Professional Level Options Module, Paper P6 (SGP)

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1 Answers

2 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2017 Answers Note: ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers. Where such references are shown below, they are given for information purposes only. 1 Tax advice to Kenny Tsang Tax adviser Firm s address Kenny Tsang Client address 8 June 2017 Dear Sir Singapore tax implications on the acquisition, holding and subsequent disposal of a residential property in Singapore I understand that you are a foreigner exploring the possibility of applying to become a Singapore permanent resident or even a Singapore citizen. Meanwhile, you would like to understand the various Singapore tax implications which may arise if you were to acquire, hold and subsequently dispose of a private residential property in Singapore, with an acquisition cost of approximately $2 million. At this point, no specific property or acquisition structure has been identified. However, the following possibilities need to be considered: The property may be acquired by a Singapore citizen or a foreigner (yourself) or by both jointly. The property may be one of a number of properties (whether commercial or residential) acquired or to be acquired by you. Upon acquisition, you may use the property as your own residence, or it may be let out or left vacant. As requested, I am pleased to set out my advice below: (i) The Singapore tax liabilities which may arise in respect of the acquisition, holding and subsequent disposal of the property (Property A) Acquisition Goods and services tax (GST) GST is only payable on the price of immovable property classified as non-residential in cases where the seller is GST registered with the Inland Revenue Authority of Singapore (IRAS). GST is not charged on the purchase of residential properties, which is treated as an exempt supply. Hence, you will not incur GST on the purchase of Property A, but may do so if you purchase a commercial (non-residential) property in the future. Stamp duty Buyer s stamp duty (BSD) Buyers of all kinds of properties in Singapore have to pay BSD based on a certain percentage of the higher of the market value or the value of consideration paid for the property, as follows: 1% for up to the first $180,000; 2% for up to the next $180,000; and 3% above $360,000. For a property with a value of $2 million the BSD payable would be $54,600 ((3% x $2 million) $5,400). Additional buyer s stamp duty (ABSD) In addition to BSD, ABSD is payable on the acquisition of residential properties. ABSD is also chargeable on the higher of the market value or the value of consideration and the percentage varies depending on the classification of the buyer(s) of the property and the number of previous properties they have purchased, as follows: Foreigners and entities buying a first and subsequent residential property 15% Singapore permanent residents buying a first residential property 5% Singapore permanent residents buying a second and subsequent residential property 10% Singapore citizens buying a second residential property 7% Singapore citizens buying a third and subsequent residential property 10% Where a property is bought jointly by two or more owners, then the ABSD is computed based on the highest applicable percentage of the respective owners. As you are a foreigner, the ABSD rate applicable will be 15% and the amount payable is $300,000 ($2 million x 15%) whether you acquire Property A entirely in your own name or jointly with your girlfriend, Tamsin, a Singapore citizen, assuming she does not currently own any Singapore residential properties. 13

3 Holding period Income tax Where a property is used as a residence or left vacant, then there will be no income derived from the property and consequently, there will be no individual income tax implications for the owner or joint owners. However, if Property A is rented out, the owner will be assessed on the rental income derived from the letting of the immovable property. The income will be considered sourced in Singapore because Property A is situated in Singapore, regardless of where the tenancy agreement is signed or where the payment is made. Such income is taxable under s.10(1)(f) of the Income Tax Act. Rental income is taxed on an accrual basis and it accrues on the date on which it becomes due, regardless of when it is actually paid. Rental income is taxed on a calendar year and net basis, i.e. on the gross rental income (including charges on the property, furniture and fittings and service charges) less tax-deductible expenses. The following expenses are deductible for income tax purposes: bank interest on any mortgage loan; property tax; fire insurance on the property; repairs and maintenance, including maintenance charges paid to management corporations; commission paid to secure subsequent tenants (but not the first tenant); cost of renewing a lease or getting a new tenant (except for the first tenant). The following are NOT deductible for income tax purposes: mortgage loan principal repayments; agent s commission, advertising and legal costs of getting the first tenant; depreciation of furniture and fixtures; costs of renovation, additions, and alterations to the property. With effect from the year of assessment (YA) 2016, an individual who derives passive rental income from the renting of a residential property in Singapore can, in