Professional Level Options Module, Paper P6 (SGP)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 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 Sulaiman Ahmad (SA) Sulaiman Ahmad Client Address 7 December 2017 Dear Sir Singapore income tax implications arising from your employment contracts Tax Adviser Firm s address I understand that you have completed a five-year employment contract with Betterchip Brunei Limited (BBL) from 2011 to 2015 and that this contract has been renewed for a further three years from 2016 to Despite being employed by a company incorporated in Brunei, a country which exempts individuals from income tax, you are concerned about your personal income tax liabilities in Singapore and how you might have minimised these tax exposures. As requested, I am pleased to set out my advice on these matters below: (i) Liability to Singapore personal income tax for the years of assessment (YAs) 2012 to 2016 Even though you had a formal employment contract with a Brunei company, you may still be subject to Singapore personal income tax if the facts show that you were exercising your employment in Singapore for any period, unless that income can be exempted under the tax treaty between Singapore and Brunei. An individual is only subject to Singapore personal tax on Singapore sourced income. Foreign sourced income derived by an individual will not be subject to Singapore personal income tax even if such income is received in Singapore, unless it is derived through a partnership and is not exempted under the Singapore Income Tax Act. Your employment terms require you to travel frequently to Singapore where you assist your Brunei company to collect orders and also to liaise with its independent distributors. Strictly, such activities can be construed as exercising a Singapore employment and the key issue is therefore, whether exemption can be sought under the Dependent Personal Services Article of the Singapore/Brunei tax treaty. It appears that the standard conditions to qualify for exemption under the Dependent Personal Services Article can all be fulfilled in your case since: You were not present in Singapore for a period or periods exceeding in aggregate 183 days within any 12-month period commencing or ending in the calendar years concerned, as you were present in Singapore for less than 90 days in each of the years 2011 to 2014, and even in the year 2015, were only present for 180 days, which also did not exceed the threshold period of 183 days. Your remuneration was paid by or on behalf of your employer who is a resident of Brunei. Your remuneration was not borne by a permanent establishment or a fixed base which your employer has in Singapore. Hence, you should have no personal income tax liabilities in Singapore for any of the YAs 2012 to (ii) Liability to Singapore personal income tax for YA 2017 With the renewal of your employment contract for a further three years from 2016 to 2018, you are essentially performing the same employment duties but with a higher monthly salary. However, you are now spending more time in Singapore attending not only to the affairs of the Brunei company, BBL, but also the newly formed Singapore subsidiary, Betterchip Singapore Pte Ltd (BSPL), although your official employment contract remains only with BBL. In the year 2016, you spent more than 183 days in Singapore, so you will not be able to meet the first condition stipulated in the Dependent Personal Services Article of the Singapore/Brunei tax treaty. Therefore, even though you can still meet the other two conditions, you can no longer enjoy any treaty protection as the exemption is only possible provided all three conditions can be met. Further, as you spent more than half of your time (eight months of the year) in Singapore attending to the affairs of both companies in 2016, there is a risk that the Inland Revenue Authority of Singapore (IRAS) may take the view that your entire salary of $288,000 is fully attributable to a Singapore employment and accordingly should be fully taxable in Singapore. You should attempt to attribute a reasonable amount of salary to each of the companies (BBL and BSPL) in order to mitigate such a risk. In the event that you can justify to the IRAS that you continue to exercise a Brunei employment, then it may be possible that the IRAS will only attribute a portion of your total salary to a Singapore employment and subject only this amount to Singapore 13

