TEI files first submission in Singapore on tax treatment of benefits-in-kind provided to employees: February 3, 2006.
On behalf of the Asia Chapter of Tax Executives Institute (TEI), I am pleased to offer the following comments on the benefit-in-kind taxation guidelines recently issued by the Inland Revenue Authority of Singapore (IRAS). These rules, which become effective almost immediately, include provisions concerning work-related transportation reimbursement and per diem allowances. TEI believes that the change in treatment of these benefits may adversely affect companies doing business in Singapore and should be modified.
TEI (www.tei.org) is an international organization of more than 5,800 members who are responsible--in executive, administrative, or managerial capacities--for the tax affairs of their employers. TEI's members represent more than 2,800 of the leading corporations with 53 chapters in Asia, North America, and Europe. In September 2005, the Asia Chapter of TEI was officially registered as a Society in Singapore as Tax Executives--Asia Chapter.
TEI members are accountants, lawyers, and other corporate and business employees. The organization is dedicated to the development of sound tax policy, compliance with and uniform enforcement of tax laws, and minimization of administration and compliance costs to the benefit of both government and taxpayers. TEI's Asia Chapter is pleased to offer the following comments on the tax treatment in Singapore of certain benefits-in-kind provided to employees.
Proposed Treatment by IRAS
The IRAS's new guidelines would treat certain benefits-in-kind, as follows:
* Transport reimbursement as a result of commuting from the employee's home to a meeting venue, such as a client's office, would be taxable to the employee.
* Transport reimbursement from the employee's home to the airport for business trips would be taxable to employee.
* If a machine breaks down and the employee must return to the office, the transport reimbursement would be taxable to the employee.
* Reimbursement by the employer of living expenses incurred by an employee during overseas business trips (e.g., cost of meals, transport expenses, and other incidental expenses such as laundry) would be subject to the per diem allowance rates annually set by IRAS. Any amount in excess of the IRAS-prescribed rates would be taxable to the employee.
Before the issuance of the IRAS guidelines, the reimbursement of transport expenses to attend meetings or visit clients for business purposes (e.g., traveling from the employee's office to the client's office or from the office of one client to another) was not taxable because these expenses were viewed as incurred to enable the employees to discharge their official duties. Likewise, transport reimbursement as a result of commuting from home to a meeting venue--such as a client's office or the airport for business trips--enables the employees to perform their duties. The commencement point of the business trips is not relevant, especially where the traveling distance between the employee's home and the client's office or airport is shorter than the distance from the employee's office to the client's office or airport.
For Singapore to remain a dynamic, globally competitive economy in a changing business environment, companies doing business in the region must retain the flexibility to permit their employees to travel within the jurisdiction and abroad. The traveling required as part of the employee's employment is for the benefit of the employer. The reimbursement is merely a transfer of an expense burden, incurred by the employee during the course of employment, to the employer. It is also out of sync with the treatment of the expenses by other jurisdictions.
Not taxing such reimbursements will also advance the Singapore Government's initiative to encourage the Work-Life Harmony Programme. It is inevitable that those employees who work from home must at times travel to a client's office or to the airport for business trips. They should not suffer a disadvantage because the trip begins at their homes. The new tax treatment is also likely to create morale issues for the employees who will be taxed on the reimbursement and could affect the productivity of the Singapore labor force as a whole.
Moreover, the reimbursement for overseas living expenses--as well as transportation for all business-related trips--should not be viewed as gains or profits derived by an employee in respect of his or her employment, notwithstanding that it may exceed the per diem allowance set by the IRAS. Full reimbursement of expenses should not be taxable at all to an employee who does not derive any personal benefit from incurring the traveling expenses. It is merely an expense that was incurred in the course of carrying out the employee's duties. If the IRAS believes there are abuses in the system, these and proposed regulations requiring certain large corporations to electronically file their 2005 income tax return. This mandate, issued without proper consultation with affected taxpayers, will impose significant burdens on the business community without any assurance that the IRS will have adequate systems, procedures, and personnel in place to receive and process the data and capabilities to effectively analyze that data to fulfill its audit and compliance responsibilities. The Institute believes the mandate is an example of how not to deliver good customer service.