lieu of claiming the actual amount of deductible expenses incurred (excluding interest expenses) against his qualifying rental income, claim a specified amount of expenses as a proxy for the deductible expenses. This deduction is based on 15% of the gross rental income derived from the residential property. In addition, the individual can continue to deduct the actual interest expense incurred. Subsequent disposal Stamp duty Seller s stamp duty (SSD) SSD is imposed on sellers when they dispose of a residential property within a short time frame following its acquisition, as follows: Property disposed of within one year of purchase 16% Property disposed of within more than one year and up to two years of purchase 12% Property disposed of within more than two years and up to three years of purchase 8% Property disposed of within more than three years and up to four years of purchase 4% No SSD is payable if the property is disposed of more than four years after purchase. Again, the percentage is chargeable on the higher of the market value or the value of consideration paid for the property. Income tax Where an immovable property (residential or commercial) is sold after holding it for a certain period, the owner may make a gain from the sale of this property. Whether or not this gain is taxable will depend on whether the gain is treated as a capital gain, in which case it is not taxable; or whether the gain is treated as a trading receipt derived from a trading activity, in which case the net gain, i.e. after deducting the related expenses, will be taxable. Whether an activity constitutes trading is a question of fact. In determining whether a taxpayer is carrying on a trade, it is necessary to consider the activities of the taxpayer in the light of the circumstances and the various factors relating to the purchase and sale of the asset in question. As a guide, both IRAS and the courts in Singapore tend to examine the following badges of trade to determine whether a transaction is trading in nature. Each of these badges is by itself inconclusive. Taken in totality, however, they should provide a good indication of the existence of a trade or otherwise. Subject matter of realisation The nature of the subject matter is important as it sometimes provides a good indication as to whether the sale of an asset is clearly in the nature of trade. In the case of properties, it may not be conclusive as a property may be bought for long-term investment or for trading purposes, depending on the actual facts. Length of period of ownership This factor is often not conclusive by itself, but generally, property realised within a short period of time after acquisition points to a trading transaction, although there could be exceptions to this universal rule. On the other hand, a taxpayer who holds an asset for a longer period will be in a better position to contend that they acquired the asset for investment. 14

4 Frequency of similar transactions An isolated transaction is more likely to support a capital transaction, although there could be exceptions especially when the other badges of trade have a strong inference of trade. On the other hand, frequent or repeated purchases and realisations of the same type of asset within a certain period can give rise to a strong presumption of trading. Supplementary work on or in connection with the property realised What happens to an asset after it has been acquired can be an important indicator of trade. There could be a presumption of trade if the taxpayer expends time and effort to make the subject matter more marketable or increase its market value, or if they make a conscientious effort to source purchasers. Circumstances responsible for the realisation The realisation or sale of an investment could be prompted by unforeseen circumstances such as a sudden emergency or threat of foreclosure by creditors, in which case the sale is less likely to be regarded as a trade transaction. Motive The motive of a taxpayer in entering into a transaction which results in the gain is always relevant. Such a motive may be inferred from their intentions (either stated or inferred from their actions) right from the time the asset was acquired until its ultimate disposal. Where evidence of the seller s intentions is absent, then one can also infer the motive from the surrounding circumstances. How the property is financed may provide a clue on the motive for acquiring the property. In this regard, a short-term financing, or any indications of a financial inability to hold the property for a long period without having to dispose of it to repay the loan, may indicate a trading motive. How the proceeds from the future sale of the property are utilised may also throw further light on the taxpayer s intentions. It is important to retain contemporaneous documentation to support any capital gain argument. (ii) (iii) The income tax filing obligations, including on disposal of a property Where a property is rented to derive rental income, the owner has to declare details of the rental income received from its tenants and the expenses which are claimed in the annual income tax return which they receive. In the case of an individual, the due date for filing the return is 15 April. At the time the tax return is submitted, the owner does not need to send any supporting documents to substantiate the details of the income or expenses. However, these documents should be retained and