Paper P6 (SGP) Advanced Taxation (Singapore) Friday 5 June Professional Level Options Module. The Association of Chartered Certified Accountants

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1 Professional Level Options Module Advanced Taxation (Singapore) Friday 5 June 2015 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 4 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (SGP) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the year of assessment 2015 will continue to apply for the foreseeable future. 2. All apportionments should be made to the nearest month. 3. Calculations and workings need only be made to the nearest $. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Goods and services tax Standard rate 7% Registration threshold $1 million Buyer s stamp duty for all properties Purchase price or market value Every $100 or part thereof of the first $180,000 $1 Every $100 or part thereof of the next $180,000 $2 Thereafter, every $100 or part thereof $3 Additional buyer s stamp duty for residential properties 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% Seller s stamp duty for residential properties Property disposed of within one year of purchase 16% Property disposed of more than one year and up to two years of purchase 12% Property disposed of more than two years and up to three years of purchase 8% Property disposed of more than three years and up to four years of purchase 4% Seller s stamp duty for industrial properties Property disposed of within one year of purchase 15% Property disposed of more than one year and up to two years of purchase 10% Property disposed of more than two years and up to three years of purchase 5% Stamp duty on transfer of shares Purchase price or net asset value: every $100 or part thereof $0 20 2

3 Corporate income tax Rate Year of assessment % Corporate income tax rebate (capped at $30,000) 30% Partial tax exemption $ First $10,000 of chargeable income is 75% exempt 7,500 Next $290,000 of chargeable income is 50% exempt 145,000 Total 152,500 Full tax exemption for new start-up companies $ First $100,000 of chargeable income is 100% exempt 100,000 Next $200,000 of chargeable income is 50% exempt 100,000 Total 200,000 Central Provident Fund (CPF) Contributions for individuals below the age of 50 years and earning more than $1,500 per month Employee Employer Rates of CPF contributions 20% 16% Maximum monthly ordinary wages (OW) attracting CPF $5,000 For the year 2014 (i.e. from 1 January 2014 to 31 December 2014) Maximum annual ordinary wages (OW) attracting CPF $60,000 Maximum annual additional wages (AW) attracting CPF $85,000 less OW subject to CPF Personal income tax for the year of assessment 2015 Chargeable income Tax rate Tax $ % $ On the first 20, On the next 10, On the first 30, On the next 10, On the first 40, On the next 40, ,800 On the first 80,000 3,350 On the next 40, ,600 On the first 120,000 7,950 On the next 40, ,000 On the first 160,000 13,950 On the next 40, ,800 On the first 200,000 20,750 On the next 120, ,600 On the first 320,000 42,350 Above 320, [P.T.O.

4 Personal income tax reliefs for the year of assessment 2015 Earned income Normal (max) Handicapped (max) Below 55 years $1,000 $4, to 59 years $6,000 $10, years and above $8,000 $12,000 Spouse relief Handicapped dependent spouse relief $2,000 (max) $5,500 (max) Qualifying child relief (per child) $4,000 Handicapped child relief (per child) $7,500 Working mother s child relief (WMCR) % of mother s earned income First child 15% Second child 20% Third and subsequent child 25% Maximum cumulative WMCR 100% Maximum relief per child $50,000 Parent relief Normal parent Handicapped parent Not living in the same household $5,500 $10,000 Living in the same household $9,000 $14,000 Grandparent caregiver relief $3,000 Dependent handicapped sibling relief $5,500 Life assurance relief Voluntary CPF contribution of self-employed Course fees $5,000 (max) Capped at $30,600 or 36% of assessable trade income whichever is lower $5,500 (max) NSman Normal appointment Key appointment holder holder Active NSman $3,000 $5,000 Non-active NSman $1,500 $3,500 Wife/widow/parent of NSman $750 $750 Foreign maid levy $6,360 (max) Supplementary retirement scheme Foreigners Singaporeans and Singapore permanent residents $29,750 (max) $12,750 (max) 4

