Getting Companies to Comply

IRAS' upcoming focus will be in these areas:

1. Car dealers
2. Private hire car operators
   The areas of focus include revenue recognition, motor car expenses, capital allowances and related party transactions.
3. Food & Beverage establishments
   The areas of focus include record keeping, revenue recognition, renovation and refurbishment expenses and costs incurred on reinstatement of premises.

IRAS continues to focus compliance efforts on these areas:

1. Timely Filing of Corporate Income Tax Returns
   
   Currently, about 81% of corporate taxpayers file their tax returns on time. Companies have 11 months (for companies with financial years ending in December) to 22 months (for companies with financial years ending in January) to prepare and file their returns. This is a reasonable period for a company to fulfil its filing obligations.
    

   It is important that companies file their tax returns promptly to ensure timely finalisation of their tax and financial matters. Companies that do not file their Income Tax Returns on time may face penalties.

   To learn how to file the Income Tax Returns on time and avoid paying penalties:

      a.   Read Additional Tips on Filing Form C-S/ C; and/ or
   
      b.   Sign up for a free one-day Corporate Tax Seminar conducted by IRAS.
2. Productivity and Innovation Credit (PIC) Claims
   
   Businesses that met the qualifying conditions could claim tax benefits under the PIC scheme in the Years of Assessment (YA) 2011 to 2018. The scheme expired after YA 2018.
    

   Notwithstanding the expiry of the scheme, IRAS has been reviewing selected PIC cash payout claims made by companies to ascertain that the claims are in order. Since financial year 2013, IRAS has also been auditing companies to determine if they have made erroneous claims for PIC benefits in their Income Tax Returns.

   Based on past reviews, IRAS has identified common mistakes that businesses should avoid in their PIC claims.

   While the majority of businesses are generally compliant, IRAS takes a serious view of taxpayers who defraud the PIC scheme. 
   
   Offenders convicted of PIC fraud will have to pay a penalty of up to four times the amount of cash payout fraudulently obtained, and a fine of up to $50,000 and/ or imprisonment of up to five years.

3. Classification of Income and Expenses for Income Taxable at Concessionary and Prevailing Corporate Tax Rates
   
   

   A company may receive different streams of income taxable at different tax rates, i.e. the prevailing corporate tax rate and concessionary tax rates.  

   Through our reviews, we have observed that some companies have made the following errors:

      a.  Incorrect classification of non-qualifying income under the concessionary tax rate category;

      b.  Incorrect identification of direct and common expenses; and

      c.  Adoption of inappropriate bases in the allocation of common expenses and capital allowances.
   
   Through our on-going compliance reviews, we aim to understand the measures/ controls put in place by these companies to ensure accuracy of their tax reporting and to help taxpayers get their tax matters right by offering guidance on how to improve their controls.
4. Group Relief (GR) Claims
   
   

   Since 2013, IRAS has audited selected companies to determine if they had made errors in the GR claims in their Income Tax Returns.

   The review of the GR claims focus on areas such as:
    

      a.   Whether the 75% ordinary shareholding requirement has been met;

      b.   Whether the set-off of loss items transferred/ claimed is in the correct order; and

      c.   Whether adjustment has been made for different continuous periods.

   Through our reviews, we have observed the following compliance risks:

      a.   Companies failed to meet the 75% ordinary shareholding requirement to be considered part of the same Group; and
    

      b.   Companies with different financial year ends should not have transferred or claimed losses from each other.

   IRAS will continue to review selected GR claims made by companies to ascertain that the claims are in order. 
5. Tax Exemption for foreign-sourced dividends
   
   

   Companies may receive foreign-sourced dividends in Singapore and claim tax exemption of these dividends under the foreign-sourced income exemption (FSIE) scheme, subject to certain qualifying conditions.

   From our review of such claims, we have observed the following errors committed by companies:
   
      a.   The  dividends did not meet the “headline tax rate” condition i.e. the dividends were received from foreign jurisdictions with headline tax rates of less than 15% when the dividends were received in Singapore; and
   
      b.   The dividends did not meet the “subject to tax” condition e.g. the dividends were distributed from a company which is part of a group and the income of the company was found not to be subject to tax, even though the consolidated audited accounts had shown a positive current year tax for the financial year prior to the year the dividend is received. 
   
   

   IRAS will continue to review claims relating to exemption of foreign-sourced dividends so as to ascertain that the claims for FSIE benefits are in order.

6. Recognition of income from construction contracts and provisions claimed by construction companies

   Income derived from construction contracts are to be recognised using the percentage of completion method (PCM) i.e. the revenue earned and cost incurred for each finanicial period is to be determined by reference to the stage of completion of each contract at the end of the financial period.