Let there be no misunderstanding--TEI supports the goal of increasing the IRS's use of technology including its ability to effectively process e-filed returns. Further, we agree that a properly designed and implemented e-filing process will advance key IRS objectives, namely, providing the IRS with accurate and timely return information, reducing audit cycle time, and achieving currency in those audits. Since the regulations were issued, TEI and other interested parties have worked with the IRS to help make the e-filing mandate a reality. The Institute has met several times with the IRS, and our members and staff have participated in an IRS task group (styled the "IRS-TEI Forms and Attachments Task Group"). This group has held several day-long sessions and numerous conference calls to review every form and schedule a corporate taxpayer may file in an attempt to determine which forms could be filed in XML format and which could be filed in other formats (such as PDF files and on paper). Meetings have also been held with the major software vendors (CorpTax, InSource, and Vertex) in an effort to identify challenges and work toward acceptable solutions.
In spite of the tremendous efforts of IRS, taxpayers, and the software vendors, significant challenges remain C issues that may not be solvable by the time the returns are due to be filed later this year. TEI believes that the IRS's e-filing mandate imposes unnecessary costs on taxpayers and may threaten the orderly processing of returns for the 2006 filing season.
What could the IRS have done differently in respect of e-filing to improve customer service?
First, the IRS should have reached out to the affected taxpayers before the mandate was issued. The largely unilateral process employed by the IRS stands in marked contrast to the collaborative, customer-service approach the agency has productively used in other areas. For example, the processes affecting currency noted above were developed through joint efforts of both the agency and taxpayers. Or consider another recent IRS project, relating to the Schedule M-3 on which a taxpayer reports book-tax differences. With the Schedule M-3, the IRS and Treasury actively sought taxpayer input more than a year in advance and worked to address concerns before a draft of the schedule was issued. And, even after the form was collaboratively developed, the IRS afforded affected taxpayers time to recommend changes and to implement the mandate.
Second, the IRS should have provided for a phased-in implementation of the mandate, permitting taxpayers and software vendors adequate time to develop and test the software packages. One major challenge of the proposal is that many taxpayers use different types of software; a company may, for example, use CorpTax to prepare its domestic schedules and forms and InSource to prepare its international forms. One year after the issuance of the mandate, there is still no software that would permit data from multiple programs to be aggregated in one XML file, as required by the regulations. In other words, the IRS has gotten ahead of the market in respect of this initiative. In its recent annual report, this Board recognized that the goal of having 80 percent of returns electronically filed by 2007 is ambitious, but impossible to meet. The IRS should likewise admit that a more measured approach by the agency in respect of corporate returns is warranted. Phasing in the mandate would allow for the development of an aggregation program and permit taxpayers to adequately test the new systems.
Third, the IRS should have permitted taxpayers and software vendors more time to test the new system. Prototypes of the new software to be used to facilitate e-filing were only issued in January 2006--and one major vendor's package is not expected until March. While historically program and version updates are typically released in December, corporate taxpayers are understandably concerned about integrating the new programs into their existing data collection. Given the wholesale changes that have to be incorporated in the new software, taxpayers will be extremely pressed to install, test, and debug the software before their returns must be filed. Further, it is not clear what tools the vendors will provide to allow taxpayers to review data before actual submission. The rushed implementation of this mandate increases the risk of duplicated effort and waste of limited resources.
Finally, prompt, meaningful guidance on securing hardship waivers from the e-filing mandate should have been a higher priority within the IRS. Initially taxpayers were promised that the criteria for obtaining a waiver would be issued by September 1st. Other priorities (including the need to address tax administration issues spawned by Hurricanes Katrina, Rita, and Wilma) delayed the guidance, which was not issued until November 10th. Although the delay is understandable, it deprived taxpayers of the time and detail needed to determine whether they will come within the mandate and to establish a plan for compliance. Of greater significance is that, even after taking additional time to develop the guidance, the IRS's notice provides taxpayers with little assistance in determining what might or might not qualify a taxpayer for relief. For example, the IRS has indicated on several occasions that companies undergoing mergers and acquisitions may be candidates for relief, but nothing in the notice addresses this issue. Examples of circumstances in which a waiver will be issued are sorely needed (e.g., whether a taxpayer's attempted e-filed return constitutes the "return" for federal income tax purposes; whether a "protective" hardcopy return will protect taxpayers' timely completed but un-filed elections, etc.).