provided to the Comptroller upon request. Notwithstanding that for whatever reasons, no income tax return has been issued to the owner, they still have to declare such income by first writing in to request a tax return. Such a request should be made no later than 14 April of the year following the year the income was earned. In the event of a sale, the owner would have to prepare a computation showing the adjusted profit or loss for income tax purposes after claiming all the related costs against the sales proceeds. However, if the owner is of the opinion that the gain should be regarded as a capital gain, it would be prudent to write in to the IRAS to state this position, lest the Comptroller takes a contrary view and later tries to penalise the owner for making an incorrect tax return. Steps which might be taken to minimise the tax liabilities identified in (i) above Stamp duty BSD cannot be avoided. ABSD can be minimised by attempting to qualify for the lower ABSD rates accorded to certain categories of buyer. In your case, the simplest way to achieve this is by having the property owned entirely by your Singaporean girlfriend, as ABSD may be totally avoided if she does not currently own a Singapore residential property or be reduced to 7% or 10% if she is already the owner or joint owner of Singapore residential property. If you wish to purchase the property in your own name, then the only way to enjoy a lower ABSD rate is to expedite your application to become a Singapore permanent resident, or better still, a Singapore citizen (see further under (iv) below). You will appreciate that there are other non-tax factors which should be considered before adopting any of these measures to save ABSD. SSD can be minimised by holding the property for a longer period before any future sale or eliminated by holding the property for at least four years. Income tax In respect of the rental income derived from renting out an immovable property, the best way to minimise the income tax liability is to be aware of all the rental-related expenses which are claimable and attempt to claim them. In addition, you should ensure you take advantage of the following concessions, where applicable: continuing source concession; subsequent tenancy concession; subsequent property concession; and block basis concession. In respect of the potential tax on any gain derived from the sale of a property, there is scope for using proactive tax planning to make the badges of trade swing in your favour. Some examples of the actions which can support the capital gains argument on the disposal of a property include: Deriving decent rental yields from renting out the properties for long-term investment. 15

5 Holding the property for a long period. No prior history in dealing in properties. Not engaging in any subsequent actions following the purchase of the property which can enhance its marketability. Tutorial notes: Under the continuing source concession, taxpayers are able to claim expenses which are incurred during a vacant period between two periods of tenancy. However, this concession does not apply if a subsequent tenant is not found and the property is sold after a period of vacancy. It also does not apply to a claim for property tax expense relating to a period of vacancy in excess of one month, since the landlord is able to claim a refund of property tax for a vacant period in excess of one month. Under the subsequent tenancy concession, the IRAS allows a claim for deduction for expenses incurred to secure a subsequent tenant, although such expenses are regarded as capital in nature as they were incurred to acquire a source of income. Under the subsequent property concession, the IRAS will allow a claim for a deduction for expenses incurred for securing a first tenant if the property is a subsequent property. However, this concession will only be relevant if you acquire further Singapore properties. Under the block basis concession, the IRAS allows rental income from the same block of rental-income-producing properties to be aggregated to determine the net rental income or loss. Again, this will only be relevant if you acquire further Singapore properties. (iv) Advantages of being treated as a tax resident of Singapore and how to achieve this The concept of tax residence is important for you as the tax consequences are different for resident and non-resident individuals. As a non-resident, you will be taxed at a flat rate of 22%. This rate has been increased from 20% with effect from YA 2017 and is based on the income earned by you in Moreover, non-residents will also not be able to claim any personal reliefs or avail themselves of the benefits accorded under the tax treaties concluded between Singapore and another country. An individual is regarded as a tax resident in Singapore in a year of assessment if, in the preceding calendar year, he or she was physically present in Singapore or exercised an employment in Singapore (other than as a director of a company) for 183 days or more, or if he or she ordinarily resides in Singapore. The test normally applied to foreigners, such as yourself, is the quantitative test, whereby an individual is regarded as resident in Singapore if during the preceding fiscal year he or she: was physically present in Singapore for 183 or more days, or exercised an employment (except as a company director) in Singapore for 183 or more days. The alternative, qualitative test, looks