Less: Interest on bank term loan 11,250,000 35,750,000. Adjusted profit 82,750,000. Less: Capital allowances 73,700,000 Tax exempt profits 9,050,000

Transcription

1 Answers

2 7D CHNIX Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) 1 SingCo December 2007 Answers 7D CHNAA (a) (1) The production day determines the date of commencement of the tax holiday. It signifies the date from which the pioneer company is able to produce its pioneer products in marketable quantities. (2) The claim for capital allowances on qualifying capital expenditure is on a due claim basis. However the Economic Expansion Incentives (Relief from Income Tax) Act provides that the profits exempt from income tax shall be reduced by the claim for capital allowances notwithstanding that no claim for such allowances has been made. (3) During the tax relief period, the unabsorbed capital allowances and tax losses can be carried forward for set off against subsequent tax exempt profits. There is no need to satisfy the continuity of ownership test. The remaining unabsorbed capital allowances and tax losses at the end of the tax relief period can be carried forward and set off against profits from the post pioneer trade subject to the continuity of ownership test. In the case of unabsorbed capital allowances, the Economic Expansion Incentives (Relief from Income Tax) Act specifically allows carry forward, notwithstanding that a new trade commences after the tax relief period. (b) Computation of tax exempt profits for the five-year period ending 31 December 2012 Finance option I $ Profit before interest on bank term loan or hire purchase interest 47,000,000 Less: Interest on bank term loan 11,250,000 35,750,000 Add: Depreciation 48,000,000 Less: Section 14N premium (1,000,000) 47,000,000 Adjusted profit 82,750,000 Less: Capital allowances 73,700,000 Tax exempt profits 9,050,000 Claim for capital allowances Computers Factory Plant and and office Land building machinery equipment Furniture Total 25 years 6 years 8 years 10 years $ $ $ $ $ $ Cost 6,000,000 15,000,000 75,000,000 3,000,000 1,000, ,000,000 Year 1 Initial allowance 3,750,000 15,000, , ,000 19,550,000 Annual allowance 450,000 10,000, ,000 80,000 10,830,000 Section 14N 200,000 Total allowances claimed over the five years Initial allowance 19,550,000 Annual allowances 54,150,000 73,700,000 Section 14N 1,000,000 13

3 (c) Computation of tax payable for the five-year period ending 31 December 2012 Finance option II $ Profit before interest on bank term loan or hire purchase interest 47,000,000 Less: Hire purchase interest 5,500,000 41,500,000 Add: Depreciation 48,000,000 Less: Section 14N premium (1,000,000) 47,000,000 Adjusted profit 88,500,000 Less: Capital allowances 68,700,000 Chargeable income 19,800,000 Tax at 18% 3,564,000 Claim for capital allowances under hire purchase arrangement $ Total allowances claimed as above 73,700,000 Less: Adjustment for capital repayments Total payments 75,000,000 Less: Repayments due up to 31 December ,000,000 25,000,000 20% of $25,000,000 5,000,000 68,700,000 (d) Comparison of the two options Pioneer Non-pioneer $ $ Profit after interest 35,750,000 41,500,000 Less: Tax payable 0 (3,564,000) Less: Hire purchase interest for period after 31 December 2012 (net of tax relief) of ($900,000 x 82%) 0 (738,000) Profit after tax 35,750,000 37,198,000 Tax written down value as at 31 December ,300,000 25,300,000 Section 14N remaining premium 5,000,000 5,000,000 Based on the above, it is more tax efficient to forgo the Pioneer Incentive. This is because the savings in interest of $4,850,000 (11 25 million less (5 5 million plus 0 9 million)) are greater than the tax payable of $3,564,000. Further, there is also a higher tax written down value to be carried forward for the periods after 31 December 2012 because principal repayments of $25 million are due after that date. SingCo should renegotiate with the Economic Development Board for the investment allowance incentive. Assuming a fiveyear qualifying period is granted, the capital expenditure qualifying for investment allowance will amount to $69 million (100 million less 6 million less 25 million). If the investment allowance granted is say, 50%, NewCo will have tax exempt profits of $34 5 million and there is no time limit for the utilisation of the investment allowance. 14

