Navigating Singapore’s changing corporate income tax audit landscape 

The latest trends in corporate income tax audits highlight the need for businesses to enhance compliance and prepare for stricter enforcement measures.

The latest tax collection statistics for Singapore have been released by the Inland Revenue Authority of Singapore (IRAS). For the financial year (FY) 2024/25, the total tax collection amounted to S$88.9 billion, representing a 10.7% growth from the previous year. Corporate income tax (CIT) remains the largest contributor, accounting for S$30.9 billion or close to 35% of the total tax revenue. 

This upswing in tax revenue not only underscores the robustness of Singapore’s economic performance but also reflects the enforcement efforts of the IRAS. As disclosed in the IRAS annual report for FY 2024/25, the cost of collection remains low at 0.58 cents per dollar of tax revenue collected – an indicator of the IRAS’ targeted compliance efforts. 

In this article, we share our practical observations on the evolving CIT audit landscape, highlighting certain key trends and focus areas that companies should be aware of.

1. Reconciliation of companies’ filings across different tax types

As part of the IRAS’ routine compliance review for CIT, they may occasionally raise questions on other tax obligations, such as withholding tax (WHT) and goods and services tax (GST) historically. However, recent developments point to a more systematic and data-driven approach. Companies are receiving letters from the IRAS containing specific and detailed questions, highlighting discrepancies between their CIT filings and other tax submissions.

For example, the IRAS has intensified its scrutiny on the mismatches between income tax returns and WHT records. In several instances, the IRAS was able to detect and point out that companies declared in their income tax returns that they had made payments subject to WHT and complied with the WHT obligations, yet no corresponding WHT submissions were found in the IRAS’ system. These cases have prompted the IRAS to raise concerns about erroneous declarations in the taxpayer’s CIT returns. 

Similarly, the IRAS has deepened its focus on GST compliance by cross-referencing reported income in tax returns with GST registration data. Companies reporting annual revenue exceeding the S$1 million GST registration threshold, but without a GST registration, have been flagged for further review. 

The above underscores IRAS’ enhanced data analytics capabilities, which will play an increasingly central role in their enforcement efforts. Companies should proactively assess their tax reporting processes, ensure consistency across tax types, and be prepared to respond to targeted and data-informed queries from the IRAS. 

2. Enforcement of penalties for incorrect returns

Under Singapore’s tax legislation, companies that file incorrect tax returns may face penalties of up to 100% of the tax undercharged. Where the incorrect tax return is made without reasonable excuse or due to negligence, the penalty can escalate up to 200%. The Comptroller of Income Tax is empowered to compound such offences, taking into account the specific facts and circumstances of each case.

In practice, the IRAS usually exercises discretion in applying the penalties, often considering the mitigating factors such as the company’s compliance history and internal controls put in place to prevent recurrence. Recent trends point to a more stringent enforcement stance. Notably, even in cases of first-time error, the IRAS has imposed penalties, albeit at reduced rates, rather than issuing warnings. 

A common area of error is the incorrect identification of capital and revenue foreign exchange differences. This continues to be a frequent pitfall, often resulting in incorrect tax positions and subsequent penalties.  

The IRAS has updated its website to identify claims made under the Enterprise Innovation Scheme (EIS) as an upcoming area of review. Companies that have submitted EIS claims should be prepared to provide documentation to the IRAS to confirm their eligibility for enhanced deductions or cash payouts. 

As the IRAS sharpens its enforcement stance, companies should prioritise accuracy in their income tax filings. To manage and mitigate the risk of penalties, business should also consider making use of available compliance initiatives, such as the Voluntary Disclosure Programme.  

3. Submission of revised tax computations to seek refunds

There has been a growing number of cases where the IRAS is challenging the basis on which companies submit revised tax computations to amend prior assessments and seek tax refunds. This is especially the case where a Notice of Assessment was previously issued and no valid objection was lodged within the statutory time frame. 

While Singapore’s tax framework provides a mechanism for relief under the “error or mistake” provision, its application does not cover all scenarios. Where the revision stems from a change in tax position or interpretation, rather than a factual or computational error, the company would have to demonstrate that its original position or interpretation indeed arises from some “error or mistake”.  In the absence of such justification, the IRAS has rejected the revised tax computations on the grounds that the “error or mistake” relief does not apply, and no valid objection was filed when the assessment was issued by the IRAS. 

Companies considering revisions to prior assessments should be prepared to substantiate how their case fall within the scope of the “error or mistake” relief provision.  

4. Enforcement of transfer pricing (TP) surcharge

Since the Year of Assessment (YA) 2019, the IRAS is empowered to impose a 5% surcharge on the amount of TP adjustment made, regardless of whether the TP adjustment results in additional tax payable. The IRAS can make TP adjustment when it determines that the taxpayer has understated its taxable income or overstated its losses due to non-arm’s length related-party transactions.

In practice, we have observed the IRAS strictly enforcing the 5% surcharge in cases where TP adjustments are made. A common scenario involves taxpayers providing intercompany services without applying a mark-up on all costs incurred. The IRAS may deem a mark-up on certain unrecovered costs, viewing them as expenses incurred by the taxpayer to provide the services. The deemed mark-up, in this case, would be subject to tax. The resulting TP adjustment, which is the increase in the deemed service fee income, would be subject to the 5% surcharge.  

If the TP dispute is not resolved before the statutory time bar, the IRAS typically issues a protective assessment to collect the tax arising from the deemed mark-up, alongside a notice of surcharge for the 5% TP surcharge. The surcharge, like the additional tax assessed, must be settled within a one-month period, notwithstanding that an objection is lodged by the taxpayer. This can result in a significant financial cash outlay to the taxpayer. 

Given the financial implications, companies should consider the merits of early and proactive engagement with the IRAS on TP matters. 

Final thoughts

The IRAS’ tax enforcement approach is sharper, stricter and more data-driven than ever. Companies should take a proactive approach to manage tax risks and mitigate exposure to penalties and surcharges. 

Organisations seeking to reinforce their internal tax controls and demonstrate a strong commitment to tax governance may consider adopting voluntary compliance programmes such as the Tax Governance Framework (TGF) and the Tax Risk Management and Control Framework for Corporate Income Tax (CTRM). These frameworks not only facilitate effective risk management and reduce exposure to penalties and surcharges but also promote transparency and foster trust in interactions with the IRAS.

The author of this article is Ting Ting Lim, Partner, Tax Services from Ernst & Young Solutions LLP.