at the quality of an individual s stay in Singapore and is only applicable to Singaporeans and Singapore permanent residents who have permanent homes in Singapore and normally reside in Singapore, apart from such temporary absences as may be reasonable. This test is not currently applicable to you, although it may be so in the future, once you have qualified as a permanent resident. As there is a tax treaty between Singapore and Country X which is based on the OECD model, it will provide for any potential dispute as to your resident status to be resolved by the application of a series of tie-breaker rules as follows: (a) An individual will be deemed to be a resident only of the state in which a permanent home is available to that individual; if a permanent home is available to the individual in both states, the individual shall be deemed to be a resident only of the state with which their personal and economic relations are closer (centre of vital interests); If the state in which the individual s centre of vital interests cannot be determined, or if a permanent home is not available to the individual in either state, the individual shall be deemed to be a resident only of the state in which the individual has an habitual abode; (c) If the individual has an habitual abode in both states or in neither of them, the individual shall be deemed to be a resident only of the state of which they are a national; (d) In any other case, the competent authorities of the contracting states shall settle the question by mutual agreement. As can be seen from the above rules, the existence of a comprehensive tax treaty between Singapore and Country X is likely to preclude your being considered tax resident in Singapore if you retain a permanent home in Country X or continue to have other vital interests, economic or personal, there. It is therefore important for you to understand the application of these rules if you want to be regarded as a Singapore tax resident. I hope the above is useful. Please do not hesitate to contact me if you need further clarifications. Yours sincerely Tax adviser 16

6 2 Star Commodities Pte Ltd (SCPL) (a) Tax computation for the year of assessment (YA) 2017 GTP Non-GTP Total Marks qualifying qualifying $ $ $ Revenue Sales of commodities (bought from qualifying persons (QPs) to customers overseas who are also QPs 7,000,000 7,000, Sales of commodities (bought from non-qps) to customers overseas who are QPs 1,400,000 1,400, Income from supplying fuel to aircraft within Singapore 1,600,000 1,600, Total revenue 7,000,000 3,000,000 10,000,000 Revenue ratio 70 0% 30 0% 0 5 Cost of sales Purchases from QPs (sold to customers overseas who are QPs) (3,500,000) (3,500,000) 0 5 Purchases from non-qps (sold to customers overseas who are QPs) (1,500,000) (1,500,000) 0 5 Purchases from QPs (supplied to aircraft within Singapore) (700,000) (700,000) 0 5 Freight expenses (for sales to customers overseas) (500,000) (100,000) (600,000) 1 0 (6,300,000) Interest from fixed deposits 50,000 50, Operating expenses Audit fees (15,000) Bank charges (170,000) Depreciation (37,000) Donations (20,000) Medical fees (8,000) Salaries and CPF (500,000) (525,000) (225,000) (750,000) 2 0 Net profit 2,475, ,000 3,000,000 Tax rate 10% 17% Net profit (as above) 2,475, ,000 3,000,000 Less: Interest from fixed deposit (50,000) (50,000) 0 5 2,475, ,000 2,950,000 Add: Disallowable expenses Depreciation 25,900 11,100 37, Donations 14,000 6,000 20, Medical expenses (8,000 less 1% of 500,000) 0 3,000 3, Adjusted profit before capital allowances 2,514, ,100 3,010,000 Less: Capital allowances (100% base allowance plus 300% PIC enhanced allowance) (56,000) (24,000) (80,000) 1 5 Adjusted trade profit after capital allowances 2,458, ,100 2,930,000 Interest 50,000 50, Statutory income 2,458, ,100 2,980,000 Less: YA 2016 losses brought forward (560,000) (560,000) 1 0 Less: Approved donations (2 5 x 20,000) (35,000) (15,000) (50,000) 1 0 Assessable income before s.37b adjustment 2,423,900 (53,900) 2,370,000 Less: Section 37B adjustment (91,630) 53,900 (37,730) 2 0 Chargeable income 2,332, ,332,270 Tax payable at 10% 233, , Less: 50% corporate income tax rebate (capped) (20,000) (20,000) 0 5 Net tax payable 213, ,

7 (c) The three quantitative benchmark criteria areas for application of the GTP scheme Annual physical offshore trading turnover on a principal basis. Annual local business spending. Employment of qualified trading professionals. Non-qualifying transactions for physical trading by an approved global trading company Where the commodity is purchased for the purpose of consumption in Singapore. Where the commodity is purchased for the supply of fuel to aircraft or vessels within Singapore. Where the transaction involves any petroleum or petroleum product purchased from and sold to any approved petrochemical manufacturing company in Singapore. Where the commodity is purchased from and sold to any approved company in Singapore. Where income is earned from the storage of commodities in Singapore. Where the transaction involves local value add activities. Note: Only FOUR transactions required 3 (a) Tax evasion, tax avoidance and tax planning Tax evasion Tax evasion is a criminal offence which involves the reduction of a person s tax liability or obtainment of tax credits or refunds through illegal means such as the claim for fictitious or non-existent expenses and/or the failure to declare taxable income. Where a