3 personal income tax. One reasonable basis of splitting your salary is based on the actual time spent in each country and adopting this approach, an amount of $192,000 (i.e. $24,000 x 8) may be subject to personal income tax in Singapore for YA The tax on $192,000 in YA 2016 would be $16,956 (see detailed calculation in the Appendix 1 to this letter). (iii) Dual employment contract Due to the risk that the IRAS may attribute your entire salary of $288,000 earned in 2016 to a Singapore employment and subject it to Singapore tax, it would be prudent to put in place a defensible dual employment contract to mitigate this risk. A dual employment contract works on the premise that there are two distinct sets of employment responsibilities, in your case, one set in Singapore and the second set in Brunei. If the dual contract is effective, you should only pay Singapore tax on your Singapore-sourced income attributable to your Singapore employment and not on any part of your salary attributable to your employment exercised outside Singapore. Such employment income would be regarded as sourced outside Singapore and so not taxable even when remitted to Singapore. To structure a defensible dual employment contract, the following principles should be adhered to as far as possible: The two employment contracts should be drawn up to set out clearly the distinct duties and services to be rendered separately inside and outside Singapore. The salary expense relating to your Brunei employment cannot be recharged by BBL to any Singapore entity. Your Brunei employment under the separate overseas contract must be exercised exclusively outside Singapore. Your employment duties performed outside Singapore under the separate overseas contract must be separate and distinct from those performed in Singapore. The income attributable to your Singapore employment must be commensurate with your employment responsibilities in Singapore. (iv) Not ordinarily resident (NOR) scheme In addition to the use of a dual employment contract, another way to mitigate the risk that the IRAS may attribute your entire salary of $288,000 earned in 2016 to a Singapore employment and subject it to Singapore tax would be for you to apply for and be awarded the NOR scheme. To qualify for the NOR scheme, you must meet both of the following two conditions: you must be a resident of Singapore for income tax purposes for the YA when you make the application; and you must not have been a resident of Singapore for income tax purposes for the three consecutive YAs immediately preceding that YA. An individual is regarded as a tax resident in Singapore in a YA if, in the preceding calendar year, they were 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 they ordinarily reside in Singapore. In your case, as you worked outside Singapore for the five years 2011 to 2015, you would not be regarded as ordinarily residing in Singapore for that entire period. You were also not physically present in Singapore for at least 183 days for each of these years. Neither are you likely to be treated as a tax resident of Singapore based on the qualitative test. You will not be treated as ordinarily resident in Singapore since you and your family have no intentions to come back to stay in Singapore. Hence, you should be treated as a non-resident for YAs 2012 to As you returned to take up employment in Singapore from January 2016, you would qualify to be treated as resident for YA Hence, you are likely to satisfy both requirements. Upon application, once the IRAS has agreed that you satisfy the basic conditions, you will be accorded NOR status for five consecutive YAs, starting from the YA in which you first meet the criteria, i.e. in your case from YA As an individual accorded NOR status, you will be entitled to the tax concession during the NOR period of having your Singapore employment income time apportioned, i.e. as a resident NOR taxpayer who is a Singapore employee you will not be subject to tax on the portion of your Singapore employment income which corresponds to the number of days spent outside Singapore for business reasons. However, to qualify for this concession, as a NOR taxpayer you must meet the following additional conditions: You must spend at least 90 days in the calendar year outside Singapore for business reasons with respect to your Singapore employment. Your total Singapore employment income must be at least $160,000. Once the time apportionment benefit is granted, the amount of tax payable on your time apportioned income must be at least 10% of your total employment income before apportionment, failing which your taxable employment income must be regrossed to an amount to meet this condition. You clearly satisfy the first two conditions given that in 2016 you spent four months outside Singapore for business reasons and your Singapore employment income was $288,

