IRAS Income Tax Audit: What to Expect
If your business is selected for an income tax audit by the Inland Revenue Authority of Singapore (IRAS), the process may seem daunting. However, selection for an audit does not necessarily imply wrongdoing or errors in your tax filings. IRAS adopts a risk-based approach and may audit businesses across various industries, sometimes at random, to promote tax compliance and ensure adherence to tax laws.
Preparing for an IRAS Income Tax Audit
The audit process usually begins with a notification letter from IRAS. This letter outlines the documents and information your business needs to prepare.
For instance, if your company has claimed capital allowances in your Form C or Form C-S for a particular Year of Assessment (YA), you may be asked to conduct a self-review to identify and correct any discrepancies. You can access your forms via the myTax Portal to assist with the review. Depending on your business structure, here are common issues to watch for in capital allowance claims:
- Incorrect classification of assets: Items such as flooring, ceilings, doors, and general lighting do not qualify as Plant & Machinery (P&M). Interior design costs are also ineligible.
- Assets not used by the claiming company: Capital allowances can only be claimed for assets used directly by your business.
- Failure to disallow depreciation expenses: Depreciation is an accounting expense and is not deductible for tax purposes.
- Errors in balancing allowance or charge calculations: When disposing of assets, the sale price must be taken into account to compute any balancing allowance or charge.
- Incorrect claims under renovation and refurbishment: Expenses qualifying under Section 14N of the Income Tax Act 1947 for renovation and refurbishment cannot be claimed as capital allowances.
After completing your review, you must submit the capital allowance and renovation/refurbishment schedules. If any amendments are made, attach the revised tax computation and the updated schedules for the relevant YA.
Other Common Compliance Errors to Avoid
Besides reviewing capital allowance claims, businesses should avoid the following compliance pitfalls:
- Misuse of tax exemption schemes: IRAS has found cases where:
- Profits are diverted to shell companies to unfairly reduce tax obligations.
- Expenses are charged to shell companies with no real business justification.
- Directors or shareholders are underpaid to exploit tax rate differences.
- Improper pricing for related-party services: Ensure transactions with related entities adhere to the arm’s length principle. Mark-up pricing should reflect what would be charged to an unrelated party. Maintain proper transfer pricing documentation.
What Happens During an Audit?
IRAS auditors will verify timely filing of Form C-S, Form C-S (Lite), or Form C. They will also assess whether different streams of income are taxed at the correct rates. Common issues include:
- Private or non-deductible expenses: Personal costs such as holidays or meals claimed as business expenses are not deductible. Likewise, S-plated car expenses remain non-deductible, even when used for business purposes.
- Incorrect Group Relief claims: Ensure that the 75% ordinary shareholding requirement is met, and avoid transferring losses between companies with differing financial year-ends, as this is not permitted.
- Foreign-sourced dividend exemptions: To qualify under the Foreign-Sourced Income Exemption (FSIE) scheme, the dividends must come from jurisdictions with a headline corporate tax rate of at least 15% and must have been subject to tax in that jurisdiction.
- Construction industry income and provisions: Provisions for future expenses such as defects or damages are not deductible. Only incurred and qualifying expenses are allowed under Section 15 of the Income Tax Act.
- Dormant companies: Businesses exempt from filing Corporate Income Tax returns due to dormant status must resume filing once operations recommence. Failure to do so can result in penalties.
Professional Guidance is Key
To ensure accuracy and full compliance with IRAS requirements, consider engaging a qualified tax services provider such as WLP. Whether you’re a start-up or a well-established enterprise, professional tax support can offer peace of mind and help you stay prepared for any audit or compliance review.
For expert assistance, feel free to contact the WLP team today.