24 October 2023
Editor: ET
Avoiding common tax filing mistakes is essential for businesses to ensure accurate declarations and compliance with tax regulations.
Tax season can be a daunting time for businesses, and even the most diligent companies can make inadvertent errors when filing their tax returns. Understanding and avoiding common tax filing mistakes is crucial to ensure accurate declarations and maintain compliance with tax regulations.
In this article, we'll explore four of the most frequent tax filing errors and provide insights on how to steer clear of them.
1. Understatement or Omission of Income
One of the most prevalent errors made by businesses is the understatement or omission of income sources. This often happens due to incomplete recording of revenue, and it can result from poor record-keeping practices. Inaccurate declarations can have serious consequences for companies, and they might arise from:
Failing to account for all invoices related to goods sold or services provided.
Neglecting to report income generated through alternative channels, such as online sales or commission income from third parties.
Companies must emphasize proper record-keeping practices to ensure they account for income generated from all sources. This step is vital to prevent incorrect tax declarations and the associated penalties.
2. Incorrect Claims of Capital Allowances
Another common mistake is the incorrect claiming of capital allowances for assets that do not qualify as 'plant and machinery' or assets purchased for personal use. Capital allowances can only be claimed for qualifying fixed assets used for the company's trade or business. Companies are encouraged to consult the Inland Revenue Authority of Singapore (IRAS) webpage on Capital Allowances for guidance on qualifying assets.
3. Failure to Apply the Arm’s Length Principle for Related Party Services
The arm's length principle is internationally endorsed and guides the pricing of transactions between related parties. It requires that transaction prices between related parties must be equivalent to prices unrelated parties would have charged under similar circumstances. Nonetheless, some companies providing support services to related parties do not comply with this principle:
They may charge related parties at rates far below what they would charge unrelated parties.
This non-compliance can result in understated profits.
Failure to adhere to the arm's length principle can lead to transfer pricing adjustments by IRAS to correct understated profits. Companies can refer to the IRAS e-Tax Guide on Transfer Pricing Guidelines for comprehensive information on this principle.
4. Poor Record-Keeping and Incorrect Claims by Family-Owned/Managed Companies
Many family-owned or managed companies struggle with poor record-keeping practices, leading to insufficient supporting documents for purchases and expenses. Some common mistakes in this category include:
Failing to distinguish between business and private expenses.
Claiming tax deductions on remunerations that are not commensurate with the actual services rendered.
Expenses must be wholly and exclusively incurred in the production of business income for tax deductibility. Remunerations should align with the actual services provided. IRAS reminds all companies that tax deductions without a valid basis and proper document support are not acceptable.
Avoiding common tax filing mistakes is essential for businesses to ensure accurate declarations and compliance with tax regulations. By addressing these common errors, companies can streamline their tax filing processes and minimize the risk of facing penalties or audit adjustments.
Emphasizing accurate record-keeping, staying informed on tax regulations, and seeking professional advice when necessary can help companies navigate the complexities of tax filing successfully.