4 Applying the effect of the third condition, the Singapore personal income tax payable by you under the NOR scheme on employment income of $192,000 for the YA 2017 would be $24,980 (see detailed calculation in the Appendix 2 to this letter). Accordingly, application for the scheme would not be beneficial compared to simple time apportionment. Tutorial note: In the case of a taxpayer granted NOR status, who is a non-singapore citizen, the employer s contribution to a non-mandatory overseas pension fund or social security fund is exempt from Singapore tax. I hope the above is useful. Please do not hesitate to contact me if you need further clarifications. Yours faithfully Tax adviser APPENDICES Appendix 1: Personal income tax payable in Singapore for YA 2017 assuming employment income is split on a time basis $ $ Total salary attributable to Singapore employment 192,000 Less personal reliefs: Earned income relief 1,000 Spouse relief (no income) 2,000 NSman relief 1,500 Course fees relief 1,200 Central provident fund contributions ($6,000 x 8 x 20%) 9,600 Parent relief (both parents not living in Singapore) 0 (15,300) Chargeable income 176,700 Tax on first $160,000 13,950 Tax on the next $16,700 at 18% 3,006 Net tax payable 16,956 Appendix 2: Personal income tax payable in Singapore for YA 2017 assuming the NOR scheme is applied $ Singapore employment income (apportioned $288,000 x 8/12) 192,000 Tax on first $160,000 13,950 Tax on the next $32,000 at 18% 5,760 Net tax payable 19,710 Since $19,710/$288,000 is <10%, the 10% floor rate will apply and the apportioned employment income will need to be regrossed. Regrossing calculation: 10% on total employment income of $288,000 = $28,800 Tax payable on $240,000 = $28,750 Therefore, $28,750 + ($X at 19 5%) = $28,800 Solving, X = $256 Regrossed apportioned Singapore employment income ($240,000 + $256) = $240,256. $ $ Final assessable income 240,256 Less personal reliefs: Earned income relief 1,000 Spouse relief (no income) 2,000 NSman relief 1,500 Course fees relief 1,200 Central provident fund contributions ($6,000 x 12 x 20%) 14,400 Parent relief (both parents not living in Singapore) 0 (20,100) Chargeable income 220,156 Tax on first $200,000 21,150 Tax on the next $20,156 at 9% 3,830 Net tax payable 24,980 15

5 2 Orange Pte Ltd (OPL) and Purple Pte Ltd (PPL) (a) Tax implications arising from the transfer of OPL s business and assets to PPL Corporate income tax For income tax purposes, the transfer of a business would ordinarily give rise to a deemed disposal or sale of business. A sale of a business by a company to another company will in turn be treated as a sale of its assets. The tax implications arising from the transfer of a business depends on the actual assets transferred. Singapore does not impose tax on capital gains. Gains from the disposal of shares, businesses and real properties (land and buildings) which could be supportable as capital assets or intended for long-term investment (and not acquired with the intention of resale) are ordinarily regarded as capital gains and not subject to income tax in Singapore, unless the seller is treated as a trader engaged in the business of buying and selling such shares, businesses or real properties. Equipment and other fixed assets Equipment and other fixed assets would ordinarily be transferred at their market value. Where the transfer price is lower than the market value, the Inland Revenue Authority of Singapore (IRAS) will deem the transfer to be effected at the open market value. Consequently, for assets where capital allowances have previously been claimed, a balancing charge or balancing allowance will need to be computed on the disposal or deemed disposal. The former will arise where the sales proceeds are higher than the tax written down value, and the latter where the sales proceeds are lower. A balancing charge is taxable on the transferor at the prevailing corporate tax rate but restricted to the amount of capital allowances previously claimed on the asset. On the other hand, a balancing allowance represents an additional allowance which would reduce the taxable profit of the period. However, as OPL and PPL are both wholly owned subsidiaries of Blue Pte Ltd (BPL), the transfer of fixed assets is between two related Singapore companies under common control. Accordingly, the transfer of fixed assets may be effected at tax written down values regardless of the actual transfer values, provided the companies concerned make a written election under s.24 of the Singapore Income Tax Act. The transfer (sale) must not be a tax avoidance arrangement. Also, the