BLUTRUST BLOG

IRAS Compliance Programmes: Key Tax Requirements for Singapore Businesses

Is your business prepared for the latest IRAS compliance programmes in Singapore? The Inland Revenue Authority of Singapore (IRAS) is strengthening its compliance programmes to help companies navigate complex tax regulations, focusing on key tax requirements, transparency, and fairness in tax adherence. By aligning with IRAS’s expectations, businesses can avoid penalties, maintain smooth interactions with the tax authority, and contribute to a more transparent business environment. Understanding withholding tax, ensuring accurate income recognition, and avoiding common compliance mistakes are crucial steps for companies to meet these evolving standards effectively.

Key Takeaways

  • Withholding tax is a critical focus in IRAS’s compliance programmes, emphasizing the importance of accurate tax collection on cross-border transactions.
  • Income recognition and provisions claimed by construction companies are scrutinized to ensure accurate reporting and adherence to accounting standards.
  • Common compliance-related mistakes, such as filing errors and incorrect tax deductions, highlight the need for meticulous tax management and regular audits.

Understanding IRAS’s Compliance Programmes for Companies in Singapore

In Singapore, the tax authority (IRAS) runs programs to ensure companies pay taxes correctly and on time, promoting fairness and voluntary compliance. These initiatives include:

  •   Audits: A detailed review of tax filings to ensure compliance.
  •   Investigations: Targeting potential tax evasion or non-compliance.
  •   Advisory services: Guidance on best practices for meeting tax obligations.

By aligning with IRAS’s expectations, businesses can avoid penalties, maintain smoother interactions with the tax authority, and contribute to a more transparent business environment.

IRAS uses risk-based audits, thematic reviews, and advanced data analytics to identify non- compliance. Recent developments show a shift towards digital transformation. Over 90% of companies now file tax returns electronically, reducing paperwork and enabling early detection of non-compliance.

To align with these programmes, companies should maintain accurate records, conduct internal audits, seek professional advice, and stay updated on tax laws. Engaging with IRAS’s advisory services, such as consultation on withholding tax, can help navigate complex tax issues effectively.

Withholding Tax: Key Focus Area of IRAS’s Compliance Programmes

IRAS is also prioritizing withholding tax compliance for companies. This tax is deducted from payments to non-residents for services, interest, and royalties, ensuring tax collection from international transactions. The focus stems from its complexity and potential for non- compliance, aligning with global efforts to prevent tax avoidance.

Companies must withhold tax at specific rates when paying non-residents, with rates varying based on payment type and tax treaties. Challenges include understanding rates, interpreting treaties, and managing compliance. To mitigate risks, companies should implement strong internal controls, regularly train staff, maintain accurate records, and use technology for reporting, such as automated tax compliance software. Seeking expert advice, such as from tax consultants or legal advisors, can further help navigate changing regulations and ensure compliance with IRAS’s requirements effectively.

Other Ongoing Areas of Focus

In Singapore, corporate tax compliance is crucial for businesses, with IRAS reporting high on- time filing rates. It strictly enforces compliance, particularly among directors managing multiple companies, due to the increased risk of oversight or deliberate non-compliance across their various entities.

IRAS allows tax deductions only for business-related expenses, explicitly excluding personal costs. Regular audits are conducted to ensure accurate expense claims and proper tax declarations, with special attention given to family-owned companies because of potential

issues with related-party transactions. Companies may have income taxed at different rates, including standard and concessionary rates under specific incentive schemes. IRAS has identified common errors in income classification and expense allocation and is conducting reviews to address these issues.

For construction companies, IRAS accepts the Percentage of Completion method for income recognition but has specific rules for expense deductions to prevent mismatches between reported income and expenses. Dormant companies may receive exemptions from certain filing requirements but must inform IRAS of their status and are required to file returns upon resuming business activities. The taxability of property sale gains depends on factors like transaction frequency, holding period, and the intention at the time of purchase.

Recently, IRAS has focused on taxpayers in the digital economy, addressing issues like income understatement from online sales and incorrect expense claims related to digital services.

Taxpayers are encouraged to review their tax matters and voluntarily disclose any discrepancies to minimize penalties. Interest expenses on income-producing assets are tax- deductible, while those incurred for non-income-producing purposes are not. IRAS regularly examines tax returns to maintain a fair and compliant tax environment for all Singapore businesses.

What Are the Most Common Compliance-Related Mistakes & Issues?

Tax compliance issues are common among businesses, with several key areas of concern. One significant problem is the misuse of tax exemption schemes. For example, some companies distribute income to shell companies to keep each entity’s income within tax-free limits, effectively evading taxes. Others set up shell companies to charge unjustified fees to profitable businesses or deliberately underpay directors and shareholders to retain profits within the company and exploit tax benefits. These practices unfairly reduce tax payments, violate tax laws, and should be reported to authorities.

Another frequent issue involves incorrect claims for capital allowances. Companies often mistakenly claim allowances for items not considered plant and machinery, such as doors or general lighting fixtures. Some businesses claim allowances for assets used by others, which is not permitted. Additionally, failing to adjust taxable income for depreciation expenses and making errors in calculating allowances when selling fixed assets are common mistakes. These errors can lead to significant inaccuracies in tax calculations and potential penalties.