5 This is a blank page. Question 1 begins on page 6. 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 You should assume that today s date is 10 July Sparkling Services Inc (SSI) is an established technology company incorporated in the United States since It is contemplating establishing a presence in Singapore by launching its first data centre here in December Meanwhile, its operations are currently being run entirely from the United States. SSI is not familiar with the detailed rules of taxation in Singapore and is concerned about the potential goods and service tax (GST) and corporate tax exposures which might arise from its operations in Singapore. SSI expects to incur GST in respect of the significant amounts of data equipment which it will need to procure in the United States and import into Singapore for use in the data centre. If these GST costs are substantial, SSI will consider other procurement options such as the leasing of the equipment in Singapore. The turnover of SSI s Singapore operations is expected be in the range of $800,000 to $1,200,000 in its first year of operations. John Howard has worked for the SSI group of companies since 2004 but will soon reach the company s normal retirement age. His employment history with the SSI group is as follows: Period 1: from 1 January 2004 to 31 December 2008 John first joined SSI on 1 January On 1 January 2006, he was transferred to Singapore and worked in the Singapore branch of SSI until 31 December 2008 when his Singapore local employment contract ceased with the closure of the Singapore branch. Period 2: from 1 January 2009 onwards On 1 January 2009, John was transferred to Japan, where he has worked for a 100% Japanese subsidiary of SSI as its business development director. At the time of his transfer to Japan, John was provided with an indemnification letter which stipulates that he will be compensated by way of a severance payment for his services from 1 January 2004 until any future date of his job termination. This severance payment will comprise one month of base salary for every year of his employment with the SSI group. Due to corporate structural changes in its Japan operations, the SSI group plans to terminate John s employment in Japan. The current understanding is that John will cease his employment with the subsidiary and withdraw his Japanese residence visa towards the end of December The SSI group is now considering transferring John to conduct its operations in Singapore. He will be based in Singapore and liaise with customers and business partners in Singapore. Any future contracts will be signed in Singapore by John and the resulting trading income will be booked as the income of SSI and credited into SSI s bank account in Singapore. Sales invoices will be prepared by John initially and later by staff of an accounting department to be set up in Singapore in The current proposals regarding John s transfer back to Singapore are as follows: John will continue working for the Japanese subsidiary until 30 September The severance package due to John under his current employment contract in respect of Period 1 will be paid to him directly by SSI on his arrival in Singapore in October 2014; and in respect of Period 2, be paid by the Japanese subsidiary before he leaves Japan. John is liable to pay any taxes due on his severance package, either in Japan or elsewhere. From 1 November 2014, John will work in Singapore for SSI based on a new employment agreement. It has still to be decided whether the period of John s employment under this agreement will be for one month (i.e. to 30 November 2014), five months (i.e. to 31 March 2015) or one year (i.e. to 31 October 2015). However, regardless of the length of his employment in Singapore, John will work at home (not at the data centre) and receive his monthly salary in Singapore by bank transfer directly from SSI. 6

7 Required: As tax adviser to Sparkling Services Inc (SSI), write a letter to the board of directors advising them on the following: (i) The goods and services tax (GST) implications arising from the proposed operations in Singapore. (10 marks) (ii) The corporate income tax implications arising from the proposed operations in Singapore. (11 marks) (iii) The basis on which John Howard will be taxed in Singapore, in respect of both his severance package and his monthly salary. (10 marks) Note: There is no comprehensive double taxation agreement between Singapore and the United States of America. Professional marks will be awarded in question 1 for the appropriateness of the format, presentation and structure of the letter, the effectiveness with which the information is communicated and its logical flow. (4 marks) (35 marks) 7 [P.T.O.

