Taxpayers should always ensure that their tax returns are complete and accurate. While this is a moral and legal duty, it also happens to make good business sense. There are a number of provisions in the tax laws of Singapore that penalise taxpayers for making incorrect returns and the penalties can be quite significant indeed. Good tax governance can help to mitigate the risks of making incorrect returns and is crucial for keeping the taxpayer out of trouble with the revenue authorities. The Inland Revenue Authority of Singapore (“IRAS”) has introduced a Tax Governance Framework (“TGF”) that can help taxpayers better comply with tax laws and mitigate tax risks. However, apart from these benefits, the TGF also provides further opportunities for taxpayers to benefit from its adoption. These come in the form of a one-time extended grace period for voluntary disclosure of certain errors to the IRAS and a boost to the environmental, social, and governance (“ESG”) profile of the taxpayer. There are a variety of such provisions in, inter alia, the Income Tax Act 1947 (“ITA”) and Goods and Services Tax Act 1993 (“GSTA”). We will assume in this case that taxpayers who are considering implementing the TGF are unlikely to be considering tax evasion or tax fraud. Thus, the main risks come in the form of inadvertently making incorrect returns.
Income Tax Offences
With respect to income tax returns, section 95(1) of the ITA provides that a person who 1) makes an incorrect return by omitting or understating any income in a tax return; or 2) gave any incorrect information with respect to its liability to tax, will be subject to a penalty of the amount of tax undercharged. Section 95(2) is similar, but applies where a person makes the incorrect return or gives incorrect information without reasonable excuse or through negligence. The penalty in such a case is double the amount of tax undercharged. Negligence in this case might involve the taxpayer falling below the standard expected of a reasonable person as far as record-keeping and tax filing practices are involved. Implementing the TGF may benefit a taxpayer on this point, because it may assist the taxpayer in showing that it was not negligent, since it had a strong process in place to catch and avoid filing errors.
Goods and Services Tax Offences
There are similar provisions in the GSTA. Section 59(1) provides that a person who 1) makes an incorrect return by omitting or understating any output tax or overstating any input tax; or 2) gives any incorrect information in relation to any matter affecting the person’s own liability to tax or the liability of any other person, will be subject to a penalty of the amount of tax undercharged. Section 59(2) is similar, but applies where a person makes the incorrect return or gives incorrect information without reasonable excuse or through negligence. The penalty in such a case is double the amount of tax undercharged. However, in this case, there may be an additional fine of up to $5,000 imposed. There is also the possibility of imprisonment if the taxpayer is an individual.
Withholding Tax Offences
As for withholding tax, section 45(4) of the ITA provides that if the correct amount of tax is not paid to the IRAS by the 15th day of the following month where the relevant payment (on which withholding was required) was made, a penalty of 5% will apply. An additional penalty of 1% will apply for each completed month thereafter where the tax remains unpaid. Further, if the taxpayer has withheld the tax but not notified the IRAS that it has done so, a much harsher penalty will be applied. The taxpayer will have to pay a penalty of three times the tax withheld and shall also be liable to a fine not exceeding $10,000. There is also the possibility of imprisonment if the taxpayer is an individual.
Benefits of the TGF
These penal provisions can result in serious consequences for taxpayers and thus, every attempt should be made to avoid falling foul of them. However, the IRAS is offering companies which adopt the TGF a one-time extended grace period for voluntary disclosure of errors. The length of this grace period will be two years for corporate income tax errors, withholding tax errors, and GST errors, starting from when the TGF application was approved. For GST-registered businesses with ACAP status, the grace period will be three years. Thus, not only does the TGF help taxpayers to improve their tax governance and potentially discover any errors which they might not be aware of, the IRAS further incentivises this by granting a grace period for voluntary disclosure of these errors.
Finally, implementing the TGF can help a taxpayer to fulfil its ESG obligations by ensuring that it pays its fair share of taxes. It also sends a clear signal to a taxpayer’s customers and business partners of its commitment to doing so, which may bring reputational benefits to the taxpayer. There are therefore considerable benefits of implementing the TGF. Apart from ensuring that the taxpayer is “doing the right thing”, which is a moral imperative, there are also potential commercial benefits that might well more than offset any costs in implementing the TGF.