IRAS Income Tax Audit: What Should You Expect

If your business is selected for a tax audit in Singapore, it can be a stressful experience. An income tax audit is when the Inland Revenue Authority of Singapore (IRAS) selects your tax returns for closer scrutiny. However, being selected for an audit does not mean that you have been negligent in your filing. Using a risk-based approach, audits can be done randomly across various industries as part of IRAS’ efforts to ensure that businesses are complying with the tax laws and help to improve tax compliance.

How to Prepare for the IRAS Income Tax Audit

The process of being audited by the IRAS typically begins with a letter from the authority notifying you that your business has been selected for an audit. The letter will detail what you may need to prepare in advance.

For example, if your business has claimed capital allowances in the Form C/C-S for the Year of Assessment (YA), you will be requested to conduct a self-review first. This is to check for discrepancies that could result in an inaccurate income tax assessment. In this case, you may get access to your Form C/C-S through the myTax Portal to assist in the review. Depending on your type of organisation, you will want to look out for the following red flags in your capital allowances claim and rectify them accordingly:

  • Claiming capital allowances on assets not considered as Plant & Machinery (P&M): Items are not considered P&M includes doors, ceiling works, flooring as well as lighting that are for general illumination. Bear in mind that interior design fees also do not quality as P&M.
  • Claiming capital allowances on assets used by another party: Capital allowances for P&M can only be claimed by the company that uses it.
  • Not making adjustments to disallow depreciation expense: The depreciation of fixed assets is an accounting charge for wear and tear, age or obsolescence. Take note that this expense cannot be deducted from your taxable income.
  • Error in calculating balancing allowance/balancing charge: Should you have sold fixed assets that have been used for some years, the selling price must be factored in when computing the balancing allowance or charge.
  • Incorrect claim of capital allowance: Tax deduction that can be claimed for qualifying renovation and refurbishment costs incurred under Section 14N of the Income Tax Act 1947 is not eligible for capital allowance claims.

Once you have run through your capital allowance claims, you are required to submit a copy of the capital allowances and renovation or refurbishment (if applicable) schedule. If there have been any amendments made, you will also need to attach the revised tax computation for the specific Year of Assessment and the capital allowances and renovation or refurbishment schedule.

Besides reviewing your capital allowances claims for errors, you will also want to avoid these common compliance-related mistakes:

Abuse of tax exemptions schemes intended for companies

There have been instances of companies found abusing tax exemption schemes, claiming exemptions to which they are not entitled to. This includes scenarios where:

  • The income of an existing profitable going concern is diverted to shell companies instead. This results in a significant reduction in the amount of taxes that are owed.
  • Fees or expenses are charged to shell companies without any legitimate business purpose. The shell companies claim the tax exemption on the income received from the profitable going concern, while the parent company claims a deduction on the fees or expenses paid to the shell companies.
  • Under-remunerating directors and shareholders for the work they do. This allows the company to take advantage of the various tax exemption schemes and the difference in tax rates between companies and individuals.

Related party services not priced at arm’s length

If you are a service provider offering support services to related parties in Singapore or overseas, do your due diligence to comply with the arm’s length principle and charge an appropriate amount with mark up for the support services provided as if the services are provided to non-related parties. You must also maintain contemporaneous transfer pricing documentation to support the pricing.

What Happens in an Income Tax Audit?

During the income tax audit, IRAS will – for starters – want to check that your filing of the Form C-S, Form C-S (Lite) or Form C is completed by the specified deadline. If you have various streams of income, it is crucial that they are taxable under the right tax rate. Common mistakes spotted by IRAS include the inaccurate identification of direct and common expenses as well as the wrong classification of non-qualifying income under the concessionary tax rate category.

The tax officials will also be paying attention to the following areas:

1. Claiming of private or non-deductible expenses

Examples of private expenses include payments for family holidays and meals masqueraded as business entertainment expenses. Companies should exercise caution when claiming deduction for expenses that could be construed as personal in nature. For non-deductible expenses, the common examples are transport expenses incurred on S-plated vehicles or reimbursement to employees for S-plated car expenses, even if the vehicles are used for business purposes.

2. Group Relief claims

When making Group Relief claims, do ensure that you have met the 75% ordinary shareholding requirement to be considered as part of the same Group. Additionally, for companies with different financial year ends, it can be tempting to transfer or claim losses from each other to minimise your tax liability. However, take note that this practice is not allowed in Singapore.

3. Tax exemption for foreign-sourced dividends

If you are claiming tax exemption of dividends under the foreign-sourced income exemption (FSIE) scheme, do note that the dividends must meet the ‘foreign headline tax rate of at least 15%’ condition when it is received in Singapore i.e. the jurisdiction in which the company paying the dividend is a tax resident of must have the highest Corporate Income Tax rate of at least 15%. Furthermore, the foreign income should be subjected to tax based on the country’s jurisdiction from which it is received.

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

If you are a construction company who have made provisions for expenses such as damages and defects, bear in mind that they are not eligible for tax deduction. The rule of thumb for allowable deductions is that expenses must be incurred and qualified for deduction under Section 15 of the Income Tax Act 194.

5. Companies with No Business Done status that are exempted from filing Corporate Income Tax returns

Your company may be exempted from filing Corporate Income Tax Returns if you have:

  • Filed Form C-S/Form C-S (Lite)/Form C as a dormant company for two consecutive YAs: or
  • 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.

That being said, you must start filing Corporate Income Tax Returns again once you recommence your business. Otherwise, you can be liable to penalties.

Seek Professional Help

If you want assurance that your tax filing is accurate, up-to-date and – most importantly – compliant with the IRAS, you may reach out to an experienced tax services provider like Chartsworth. Whether you’re just starting out in business or you’ve been in operation for years, corporate tax services can give you the peace of mind that comes from knowing your business is prepared for anything. For more information, don’t hesitate to contact our team at Chartsworth today.