Is it time for a tax health check on remuneration reporting?
Given increased audit and hefty penalties, companies should proactively identify potential risks in employee remuneration reporting.
Individual income tax generated 23% of total revenue collection by the Inland Revenue Authority of Singapore (IRAS) in Financial Year (FY) 20211, the second largest revenue-generating tax type after corporate income tax. This makes the correct reporting and collection of individual income tax important to enabling the IRAS to continue supporting the economic and social programmes in Singapore.
In addition to encouraging self-review, the IRAS also makes use of data and technology, and shares information with their corporate tax teams, as well as with other government agencies such as the Central Provident Fund (CPF) and Ministry of Manpower (MOM), so as to manage and monitor individual tax compliance. That said, the most common approach to identifying potential gaps in employee remuneration reporting is the issuance of an assurance questionnaire. An in-depth audit may be conducted if the responses to the questionnaire highlight any concerns.
The assurance questionnaire is extensive and will request confirmation from the company on payroll processes and software, remuneration components, staff training, and knowledge of tax treatment, particularly with respect to share-settled remuneration. In addition to answering the questions, the company must also declare that a complete review of the remuneration reporting for the year has been undertaken and that all taxable components have been reported. Hence, it is important for the company to be confident of their income tax compliance before completing the declaration in the assurance questionnaire.
In FY2021, about S$43m2 in taxes and penalties arose from audit activity conducted by the IRAS on individual income tax reporting.
Common errors in employer’s reporting of employee remuneration
Given the war for talent, companies are always looking at refining the remuneration packages to attract and retain talent. Some of the commonly omitted remuneration items include:
- Items provided through a third party, as is often the case for flexi-benefits and points-based reward systems
- Items paid through an overseas payroll, generally for international assignees
- Share-settled remuneration as the tax rules will depend on the features of the plan
- Employer contributions to overseas pension funds. The company should be aware of the criteria for the tax concession and whether the contributions meet these criteria
- Payments such as bonuses which relate to the Singapore employment, but paid after the individual has relocated abroad
- Incentive holiday trips
- Reimbursement of employee’s car expenses
- Private usage of mobile phone or phone and internet charges
- Insurance coverage or benefits
Furthermore, with remote and hybrid working arrangements becoming more common post-pandemic, companies that do not fully understand the tax implications of their remote working arrangements and policies in Singapore risk being non-compliant.
Remediation under the Voluntary Disclosure Programme (VDP)
If the company becomes aware of any underreporting, they may be able to utilise the IRAS’ VDP in order to rectify past errors. Under the VDP, any penalties to be imposed would be reduced to only 5% per year of delay if all conditions under the VDP are met.
Furthermore, under the statute of limitations, an employer is only expected to remediate to four back years of assessment. For a VDP submission made to the IRAS before 31 December 2023, the period of review will be limited to YA2019 to YA2023 (income years 2018 – 2022).
It is important to note that where errors are identified due to a review triggered by the IRAS, the reduced penalties under the VDP are not available.
It is ultimately the employer’s responsibility to correctly report employee remuneration, and any penalties for underreporting of employment income will be levied on the company in the first instance.
Independent review is key
Companies will need to stay up to date with any changes to tax legislation and be proactive in reviewing prior year reporting to determine any potential gaps in order to leverage the reduced tax penalty rates under the VDP.
Any review should be conducted by an independent party, either within the company or by a professional firm, who is familiar with the reporting requirements. Engaging an independent professional firm advisor to perform a diagnostic review to understand the “state of health” of the employees' remuneration reporting in the Forms IR8A and IR21 enables companies to tap on their technical expertise and the relevant experience, and provide comfort to the board members and the company management that things are in order.
The advisor can undertake a structured evaluation of remuneration reporting and procedures, prepare a gap analysis report to document the current reporting process and provide recommendations to minimise future errors. If any errors are identified, the advisor can support the preparation and submission of the underreported items under the VDP in order to apply for the reduced penalty rates.
The co-authors of the article are Kerrie Chang, Partner, People Advisory Services — Mobility Tax from Ernst & Young Solutions LLP and Alison McNicholas, Manager, People Advisory Services from EY Corporate Advisors Pte. Ltd.
