What to focus on for the YA 2025 corporate income tax filing

Understanding common pitfalls and compliance requirements is crucial for accurate corporate income tax filing.

Receiving a tax query letter from the Inland Revenue Authority of Singapore (IRAS) can be unsettling, especially when the letter spans several pages and is followed by another stating that the company has submitted an incorrect tax return and that the penal aspects of the income tax return are currently under review.

As businesses in Singapore prepare for the Year of Assessment (YA) 2025 corporate income tax filing, which is due by 30 November 2025, it is timely to review the common pitfalls. These include:

• Deduction claims for accrued expenses that are general provisions where the liability to pay has not crystallised.

• Tax exemption claims on foreign dividend income received in Singapore without support that the income was taxed in the foreign jurisdiction.

• Related party services not priced at arm’s length.

In this article, we highlight some key areas to focus on when preparing and reviewing your YA 2025 tax return.

1. Accrued expense

There is continued focus by the IRAS on the audit of year-end accrued expense balances. These balances can be significant and often include a variety of expense types. A common oversight by companies is assuming that the entire accrued expense balance is tax-deductible, without verifying whether they include general provisions for expenses yet to be incurred as of the financial year-end.

From a tax audit standpoint, the IRAS typically requests a detailed breakdown of the accrued expenses, including the nature of each item. Companies may also be asked to reconcile these balances with their income tax computations and financial statements. The IRAS often require information on the timing of payments e.g., whether made within 12 months of year-end and explanations for any amounts that remain unpaid.

In some cases, supporting documents such as contracts or agreements may be necessary to demonstrate that the liabilities were indeed incurred as at year-end, e.g., whether there is clear evidence of a contractual obligation to pay a specifically determined amount.

Companies should carefully review their year-end accrued expense balances and maintain sufficient documentation to support each item. For balances that remain unpaid more than 12 months after the end of the financial year in which they were accrued, companies should, from a practical perspective, reassess the validity of the deduction and determine whether a claim is still appropriate.

2. Related party services

Since the release of the IRAS e-Tax-Guide Transfer Pricing Guidelines (Seventh Edition) just over a year ago, we have observed increased scrutiny on related party transactions. In particular, there is a growing risk of transfer pricing (TP) surcharges being imposed under Section 34E of the Income Tax Act. These surcharges can be substantial, as they are calculated based on the amount of TP adjustments (and not based on the amount of taxes arising from these adjustments) made by the IRAS.

One common area of dispute involves related party services, where service fees are calculated using a mark-up on direct costs only (such as personnel expenses). However, the IRAS generally expects the mark-up to be applied on a broader cost base, which includes both direct and indirect costs, as well as relevant operating expenses. Another related area of focus is the inclusion of share-based compensation (SBC) as part of the cost base. While the current guidelines do not explicitly require SBC to be included in the cost base for service fee calculations, we have seen the IRAS consistently take the position that such costs (including notional SBC where no actual charge is made) should be factored into the cost base when determining an arm’s length service fee.

Given this evolving landscape, it is essential for companies to ensure that their related party transactions are priced in accordance with the arm’s length principle. Maintaining robust and contemporaneous TP documentation is critical to support the pricing and defend against potential adjustments or surcharges.

3. New compliance disclosures for YA 2025

Companies should take note of several new reporting requirements for YA 2025, including the following:

A) Gains or losses from sale or disposal of foreign assets

With effect from 1 January 2024, the foreign-sourced disposal gains tax regime under Section 10L of the Income Tax Act has come into force. Under this regime, certain gains from the sale or disposal of foreign assets may be taxable when received in Singapore, unless the business has adequate economic substance in Singapore.

For YA 2025, businesses are required to disclose the following in their income tax computations:

• Unremitted gains or unutilised losses brought forward and to be carried forward

• Gains or losses recognised during the year, utilised in Singapore during the year, used during the year and not received in Singapore

• Tracking of allowable expenses

• Information demonstrating economic substance in Singapore e.g., number of employees, operating expenditure and outsourcing arrangements

New declarations related to foreign asset disposals are also required in the YA 2025 income tax return.

To support these disclosures, businesses should maintain proper documentation, such as sales agreements, cost records, foreign tax payments and payroll data. While the IRAS has issued an e-Tax Guide to clarify aspects of the economic substance requirement, businesses seeking certainty may apply for an advance ruling if a disposal is expected within one year.

B) Renovation and refurbishment (R&R) expenditure

As announced in Budget 2024, the R&R expenditure cap will now follow a fixed three-year period, starting with YA 2025 to YA 2027. This replaces the previous rolling three-year period based on the first year of claim. As a transition measure, if a business’s current three-year period overlaps with YA 2025, it will still be entitled to the full S$300,000 cap for YA 2025 to YA 2027, even if the R&R expenditure were claimed in the previous relevant YAs.

In addition, effective YA 2025, designer and professional fees (not related to structural works where approval from the Commissioner of Building Control is required) will now qualify for R&R deductions. A new one-year write-off option is also available (irrevocable once elected), subject to the S$300,000 cap within the fixed three-year period. 

With the changes and enhancements made to the R&R scheme, companies should ensure that the correct R&R expenditure is claimed in YA 2025.

Conclusion

With the IRAS continuing its focus on tax compliance, it is essential for companies to ensure that their corporate income tax returns are complete and accurate. Filing an incorrect tax return without reasonable excuse or as a result of negligence can result in hefty penalties, potentially up to 200% of the tax undercharged.

To mitigate these risks, companies should adopt a proactive approach to tax compliance. This includes conducting regular reviews of their tax filings, staying informed of key regulatory changes, and maintaining robust documentation to support the positions taken in their returns. For more complex issues, they should seek advice from tax advisors where appropriate. 

The co-authors of this article are Xiu Mei Chua, Partner, Tax Services from Ernst & Young Solutions LLP and Warren Ang, Associate Director, Tax Services from EY Corporate Advisors Pte. Ltd.