person wilfully evades or assists any person to evade tax, the penalty is based on 300% of the tax undercharged and in addition there is a maximum fine of $10,000 and/or maximum jail term of three years. For serious fraudulent tax evasion cases, the penalty is based on 400% of the tax undercharged and in addition there is a maximum fine of $50,000 and/or maximum jail term of five years. Tax avoidance A tax avoidance arrangement normally involves an arrangement which is artificial, contrived or has little or no commercial substance and is designed to obtain a tax advantage which is not intended by Parliament. Although there are no penalties for tax avoidance arrangements, the Comptroller is empowered to disregard and make relevant adjustments to arrangements which are carried out with tax avoidance as one of their main purposes and not for bona fide commercial reasons. Tax planning Tax planning is the process of structuring a transaction or series of transactions so as to minimise a person s tax liability, and usually fulfils both the legal requirements and intent of the income tax law. There are neither penalties nor potential adjustments made where proper tax planning is undertaken by a taxpayer as there is valid tax mitigation within both the language and spirit of the law. Advice given to Charlie Teo by Desmond Teo Charlie Consultancy Services Pte Ltd (CCSPL) could potentially qualify for full tax exemption for the first three years of assessment (YA) after incorporation under the start-up tax exemption (SUTE) scheme as the following conditions are satisfied: CCSPL will be incorporated in Singapore; CCSPL will be regarded as tax resident in Singapore if it conducts all of its board meetings in Singapore; CCSPL will have fewer than 20 shareholders, as there will be only one individual shareholder, Charlie, who owns 100% of the company; and CCSPL derives trading income, i.e. the consultancy fees, and is neither an investment holding company nor a property company. As Charlie s share of the LLP partnership income is expected to exceed $320,000, the exclusion of the $100,000 director s fee from his statutory income will reduce his individual tax liability by $22,000 (22% x $100,000). Hence the scheme suggested by Desmond will potentially yield Charlie a net tax saving of $22,000 in each of the years YA 2017, YA 2018 and YA 2019 due to the tax exemption available to CCSPL in those YAs. Whilst this proposal is unlikely to be construed as tax evasion as there is no illegality involved, it is questionable whether it is legal tax planning. More specifically, it could be regarded as a tax avoidance arrangement due to the following factors: 1. The reasons for the change in the form of business entity There appears to be no valid business reason, apart from trying to exploit the tax benefit under the SUTE scheme, for changing the recipient of the director s fee from Charlie in his own individual capacity to CCSPL, a company solely owned by himself. This is unlike Desmond s situation where his partnership has a policy for all its partners to contribute any director s fees to the partnership to be shared equally by all partners, and no obvious tax benefits are derived. 18

8 2. Whether the activities carried out by the new business entity conform to the reasons given There are no compelling reasons for director s fees to be earned by an entity instead of by the individual. Again, this is unlike Desmond s situation. 3. Whether new employees are engaged to support the activities of the new entity CCSPL has no employees and although it derives a consultancy fee, in substance it is a shell company as all the services could have been provided directly by the individual director, i.e. Charlie. 4. How the income is attributed before and after the conversion Before the change, the director s fee is taxable in the hands of the individual director. By attributing the income to the new company, it may potentially now be fully tax exempt as the new company appears to satisfy all the conditions under the SUTE scheme. In conclusion, this proposal is likely to be challenged by the Comptroller as a tax avoidance arrangement on the grounds that it alters the incidence of tax which is payable by or would otherwise be payable by Charlie [s.33]. Accordingly, the Comptroller is likely to disregard the arrangement and make the relevant adjustments to cancel out the tax advantage which Charlie seeks to gain, i.e. he is likely to continue to assess the director s fee in Charlie s personal name. However, no additional penalty will be payable as the provisions of s.33 do not give the Comptroller the power to impose one. (c) Taxpayer audit A taxpayer audit involves an examination of the books, records and financial affairs of a taxpayer to verify that the returns submitted are in compliance with the tax laws. Taxpayers are selected for audit on a systematic basis by the Inland Revenue Authority of Singapore (IRAS) using a risk based approach. In contrast, a tax investigation is undertaken by the IRAS where preliminary enquiries have indicated prima facie evidence of tax evasion and to specifically enquire into such acts. 4 (a) Accounting Clarity Pte Ltd (ACPL) (i) Goods and services tax (GST) registered businesses can claim input tax on expenses incurred relating to the provision of fringe benefits provided they satisfy all of the following conditions: 1. The goods and services are contractually supplied to the employer or the employee is acting as an agent of the employer. 