4 7D CHNAB (e) The Board of Directors SingCo Company s address 3 December 2007 Dear Sirs ABC Tax Consultants Firm s address With reference to your recent enquiry regarding the remittance of offshore income into Singapore, we are pleased to advise as follows. Malaysia has a headline tax rate of more than 15%. Even though the profits derived by the Malaysian subsidiary are exempt from Malaysian tax under the Pioneer Incentive Scheme, the profits are still deemed to have suffered Malaysian corporate tax of 27%. Hence, when the Malaysian dividends are remitted to Singapore, they will be exempt from Singapore income tax under s.13(8) of the Income Tax Act. Similarly, the Thai dividends will be exempt from Singapore income tax when they are received in Singapore. Section 13(8), however, does not exempt offshore interest income remitted to Singapore. SingCo will therefore be taxed at 18% on receipt of the remitted interest income earned in Hong Kong. As the income tax treatment on each source of offshore income is different, it will be necessary for SingCo to keep track of the offshore income. SingCo should first remit offshore income that will be exempt from tax and in this regard, it should first remit the dividend income from the Malaysian and Thai subsidiaries (total of $17 million net). The interest income from Hong Kong should be remitted only when there is a need for such funds given that the remittance of such income will be subject to Singapore income tax. In this case, SingCo should only remit the $9 756 million of the interest income necessary to provide the balance of $8 million net of tax at 18%, required to meet the $25 million financial contribution to match GermanCo s contributions. Please do not hesitate to contact us if you need any further explanations or advice regarding this matter. Yours faithfully, ABC Tax Consultants 2 XYZ Singapore Pte Ltd To: Chief Financial Officer, XYZ Singapore Pte Ltd From: Tax Consultant Date: 3 December 2007 Report evaluating the tax implications of the three proposals for assessing the potential usage of the land (a) Singapore income tax implications of XYZ Singapore Pte Ltd Under s.12(7) of the Income Tax Act, the payments made by XYZ Singapore Pte Ltd will be deemed to be derived from Singapore. Hence, XYZ Singapore Pte Ltd has an obligation to withold tax if the payment is made to a person not resident in Singapore. There is, however, an administrative concession with regard to services rendered outside Singapore. If the following conditions are met, the fee will not be deemed to be derived from Singapore and hence not subject to Singapore income tax: the fee charged for services rendered outside Singapore is on an arm s length basis; and the fee charged is not with an intent to siphon off Singapore income. Proposal I The US party has not split its fee for services to be rendered within and outside Singapore. In the circumstances, the Singapore Inland Revenue may subject the entire fee of $2 million to income tax. As the fee is net of Singapore tax of 18%, the cost of the contract to XYZ Singapore Pte Ltd will be $2 439 million ($2 million re-grossed by 18%). The reimbursement of $60,000 should not be subject to Singapore income tax provided that the sum represents a pure reimbursement of expenses incurred by the US party in connection with the contract. The total cost to XYZ Singapore Pte Ltd, inclusive of Singapore tax, will thus be $2 499 million ($2 439 million plus $60,000). Proposal II In this proposal, the sum that will be subject to Singapore withholding tax should be $1,050,000, notwithstanding that a sum of $200,000 will be paid to the liaison person in Singapore. If the liaison person is tax resident in Singapore, the withholding tax can be mitigated by arranging for the liaison person to bill XYZ Singapore Pte Ltd directly and for the Hong Kong party to reduce its contract sum by the same amount. 15

