Four potential pitfalls to avoid for the YA 2023 corporate income tax filing
Companies should be vigilant and avoid these costly errors in their corporate tax filing.
The corporate income tax return for the Year of Assessment (YA) 2023 is due for filing by 30 November 2023. In this article, we cover four potential pitfalls that are relevant to the YA 2023 corporate income tax filing and can be costly for companies, if not managed properly and adequately.
1. Foreign exchange (FX) differences on Financial Reporting Standard (FRS) 116 lease liability
In March 2023, the Inland Revenue Authority of Singapore (IRAS) updated its e-tax guide to clarify the tax treatment of FX differences on FRS 116 lease liability. This could impact companies with non-S$ functional currency and operating leases denominated in S$.
Key areas to note from the IRAS’ clarifications include:
(i) Companies could record FX differences when they revalue their S$ denominated year-end lease liability balance into their respective functional currencies. The IRAS clarified that FX differences arising from the revaluation of the outstanding FRS 116 lease liability are to be disregarded for tax purposes on the basis that such FX differences are notional accounting adjustments.
(ii) FX differences could also arise for companies when they settle their S$ denominated contractual operating lease payment incurred in the subsequent year. The IRAS confirmed that such FX gains or losses are taxable or deductible if they arise from deductible contractual operating lease payments[1].
As a general principle, FX gains or losses arising from revenue or trade transactions are taxable or deductible, whereas FX gains or losses arising from capital transactions are non-taxable or non-deductible, whether realised or not.
It is possible that prior to the IRAS’ clarifications, companies may have treated FX gains or losses on their operating lease liability as arising from revenue transaction and taxed the FX gains, or claimed a deduction on the FX losses in their tax returns filed. This treatment does not align with the IRAS’ clarifications that the FX differences are to be disregarded for tax purposes, except when they result from the settlement of the contractual operating lease payment.
Companies should review their filing position on the FRS 116 FX differences for the YA 2023 and before. If the position differs from that of the IRAS, companies should consider and evaluate their next course of actions, including lodging revisions of their income tax computations for the prior years of assessment with the IRAS.
2. Interest expense deduction
Companies that adopt the “total asset method” (TAM)[2] in their tax returns should pay attention to the following:
(i) It is incorrect to simply apply the TAM on all interest expense incurred. If the loan that gives rise to the interest expense is used specifically to finance assets that are non-income producing (such as extending a back-to-back interest-free loan to related parties), or assets that do not produce taxable income (such as equity investments that produce tax exempt dividend income), or used for dividend payment to shareholders, the interest expense is wholly non-deductible and cannot be included in the TAM calculation.
From a tax audit perspective, we observed that the IRAS scrutinises the purpose of the loan before agreeing to the use of the TAM. Apart from requesting for loan agreements to review the purpose of the loan, the IRAS may also examine the company’s cash flow statement to understand the movement of the company’s flow of funds from the loan. Where the agreement or cash flow statement shows a co-relation between the incoming funds from the loan and outgoing cash used to provide a loan to related parties or to make investments, the IRAS could challenge the company’s use of the TAM.
Companies should maintain adequate documentation to support the purpose of their loan(s). It is also a good practice to monitor the usage of the loan(s) to ensure that the factual matrix aligns with the purported purpose.
(ii) Any variations to the TAM, such as the exclusion of equity investments (that were made by the company before the loan was taken up) from the TAM formula, should be reviewed. The IRAS has stated in its e-tax guide that it does not allow a company to exclude from the TAM the cost of non-income producing asset that existed before the company takes a loan. In cases where the IRAS has previously accepted variations to the TAM, the agreed variations will cease to apply once the relevant assets are disposed or relevant loans are repaid.
3. Non-remittance of foreign sourced income
There is a renewed focus by the IRAS to verify the non-remittance position adopted by companies on their foreign sourced income and we are expecting the IRAS to be issuing certain reporting or tracking requirements on this soon. To ensure that the correct filing position is adopted, companies that assert their foreign sourced income is not remitted should track the movement of such income and monitor how the foreign sourced income is used or kept outside of Singapore. In the case of foreign sourced interest income that arises from a cash pooling arrangement with frequent withdrawals and deposits of funds, it is more pertinent for a robust tracking mechanism to be in place to ensure that the non-remittance position can be substantiated to the IRAS.
4. Tax deduction on share-based plans
Examples of non-tax deductible share-based compensation include the following:
(i) Share-based compensation that is not fulfilled out of treasury shares (for example, issuance of new shares).
(ii) Share-based compensation that is not granted to a person by reason of any office or employment held in Singapore by that person.
A Singapore subsidiary can participate in the share-based plans of its parent company and incur a recharge of the share-based compensation from its parent company for the Singapore employees. If the share-based compensation is fulfilled via the issuance of new shares, no tax deduction is allowed to the Singapore subsidiary, notwithstanding that there is an actual charge down which is paid by the Singapore subsidiary.
A Singapore subsidiary can have employees that are assigned or transferred from other foreign offices. No tax deduction is allowed on the share-based compensation expenses incurred for such employees if the share options or awards are granted to them during their employment under the foreign office. This is notwithstanding that the share options or awards are exercised or vested during the Singapore employment of these personnel.
Conclusion
The penalties for filing an incorrect return without reasonable excuse or as a result of negligence can go up to 200% of the tax undercharged. Companies should proactively manage their tax compliance risks and avoid the abovementioned pitfalls in their tax filings. Where the issues are not straight-forward, companies should consider seeking guidance and advice from their tax advisors as appropriate.
The co-authors of this article are Chia Seng Chye, Partner, Tax Services from Ernst & Young Solutions LLP and Lim Ting Ting, Director, Tax Services from EY Corporate Advisors Pte. Ltd.