8 2 (a) Alpha Pte Ltd (APL), Beta Pte Ltd (BPL), Charlie Pte Ltd (CPL) and Delta Pte Ltd (DPL) are all companies incorporated and resident in Singapore. The following diagram represents the corporate group structure and percentage of beneficial ownership of ordinary shares to which these companies belong: APL 100% 80% BPL CPL 90% The same corporate structure has prevailed since The ordinary shares of CPL and DPL are beneficially held to the extent of 20% and 10% respectively by minority shareholders, who are all individuals. The shareholders of APL and their respective shareholdings for the various periods of time have been as follows: Up to and From 1 April 2014 From including 31 March 2014 to 31 March April 2015 Shareholder 000 shares 000 shares 000 shares Edward 700 1,200 1,200 Frankie 1, Gerrard Hector 0 2,200 2,800 The following tax data pertains to the various companies for the years of assessment (YA) 2015 and 2014: APL BPL CPL DPL $ $ $ $ YA 2015 (year ended 31 March 2014) Adjusted profit/(loss) (600,000) (100,000) 2,000, ,000 Capital allowances 250, ,000 1,400, ,000 YA 2014 (year ended 31 March 2013) Adjusted profit 850,000 1,000,000 2,400, ,000 Capital allowances 230, ,000 1,500, ,000 On 31 March 2014, BPL permanently ceased the manufacturing business which it had been carrying on since its incorporation in On 1 April 2014, BPL commenced a new business as a provider of IT consultancy. This new business was immediately profitable and is expected to continue to be profitable in future years. Required: Advise Beta Pte Ltd (BPL) on the most tax-beneficial utilisation of its unabsorbed loss and capital allowances of $100,000 and $650,000 respectively for the year of assessment Your answer should clearly identify and explain the amounts (if any) of the unabsorbed items which you recommend BPL to carry back, carry forward and/or transfer to another company under the group relief scheme, together with the resulting tax savings achieved and any deadlines which must be met. DPL Note: You are NOT required to present full tax computations for any of the companies. (18 marks) 8

9 (b) Echo Pte Ltd (EPL) is a company incorporated in Singapore on 1 March 2013, which since its incorporation has been actively engaged in providing business consultancy services to new enterprises. EPL is run by Malcolm Lee, a sole shareholder cum director, who is also one of the company s two employees. EPL s other employee is Malcolm s father, Nicholas Lee, who holds a doctorate in accounting. For its first accounting period ended 31 December 2013, EPL submitted a tax computation for the year of assessment (YA) 2014 which showed an assessable income of $190,000. EPL is extremely profitable and is expected to achieve an assessable income exceeding $2 million in its second financial year ended 31 December Whilst preparing its corporate tax return and tax computation for the YA 2015, EPL discovered that it had not claimed any productivity and innovation credit (PIC) benefits for YA On discovery of this omission, Malcolm compiled the following list of expenditure incurred in the financial period ended 31 December 2013 and financial year ended 31 December 2014, for which he would like to claim maximum PIC benefits for the company: Financial period ended 31 December 2013 Two-day seminar on transfer pricing conducted by an accounting firm attended by Malcolm $1,500 One-day workshop on financial management conducted by Nicholas for Malcolm $1,000 comprising the salary cost of Nicholas, refreshments and workshop materials Expenditure on computers and accessories $15,000 Financial year ended 31 December 2014 Expenditure incurred in relation to qualifying research and development (R&D) conducted in Singapore $60,000 Expenditure incurred in relation to qualifying research and development (R&D) conducted outside Singapore $40,000 Required: Advise Echo Pte Ltd on its eligibility to claim productivity and innovation credit (PIC) benefits for the relevant years of assessment, and state the tax savings which can be achieved in respect of each qualifying item. (7 marks) (25 marks) 9 [P.T.O.

10 Section B TWO questions ONLY to be attempted 3 Asia Laboratory Private Limited (ALPL) is in the business of operating a radiologic imaging centre in Singapore. ALPL intends to engage Bestwork Medical Private Limited (BMPL), a related company, to provide the required radiologic services through BMPL s sole director cum employee, who is a specialist consultant radiologist (the Specialist) and a tax resident in Singapore. ALPL will draw up a service agreement (Agreement) with BMPL which will state that BMPL (and not the Specialist) is the party engaged by ALPL for the provision of radiologic services. Further, the Agreement will state that the Specialist is not an employee of ALPL. In addition, the Agreement will provide that the Specialist is personally responsible to ALPL for all obligations and commits to the following: The Specialist s official working hours will be from 0900 to 1800 hours daily from Monday to Friday, and 0900 to 1300 hours on Saturday. The Specialist has to attend the place of business of ALPL or at such other places as required by ALPL, unless prevented by sickness or other cause beyond her control. The Specialist has to provide advance notice of any absence from work and medical certificates to ALPL when the Specialist takes annual leave or medical leave, as the case may be. The Specialist s annual and medical leave entitlements must be agreed between ALPL and BMPL. For the services of the Specialist, BMPL will be paid the following by ALPL: the Specialist s monthly consultancy fees of $50,000; an annual profit sharing based on 10% of the net profit of ALPL; the monthly car park charges paid by the Specialist at ALPL s premises; and all of the Specialist s medical and dental expenses. Required: (a) (b) Comment on the income tax implications, obligations and exposures for Asia Laboratory Private Limited (ALPL) and the income tax implications for the Specialist arising from the proposed service agreement which ALPL intends to enter into with Bestwork Medical Private Limited. (12 marks) Propose how the potential tax exposures/obligations of ALPL (as identified in (a)) may be mitigated. (8 marks) (20 marks) 10