5 $ $ Fee due to liaison person in Singapore 200,000 Fee for services rendered in Singapore 850,000 Add: Withholding tax at 18% 187,000 1,037,000 Fee for services rendered outside Singapore 1,200,000 Total cost 2,437,000 Proposal III In this proposal, if the Singapore company is tax resident in Singapore, there will be no withholding tax on the contract sum even though it is disclosed in the proposal that 60% of the fee will be paid to the Australian party. The fee paid by the Singapore company to its Australian parent must be regarded as strictly an arrangement between the Singapore company and the Australian parent. The cost of the contract remains at $2 5 million. Conclusion Based on the existing proposals, Proposal II is the most cost efficient. However, XYZ Singapore Pte Ltd could ask the US party which submitted Proposal I to split its fee for services rendered in and outside Singapore in order to reduce the withholding tax liability, and if they were to do this, then Proposal I might become the better option. (b) (c) Singapore income tax implications of the contract personnel In general, income derived from the provision of services in Singapore is chargeable to Singapore income tax. However, where an individual is only physically in Singapore for a period of 60 days or less within a calendar year, he will be exempt from Singapore income tax. Proposal I In this proposal, the two US personnel who will be in Singapore for a period of two weeks will be exempt from Singapore tax. As regards the third US personnel, it will depend on his date of first arrival. If he is in Singapore for twelve weeks from 1 November 2007, his stay in Singapore will exceed 60 days in the year of assessment 2008 and hence he will be liable to Singapore income tax. However, he will be exempt from Singapore income tax in the year of assessment 2009 as his period of stay in 2008 will not exceed 60 days. His income for the year of assessment 2008 will be taxed at a flat rate of 15% or the resident rate, whichever is higher. To qualify for tax exemption in both years of assessment, 2008 and 2009, he will have to ensure that his stay in each year does not exceed 60 days, for example, if his twelve weeks stay commences on 15 November 2007 and runs to 8 February Proposal II The two Hong Kong personnel should be exempt from Singapore income tax as their stay will be less than 60 days. Proposal III It is unclear how long the personnel from the Australian parent will be in Singapore; also, in this case it will be relevant to consider the provisions contained in the double taxation agreement between Singapore and Australia. Goods and services tax (GST) position Proposal I There are no GST implications as the US party does not belong to Singapore. Proposal II If the liaison person is a GST registered person, the fee of $200,000 will be subject to GST at 7%. But if XYZ Singapore Pte Ltd is also a GST registered person, then the 7% GST charged will be available as creditable input GST. Thus, any GST will not be an additional cost to XYZ Singapore Pte Ltd. Proposal III The Singapore party will need to register for GST purposes and the fee of $2 5 million will be subject to GST at 7%. The impact on XYZ Singapore Pte Ltd is similar to Proposal II. Note: The GST rate was increased to 7% with effect from 1 July However, candidates who used the previous GST rate (as given in the question paper) of 5% were given equal credit. 16

6 Section B 3 Ivan (a) (1) Asia Trading Pte Ltd should first utilise its remaining s.44a balance as this will be forfeited from 1 January Asia Trading Pte Ltd can declare and pay an interim dividend to generate some cash to Ivan. $ Gross dividend 400,000 Tax deducted at source at 18% 72,000 Net dividend paid by Asia Trading Pte Ltd 328,000 Ivan s share of 45% 147,600 Asia Trading Pte Ltd will be required to complete a s.44a statement and submit this to the Comptroller of Income Tax after the dividend payment. (2) Ivan should consider obtaining a bridging credit facility of $852,400 ($1,000,000 less dividend received of $147,600) to repay the existing director s loan of $1,000,000. Part of the sum of $852,400 can also be borrowed from his wife and children who collectively will receive net dividends of $180,400. This will reduce Ivan s commercial loan of $1,000,000 to $672,000. (3) Asia Trading Pte Ltd could extend loans to all its shareholders based on the proportion of their shareholdings. Loans to shareholders are not regarded as perquisites of an employment and hence not taxable in the hands of the shareholders. But given that Ivan only has 45% of the shares, Asia Trading Pte Ltd would need to advance a total of $1,493,333 ($672,000 regrossed at 45%). Asia Trading Pte Ltd may not have adequate credit facility to grant the full loan of $1,493,333. (4) The alternative is for Ivan to enter into a private arrangement with his two children to buy over their shares of 50%. In this way, the sum required for any loan to shareholders will be reduced to $707,000 ($672,000 regrossed at 95%). Hence, the proposed arrangement will only result in a net cash outflow of $35,000 ($328,000 + $707,000 $1,000,000) to Asia Trading Pte Ltd, which should not be significant. (5) If Ivan were to buy over the 50% interest from his two children, he cannot also buy over his wife s shares of 5% as a change in the ownership of more than 50% of the shares will result in a substantial change in shareholders, which will cause the tax loss of $200,000 to be forfeited. (6) There should be two board resolutions drawn up, one for the approval and payment of the s.44a interim dividend and the other for the granting of the shareholders loans. In the latter case, all the elements of a shareholders loan should be present such as: (i) There must be bona fide reasons for the company to extend loans to directors/shareholders in their capacity as shareholders instead of paying them dividends or returning capital. (ii) The loans are not remuneration or benefits to the directors disguised in the form of loans to shareholders. There must be evidence of a genuine creditor debtor relationship between the company and the shareholders. In this regard, there should be terms similar to a typical loan arrangement, for example, there are repayment terms provided. (iii) The loans extended must be in proportion to their respective shareholdings and not due to the influence or position held by any shareholder/director in the company. (iv) There must be contemporaneous documentation to show that they are indeed shareholders loans. (b) The issue here is whether the Comptroller can invoke the provisions of s.33 on anti tax avoidance. This section provides that if the Comptroller is satisfied that the purpose or the effect of the arrangement is to: (i) alter the incidence of any tax payable; (ii) relieve any person from any tax liability; or (iii) reduce or avoid any tax liability which would otherwise have been imposed, then the Comptroller is empowered to disregard or vary such arrangement and to make such adjustments as he deems fit. However, s.33 does not apply to any arrangement carried out for bona fide commercial reasons. In the above arrangement, the Comptroller could challenge the revised scheme on the grounds that it is in fact, no different from the previous arrangement. It is therefore important for Asia Trading Pte Ltd to provide strong commercial reasons to support the revised arrangement. 17