2. The input tax is not disallowed (blocked) under regulations 26 and 27 of the GST (General) Regulations. 3. The fringe benefits are given to employees for the purpose of business, i.e. the provision of the fringe benefit must have a close nexus to the business activities (close nexus test). Specifically, it must meet any one of the following six indicators: (i) It is necessary for the proper operation of the business Taxpayers should consider factors such as the nature of the business, industry practice, commercial requirements and regulatory requirements to determine whether a fringe benefit is necessary to the business operation. (ii) It directly maintains or increases the efficiency of the business operations There is a close nexus if the fringe benefit enables employees to better utilise their time to carry out their job responsibilities and thus increases the efficiency of business operations. (iii) It is incurred for corporate activities Fringe benefits incurred for corporate activities have a close nexus to the business as these activities promote interaction and improve working relationships between employees. (iv) It encourages the upgrading of employees skills and knowledge relevant to the business Skills and knowledge which are relevant to the business will be considered as having a close nexus with the business activities if these skills allow the employee to enhance work performance or perform other job functions. (v) It is given in recognition of an employee s contributions towards the business Long service awards or awards given for meeting business targets are intended to acknowledge the employee s contributions and therefore have a close nexus to the business. (vi) It promotes corporate identity Fringe benefits provided for the purpose of promoting the image of the business will have a close nexus to the business operations. In addition, the goods and services must not be provided only to specific persons who are owners of the business such as sole proprietors, partners or directors. (ii) Application to the benefits provided in the quarter ended 30 September 2016 Input tax relating to the provision of accommodation to expatriate employees will not be claimable as this fringe benefit does not generally fall under any of the indicators under the close nexus test in condition 3. Consequently, there is no need to account for any deemed output tax. 19

9 Input tax relating to the preparation of an expatriate employee s income tax return will not be claimable as this fringe benefit does not fall under any of the indicators under the close nexus test in condition 3. Consequently, there is no need to account for any deemed output tax. Input tax relating to the reimbursement of ACCA membership fees incurred by the business s accountant employees is claimable under an administrative concession, assuming the expense is recognised as a business expense in the accounts, as it falls under indicator (iv) in condition 3. This is notwithstanding that the supply of the fringe benefit is clearly contracted to the employee and not in the employer s name. There is no need to account for output tax as this fringe benefit is a service. Dallas Innovation Pte Ltd (DIPL) Customer information, including a list of customers gathered in the course of business, is not considered as copyright. Information on work processes including standard operating procedures is not considered as trade secret or information with commercial value. Therefore, neither of these expenditures will qualify for writing down allowances (WDA) either base or enhanced. The amount of $1 million incurred on patents is expenditure to acquire an intellectual property right and so can potentially qualify for both base WDA and enhanced WDA under the productivity and innovation credit (PIC) scheme, provided DIPL (the claimant company) has acquired both the legal and economic ownership of the patent. Legal ownership means the legal assignment of the patent is granted to the claimant company. Economic ownership means the future economic benefits attributable to the patent must accrue to the claimant company. Given that DIPL has acquired the patents by means of an outright purchase from an unrelated company, there is no reason to consider that this is not the case. DIPL is a qualifying SME for the purpose of claiming PIC as it employs fewer than 200 workers. As such, DIPL s combined cap for the period from year of assessment (YA) 2016 to YA 2018 will be $1 8 million ($600,000 x 3). DIPL can claim a 20% base WDA and an enhanced WDA of 300% of this amount for YA 2017 since it did not claim any PIC benefits for the acquisition of intellectual property rights in YA 2016, i.e. a total allowance of $800,000 (20% x 400% x $1 million). Given the huge quantum involved, there would be no merit in DIPL opting for a PIC cash payout, as this would be capped at $100,000 and any excess is forfeited. 