Board Matters Quarterly - Issue 14: December 2012
Year-end issues the audit committee should consider
Common tax return mistakes
The Inland Revenue Authority of Singapore (IRAS) has highlighted common mistakes made by taxpayers in the filing of tax returns on its website:
- Understatement of income including omission of particular receipts or invoices.
- Claiming deductions for non-deductible expenses including directors’ private expenses and private motor vehicle expenses.
- Claiming remuneration to related parties (shareholders’ or directors’ family members) which do not commensurate with the level of services rendered by the recipients.
- Incorrect claiming of expenses including expenses based on estimations, expenditure on public transport and entertainment with incomplete supporting records and failure to maintain business records for the statutory record-keeping period1.
As the Singapore Income Tax Act provides for penalties2, fines or in some cases imprisonment to be imposed on those guilty of inaccurate tax reporting, companies should take a good degree of care to minimize any mistakes or errors in the tax return filed with the IRAS:
- Perform tax health checks to identify risks of understatement of income.
- Consider tax filing when classifying and recording expenses.
- Have proper documentation to support claims of deductions.
- Put in place tax-related controls to ensure proper retention of records.
The financial year-end for most businesses is drawing to a close. This is an opportune time to take stock of the internal controls and processes to ensure that the figures in the books are accurate, as financial statements are the bedrock in the preparation of income tax returns.
Tax incentive reporting
In Singapore, companies have a wide menu of tax incentives to choose from. However, tax incentive compliance is traditionally not on the radar screens of many companies. In the context of tax risk management, this is something which cannot afford to be ignored given today’s tougher tax landscape. The IRAS has stepped up enforcement of compliance by corporate taxpayers and has devoted more attention to ensure taxpayers have controls in place to manage tax risks. As part of its compliance efforts, the IRAS indicated that it will be scrutinizing the classification of income and expenses by companies enjoying tax incentives.3
Aligned with this trend, companies need to address tax incentive compliance risks. These can include any action taken (or the lack of) in relation to tax incentive reporting obligations such as progress reports, annual reporting and tracking of incentive conditions. In addition, risks also arise in areas such as controls and processes to segregate qualifying versus non-qualifying income and allocation of expenses.
The AC should discuss with management the implications of making incorrect tax return, and the steps that can be taken to minimize the error.
In addition to reviewing the status of existing tax issues, many ACs also review the processes through which strategies are developed, and issues are resolved. In this role, the AC may want to focus on the operations of the tax department and related functions, including whether the company has the appropriate level of resources. Discussing with management the potential ramifications of specific tax disputes, including the risk of serious penalties and reputational damage, and the status of tax audits can help the AC understand the processes the management uses to identify, measure, and manage its tax risks.
1 The statutory record-keeping period is five years for accounting records and supporting documents relating to the Year of Assessment (YA) 2008 and each subsequent YA. For accounting records and supporting documents relating to the YA 2007 and the earlier YAs, they must be retained for a period of seven years from the relevant YA.
2 Under section 95 of the Income Tax Act, penalties of up to twice the tax undercharged may be imposed if a taxpayer makes an incorrect return by omitting or understating any income or gives any incorrect information in relation to any matter affecting the taxpayer’s own liability to tax or the tax liability of any other person.
3 Source: http://www.iras.gov.sg/irasHome/page03a.aspx?id=8010