Getting Companies to Comply

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

1. Withholding Tax

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.

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.

IRAS continues to focus compliance efforts on these areas:

1. Timely Filing of Corporate Income Tax Returns (Form C-S/ Form C-S (Lite)/ Form C)

About 87% of corporate taxpayers filed their Corporate Income Tax Returns for the Year of Assessment 2022 on time. Companies have between 11 months (for companies with financial years ending in Dec) and 22 months (for companies with financial years ending in Jan) 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 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. 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.

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.

Through our review, we note that many family-owned companies were managed by family members and the remuneration paid to the directors as well as their family members such as their children, did not commensurate with the actual services performed.

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. Taxpayers should review their claims to ensure that they are compliant with tax laws.

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

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

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

• Incorrect classification of non-qualifying income under the concessionary tax rate category
• Incorrect identification of direct and common expenses
• 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 they have filed their Corporate Income Tax Returns correctly and provide guidance to improve their controls.

4. 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 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. Learn about the tax treatment for common scenarios of income recognition by 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 1947.

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

5. 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. 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. Companies that are sourcing for business are regarded as having recommenced their business and are required to file a Corporate Income Tax Return for the relevant year.

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

7. Digital Economy

IRAS aims to achieve a broad and even audit coverage across all segments of the taxpayer base. In the year 2023, we have focused our attention on taxpayers whose business model revolves around the digital economy such as content creators and social media influencers.

Our audit reviews are on-going, and we expect to continue with our compliance efforts for this sector in the coming years. Through our reviews, we observed the following common errors being committed 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.

We advise taxpayers to review their tax matters to ensure that they are in order. Where discrepancies/ errors are found, taxpayers 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. IRAS 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 mistakes identified from past and ongoing compliance programmes are:

1. Abuse of Tax Exemption Schemes Intended for Companies

The abuse of the tax exemption schemes 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

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.

2. Erroneous Claims for Capital Allowances

Common mistakes relating to capital allowance claims are:

• 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 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. 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

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.

Some companies charged service fees at a mark-up on direct expenses, like personnel costs, only. All costs including direct, indirect and operating expenses relating to the provision of services must be considered in computing the mark-up.

If the service fee is not charged at arm’s length, IRAS can make a transfer pricing adjustment under section 34D and with effect from the Year of Assessment 2019, impose a section 34E surcharge on the section 34D adjustment made.

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.

Learn more about transfer pricing.

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. You may refer to the template – Basic format of tax computation for an investment dealing company (XLSX, 19KB).

5. Common Mistakes Made by Companies in Specific Industries

• Beauty and Wellness Industry (PDF, 181KB)
• Budget Hotels (PDF, 168KB)
• [Updated!] Family-Owned/ Managed Companies (PDF, 157KB)
• Motor Vehicle Retail Sector (PDF, 196KB)
• Private Hire Car Companies (PDF, 141KB)
• [New!] Shipping Companies (PDF, 150KB)

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 filed 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 for penalty reduction under our Voluntary Disclosure Programme. Learn more about the common tax filing mistakes to avoid and the Voluntary Disclosure Programme through our e-Learning video.

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 certain transactions in order to evade their tax obligations, or you know of someone who is not complying with their tax obligations, let us know by emailing [email protected]. Your information will be kept confidential.

When you make purchases as a consumer, you should request for a written contract, tax invoice or obtain a receipt on payment. This helps to ensure that you have the necessary records and accounts of business transactions to comply with your tax obligations.

Learn more about record keeping requirements.

To make compliance easy for taxpayers, IRAS has various service channels to educate taxpayers of their obligations:

• Access the New Company Start-Up Kit and our e-Learning videos to learn more about your Corporate Income Tax filing obligations
• Refer to our step-by-step guides on filing Estimated Chargeable Income (ECI)
• Refer to our step-by-step guides on filing Form C-S/ Form C-S (Lite)/ Form C