Understanding the Shift: Corporate Tax Audit Recoveries Surpass GST in Singapore

Is It Time to Sack Your Corporate Tax Agent?

Historically, tax and penalties recovered per GST audit case were among the highest across all tax types, highlighting the challenges of GST compliance and the strength of IRAS's audit strategies. 

However, recent statistics published by Inland Revenue Authority of Singapore (IRAS) reveal a surprising shift: for the financial year ended 31 March 2024, tax and penalties recovered per corporate tax audit have significantly outstripped those from GST and personal income tax audits.

The average tax and penalties recovered per corporate tax audit in the year ended 31 March 2024 is $131,000 as compared to $65,500 and $76,700 for the years ended 31 March 2023 and 31 March 2022 respectively.  This represents a 100% increase in tax and penalties per corporate tax audit in the year ended 31 March 2024! 

This emerging trend raises important questions about the evolving tax landscape in Singapore, the impact of IRAS's audit focus, and the implications for businesses.

Why the Shift? 

There wasn’t any explanation or footnote in the IRAS financial statements that explain the increase in tax and penalties for corporate tax audit.  It wouldn’t be due to Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two taxes as that will only be for financial years starting on or after 1 January 2025.

As a GST advisor, here are some of my thoughts:

Is the IRAS auditor getting more sophisticated, using advanced technology and AI to do their jobs better?  With corporate structure and transactions getting more complex, are the companies taking bolder tax positions and are IRAS auditors pushing back and imposing penalties?

Since most of the corporate tax returns are outsourced to the corporate tax agent and if IRAS is recovering more tax and penalties in corporate tax audits, does that mean your tax agent isn't doing their job well?  

Implications of this trend for businesses and tax authorities

The shift towards higher tax recoveries from corporate tax audits carries significant implications for both businesses and the tax authorities:

1. Increased Audit Risk for Corporations:

   • Businesses, especially those with complex structures and cross-border transactions, now face increased audit risks. If the trend of higher tax and penalty for corporate tax audit continues, it may suggest that IRAS is placing a greater emphasis on corporate tax compliance, and companies must be prepared for more frequent and thorough audits. Businesses should review their tax positions, particularly in areas like transfer pricing, cross-border transactions, and tax incentives, to ensure they comply with current regulations.

2. Higher Compliance Costs and Need for Robust Tax Governance:

   • With the heightened focus on corporate tax compliance, companies may face increased compliance costs. These could stem from the need for better internal controls, comprehensive transfer pricing documentation, and possibly seeking expert advice to navigate complex tax rules. A robust tax governance framework will be essential for businesses to manage their tax risks effectively.  For companies looking to incorporate a tax governance framework, you may want to start looking at the Tax Governance Framework (“TGF”) introduced by the IRAS.

3. Reinforcement of Fair and Transparent Tax Regime:

   • For IRAS, the focus on corporate tax audits reinforces Singapore's commitment to a fair and transparent tax regime. As the city-state aligns its tax policies with international standards, the emphasis on corporate tax audits sends a strong message about Singapore’s zero tolerance for tax avoidance and evasion. This, in turn, helps to protect the country’s tax base and uphold its reputation as a responsible global financial hub.

4. Shift in Audit Strategy from Indirect to Direct Taxes?:

   • This may be the start of a trend that indicates a shift in IRAS's audit strategy from indirect taxes like GST to direct taxes such as corporate income tax. 

     The number of corporate tax audits conducted did increase by 314 cases (which represent an increase of about 8%) for the year ended 31 March 2024. But that doesn’t explain why the amount of tax and penalties recovered per corporate tax audit increases by 100%. Nevertheless, as global tax environments become more complex, there is a growing need to address risks associated with corporate tax avoidance.

5. Potential Recalibration of GST and Personal Income Tax Audits:

   • While corporate tax audits currently yield higher recoveries, this does not mean that GST and personal income tax audits will become less significant. Instead, IRAS may recalibrate its audit focus within these areas, perhaps by concentrating on specific sectors or high-risk behaviors, such as fraudulent GST refund claims or under-declaration of personal income by high-net-worth individuals.

Conclusion: A New Era of Corporate Tax Scrutiny

The recent data from IRAS on audit recoveries may underscore the beginning of a pivotal shift in Singapore's tax landscape. For businesses, this means a heightened focus on compliance, stronger governance, and readiness for deeper scrutiny from tax authorities. 

Talk to your corporate tax agent and if they are unable to explain why tax and penalties per corporate tax audit case increased by 100% in the past year, you know what you need to do.

I’m a GST advisor and I’m part of the reason why the IRAS could not increase the tax and penalties from the GST audit. :)