7 4 Company A (a) Michelle and Nicole have a combined shareholding of 50 5%. Hence, if they both retire and dispose of their shareholdings, it will result in a substantial change in shareholders. However, it does not necessarily follow that the continuity of ownership test will be breached and hence result in the forfeiture of the tax loss and unabsorbed capital allowances. This is because the continuity of ownership test only looks at two relevant dates. The two dates are: (i) 31 December of the year in which the loss was incurred and 1 January of the year of assessment in which the loss is to be utilised; 31 December applies in all cases regardless of the company s financial year end; and (ii) 31 December of the year of assessment in which the unabsorbed capital allowances arose and 1 January of the year of assessment in which the allowances are to be utilised. Company A has a 30 September year end and in this case, both Michelle and Nicole can retire and dispose of their shares before 31 December If Company A makes a profit in the year ending 30 September 2008, the relevant dates will be 31 December 2007 and 1 January The alternative is to allow Michelle to sell her shares in the year 2008 but persuade Nicole to delay selling her shares until the tax loss and unabsorbed capital allowances have been utilised. This is because a 50% change does not constitute a substantial change in shareholders for the purposes of ss23 and 37. (b) (i) Paul currently has a chargeable income exceeding $320,000. Thus, any additional taxable income will be taxed at the highest marginal tax rate of 20%. A distribution made by a real estate investment trust (REIT) is tax exempt in the hands of individuals tax resident in Singapore. In the case of Fortune REIT, its rental income will be taxed in Hong Kong at the rate of 17 5%, hence any distribution is net of Hong Kong tax. On the other hand, H REIT will be exempt from Singapore income tax provided that it distributes at least 90% of its distributable income. The net after-tax return from the two investments is as follows: Fortune REIT H REIT $ $ Distribution before tax Less: Tax on income Net distribution after tax Price per unit $1 80 $2 00 Yield per unit 9 17% 10 00% (ii) On the basis of the above, the investment in H REIT will yield a higher return. The return from the investment in the US hedge fund will be income sourced outside Singapore. Individuals are exempt from income tax on the remittance of offshore income, however, any loss on exchange will not be tax deductible. 5 United Group Singapore Pte Ltd United Group Singapore Pte Ltd is an investment holding company and from 1 January 2008, all the subsidary companies will have to adopt the one-tier tax system. This means that the dividend income received will be exempt from tax. Hence, in future any interest cost which is deductible against dividend income will only reduce the amount of tax exempt income, but not the tax liability. Therefore, the financing of the group should be reviewed and where possible, all loans should be taken out at the operating level. In addition, it may be appropriate to reduce the paid up capital of Subsidary D. With regard to the loans currently extended to the subsidiaries, interest should be recovered from Subsidiary C. While this subsidiary is currently suffering a loss and the interest charge will increase that loss, the tax loss can be carried forward for set off against future profits, subject to the shareholders and shareholdings of United Group Singapore Pte Ltd remaining substantially the same. Similarly, salaries and related expenses of the executive directors should be charged to the two operating subsidiaries, Subsidiary C and Subsidiary D. Subsidiary A was previously a property development company, where the profits from the sales of properties were taxable. Applying the badges of trade test, the Comptroller of Income Tax could subject Subsidiary A to tax on the gains realised from the ultimate sale of its investment property. Therefore, the investment property of Subsidiary A should be transferred to Subsidiary B, which also owns an investment property. Where a transfer is pursuant to a corporate restructuring, it should be tax neutral. If need be, an advance ruling could be obtained from the Comptroller. 18