transferred assets must continue to be used by the transferee in the production of the income, and not have been leased to the transferee by the transferor prior to the transfer. None of these restrictions would appear to apply in this case. Where a valid election is made, the transferee can continue the claim for capital allowances which the transferor would otherwise have been entitled to. This avoids any potential clawback of the capital allowances in the books of the transferor. Accounts receivable The accounts receivable (net of allowance for doubtful debts) can be transferred without any tax consequences. However, the collectability of the debts should be reviewed before they are transferred and all known doubtful or bad trade debts should be provided for or written off in the books of OPL (the transferor) prior to their transfer, as a doubtful debt allowance or bad debts write-off will not be tax-deductible for PPL after the transfer. Inventory Under general principles, the transfer of inventory will constitute a deemed sale effected at market value and thus will give rise to a profit in OPL (the transferee). However, where the inventory is sold or transferred for valuable consideration in connection with the discontinuance of a business, to a transferee who is carrying on a trade or business in Singapore and the cost of the inventory will become deductible as an expense of the transferee s (PPL s) business, the inventory may be transferred at book value. As it is intended that PPL will continue to operate the wholesale catering business, this will apply to the transfer and the crystallisation of any profits in OPL (the transferor) will be avoided. Stamp duty Stamp duty is payable on the transfer, assignment and conveyance on sale of immovable properties and of shares by instruments executed in Singapore. There is no stamp duty on the transfer of other movable properties. Unless specifically exempted under the provisions of the Stamp Duties Act, stamp duty is payable by the purchaser based on the higher of the purchase consideration and the market value of the real property. Basic buyer s stamp duty is payable at rates ranging from 1% on the first $180,000, up to 3% on the value over $360,000. Neither additional buyer s stamp duty nor seller s stamp duty will apply because the only immovable property to be transferred is a commercial property. For a transfer of shares in an unlisted company executed in Singapore, stamp duty is payable at the rate of 0 2% on the higher of the consideration or the market value of the shares. Net asset value is used where the market value is not readily available. Stamp duty is not applicable to transfers of shares in either overseas companies or local listed entities. However, a claim for relief from stamp duty may be made in certain circumstances in the case of both transfers of immovable property and unlisted shares between associated companies. PPL should be able to avail itself of this relief under s.15(1)(b) of the Stamp Duties Act, because: OPL and PPL are wholly owned subsidiaries of BPL, and thus satisfy one of the conditions for associated companies, i.e. at least 75% of the voting share capital and more than 50% of the voting rights in both entities are held by a common holding entity. They have been associated for at least 12 months prior to the date of the transfers. 16

6 There are bona fide commercial reasons for the asset transfer, i.e. the streamlining of the operations of the group. All of the beneficial interest in the assets is to be transferred from OPL to PPL. It can be assumed that consideration at least equal to the book value of the assets transferred has been paid (or will be in order to satisfy the requirements for the relief). The claim for relief must be made within 14 days of the execution of an instrument executed in Singapore (30 days if the instrument is executed overseas). Also, the two companies (i.e. OPL and PPL) must remain associated for two years from the date of the instrument, except where the change was due to a reconstruction, amalgamation or liquidation. Goods and services tax (GST) The transfer of assets would ordinarily give rise to a disposal of assets and the transferor (being GST registered) would need to account for GST at 7% on the market value of the assets transferred, unless the transfer qualifies as a transfer of a going concern between two GST registered persons. The transfer of a business (or part of a business which is capable of separate independent operation) as a going concern between two GST taxable persons is treated as neither a supply of goods nor a supply of services for GST purposes, i.e. the