IRAS – Getting Companies to Comply (Part 2 of 3)
In extension to our preceding Part 1 article regarding the companies’ tax compliance, we are pleased to present Part 2, which cover the other areas where IRAS compliance efforts will be focus.
4. Recognition of Income from Construction Contracts and Provisions Claimed by Construction Companies
Income from construction contracts is recognized progressively over time, commonly known in the industry as the Percentage of Completion method.
For tax purposes, IRAS accepts this method of accounting as it aligns with the tax rule of taxing income when it is accrued. Construction companies may set aside provisions for expenses such as defects, damages, warranties, and foreseeable losses. These provisions are not tax-deductible; deductions are allowed only when the expenses are incurred and not disallowed under section 15 of the Income Tax Act 1947.
The purpose of compliance reviews for construction companies is to ensure that income and expenses are accurately reported for tax purposes.
5. Companies Exempted from Filing Corporate Income Tax Returns
IRAS exempts companies from filing Corporate Income Tax Returns if:
- The company has filed Form C-S/ Form C-S (Lite)/ Form C as a dormant company for two consecutive Years of Assessment; or
- The company has applied for a waiver to file Form C-S/ Form C-S (Lite)/ Form C on the grounds that it is dormant with no immediate intention to recommence business.
Companies that are exempted but later recommence business must file a Corporate Income Tax Return for the year they restart operations. They must inform IRAS and request a Corporate Income Tax Return. IRAS regularly reviews companies granted exemption to ensure they remain dormant. Companies found to have recommenced business without fulfilling their filing obligations may face penalties. Companies that are actively seeking business are considered to have recommenced operations and must file a Corporate Income Tax Return for the relevant year.
6. Taxability of Income/ Gains from Sale of Properties
Taxpayers may purchase property and realize gains upon its sale. Whether these gains are taxable as revenue receipts or exempt as capital gains depends on whether the taxpayer is deemed to be engaged in the trade of buying and selling properties or deriving gains of an income nature. Indicators such as the frequency of transactions, the duration the properties were held, and the manner of financing can help determine the taxpayer’s intent to trade in properties. IRAS regularly reviews such transactions to assess whether taxpayers have correctly filed their tax returns.
Through IRAS ongoing compliance assessments, IRAS goal is to comprehend the measures and controls implemented by these companies to ensure accurate filing of their Corporate Income Tax Returns. IRAS also strive to offer guidance for enhancing their control mechanisms.
