Common mistakes made by businesses in filing income taxes

-by Audrey Ong

The following article covers common mistakes that businesses may often overlook when filing their income tax returns and what measures to follow to avoid them.

A Employers – Income Tax Clearance for Expatriate /Non-Singapore Citizen Employee
  Wrong Correct
1 Submit IR21 to IRAS after employee leaves employ. Submit IR21/notify IRAS at least one month before the non-Singapore citizen employee ceases employment
Else, employer may be liable to a fine of up to $1,000.
2 Withhold one month’s salary of employee or not at all. Withhold all monies due to the employeefrom the date communicated of his impending cessation of employment or exit from Singapore.
Else, Employer may be held liable for unpaid income taxes.
3 IR21 not required when non-Singapore citizen employee goes on an overseas posting or plans to leave Singapore for a period longer than three months. IR21 is required.
4 Employee has yet to exercise hisshare options upon cessation of employment in Singapore.
There are no share option gains to be reported in the Form IR21.		 Under the “deemed exercise” rule, the employee is deemed to have derived gains from his unexercised share options or unvested share awards at the point of tax clearance.
The deemed gains are to be reported in Form IR21 – Appendix 2.
B Businesses –Withholding Tax (“WHT”) on non-resident professional rendering service in Singapore
  Wrong Correct
  Companiespay non-resident professional working in Singapore fee in full – do not withhold any monies  A non-resident professional whose service is performed in Singapore is subject to a

  • final Singapore withholding tax of 15% on his gross income/fee or
  • 22% of net income if option is exercised.

Companiesare responsible to withhold these monies and pay the WHT by the 15th of the second month from the date of payment.
C Businesses – Productivity and Innovation (“PIC”) Claims on Qualifying Assets purchased under Hire Purchase (“HP”) Terms
  Wrong Correct
1 PIC scheme ended YA2018 – no more PIC claims in YA2019, YA2020 and beyond. For qualifying assets purchased on HP terms during PIC scheme to YA2018, any HP payments in YA2019 and beyond would continue to qualify for PIC cash payout or enhanced 300% allowance.
2 Incentive companies (where profits are tax exempt or taxed at concessionary tax rates of 5%, 10% etc) – the medical expense restriction/add back is added back at the tax exempt or concessionary tax rate category. Medical expense incurred in excess of 1% of total employee remuneration is to be added back and taxed at prevailing corporate tax rate of 17%, not at 0% or concessionary tax rate.
3 Car expense incurred on S-plated cars for business purposes are tax deductible. Deduction for any expenses incurred on S-plated cars are prohibited from tax deduction, even if such were incurred for business purposes.  The same applies to hire of private cars.
Expenses for public transport like cabfares for business purposes are however, tax deductible.Car hire for business-related purposes where the passenger does nothave control or possession of vehicle (e.g. bookings for SZ or S-plated cars via Grab) are also deductible.
4 Failing to report in Form IR8A as taxable in the employee’s hands whilst taking a corporate tax deduction on overseas pension fund contributions made or paid in respect of expatriatealbeit mandatory contributions per the expatriates home country rules. Generally, employer’s contributions to an overseas pension/provident fund istaxable.
As a concession, employer’s contributions to an overseas pension/provident fundare not taxed provided all these conditions are satisfied:

  1. Contributions are mandatory under social security schemes operated, regulated and supervised by the employees’ home country government even though the employees are working outside their home country; and
  2. Contributions are not borne by, or no deduction is claimed by, any permanent establishment / company in Singapore.

The above exemption does not apply (for contributions starting 1 Jan 2014) to an employer who is an investment holding company, a tax-exempt body, a representative office or a foreign company not registered in Singapore and from YA2016, to a service company (“SC”) whose computation is prepared on the cost plus method basis of taxation unless the SC moves to a normal trading company basis of tax computation.
D Smaller Run or Family Owned Set-ups/Businesses
  Wrong Correct
1 Excessive payments to family members or related parties.

 

 Tax deduction can only be claimed for salaries/payments pegged at market rates and not considered excessive compared to salary/fee earned by an unrelated employee/party with similar qualifications, experience and skills performing a similar job scope/service.
2 Tax deduction taken from private expenses incurred by company directors or those specifically prohibited from tax deduction. Petrol, office car park charges on S-plated cars albeit for business purposes, family meals, holidays etc are not tax deductible.
3 Failure to keep proper records and accounts. Taxpayers are required to prepare and retain proper accounting records up to 5 years (For example, records for business operations in year 2015 are to be kept up to 2020).
IRAS has up to YA2020 to issue a tax query on income tax matters pertaining to YA2016 (Year 2015 business operations).

If you discover any errors now, it is advisable to conduct a review of  prior YAs as well and disclose them to IRAS as soon as the information collated is complete.The disclosure can only goas far back as YA2016 since tax matters before that are time-barredas of 31stDecember 2019.The sooner the disclosure is made to IRAS, the lower the penalties are under the Voluntary Disclosure Program (“VDP”).

Under VDP, IRAS aims to encourage taxpayers to voluntarily come forward to report and correct their past errors in exchange for reduced penalties. The conditions are that the VDP must be timely, accurate, complete and self-initiated, i.e. before IRAS questions you on the same matter/issue. The VDP applies to income tax, GST, withholding tax and stamp duty.

To avoid IRAS queries, it is recommended to carry out a voluntary disclosure to IRAS. For example, a self-initiated disclosure of awrongful claim of non-deductible expenses leading to S$15,000 in incremental income taxes over past 3 YAs 2017 to 2019 may result in a much lower penalty of S$1,500 as opposed to 100% to 200% penalties of S$15k to S$30k.It pays to disclose the errors sooner than later as the penalties increases by 5% for every YA, i.e. 0% penalties for YA2019, 5% for YA2018 and 10% for YA2017 in taxes underpaid if the VDP is submitted to IRAS before 30 Nov 2020. Else, another 5% penalty is added to each of the YAs involved.

All materials have been prepared for general information purposes only. The information presented in this document is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. Professional advisory should be sought before taking or refraining from any action as a result of the contents of this document.