Our current income tax system has the following characteristics:
Basis Period of Assessment: The incomes derived by individuals and companies are assessed for tax on a preceding year basis. In other words, income tax payable this year is based on income earned in the previous year.
Method of Assessment:
Singapore currently operates an Official Assessment System (OAS). This means that the legal onus is on IRAS to assess the tax liability based on the taxpayer’s declaration of income. IRAS will then issue a Notice of Assessment on the amount of tax payable.
In addition, companies are required to file an Estimated Chargeable Income (ECI) within 3 months from the end of the accounting year. Hence, a company whose accounting year ends on 31 Dec is required to file an ECI by 31 Mar of the following year. The tax computed based on the ECI can be paid in installments.
Companies need only submit their final income tax return (Form C) together with their accounts and tax computation by 31 Jul of each year. The final tax liability will be determined based on the return filed.
Individuals are required to report their incomes earned in the previous year by filing the income tax return (Form B or Form B1) by 15 Apr of the following year. IRAS then assesses the tax payable and issues a Notice of Assessment to taxpayers. Tax is payable within 1 month from the date of the Notice of Assessment.
Taxpayers who are paying income tax via GIRO start paying their income tax based on estimated taxes before their actual tax liability is assessed by IRAS. However, upon the filing of income tax returns and after IRAS has assessed the actual tax payable and issued the Notice of Assessment, the outstanding installments will be adjusted to reflect the actual tax payable.
POSSIBLE DESIGNS OF THE TAX SYSTEM UNDER A CURRENT YEAR BASIS OF ASSESSMENT
There are alternative approaches we can adopt for individuals and companies if we were to switch to a CY basis of assessment. For corporate tax, IRAS could adopt either an upfront estimation method under which companies file an estimate of their chargeable income and tax payable at the start of the year, or a periodic filing method under which companies file their returns periodically
There are similarly two alternative models to adopt with regard to income taxes on individuals. The first is an employee declaration method under which the employee informs IRAS of his salary details for the year ahead, IRAS makes an assessment of the tax payable, and the employee makes regular payments by installment. The alternative is an employer withholding method under which employers to report to IRAS and withhold the taxes by deducting them from the salaries of its employees. Employees would then receive their salaries net of taxes.
TRANSITIONAL ISSUES
If a decision is made to switch to a CY basis of assessment, one of the problems the Government will face is having to assess two years of income to tax in the year of transition. However, these transitional issues will be considered only after the study on whether the switch to CY basis is deemed desirable and feasible. This current study will therefore focus primarily one the long-term benefits and disadvantages of the CY system, rather than on one-off, transitional issues.
The various options are put forward only for the purpose of discussion as part of an ongoing study on how the tax assessment system may be improved. They do not represent a policy decision or policy position on the part of the Government. All comments received will be studied thoroughly before any decision is made as to whether to consider a switch to CY basis of assessment.
Macroeconomic Impact of Current Year Basis of Assessment
Taxing on the basis of income earned in the current year instead of the previous year enhances the automatic stabilisation effect of the tax system. When individuals pay tax according to their current wages, their disposable income net of tax becomes less volatile in the face of wage fluctuations. This in turn helps to smoothen their income and spending patterns. For companies, CY assessment could improve their cash flow as they will not be paying taxes based on previous year’s profits. More stable household disposable incomes and corporate cash flows provide in aggregate a counter-cyclical macroeconomic stabilisation effect by supporting consumption and investment in a downturn, and holding back such expenditures in an upturn.
Table 1 compares the personal income tax (PIT) revenue collected under the PY assessment with what would have been collected under CY assessment for the period 1997-2002. If CY assessment were adopted, PIT collections during the recessionary period of 2001-2002 would have been 4.6-8.9% less than under the current PY system. In other words, CY assessment would have led to a smaller contraction in disposable incomes than PY assessment, and thereby provided greater support to the economy during the recession. Likewise, during 1997 and 1999-2000, when the economy was growing above potential, a CY basis of assessment would have dampened the rise in disposable incomes and exerted an appropriately dampening effect on the economy.