Improper pricing of services between related companies is another major concern. Some businesses providing support to regional amliates only recover costs without adding a markup, which violates the arm’s length principle. This principle requires companies to charge market-based fees for their services, as they would to an unrelated third party, considering all costs and a reasonable profit margin. Failing to comply can result in transfer pricing adjustments by tax authorities and potential surcharges.

Investment dealing companies face unique tax considerations. These entities primarily buy and sell investments for profit and must recognize that gains from investment sales are taxable. Distributions from trading stocks are considered trading receipts and are subject to taxation. While some income may be tax-exempt or subject to special rates, it’s crucial for these companies to properly allocate expenses and capital allowances, especially if they have multiple income streams with different tax treatments. Incorrect allocation can lead to non-compliance and financial penalties.

The Bottom Line: Navigating Tax Compliance Successfully

IRAS’s upcoming compliance programmes are crucial in shaping Singapore’s tax environment, focusing on key areas like withholding tax, income recognition, and construction company provisions. These initiatives highlight the need for meticulous record-keeping and advanced accounting practices across industries. Common compliance mistakes, such as filing errors and incorrect deductions, underscore the importance of precision in tax reporting. IRAS’s use of technology for enforcement reflects the evolving landscape of tax compliance.

For companies, this means increased responsibility to stay informed, invest in compliance infrastructure, and engage professional advisors. Best practices like internal audits, staff training, and tax software integration are recommended. As IRAS refines its programmes, companies must remain agile and proactive in tax management to thrive in this dynamic regulatory environment.

BluTrust offers expert guidance on tax compliance, including support with audits, reporting, and navigating complex regulations. Contact us today to ensure your business stays compliant and ahead of the curve.

Capital Allowances

Deductions for the decline in value of depreciating assets are available under the Uniform capital allowance (UCA) system. In addition to the rules for depreciating assets, deductions are allowed for certain other capital expenditure.

Small business entities have the option of choosing simplified depreciation rules. Under these rules, small business entities can claim an immediate deduction if the cost is below the relevant threshold or else add the asset to the small business depreciation pool.

Land, trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets.

The decline in value is generally calculated by spreading the cost of the asset over its effective life, using one of two methods:

Prime cost method – decline in value each year is calculated as a percentage of the initial cost of the asset
Diminishing value method – decline in value each year is calculated as a percentage of the opening depreciated value of the asset
MORE: Australian Taxation Office (ATO) Decline in value calculator.

For most depreciating assets, taxpayers can either self-assess the effective life, or use estimates published by the ATO. Taxpayers can recalculate, either up or down, the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset.

Decline in value of cars is restricted to the car limit. From 1 July 2022, the luxury car tax threshold for luxury cars is $64,741 (it was $60,733 for the year commencing 1 July 2021). Luxury car leases are treated as a notional sale and purchase, with decline in value restricted to the car limit.

The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.

Changes for 2022 and 2023

From 12 March 2020 until 31 December 2020, the asset cost threshold for the instant asset write-off (which is usually only available to small business entities) has increased from $30,000 to $150,000 and the eligibility criteria expended to cover entities with an aggregated turnover threshold of less than $500 million (up from $50 million).

Further, from 12 March 2020 until 30 June 2021 the Backing business investment measure applied to businesses with aggregated turnover below $500 million and provides either:

A deduction of 50% of the cost or opening adjustable value of an eligible asset on installation (existing depreciation rules apply to the balance of the asset's cost), or
For businesses using a small business depreciation pool, a deduction of 57.5% of the cost of the asset in the first year, with the balance added the asset to the small business pool
In addition, from 6 October 2020 to 30 June 2023, full expensing applies to allow eligible businesses with an aggregated turnover of less than $5 billion to deduct the full cost of new eligible depreciating assets. For businesses with aggregated turnover of less than $50 million, full expensing also applies to eligible second-hand assets.

Activity Statement

Businesses use activity statements to report and pay a number of tax obligations, including GST, pay as you go (PAYG) instalments, PAYG withholding and fringe benefits tax. Non-business taxpayers who need to pay quarterly PAYG instalments also use activity statements.

Activity statements are personalised to each taxpayer to support reporting against identified obligations.

Activity statements for businesses may be due either quarterly or monthly. Generally, businesses can lodge and pay quarterly if annual turnover is less than $20 million, and total annual PAYG withholding is $25,000 or less. Businesses that exceed one or both of those thresholds will have at least some monthly obligations. Non-business taxpayers are generally required to lodge and pay quarterly.

Taxpayers with small obligations may be able to lodge and pay annually. Some taxpayers may receive an instalment notice for GST and/or PAYG instalments, instead of an activity statement.

The Australian Taxation Office (ATO) web site provides instructions on lodging and paying activity statements. Detailed instructions are provided for each of the different tax obligations:

GST (Goods and Services Tax)
PAYG (Pay As You Go) Instalments
PAYG (Pay As You Go) Withholding
FBT (Fringe Benefit Tax)
LCT (Luxury Car Tax)
WET (Wine Equalisation Tax)
Fuel Tax Credits