transfer will be an out-of-scope supply and GST will not be chargeable on such a transaction. This will apply in OPL/PPL s case because they are both GST registered persons and the assets are to be used by the transferee (PPL) in an existing or new business of the same kind as that carried on by the transferor (OPL). Consolidation of businesses The restructuring will not result in a substantial change in shareholding since the ultimate shareholder, Yellow Corporation Limited, remains unchanged. Therefore, any unutilised tax losses in PPL will be preserved. The unutilised capital allowances will also be preserved since there is no change in trade. (b) Only the wholesale catering business assets are transferred to PPL The corporate income tax and stamp duty implications as per part (a) would also apply in the case of a transfer of selected assets. However, the GST implications would differ because the transfer of certain assets only would not be treated as a transfer of a going concern and so GST at 7% would have to be charged on the market value of the assets transferred by OPL. However, in terms of timing, this will only create a cash flow disadvantage for PPL as it can claim a credit for the input tax paid. (c) Applicability of the mergers and acquisition scheme and the tax framework Mergers and acquisition scheme PPL as the buyer cannot take advantage of the mergers and acquisition scheme as this scheme is only applicable in the case of share acquisitions and not asset acquisitions as contemplated in the current restructuring plan. Tax framework for statutory voluntary amalgamation The Group is also unable to take advantage of the benefits under the new tax framework as the amalgamation will not be a qualifying amalgamation. A qualifying amalgamation must be a statutory voluntary amalgamation, i.e. only one company remains in existence or is formed upon the completion of the amalgamation process, whereas in this case it is proposed that both companies, OPL and PPL, will remain in existence after the disposal of the wholesale catering business and assets to PPL. 3 Hellboy Corporation Limited (HCL) (a) Storage of products in Company X s warehouse By itself, the setting up of a representative office (RO) will not create any goods and services tax (GST) implications. This is because an RO is not allowed to undertake any trading activities and its operations can only relate to marketing and liaison activities. GST is levied on both the import of goods and the supply of taxable goods and services made in Singapore by a taxable person in the course or furtherance of any business carried on by them. HCL will be carrying on a business in Singapore and supplying goods both in Singapore and elsewhere in the South East Asia region. GST registration is compulsory when: a business s taxable turnover for the past four quarters is more than $1 million (unless there is certainty that turnover in the next 12 months will not exceed $1 million); or a business is currently making sales and the taxable turnover in the next 12 months is reasonably expected to be more than $1 million. HCL s annual sales in Singapore are expected to be $1 5 million, therefore, the second (prospective) test will apply and HCL will be required to apply to be GST registered within 30 days of the date on which the liability to register arises. The registration can be done in the name of the RO, as this is the establishment which is closely connected to HCL s sales in Singapore. Once registered, HCL must charge GST (output tax) on all the taxable supplies it makes and will be entitled to claim a credit for any 17

7 GST (input tax) incurred on its own purchases of goods and services. It will also have to file GST returns on a quarterly basis and account for the output tax collected net of any input tax credits it is entitled to claim. Although the sales of goods in Singapore will be subject to GST at the standard rate of 7%, the goods exported to elsewhere in the region will be regarded as zero-rated supplies provided all the necessary documentation to substantiate that the goods have been exported to customers outside Singapore is available. Exports are nevertheless taxable supplies, albeit at a 0% rate, and thus an input tax credit will still be claimable for any GST suffered on the purchases and expenses attributable to such zero-rated supplies. Goods imported into Singapore are subject to GST on their importation, when import GST at the prevailing rate is collected by the Singapore Customs. As a taxable (GST registered) person, HCL will be able to claim back the import GST paid on the goods it imports for business use, in