The IRS has also shown little sympathy for the financial burden the e-filing mandate would impose on taxpayers, informally suggesting that cost would rarely, if ever, be a basis for a hardship waiver. This is especially disappointing because section 6011(e)(2)(B) of the Internal Revenue Code requires the IRS to take into account the ability of taxpayers to comply at reasonable cost with such a mandate. In TEI's view, the costs to taxpayers of complying with the mandate and the benefits to the government should be considered and made public.
In sum, the "ready-fire-aim" philosophy that manifested itself here has acted as a barrier to good customer service.
C. Independence of Appeals. In comments filed on January 17, 2006, TEI expressed concern about the effect of Announcement 2005-80 on the independence of Appeals. (The announcement sets out concession terms for 21 transactions for which the IRS has determined the accuracy-related penalty to be applicable.) In TEI's view, Announcement 2005-80 threatens to fundamentally change the balance between Examination, Appeals, and taxpayers and to deprive taxpayers of a right conferred by Congress. By asserting that "eligible persons who forgo resolving eligible transactions under this settlement initiative ... should not expect to receive a better offer in Appeals than that offered under this settlement initiative," the IRS seemingly usurps the authority of Appeals to assess (and the right of taxpayers to have Appeals assess) the merits of cases. Let there be no mistake: This is not about tax shelters, but about the fundamental nature of Appeals.
The flaw in the Announcement is illustrated by those transactions involving valuation disputes. How can the IRS ensure the independence of Appeals (as mandated by IRS Restructuring and Reform Act of 1998) while intimating that valuation disputes--which are inherently factual--can be resolved in a formulary, cookie-cutter manner? We submit it cannot.
TEI recognizes that a delicate balance must be struck between enforcement efforts and customer service. Because Congress has unambiguously spoken on the issue of Appeals independence, however, the IRS must look for other ways to alter that balance. The Board should encourage the IRS to reaffirm and formalize its commitment to ensuring the independence of Appeals consistent with the statutory directive.
D. Service Center Issues. One measure of good customer service is the ability to respond to taxpayers' needs.
In many cases, taxpayers must rely upon IRS service centers or "campuses" to supply needed documentation for foreign and local governments.
For example, many companies process tax returns for non-U.S. citizens who are transferred from overseas. These employees may have spouses and children who are claimed as dependents on the individual's U.S. tax return. Most dependents do not qualify for Social Security numbers, but rather are required to apply for individual identification numbers (ITINs). The companies often take on the responsibility of filing the Form W-7 (Application for IRS Individual Identification Number).
The Philadelphia Service Center is responsible for processing these forms, but properly filled out Forms W-7 are often rejected for no apparent reason. One TEI member company reports that rejections may run as high as 25 percent. The delay in receiving ITINs causes numerous problems for these employees; spouses are unable to obtain a driver's license, children may be delayed from enrolling in local schools, and the family may be unable to open a bank account. TEI cannot vouch for the accuracy of all the forms, but we do believe the Service Center can and should do more to identify the reasons (and remedies) for the rejections. A commitment to good customer service demands that the IRS better train its agents and provide more helpful information to affected taxpayers.
Our members also report significant problems at the Philadelphia Service Center in processing Forms 8802 (Application for U.S. Residency Certification), which are often required by companies or individuals to claim benefits under a tax treaty or to prove tax status for purposes of claiming a benefit such as a refund of VAT taxes. Delays in receiving these certifications can be costly for taxpayers and waste resources of both the taxpayer and the government.
Tax Executives Institute commends the IRS Oversight Board for holding this public hearing. TEI looks forward to working with the Board and the IRS itself to improve tax administration.
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|Title Annotation:||Tax Executives Institute|
|Date:||Mar 1, 2006|
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