The Inland Revenue Authority of Singapore (IRAS) has updated its compliance guidance, outlining significant upcoming and ongoing areas of focus for taxpayers. Key priorities include heightened scrutiny on withholding tax compliance and persistent issues observed in transfer pricing, remuneration practices, and digital business reporting.
Upcoming Priority: Withholding Tax Audits Intensify
IRAS has explicitly designated Withholding Tax (WHT) as a primary target for its upcoming compliance program. This signals an imminent increase in desktop audits specifically examining WHT obligations. Taxpayers are strongly advised to:
- Conduct internal reviews of their WHT compliance processes.
- Ensure robust documentary evidence exists to substantiate compliance with WHT requirements for all applicable payments (e.g., royalties, services, director’s fees paid to non-residents).
- Consider making a voluntary disclosure to IRAS for any past lapses to potentially qualify for a waiver or reduction of penalties.
Ongoing Compliance Focus Areas
IRAS continues to prioritize several areas based on audit findings:
- Remuneration in Family-Owned Companies: Audits frequently uncover payments to family members (as directors, employees, etc.) that exceed the value of services actually rendered. IRAS mandates that such companies must be able to substantiate that all remuneration paid is commensurate with the services performed.
- Digital Economy Businesses (e.g., Content Creators, Influencers): Common errors identified include:
- Omission/Understatement of Income: Failure to declare all revenue streams, including sponsorships, gifts, and collaborations.
- Incorrect Expense Claims: Claiming private expenses (e.g., personal entertainment, non-business travel) as business deductions.
- Inadequate Record Keeping: Lack of proper documentation for income received and expenses incurred.
- Interest Expense & Borrowing Cost Deductions: IRAS is actively auditing the deduction of interest expenses. Taxpayers must apply the Total Asset Method when attributing common interest expenses and borrowing costs between income-producing and non-income-producing assets. Strict adherence to the methodology outlined in the IRAS e-Tax Guide “Income Tax: Total Asset Method for Interest Adjustment” is required.
- Transfer Pricing in Related Party Services: Audits reveal frequent non-compliance:
- Charging only cost (no markup) for services provided to related parties.
- Applying markup only to direct costs (like personnel), excluding indirect and operating costs.
- IRAS Mandate: Taxpayers must charge an arm’s length fee for all support services provided to related parties. This fee calculation must include all direct, indirect, and operating costs associated with service provision. Failure risks transfer pricing adjustments under Section 34D and potential Section 34E surcharges (effective YA 2019). The “benefits test” within the IRAS Transfer Pricing Guidelines should guide determinations on whether a service was actually provided.
- Investment Dealing Companies: Companies with exempt, concessionary, and standard-rate trading income must ensure proper attribution of allowable expenses and capital allowances across these distinct income streams.
Areas Removed from Active Focus
IRAS has removed “Group Relief Claims” and “Tax Exemption for Foreign-Sourced Dividends” from its published list of ongoing compliance focus areas. Crucially, taxpayers remain legally obligated to comply with all rules governing these areas and maintain documentary evidence to support their claims and compliance.
Taxpayers, particularly those operating family-owned businesses, digital platforms, engaging in related party transactions, or dealing with complex interest expenses and WHT, are urged to proactively review their practices and records against these IRAS focus areas. Ensuring robust documentation and adherence to prescribed methodologies is paramount to mitigate audit risks and potential penalties.
Source: IRAS, 5 April 2024.