the same way as for the input tax incurred on its other purchases. As an alternative to HCL itself registering for GST, HCL could appoint Company X as its GST agent under s.33(2) of the GST Act. Where this is the case, the GST agent will step into the shoes of the overseas principal and act on its behalf in respect of all GST matters. Accordingly, Company X will be deemed to have imported HCL s products into Singapore and to have made the taxable supplies to HCL s customers both inside and outside Singapore and charged the appropriate output tax thereon. Company X (not HCL) will also be responsible for filing the necessary GST returns and claiming the appropriate amount of input tax credits. (b) Storage of products in Company Y s warehouse Company Y s warehouse is located in the free trade zone (FTZ). For GST purposes, the FTZ falls outside the scope of GST and transactions within the FTZ do not fall within the jurisdiction of GST in Singapore. Therefore, if HCL s products are imported to be stored in Company Y s warehouse in the FTZ, they will not be treated as imported into Singapore for the purposes of Singapore GST and accordingly not subject to import GST. However, when the goods are taken out of the warehouse in the FTZ for delivery to customers, there will be GST implications. In the case of the goods delivered to Singapore customers, Company Y as GST agent for HCL will be regarded as having imported the goods into Singapore and import GST will become payable to the Singapore Customs. In addition, Company Y will have to account for GST at 7% on the value of the supplies made to customers in Singapore, except where the title to the goods passes to a Singapore customer within the FTZ, when there is no requirement to charge output GST on the supplies. Where goods are taken out of Company Y s warehouse in the FTZ for direct export to customers overseas, no import GST will be levied. (c) Corporate income tax implications for HCL An RO operated in Singapore by an overseas entity, being an office, could potentially be treated as a permanent establishment (PE) in accordance with the Singapore Income Tax Act. However, the Inland Revenue Authority of Singapore (IRAS) will not regard an RO as a PE of the overseas entity provided the RO does not engage in trading activities but only carries on the permitted activities, which are restricted to services relating to liaison and marketing functions on behalf of its holding entity (head office). If this condition is satisfied, then the RO should not have any corporate income tax liability in Singapore. On the other hand, if an RO goes beyond the permitted activities, the IRAS may possibly tax the RO as if it actually carries out trading activities in the same manner as it taxes a trading company. The IRAS may also regard an RO as being set up to service its head office overseas in which case it may tax the RO as a service company based on a minimum mark-up of 5% on its total costs. The arrangements which HCL intends to enter into with one of the two third party logistics companies (Company X or Company Y) should not result in any adverse corporate tax consequences for the RO. Both these companies are independent agents and so it is unlikely that HCL will create a PE as a result of these relationships. 18

8 4 Company J (a) Corporate income tax for the year of assessment (YA) 2017 without foreign tax credit (FTC) pooling $ $ Marks Adjusted Singapore sourced trading profit 300,000 Dividend income from Company K (tax exempt) 0 Royalty income from Company L ($36,000 x 100/90) 40,000 Interest income from Company M 10,000 50,000 Chargeable income before partial exemption 350,000 Less: partial tax exemption (152,500) Chargeable income after partial exemption 197,500 Tax thereon at 17% 33,575 Less: foreign tax credits Double taxation relief Dividend from Company K (not applicable) Unilateral taxation relief Royalty income from Company L (Lower of $40,000 x 10% = $4,000 or 40,000/350,000 x $33,575 = $3,837) (3,837) 1 5 Tax sparing relief Interest income from Company M (Lower of $10,000 x 8% = $800 or 10,000/350,000 x $33,575 = $959) (800) ,938 Less: 50% corporate income tax rebate (capped at $20,000) (14,469) Net tax payable 14,469 6 Explanations: Dividend from Company K This dividend income is exempt from tax in Singapore under s.13(8) because: It is a foreign-sourced income since it is paid by Company K which is not resident in Singapore; The foreign income from which it was paid was subject to tax of a similar character to income tax in Country K; The headline tax rate in Country K is at least 15% (30% corporate tax); The tax exemption will be beneficial to Company J. Royalty from Company L This royalty income is taxable in Singapore on the gross amount (before withholding tax). Despite having no double tax treaty with Country L, Singapore will grant unilateral relief for the withholding tax suffered. Interest from Company M This interest income is taxable in Singapore. The tax treaty between Country M and Singapore provides for tax sparing relief for interest income, whereby double tax relief will still be granted on the basis of the foreign tax deemed to have been paid in the other country (i.e. in this case withholding tax at 8%) despite the fact that no foreign tax was paid due to a tax exemption granted by the tax authorities. 19

