7 Common Corporate Tax Mistakes Companies Should Avoid in Singapore

The government’s principal revenue collection body, the Inland Revenue Authority of Singapore (IRAS), requires all corporate taxpayers in Singapore to file their tax reports on time. Thankfully, companies are given ample time to prepare and file their corporate tax returns. In addition, companies are also encouraged to engage in corporate tax services to help them avoid any costly corporate tax mistakes.

Corporate Tax Mistakes Every Singapore Company Should Avoid 

Here, we’ll go over seven common mistakes small and family-owned firms in Singapore should avoid when filing for corporate income tax.

1. Claiming corporate tax deductions for non-deductible expenses

One of the most common slip-ups corporate taxpayers commit is mixing business expenses and employees’ expenses Expenses incurred to manage a business are known as business expenses. Contributions to the CPF, wages, and advertising are just a few examples. There are two types of business expenses: deductible and non-deductible.

Deductible business expenses are those that are incurred “wholly and exclusively in the generating of income.” In other words, they must meet all of the following criteria:

• Expenses that are incurred purely for the purpose of generating income;
• Expenses that are not a contingent liability (they must be incurred);
• Expenses that are revenue and not capital in nature; and
• Expenses that are not prohibited from deduction under the Income Tax Act.

On the other hand, expenses that do not meet the criteria above are considered non-deductible. These include personal expenses, such as travel or entertainment that are unrelated to the operation of the business, and capital expenses, such as the costs of forming a company and the purchase of fixed assets.

2. Incorrect filing of expenses

Another most common mistake is incorrectly filing company expenses, including filing expenses based on estimates. Fees and cost of sales claims must be filed in accordance with the actual amount spent, together with supporting papers (invoices and receipts). Moreover, invoices and receipts should be serially numbered and include information, such as the date and firm registration information.

3. Compensating or remunerating related parties

It is not uncommon that some companies pay considerable but unreasonable remuneration to associated parties (i.e., parents, children, spouses, or siblings). There are also instances where a significant sum of money is paid to unrelated people who are not employees of the company. 

Companies should only compensate related parties if the quality of the service they provide is similar to that provided by an independent employee and if the related parties are qualified to complete the assignment.

4. Not identifying taxable income and when to report it

Profits earned by any tax resident from Singapore corporations, regardless of the business structure, are taxable in Singapore. To put it another way, an individual’s whole employment income obtained by performing services in Singapore is taxable, even if the local employer’s foreign holding corporation (or parent business) pays. Therefore, employers need to declare non-salary taxable income.

It’s also worth mentioning that taxability varies based on the type of payment and whether or not the employee is entitled to it. Bonuses and director’s fees are two instances of tax blunders that are frequently made.

When it comes to bonuses, employers need to avoid reporting contractual bonuses when they are paid rather than when they are received. Meanwhile, for directors’ fees, employees need to avoid reporting these fees approved in arrears in the years in which the services were given rather than when the fees were voted on and approved during the company’s annual general meeting.

5. Failure to keep correct records and accounts

Companies must keep accurate records of their financial transactions, as well as any supporting documentation. Accounting documents, bank statements, and any other records of transactions pertaining to the company’s operations must all be retained. These records should be kept for a minimum of five years as IRAS may review these documents in the future if necessary. 

Furthermore, as long as you have a permanent presence in Singapore, you must base your claims on the actual amount spent on expenses and purchases, which must be supported by receipts or invoices. When it comes to tax filing season, businesses that don’t keep their records up to date risk reporting errors.

6. Over- or under-reporting gains from employee stock option plans or employee stock ownership plans

ESOP (Employment Stock Option) and ESOW (Employee Share Ownership) have become popular with Singapore employers. However, due to their popularity, businesses must understand how taxes apply to these options, as they are still considered employment income. Both are fully taxable if they are given to employees who are currently employed in Singapore, regardless of the company’s location.

Employers may potentially underreport due to a misunderstanding of or failure to follow the “deemed exercise” criterion. When a foreign employee leaves Singapore and earns unvested or unexercised stock options, this is known as underreporting.

Overreporting also occurs when employers claim ESOW or ESOP benefits or earnings obtained while working outside Singapore. Even if the plans are vested or exercised during Singapore employment or profits are remitted to Singapore, these gains are regarded foreign-sourced and hence not taxable.

There are also cases where employers make mistakes when calculating gains from ESOP or ESOW plans with selling limitations or moratoriums. For example, they may miscalculate the gains by using the date of exercise rather than the day the moratorium was removed to calculate the profits.

7. Failure to keep updated with regulatory changes

Singapore’s Income Tax Act constantly changes to reflect the country’s current employee remuneration structure. Companies that are not up to date on these regulatory developments risk non-compliance, which will damage their ability to appropriately record employee earnings and other matters.

Companies are better off hiring a professional tax consultant who can help maximize the company’s tax efficiency by identifying the right business tax deductibles, applying the appropriate tax incentive schemes, and obtaining corporate tax rebates.

Making corporate tax mistakes can be costly and have significant ramifications. For example, when there are errors, omissions, or discrepancies in tax returns, whether intentional or not, IRAS may levy fines. In this case, hiring a professional tax adviser is advantageous since they have the essential skills to assist with any tax audits or investigations conducted by the authorities.

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