8 Additionally, a transfer of assets between associated companies is exempt from stamp duties. Currently the net rental loss in Subsidiary B will be forfeited. By transferring the investment property from Subsidiary A, the net rental loss from one property can be set off against the net rental income from the other property. In this way, the group s overall tax liability will be reduced. For income tax purposes, the profits from the sale of the apartment units by Subsidiary D will not be treated as arising until the units are completed. As the profits recognised in the accounts based on the percentage of completion basis are not regarded as earned profits for income tax purposes, the tax is effectively deferred. United Group is only able to elect for group relief with respect to Subsidiary C and Subsidiary D. But this is unlikely to generate any immediate tax benefit as Subsidary D s profits will not be taxable until the units are completed in the year Nevertheless, this possibility should be reviewed annually. United Group cannot elect for group relief for Subsidary A and Subsidiary B. This is because any losses of Subsidiary A and Subsidiary B are not qualifying deductions available for transfer under the group relief provisions. 19

9 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 2007 Marking Scheme Available Maximum 1 (a) Commencement of tax relief 0 5 Marketable quantities 0 5 Due claim 1 Mandatory deduction 1 Carry forward during tax relief period, no condition 0 5 Carry forward after tax relief period, ownership test 0 5 Carry forward after tax relief period, trade test 1 5 (b) Total operating profit 0 5 Adjustment for bank term loan interest 1 Adjustment for depreciation 0 5 Computation of initial allowances 0 5 mark each 2 Computation of annual allowances 0 5 mark each 2 Computation of Section 14N 2 8 (c) Adjustment for HP interest 1 Adjustment for IA claim on assets funded by HP 1 5 Computation of tax payable (d) Comparison of the two options based on cash flow 1 5 HP interest additional net of tax relief 1 5 Conclusion with supporting items 3 Alternative tax incentive 4 10 (e) Malaysian dividend 2 Thailand dividend 1 Hong Kong interest 2 Recommendation 2 7 Appropriate format and presentation of the letter 1 Effectiveness of communication

10 Available Maximum 2 (a) Section 12(7) 2 Administrative concession 2 Proposal I withholding tax 1 re-grossed 1 reimbursement 1 cost of contract 0 5 Proposal II liaison person liaison person 2 withholding tax/re-grossed 1 cost of contract 1 Proposal III no withholding tax no withholding tax 1 payment to Australian parent 2 cost of contract 0 5 Conclusion 1 16 (b) Singapore sourced income day exemption 1 Proposal I first two personnel 0 5 Y/As 2008 and rate of tax for Y/A recommendation 0 5 Proposal II 0 5 Proposal III 1 6 (c) Proposal I 0 5 Proposal II 1 5 Proposal III 1 3 Appropriate format, style and presentation of report 1 Effectiveness of communication (a) Payment of dividend 2 5 Bridging loan 2 5 Extend shareholders loan 2 Private arrangement 2 Inability to buy wife s shares 1 Documentation 4 14 it (b) Section 33 3 Could challenge

11 back Available Maximum 4 (a) Substantial change 1 May not result in breach of continuity test 1 Explanation of test/relevant dates 2 Sell before 31 December Michelle to sell in 2008 and Nicole to hold 2 8 (b) (i) Increase in taxable income, taxed at 20% 0 5 REIT distribution exempt in Singapore 1 Fortune REIT 2 H REIT 2 Calculation 2 Conclusion (ii) Hedge fund 2 Currency loss United Group taxation of dividend income 2 review of finance 3 recovery of interest from Sub C 1 recovery of salaries, etc 1 Subsidiary A badges of trade test 2 transfer to Sub B 2 stamp duties 1 Subsidiary B offset rental loss 2 Subsidiary D not taxable until completed 2 Group relief