Getting Companies to Comply

Focus areas of IRAS' upcoming compliance programmes include the following:

1. Sector based audits
   
   IRAS aims to achieve a broad and even audit coverage across all segments of the taxpayer base. We routinely select different industry sectors for audit. Such audits allow IRAS to better understand the respective sectors and take appropriate compliance initiatives against sectors where the tax compliance level requires improvement. 
   
   Some of the sectors selected for 2020 include hotels, leasing, renovation-related and funeral service industries. We advise taxpayers to review their tax matters for the past 4 years to ensure that they are in order. Where discrepancies are found, taxpayers should make a voluntary disclosure to IRAS before they are uncovered in an audit, and benefit from reduced penalties.
2. Taxability of income/ gains from sale of properties
   
   Taxpayers may purchase property and derive gains upon the sale of such property. Whether such gains are taxable as revenue receipts or exempt as capital gains depends on whether the taxpayer is considered to have engaged in the trade of buying and selling of properties or derive gains which are of an income nature. The frequency of transactions, length of time the properties were held and the manner they were financed are some indicators of whether the taxpayer intended to trade in properties. In 2020, IRAS will be examining taxpayers who have engaged in such transactions to evaluate if they have filed their tax returns correctly.
3. Claiming of private or non-deductible expenses
   
   Some businesses may have the practice of treating private expenses as business expenses and claiming tax deduction in respect of such expenses. In April 2019, a company and its directors were convicted for understating their income by claiming private expenses, such as purchase of luxury bags and family holidays, incurred by the directors in the company's tax returns. Other common items where such mistakes are made include transport expenses incurred on personal S-plated vehicles, as well as claiming expenses on family holidays and meals as business entertainment expenses. IRAS will be auditing businesses to ensure that expenses have been claimed correctly. Taxpayers should review their claims to ensure that they are compliant with tax laws. Where errors are found, taxpayers should make a voluntary disclosure to IRAS before they are uncovered in an audit, and benefit from reduced penalties.

IRAS continues to focus compliance efforts on these areas:

1. Timely Filing of Corporate Income Tax Returns
   
   Currently, about 84% of corporate taxpayers file their tax returns on time. Companies have between 11 months (for companies with financial years ending in December) and 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 Corporate Tax Seminar conducted by IRAS.
2. 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.
3. Group Relief (GR) Claims
   
   

   Since 2013, IRAS has audited selected companies to ensure that their GR claims made in their Income Tax Returns are correct.

   The review of the GR claims focuses 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. 
4. 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 to ensure that the claims for FSIE benefits are in order.

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

   Income derived from construction contracts is recognised progressively over a period of time - this is commonly known in the industry as the Percentage of Completion ("POC") method of income recognition.

   For income tax purposes, IRAS accepts the accounting recognition of income over time as it is consistent with the tax rule of taxing income when it is accrued. The tax treatment for common scenarios of income recognition by construction companies can be found at: Construction Companies.

   Construction companies may 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 when the expenses are incurred and not prohibited for deduction under Section 15 of the Income Tax Act.

   The objective of the compliance reviews on construction companies 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, 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, errant directors who operate multiple 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.

   
   *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 Schemes Intended for Companies
   
   The abuse of the tax exemption schemes 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.
   
      c.  Under-remunerating director(s)/ shareholder(s) for their work so as to retain profits in the companies and take advantage of tax exemption schemes and/or difference in tax rates between companies and individuals. 

   
   The effect of these forms of arrangement is an undue reduction of tax for the profitable going concern, shell companies or individuals.

   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 charge an appropriate arm's length fee for the support services it rendered to the 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 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 Programme.

2. Report Non-Compliance
   
   We encourage members of the community to report suspected tax evasion or other forms of non-compliance such as those described above. 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 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, please request a written contract, tax invoice or obtain a receipt on payment. This helps to ensure that businesses maintain sufficient records to comply with their tax obligations.