11 4 Guangzhou Pte Ltd (GPL) is a company incorporated and tax resident in Singapore, which is owned equally by two foreign Chinese nationals. GPL has a wholly-owned subsidiary in China, Guangzhou Villas Co Ltd (GVCL), which has been set up as a property holding company. GPL has held its 100% stake in GVCL since GVCL owns a piece of land and some villas in Guangzhou China. Although the value of the land and villas has risen considerably since they were first acquired by GVCL, the company has only recorded modest annual profits and to date has not paid any dividends to GPL. Neither GPL nor GVCL owns any Singapore immovable properties. Mr Ho, an individual buyer from China, would like to acquire a stake in the Guangzhou villas from the Chinese shareholders of GPL and has proposed the following options: Option 1 The two individual Chinese shareholders will sell either 49% or 100% of their collective stakes in GPL to Mr Ho, either directly or through a China company owned by him. Option 2 GPL will sell either 49% or 100% of the shares it holds in GVCL to Mr Ho, either directly or through a China company owned by him. Required: (a) (b) Discuss the Singapore income tax, goods and service tax and stamp duty implications arising from a sale of the shares in Guangzhou Pte Ltd (GPL) to Mr Ho by the two Chinese individuals, under Option 1. (13 marks) Explain how your answers in (a) will differ if Option 2, a sale of the shares in Guangzhou Villas Co Ltd to Mr Ho by GPL, is the chosen option. (7 marks) (20 marks) 11 [P.T.O.

12 5 (a) Contemporary Trading Pte Ltd (CTPL) is a company incorporated and tax resident in Singapore. During the year ended 31 December 2014, CTPL achieved a tax-adjusted profit of $200,000 from its business carried out in Singapore. CTPL has a 30% stake in the share capital of Performa Company Ltd (PCL), a company incorporated and tax resident in Country X, a country which does not have a tax treaty with Singapore. Country X has a one-tier corporate tax system similar to Singapore and levies corporate tax in two bands: 10% on taxable income up to $100,000 and 20% on taxable income in excess of $100,000. During the year ended 31 December 2013, PCL made a net profit of $2,500,000 and decided to pay CTPL a gross dividend of $110,000 on 30 July 2014 which was credited to CTPL s bank account in Singapore on the same day. This dividend was CTPL s only source of foreign income in the year ended 31 December Required: (i) (ii) Discuss the income tax implications arising in both Country X and Singapore from the payment of the dividend by Performa Company Ltd to Contemporary Trading Pte Ltd (CTPL). (8 marks) Explain how your answer to part (i) would differ if Country X only levies one standard corporate tax rate of 10% on all income and compute the Singapore tax liability of CTPL for the year of assessment Note: All the facts stated in the scenario, except for the Country X corporate tax rate, remain the same. (6 marks) (b) Velocity Trading Pte Ltd (VTPL) is a company providing business consultancy services to customers in Singapore. VTPL was newly incorporated in Singapore in the year 2014 and during its first year of operations (2014) the company held its only board meeting in Country Y. In November 2014, VTPL entered into a service agreement with Xenon Limited (XL), a company tax resident in Country Z. Under this agreement, XL will provide software development services from Country Z to VTPL for a one-off fee of $100,000. As part of the agreement, a member of staff from XL made a one-week trip to Singapore to provide training to VTPL s staff in December The invoice was issued by XL on 6 January 2015, although payment was settled in December 2014 by VTPL. Required: Advise Velocity Trading Pte Ltd on the Singapore tax implications arising from the location of its 2014 board meeting and its dealings with Xenon Limited in Country Z. (6 marks) (20 marks) End of Question Paper 12