How the withholding tax regime in Singapore is evolving
Taxpayers should understand the withholding tax rules and obligations in Singapore to avoid costly mistakes and penalties.
For the financial year (FY) that ended on 31 March 2022, the overall revenue collection by the Inland Revenue Authority of Singapore (IRAS) increased by 22.4% from the previous year, as reported in their FY2021/22 annual report. Of all the different type of taxes collected, withholding tax (WHT) registered the second highest percentage year-on-year increase in revenue collection by the IRAS. The total WHT collection for the financial year ended 31 March 2022 amounted to S$1.9 billion. This represented an increase of 18.75% over the previous year’s collection.
What is WHT?
When a Singapore payor makes certain payments to a non-resident, the Singapore payor is obliged to withhold tax on such payments. The types of payments include interest, royalties, rental for the use of movable property, fees for services rendered in Singapore, and others. Different WHT rates apply to different types of payment, and it is the obligation of the Singapore payor to determine the correct rates to apply and pay the tax to the IRAS. Late payment of the WHT to the IRAS is subject to penalties that can accumulate up to 20% of the WHT amount. This is an unnecessary cost should taxpayers not get this right.
What could have led to the increase in WHT collection?
An instinctive response is that businesses are regaining normalcy after the COVID-19 pandemic and reverting to their pre-COVID-19 business activities.
The above reason could very well be valid but certain observations in recent times provide further insights. For example, we observed an increased effort by the IRAS in conducting standalone WHT compliance review programmes that focus solely on examining a taxpayer’s WHT obligations. This differs from the IRAS’ usual practice of asking questions on WHT as part of its overall compliance review of the taxpayer’s income tax returns filed. A standalone compliance review programme that specialises in WHT entails detailed questioning on the various types of payments made by the taxpayer to non-residents and a focus on supporting documentation requirements.
We also observed that the IRAS is now able to link up information provided by the taxpayers such as the audited financial statements, corporate income tax (CIT) return and WHT filing forms, to other forms that may have been filed in relation to certain WHT exemptions. Therefore, we believe that the digitalisation of WHT and CIT returns submission has enabled the IRAS to better harness technology and data analytics to identify taxpayers with a higher risk of WHT non-compliance. The IRAS is therefore able to focus their tax audit efforts using a risk-based approach. This enhances their ability to mobilise their resources effectively, thus driving the cost of tax revenue collection down.
More often than not, taxpayers are selected for the standalone WHT compliance review programme when discrepancies are highlighted amongst the different information available to the IRAS. In many instances, the IRAS is able to specifically point out such discrepancies in its enquiries with the taxpayer.
So why is the IRAS intensifying its focus on WHT compliance?
Our take is that WHT is a “low-hanging fruit” when it comes to IRAS’ audits. Firstly, WHT applies only to certain payments made to non-residents. The rules are also not as extensive as compared to the deduction or taxability rules for CIT and for most situations, less controversial. Any discovery of non-compliance of WHT obligation will lead to the recovery of the WHT with penalties, and the maximum penalty being 20% of the WHT amount.
In addition, WHT is also not subject to the time-bar provisions. In other words, the IRAS has the power to track back to the first day of the non-compliance and collect the WHT and penalties should they wish to. If so, this could indeed be an issue for taxpayers as distant information may not be readily available.
On top of the enhanced level of scrutiny on WHT, we also noted that the IRAS has withdrawn granting WHT waiver on certain payments. Earlier this year, the IRAS announced the withdrawal of various administrative concessions that grant a waiver of WHT such as payments made to non-resident related companies for services rendered in Singapore under a cost-pooling arrangement and certain reimbursements made to non-residents for services rendered in Singapore.
Taxpayers should therefore pay attention to such changes as well as the trends in tax controversies surrounding WHT to manage their tax risks.
What are some of the common WHT pitfalls?
Taxpayers should assess if they have the required knowledge and controls within the organisation to manage their tax risks with respect to WHT compliance. There are various scenarios that can lead to non-compliance with WHT obligations. We list below three common pitfalls:
1. Capitalised interest payments
Interest payments made to non-residents attract WHT. From an accounting perspective, where the borrowings were specifically used to finance an asset of the company, the interest expense arising therefrom could be capitalised in the company’s balance sheet as part of the cost of the asset. Such interest expense is not separately recognised in the company’s profit and loss account. We have encountered cases where WHT obligations were omitted on capitalised interest payments made to non-residents. Usually, such omissions occur because the company’s process of accounting for WHT is only centred on its profit and loss account.
2. Service fees
Payments made to non-residents for services rendered in Singapore attract WHT. Without a proper tracking system in place especially for taxpayers who make multiple payments to various non-resident service providers, the identification of whether the services are rendered by the non-resident in Singapore or otherwise cannot be readily ascertained. This creates issues when accounting for the WHT to the IRAS.
3. Rental of equipment outside Singapore
Payments made to non-residents for the rental of equipment attract WHT. In practice, we have seen several cases where tax was not withheld on payments made to non-residents for the rental of equipment that is located and used outside Singapore. For WHT purposes, it is generally not relevant where the rented equipment is located and used, unless under certain specified scenarios[1].
Conclusion
With the ongoing investment in data analytics, the IRAS will increasingly enhance their capabilities to detect WHT non-compliance. Even though WHT is the tax liability of the non-resident in most instances, the late payment penalties are a cost to the Singapore payor. To seek recourse for WHT payments from the company’s counter parties is easier said than done especially for amounts that date back a few years. To avoid paying penalties and the added burden of WHT payments, it is important that taxpayers understand the WHT rules and establish a proper control system to identify and account for their WHT obligations.
The co-authors of this article are Siow Hui Goh, Partner, Tax Services from Ernst & Young Solutions LLP and Ting Ting Lim, Director, Tax Services, from EY Corporate Advisors Pte. Ltd.