9 (b) Corporate income tax for YA 2017 with FTC pooling $ $ Marks Adjusted Singapore sourced trading profit 300,000 Dividend income from Company K ($31,500 x 100/90 x 100/70) 50, Royalty income from Company L ($36,000 x 100/90) 40,000 ) Interest income from Company M 10,000 ) 100,000 Chargeable income before partial exemption 400,000 Less: partial tax exemption (152,500) Chargeable income after partial exemption 247,500 Tax thereon at 17% 42,075 Less: foreign tax credits Dividend from Company K and royalty income from Company L Lower of pooled foreign taxes paid or Singapore tax payable on total foreign income from Companies K and L Lower of ($18,500 + $4,000 = $22,500) or $(50, ,000)/400,000 x 42,075 = $9,467 (9,467) 1 5 Tax sparing relief Interest income from Company M (cannot pool, source by source) (Lower of $10,000 x 8% = $800 or 10,000/400,000 x $42,075 = $1,052) (800) ,808 Less: 50% corporate income tax rebate (capped at $20,000) (15,904) Net tax payable 15, Explanations: In the case of FTC pooling, the amount of FTC available is computed on a collective (pooled) basis rather than on a country by country basis. FTC pooling can only be claimed in respect of the dividend and royalty income. It is not permitted to pool income which is exempt from tax in the country of source, i.e. in the case of the interest income from Company M. Company J may, however, choose whether or not to elect for FTC pooling or exemption under s.13(8) for the dividend received from Company K. (c) Based on the calculations in parts (a) and (b) it would be more beneficial for Company J to elect exemption under s.13(8) for the dividend received from Company K in YA 2017, rather than FTC pooling. This will not preclude an application for FTC pooling in future years as the elections for exemption under s.13(8) and FTC pooling or source by source basis, are made separately for each YA. 5 Donny Penny Fenny Pte Ltd (DPF) (a) Inter-relationship between plant and machinery allowances, productivity and innovation credit (PIC) enhanced allowances and investment allowances In general, there is no cap on the quantum of the claim for plant and machinery allowances, assuming the conditions for the claim are satisfied. The claim essentially enables the business to claim the entire 100% of the acquisition cost, usually over a period of one or three years. In addition to claiming the 100% base plant and machinery allowances, businesses can, in addition, claim either the enhanced 300% PIC allowance or the extra prescribed percentage of the acquisition cost under the investment allowance scheme, but not both. To maximise the total claim, a business should normally opt for the PIC enhanced 300% allowance rather than the investment allowance, as the prescribed investment allowance percentage never exceeds 100%, and is usually 30% or 50%. However, the PIC allowance is subject to an annual cap of $400,000 for each of the years of assessment (YAs) 2016 to 2018; or a higher annual cap of $600,000 for the same YAs if the business is an eligible small and medium enterprise (SME). These caps can be combined into a three-year cap of $1,200,000 or $1,800,000 respectively. However, in the event that the cap has been reached and the business can no longer enjoy PIC enhanced allowances, a business s only option for obtaining an additional allowance over and above the 100% plant and machinery allowances is by applying to claim the extra investment allowance. 20

