IRAS’ audits of company tax acompliance

29 April 2024 | News
  1. Introduction

IRAS takes a comprehensive approach towards tax compliance by companies by conducting both risk-based and random audits across all industries to ensure good coverage across the corporate base. To do so, IRAS uses data analytics and other tools to profile companies according to their compliance risk.

  • Upcoming compliance audit focus

Focus area of IRAS’ upcoming compliance programmes include the Withholding Tax. The withholding tax (“WHT”) is applicable when a person (known as the payer) makes payments subject to WHT in Singapore (e.g. interest, royalty, technical service fee, management fees & director’s fees) to a non-resident person (known as the payee). The payer must withhold a percentage of the payment and pay the amount withheld to IRAS as WHT. The rate of WHT varies depending on the type of payment and the country of residence of the payee, taking into account the anti-double taxation agreement (“DTA”), when applicable.

It is important for companies to comply with Singapore’s WHT requirements to avoid late payment penalty. Companies that have failed to comply with WHT requirements are encouraged to make a voluntary disclosure to IRAS before they are uncovered in an audit in order to benefit from reduced penalties.

  • Ongoing audit programmes

IRAS continues to focus compliance efforts on the following items.

1. Timely Filing of Corporate Income Tax Returns (Form C-S/ Form C-S (Lite)/ Form C). It is important that companies file their Corporate Income Tax Returns promptly to ensure timely finalisation of their tax and financial matters. Under the law, failure to file the Corporate Income Tax Return on time is an offence.

à IRAS doesn’t 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.

2. Claiming of Private or Non-Deductible Expenses. For expenses to be tax deductible, the expenses must be wholly and exclusively incurred in the production of income, meaning to say, these expenses must be expended solely for business purposes and must not include any non-business element, such as family meals, vacation/ overseas holiday expenses and domestic groceries.

à IRAS regularly audits companies to ensure that their expenses have been claimed correctly and there has been no under-declaration of taxes. IRAS will not hesitate to impose penalties on non-compliant companies.

3. 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 – commonly known as the Percentage of Completion 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.

à The objective of the compliance reviews on construction companies is to ascertain that income and expenses have been correctly reported for tax purposes.

4. Companies Exempted from Filing Corporate Income Tax Returns. IRAS exempts companies from the requirement to file Corporate Income Tax Returns if:

  • The company has filed Form C-S/ Form C-S (Lite)/ Form C as a dormant company for 2 consecutive Years of Assessment; or
  • The company has applied for waiver to file Form C-S/ Form C-S (Lite)/ Form C on grounds that it is dormant and has no immediate intention to recommence business.

Companies that are exempted but subsequently recommence business must file a Corporate Income Tax Return for the relevant year in which they recommence their business. They must inform IRAS and request for a Corporate Income Tax Return.

à IRAS regularly reviews companies that have been granted exemption from filing Corporate Income Tax Returns to ensure that they have remained dormant. Companies found to have recommenced business but failed to meet their filing obligations may be liable to penalties.

6. 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.

à IRAS regularly examines taxpayers who have engaged in such transactions to evaluate if they have filed their tax returns correctly.

7. Digital Economy. in the year 2023, IRAS has focused its attention on taxpayers whose business model revolves around the digital economy such as content creators and social media influencers. The following common errors must be avoided by taxpayers:

  • Omission/ understatement of income including sponsorship & gifts received.
  • Incorrect claim for expenses, such as personal entertainment & travelling for non-business purposes.
  • Failure to keep proper records on the actual income received and/or expenses incurred.

à Where discrepancies/ errors are found by the taxpayers themselves, they should make a voluntary disclosure to IRAS before they are uncovered in an audit in order to benefit from reduced penalties.

8. Deductibility of Interest Expenses and Borrowing Costs. Interest expenses and qualifying borrowing costs incurred on loans or borrowings specifically taken up to finance income-producing assets are deductible against the income produced. Where the loans or borrowings were obtained for non-income producing purposes, such expenses and costs are not tax deductible. In cases where the company is unable to identify and track the use of an interest-bearing loan to specific assets financed by the loan, the total asset method is to be applied to allocate the common interest expenses and qualifying borrowing costs to the non-income producing assets and no deduction is to be claimed on the allocated expenses and costs.

àIRAS regularly examines the tax returns of taxpayers who incur interest expenses and borrowing costs to ensure that tax deductions have been correctly claimed on such expenses.

  • Specific compliance-related mistakes and issues

Specific mistakes identified from past and ongoing compliance programmes are:

1. Abuse of Tax Exemption Schemes Intended for Companies. It 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
  • 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
  • Under-remunerating director(s)/ shareholder(s) for their work so as to retain profits in the companies and take advantage of the tax exemption schemes and/or difference in tax rates between companies and individuals

2. Erroneous Claims for Capital Allowances. This can have the shape of:

  • Claiming Capital Allowances on Assets Not Considered as 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 Capital Allowances on Assets Used by Another Party. Capital allowances on P&M are only allowed to a company if the P&M are used directly in and specifically for that company’s trade. No capital allowance is allowable where the P&M in question are used by another party.
  • Not Making Adjustments to Disallow Depreciation Expense. Some companies would not 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 would compute 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. In addition, where asset is sold below open market price, it will be deemed to have been sold at the open-market price as at date of disposal or the date on which it permanently ceased to be used for computing balancing allowance/ balancing charge.

3. Related Party Services Not Priced at Arm’s Length. Some companies can recover only the cost of the services without mark-up from the related parties, or just on direct costs. 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.

If the service fee is not charged at arm’s length, IRAS can make a transfer pricing adjustment.

4. Investment Dealing Company. An investment dealing company is a company whose primary activities is to buy and sell investments with a view to making a profit. The investments are trading stocks of the company. Hence, any gain from the sale of these investments is assessable to tax under section 10(1)(a) of the Income Tax Act 1947.

An investment dealing company also derives distributions from its trading stocks in the normal course of trade. For example:

  • dividend from equity instruments;
  • interest from debt instruments; and
  • interest from qualifying debt securities (where it is subject to concessionary tax rate).

Such distributions form part and parcel of the trading receipts of the company.

Dividend income is exempt from tax if it is a:

  • Singapore one-tier exempt dividend
  • Foreign dividend satisfying conditions under the Foreign-Sourced Income Exemption (“FSIE”) regime.

An investment dealing company may derive trading receipts that are exempt from tax, subject to concessionary tax rate and subject to prevailing corporate tax rate. If so, the allowable expenses and capital allowances are to be apportioned to the different streams of income.