlighted the mistakes made on CA claims to the companies so that they will make proper claims in future. As at 30 Jun 2012, the tax recovery due to wrongful claims of CA and IBA amounted to $2.2m with penalties of $156,000.
Companies may refer to the IRAS e-Tax Guide "Machinery and Plant: Section 19/19A of the Income Tax Act" for guidelines on the capital expenses that qualify for CA. In respect of capital expenses incurred on renovations or refurbishment works, companies may refer to IRAS e-Tax Guide, "Tax Deduction for Expenses Incurred on Renovation or Refurbishment Works Done to Your Business Premises" for tax deductions granted on certain qualifying capital expenses.
An industrial building refers to a building or structure which is used or to be used for any one of the qualifying purposes stated in section 18(1) of the Income Tax Act (“ITA”).
To qualify for IBA, the industrial building or structure and relevant expenses must meet the qualifying requirements stipulated in Sections 16, 17 and 18 of the ITA.
IBA is phased out from 22 Feb 2010. With the tax change, IBA will, subject to specified transitional rules, cease to be allowed on capital expenditure incurred after 22 Feb 2010 on the construction or purchase of an industrial building. For more details, please refer to IRAS e-Tax Guide, "Phasing Out Industrial Building Allowance".
Back to Top
Common issues and mistakes taxpayers should take note of:
Please click to refer to the common mistakes made by companies
Specific mistakes identified from Compliance Focus Programmes:
1. Filing Tax Returns on Time
Under the law, failure to file the Income Tax Return (Form C/ Form C-S) on time is an offence. For late and non-filers, in particular Directors who operate multiple companies, IRAS will not hesitate to take strong deterrent measures.
If the Income Tax Return (Form C / Form C-S), accounts and tax computation* are not submitted by the filing due date, IRAS may take the following actions:
- Estimate the company’s income and issue an assessment accordingly.
- Issue a Letter of Composition and/or Summons to the companies and/or their directors.
For tips on how to avoid common mistakes pertaining to filing of returns, please refer to Essential information to note when filing Form C or Essential information to note when filing Form C-S.
*For a qualifying company that files Form C-S, the accounts and tax computation are not required to be submitted together with Form C-S. They are to be prepared and retained for submission upon IRAS’ request.
Back to Top
2. Family Owned and Managed Companies
There is a lack of due care in making claims of tax deductions, resulting in errors such as claiming for non-business expenses, private car expenses and remuneration to relatives that do not commensurate with the services performed. Such errors have resulted in incorrect returns. IRAS will therefore be putting more emphasis on education, making inquiries and audits relating to family owned and managed companies
Back to Top
3. Abuse of Tax Exemption Scheme intended for New Companies
The abuse of the tax exemption scheme generally takes the following forms:
- Allocating the income of an existing profitable going concern to a few shell companies so that the chargeable income of each shell company is within the threshold for tax exemption; or
- Charging fees/ expenses to an existing profitable going concern by shell companies without any bona fide commercial reasons. The shell companies claim the tax exemption on the income they receive from the profitable going concern, while the latter claims tax deduction on the fees/expenses paid to the shell companies.
The effect of these forms of arrangement is an overall net reduction of tax for the profitable going concern and the shell companies.
Tax evasion/fraud is a criminal offence punishable under the law and the Court imposes severe penalties for such offences. Businesses or individuals who engage in abusive tax arrangements such as setting up shell companies to take advantage of the tax exemption scheme for new start-ups, or individuals who assist others with abusive tax arrangements should disclose such abuse immediately. IRAS will treat such disclosure as a mitigating factor when considering the penal charges.
Back to Top
4. Claims for Capital Allowance (CA) and Industrial Building Allowance (IBA)
The common mistakes relating to CA claims are:
Assets not Plant & Machinery (“P&M”)
Examples of items that are not P&M are interior design fee, flooring, storage shed, toilet / plumbing items. Also lightings that are for general illumination and fittings for general electricity which form part of the premises are not considered as P&M. Similarly, renovation such as the permanent improvement of the office are capital in nature, and do not qualify as P&M.
In instances where a company allows another party to use the P&M that it has acquired, the claim for CA on such assets is not allowable. This is because the assets are not used by the company for its business, but is instead used by another party. However, CA is allowable where the P&M is used by a subcontractor in an outsourcing arrangement and the P&M is used for the purpose of the company’s business to enable the company to carry on business and produce income.
Some companies were found not to have adjusted depreciation expense. As depreciation is an accounting charge for the wear and tear, age or obsolescence of fixed assets, it is not deductible for income tax purposes.
Adjustments to Balancing Allowance/ Balancing Charge
Where fixed assets are sold after being used for some years, the selling price of those fixed assets must be considered in computing the balancing allowance or charge.
The common mistakes relating to IBA claims are:
Not qualifying activities
Activities which do not fall within the meaning of “manufacturing” or “goods or materials subject to a process” under S18(1)(c) do not qualify for IBA.
Not qualifying storage trade
The storage of goods-in-transit does not qualify for IBA unless taxpayer’s trade itself is that of storage of goods and the goods-in-transit do not belong to him.
Adjustments to qualifying area
If part of the building is let out for non-qualifying use, IBA is not allowable on that area of the building.
Adjustments to qualifying costs
The qualifying cost for computing IBA should exclude the cost of the area for non-qualifying use. If the expenditure on non-qualifying part of the building is not more than one-tenth of the total expenditure on the entire building, the entire building can be regarded as an industrial building.
Back to Top
Taxpayer's Role in Ensuring that Everyone Pays His/Her Fair Share of Taxes
- Voluntarily Disclose Past Mistakes
While IRAS believes that the majority of taxpayers are voluntarily compliant, we understand that some taxpayers could have committed tax errors due to their negligence or lack of understanding of their tax obligations. We encourage taxpayers who have made errors or submitted incorrect returns to come forward voluntarily in a timely manner, to disclose these errors or omissions and get their tax obligations right. By doing so, they may qualify under our Voluntary Disclosure Programme in which the penalty for such errors or ommisions will be greatly reduced. Please refer to the IRAS Voluntary Disclosure Program for more information.
We encourage members of the community to report suspected tax evasions. If you suspect a person or business is engaging in some transactions in order to evade their tax obligations, or you know of someone who is not complying with their tax obligations, you can let us know by writing or emailing to email@example.com. Your information will be kept confidential.
- Do your Part as a Taxpayer
As a consumer, you can request for a written contract, tax invoice or obtain a receipt on payment. This helps to ensure that businesses retain and keep some forms of records.
You could help ensure that every taxpayers pay his or her fair share of taxes through these various roles you play.
Back to Top