These may complicate the reporting process and lead to under- or over-reporting of income. Under-reporting can result in penalties, fines and/or imprisonment, while over-reporting may subject employees to additional taxes.
This article covers five mistakes Singapore employers need to avoid when preparing a Return of Employee’s Remuneration (IR8A), due 1 March.
1. Failing to understand what income is taxable and when to report it
Generally, all gains and profits derived by employees from Singapore employment are taxable in Singapore, regardless of the entity making the payments. For example, the entire income earned by an employee performing services in Singapore is taxable in Singapore, even if the local employer’s foreign parent company pays the income. Employers must also declare non-salary taxable income, such as NSmen (National Servicemen) pay reimbursed to the company or maternity payments.
Taxability can also vary according to the nature of a payment and when an employee is entitled to receive it. Employers run the risk of making mistakes if they don’t have a clear understanding of these variables. To take two examples, bonuses and directors’ fees may trip up employers. In the first case, employers must avoid reporting contractual bonuses based on when they are paid, rather than on when the employees are entitled to receive them. In the second case, employers must avoid reporting directors’ fees approved in arrears in the year services are rendered, rather than when the fees were voted and approved at the company’s annual general meeting. Again, these are just two examples intended to illustrate the potential pitfalls of reporting various payment types.
2. Over-reporting or under-reporting gains from employee stock option plans or employee share ownership plans
Employee stock option (ESOP) and employee share ownership (ESOW) plans are increasingly popular with Singapore employers. Given this growing popularity, employers need to understand the tax treatment of these plans. An employer may under-report by failing to declare free shares granted to employees; under-reporting may occur when a parent company grants an ESOP or ESOW plan. These benefits are taxable if granted to an employee exercising employment in Singapore, regardless of where the granting party is located.
Employers may also under-report because they fail to understand and follow the “deemed exercise” rule. In these cases, a foreign employee ceases employment in Singapore and is deemed to have derived a final gain on unexercised or unvested stock options or awards. These gains must be declared on Form IR21.
Over-reporting may occur when an employer declares gains or benefits from an ESOP or ESOW plan granted during non-Singapore employment. These gains or benefits are considered foreign-sourced and are not taxable, even if the plans are exercised or vested during Singapore employment or the gains are remitted to Singapore.
Employers may also make errors when calculating gains arising from ESOP or ESOW plans that have selling restrictions, or moratoriums. Employers may miscalculate these gains, basing them on the date of exercise or grant rather than on the date the moratorium was lifted.
3. Incorrectly treating benefits-in-kind
Benefits-in-kind are generally taxable, unless they are specifically exempt from tax or granted administrative concession (IRAS’ list can be found here). Taxable benefits that may be omitted by employers include gifts for special occasions (such as birthdays) and awards (such as those for service excellence), which are taxable if they exceed S$200 in value. Staff discounts are taxable if they exceed S$500 in value.
In addition, employers may miss reporting premiums incurred for employees’ personal insurance policies. These are taxable regardless of whether they are direct payments to the insurer or employee reimbursements.
4. Incorrectly reporting overseas employment and overseas income
While income from overseas (i.e., non-Singapore-based) employment is generally not taxable, reporting lapses may occur when employment services are rendered in Singapore as part of overseas employment. Unless this employment in Singapore lasts less than 60 days, the income attributable to services rendered in Singapore will be subject to Singapore tax.
If on the other hand a Singapore-based employee derives overseas income, and that income is incidental to his or her Singapore employment, then the overseas income will be taxable in Singapore. For example, if a Singapore company employs a business development manager who frequently travels outside the country as part of his or her job requirements, then the income attributable to those services is taxable in Singapore.
5. Failing to keep abreast of regulatory changes
Singapore’s Income Tax Act frequently changes to keep pace with the country’s employee compensation landscape. Employers that fail to keep abreast of these changes risk non-compliance, including failure to accurately report.
Regulatory change is particularly swift in today’s economy. In response to the pandemic, IRAS has granted tax exemptions on Covid-19-related benefits provided by employers to their employees. These benefits include for example accommodation for employees normally residing overseas who were required to stay in Singapore between 1 February and 31 December 2020 to ensure the continuity of their employers’ businesses.
If you do make a mistake: The IRAS Voluntary Disclosure Programme
IRAS recognises that employers may inadvertently make errors when attempting to comply with their tax obligations. The IRAS Voluntary Disclosure Programme encourages taxpayers to correct their errors in a timely manner. When qualifying conditions are met, IRAS is prepared to reduce penalties for voluntarily disclosed errors.
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