5 Bantin Corporation Ltd (BCL) (a) Corporate income tax implications Based on Singapore s modified territorial basis of taxation, Singapore income tax is payable on the income of a company accruing in or derived from Singapore. A foreign company, incorporated outside Singapore, is considered to derive Singapore sourced income if it has a permanent establishment (PE) in Singapore and profits can be attributed to this PE in Singapore. When that happens, the foreign company has to pay Singapore income tax on the profits derived from the PE, in the same way as a Singapore incorporated company deriving income in Singapore. In the absence of a comprehensive double taxation agreement between Singapore and Country Y, Singapore domestic tax law will apply. Section 2 of the Singapore Income Tax Act defines a PE to include a fixed place where business is wholly or partly carried on including inter alia a place of management and an office. In addition, a foreign company is also deemed to have a PE in Singapore if it has another person acting on its behalf in Singapore, who has and habitually exercises an authority to conclude contracts; or habitually secures orders wholly or almost wholly for that person or for such other enterprises as are controlled by that person. This is often termed as an agency PE. BCL relies on a network of agents in Singapore to collect and process orders for its consumer goods over the internet. As these agents also act for a number of similar companies in the industry, they are arguably not habitually securing orders wholly and almost wholly for BCL, and consequently an agency PE may not have arisen. However, BCL rents an office space in Singapore located at Jurong and employs a small team of workers comprising an office manager, an accountant and a sales manager. This office space, though small, has a certain degree of permanence as it is at the disposal of BCL for a reasonably long period in view of the two-year rental agreement. More importantly, BCL is conducting business through this fixed place with a core team of workers occupying the premises. Conducting regular monthly sales training sessions in the seminar room located at the same office address provides further evidence that BCL is conducting business in Singapore. Based on these two factors, BCL is likely to be regarded as having created a PE in Singapore through the use of this office space in Singapore. Consequently, BCL will be liable to pay Singapore income tax on the profits attributable to this PE in Singapore. On the premise that BCL has a PE in Singapore and no other PE outside Singapore, then the entire profits from BCL s sale of goods and downloadable music should be subject to Singapore income tax. Although a company incorporated outside Singapore is unlikely to be issued with a corporate income tax return, the Inland Revenue Authority of Singapore (IRAS) will likely issue such a tax return for BCL s completion once it becomes aware of its operations in Singapore. Under the law, BCL is expected to notify the IRAS and obtain the required form for completion and submission, notwithstanding that it has not received a tax return from the IRAS. BCL has to make this notification within 14 days if a tax return is still not received by 31 March for any tax year, i.e. by 14 April 2017 for income earned in the year Failure to inform the IRAS of its chargeability to tax could expose BCL to a fine not exceeding $1,000 or a maximum imprisonment term of six months only in default of the fine. 20

10 The royalty payment made to Bamta United Ltd (BUL) by BCL will be deductible for tax purposes, because it is wholly and exclusively incurred in the production of BCL s income, revenue in nature and not specifically prohibited under the Income Tax Act. Having established a PE in Singapore, BCL as a PE bearing the expense would have to withhold tax on the payment of the royalty as BUL is not a tax resident in Singapore. The withholding tax rate will be at the prevailing corporate tax rate of 17% (not at 10%), as BUL is likely to be regarded as having a PE in Singapore by virtue of its similar mode of operation as BCL. The withholding tax of $17,000 is payable by the 15th of the second month following the date of payment, which is determined to be on 31 December 2016; therefore, BCL must account for the withholding tax to the IRAS by 15 February Goods and services tax (GST) implications GST is imposed on the supply of goods and services in Singapore in the course or furtherance of a business and on the importation of goods into Singapore. Notwithstanding that BCL conducts its business transactions electronically through the internet, the normal GST rules applicable to traditional commerce still apply. BCL is selling goods via the internet and delivering them to customers in Singapore. As such, the sales constitute a local supply on which GST is chargeable at the standard rate of 7% on the value of the goods transacted. The sale of digitised goods such as music over the internet is a supply of services. The provision of services constitutes a taxable supply in Singapore if the supplier belongs in Singapore under any of the following circumstances: it has a business establishment or some fixed establishment in Singapore and nowhere else; or it is legally constituted in Singapore and has no business or fixed establishment in any other country; or it has establishments both in Singapore and outside Singapore but the services are most directly used or to be used in the establishment in Singapore. As BCL is incorporated outside Singapore, the second scenario would not apply, but both of the remaining options need to be considered. A business is treated as having a business establishment in Singapore if: its main seat of economic activity (referring to the place where the essential decisions concerning the general management of the company are made and where the functions of its central administration