   Due to the nature of the industry, construction companies may have to make provisions for expenses such as defects, damages, warranty and foreseeable losses. Being provisions of expenses, they are not allowable for tax deduction. Deduction is allowable only upon the expenses being incurred and provided that they are not prohibited for deduction under Section 15 of the Income Tax Act.

   The objective of this compliance review is to ascertain that income and expenses have been correctly reported for tax purposes.

Specific mistakes identified from past and ongoing Compliance Focus Programmes are:

1. Failure to File Tax Returns on Time
   
   Under the law, the failure to file the Income Tax Return (Form C-S/ C) on time is an offence. IRAS will not hesitate to take strong deterrent measures against taxpayers who do not file their tax returns on time, in particular, directors who operate multiple errant companies.
   
   

   If the Income Tax Return (Form C-S/ C), accounts, and tax computation* are not submitted by the filing due date, IRAS may take the following actions:

      a.  Estimate the company's income and issue an assessment accordingly; or
   
      b.  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 (PDF, 911KB) or Essential information to note when filing Form C-S (PDF, 607KB).

   *A qualifying company filing Form C-S need not submit its accounts and tax computation with the Form C-S. These documents should be prepared and retained for submission to IRAS upon request.

2. Abuse of Tax Exemption Scheme intended for New Companies
   
   The abuse of the tax exemption scheme generally takes the following forms:
   
      a.  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
   
      b.  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.

   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.

3. Claims for Capital Allowance (CA) 
   

   
   Common mistakes relating to CA claims are:

   • Claiming CA on Assets not considered Plant & Machinery ("P&M")
      
     Examples of items that are not P&M are doors, ceiling works, interior design fee, flooring and toilet/ plumbing items. Lightings that are for general illumination as well as fittings for general electricity which form part of the premises are also not considered as P&M. Similarly, renovation works such as the permanent improvement of the office are capital in nature, and do not qualify as P&M.
   • Claiming CA on Assets Used by Another Party

   • CA on P&M will only be allowed to a company if the P&M are used directly in and specifically for that company's trade. No CA is allowable where the P&M in question are used by another party. However, when a company engages the services of a subcontractor in an outsourcing arrangement and provides P&M to the subcontractor, the company may claim capital allowances on these P&M. In such an arrangement, these P&M must be used by the subcontractor solely for the purpose of the taxpayer's business.   

   • Not Making Adjustments to Disallow Depreciation Expense

   • Some companies were found not to have adjusted their taxable income for 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.

   • Error in Calculating Balancing Allowance/ Balancing Charge

   • Some companies were found to have computed balancing allowance/ balancing charge erroneously. Where fixed assets are sold after being used for some years, the selling price of those fixed assets must be taken into account when computing the balancing allowance or charge.

4. Related Party Services Rendered

   There are companies that are service providers, providing support services to related parties in the region. Our tax audit has found that some of these companies recovered only the cost of the services without mark-up from the related parties. This is inconsistent with the arm's length principle. The company should determine the arm's length fee for the support services rendered to related parties.

   To determine the arm's length fee, the company can adopt the three-step approach:

      a.  Conduct a comparability analysis

      b.  Identify the most appropriate transfer pricing method and tested party

      c.  Determine the arm's length result
    

   Alternatively, if the support services are routine in nature, the company can apply a 5% cost mark-up as a reasonable arm's length charge when certain conditions are met.

   The conditions are as follows:

      a.  The routine support services fall within Annex C of IRAS' e-Tax guide on Transfer Pricing Guidelines (PDF, 1.46MB);

      b.  The company does not offer the same routine support services to unrelated parties; and

5.    c.  All costs including direct, indirect and operating costs relating to the routine services performed are taken into account in computing the 5% mark-up.

   It is important that companies comply with the arm's length principle when transacting with their related parties and maintain contemporaneous transfer pricing documentation to substantiate their pricing.

   For more information on transfer pricing, please refer to Transfer Pricing.

1. Voluntarily Disclose Past Mistakes
   
   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 as soon as they have uncovered the error 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 omissions will be greatly reduced. For details, please refer to the IRAS Voluntary Disclosure Program.

2. Report Tax Evasion
   
   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, please let us know by writing or emailing to ifd@iras.gov.sg. Your information will be kept confidential.

   
   For details, please refer to Report Tax Evasion or Fraud.

3.  Request for contract/ invoice/ receipt

4. When you make purchases as a consumer, we encourage you to 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.