are carried out, usually its principal place of business) is in Singapore; or it carries on business through a branch in Singapore; or it carries on business through an agency in Singapore. A fixed establishment is an establishment, other than the business s own business establishment, which has both the technical and human resources necessary to provide or receive services on a permanent basis. Applying the above to BCL s case, it certainly has either a business establishment or a fixed establishment in Singapore as a result of the office space at Jurong, and the services supplied are connected to this establishment. Hence, BCL s sale of music downloads should also be standard rated for GST purposes. As both the sale of goods and music are taxable supplies in Singapore and the value of BCL s taxable turnover is expected to exceed $1 million in the period of 12 months from the commencement of its business, BCL will be required to notify the Comptroller and register for GST within 30 days of 1 July Once registered, BCL will need to charge GST on its sales and to file GST returns, generally on a quarterly basis, and to pay the tax due within one month after the end of each GST accounting period. As a corollary, BCL will also be able to make a claim for any allowable input GST which it incurs. 21

11 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2017 Marking Scheme 1 Tax advice to Kenny Tsang Available Maximum (i) (ii) (iii) Singapore tax liabilities for target property Acquisition GST implications 1 0 Stamp duty BSD 1 5 ABSD principles 1 5 ABSD application/advice 1 0 Holding period Income tax residence/vacant 0 5 Income tax rented out Principle of source and basis of assessment 1 5 Expenses actual 2 5 Flat rate option 1 0 Subsequent disposal Stamp duty SSD 1 5 Gain taxable only if it is regarded as trading gain 1 0 Discussion on badges of trade (6 x 0 5) Income tax filing obligations Obligation to declare details of rental income 1 0 Return filing date 0 5 Need to notify Comptroller of chargeability to tax 1 0 Need to prepare computation of income from sale or declare capital gain Steps which can be taken to minimise tax liabilities Stamp duty BSD 0 5 Stamp duty ABSD 2 0 Stamp duty SSD 0 5 Income tax on rental income 3 0 Argument for capital gains treatment of any disposal gain (iv) Advantages enjoyed by a tax resident of Singapore and how to be treated as one Advantages of being treated as tax resident 2 0 Tests for residence and application 3 0 Tax treaty tie-breaker rules (4 x 0 5) 2 0 Conclusion re likely outcome re Kenny Professional marks Appropriate format and presentation of the letter 1 0 Structure including relevant headings 1 0 Effectiveness of communication 1 0 Logical flow

12 2 Star Commodities Pte Ltd (SCPL) Available Maximum (a) (c) Tax computation See answers for detailed allocation of marks 18 0 Quantitative benchmark criteria areas One mark each (3 x 1) 3 0 Non-qualifying transactions for physical trading Any FOUR transactions 1 mark each, maximum (a) Tax evasion, tax avoidance and tax planning Tax evasion 3 0 Tax avoidance 2 0 Tax planning (c) Advice to Charlie Teo by Desmond Teo Start-up tax exemption scheme and application to CCPSL 3 0 Potential tax savings 1 5 Not tax evasion, with reason 1 0 Factors pointing to a tax avoidance arrangement Change of form of business entity 2 0 Remaining reasons (1 5 x 3) 4 5 Likely action by Comptroller, with reason 1 5 No penalty Taxpayer audit Purpose 1 0 Basis of selection 0 5 Contrast with investigation

13 4 (a) Accounting Clarity Pte Ltd (ACPL) Available Maximum (i) (ii) Conditions to satisfy to claim input tax on fringe benefit Contractually supplied to employer or employee acting as agent 1 0 Not disallowed under GST Regulations 1 0 Must be for purpose of business, i.e. pass the close nexus test 1 0 Business test indicators (6 x 0 5) 3 0 Must not be only for owners or directors Application to ACPL Input tax for provision of accommodation not claimable and reasons 2 0 Input tax for preparation of tax returns not claimable and reasons 2 0 Input tax for reimbursement of ACCA membership fees claimable and reasons Dallas Innovation Pte Ltd (DIPL) Customer information and information on work processes do not qualify for WDA (2 x 1) 2 0 Patents qualify for base and enhanced WDA if legal and economic ownership met 2 0 DIPL qualifying SME, with reason 1 0 Computation of PIC benefit 2 0 No merit in opting for PIC cash payout Bantin Corporation Ltd (BCL) (a) Corporate income tax implications Basis of taxation for companies in Singapore 1 0 Foreign company liable to tax if it derives income through a PE in Singapore 2 0 Definition of PE in s Application to BCL re agency PE 1 0 Application to BCL re fixed place PE 2 0 Obligation to notify chargeability to tax and penalties for non-compliance 2 0 Royalty payment deductible against taxable Singapore source 0 5 Withholding applicable, at 17%, with reason 2 0 Due date of payment to IRAS 15 February GST implications GST rules in traditional commerce also apply to e-commerce transactions 1 0 Sale of goods delivered in Singapore are standard supplies 1 0 Sale of downloadable music is the supply of services 0 5 Rules for determining a supply of services 3 0 Application to BCL taxable supply made in Singapore 1 5 Obligation to register for GST as taxable turnover is expected to exceed $1 million 1 5 Other GST obligations of GST-registered business 1 0 Ability to reclaim input GST