10 (b) (i) Investment allowance account for the period to 30 June 2016 $ Marks Qualifying expenditure Special equipment (operating lease does not qualify) 0 Computer software and accessories (better to claim PIC) Sachet machine (only the three instalments paid in October to December 2014 qualify) 90, Electronic colour separator 90,000 Automatic end sealing machine 60,000 Automatic carboniser (incurred after the end of the qualifying period) Total qualifying expenditure 240,000 Investment allowance at 50% 120, Investment allowance account Investment allowance claimed for the year ended 30 June 2015 (as above) 120,000 Less: amount utilised in YA 2016 (120,000) Balance as at 30 June Less: amount available to be utilised in YA Balance as at 30 June (ii) Corporate income tax for YA 2016 and YA 2017 YA 2016 $ $ Adjusted trade income before capital allowances 1,507,794 Less capital allowances: Special equipment (operating lease no capital allowance) 0 Computer software and accessories (normal 100% plus 300% PIC claim) 880, Sachet machine ($180,000/3) 60,000 Electronic colour separator ($90,000/3) 30,000 Automatic end sealing machine ($60,000/3) 20,000 Automatic carboniser ($30,000/3) 10,000 (1,000,000) 507,794 Less: investment allowance utilised (from (i) above) (120,000) Chargeable income before partial exemption 387,794 Less: partial tax exemption (152,500) Chargeable income after partial exemption 235,294 Tax thereon at 17% 40,000 Less: 50% corporate income tax rebate (capped at $20,000) (20,000) Net tax payable 20,

11 YA 2017 $ $ Marks Adjusted trade income before capital allowances 1,152,500 Less capital allowances: Special equipment (operating lease no capital allowance) 0 Computer software and accessories (balancing charge) (120,000) 1 0 Sachet machine ($180,000/3) 60,000 Electronic colour separator ($90,000/3) 30,000 Automatic end sealing machine ($60,000/3) 20,000 Automatic carboniser ($30,000/3) 10,000 0 Less: investment allowance utilised (from (i) above) 0 Chargeable income before partial exemption 1,152,500 Less: partial tax exemption (152,500) Chargeable income after partial exemption 1,000,000 Tax thereon at 17% 170,000 Less: 50% corporate income tax rebate (capped at $20,000) (20,000) Net tax payable 150,

12 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 2017 Marking Scheme 1 Sulaiman Ahmad Available Maximum (i) Liability to Singapore personal income tax for YAs 2012 to 2016 May have tax liability in Singapore despite formal overseas contract 1 0 Question whether exercising an employment in Singapore 1 0 Basis of taxation for an individual 1 0 Treaty protection may be available 1 0 Conditions to be satisfied to qualify for treaty protection 3 0 Logical conclusion (ii) Liability to Singapore personal income tax for YA 2017 Treaty protection not available, with reason 1 5 Possibility of Singapore tax on full salary 1 0 Need to attribute to different employments 1 0 Apportionment basis Tax computation (iii) Dual employment contract Dual contract assumes two distinct employments 1 0 Consequences of distinguishing Singapore and overseas incomes 1 0 Principles to be adhered to (5 x 1) (iv) Not ordinarily resident (NOR) scheme Basic conditions 2 0 Tests for residence and application 3 0 Benefit under the NOR scheme, including application period 2 0 Additional conditions to qualify for the tax benefits 2 5 Conditions (1) and (2) satisfied (2 x ½) 1 0 Tax computation showing the effect of conditions (3) Professional marks Appropriate format and presentation of the letter 1 0 Structure including relevant headings and use of appendix 1 0 Effectiveness of communication 1 0 Logical flow

13 2 Orange Pte Ltd (OPL) and Purple Pte Ltd (PPL) Available Maximum (a) Tax implications arising from the transfer of OPL s business and assets to PPL General comments re deemed disposal and taxation of gains 2 0 Equipment and other fixed assets: No election 2 0 Election 3 0 Accounts receivable 1 5 Inventory 1 5 Stamp duty: Applicability 3 0 Relief availability and conditions 5 0 Goods and services tax (GST) 2 5 Consolidation of businesses: Losses 1 0 Capital allowances (b) Transfer of assets only Cannot qualify to be treated as a transfer of a going concern for GST 1 5 Other implications the same 2 0 (c) Applicability of mergers and acquisition (M&A) scheme and tax framework Cannot qualify for M&A scheme and reasons 1 5 Cannot qualify for tax framework and reasons Hellboy Corporation Limited (HCL) (a) Goods and services tax (GST) implications arising from arrangement with Company X Setting up of a representative office (RO) has no implications 1 0 Obliged to register, with reason and timing 3 0 Basic principles once registered, output tax, input credit, filing of returns 2 0 Position re exports and imports 2 0 Alternative of appointing Company X as GST agent and effect (b) GST implications arising from arrangement with Company Y Import GST treatment for FTZ area 2 0 Treatment for goods delivered to Singapore customers from warehouse 3 0 Treatment for goods delivered direct to overseas customers (c) Corporate income tax implications for HCL RO is potential permanent establishment (PE) 1 0 No PE if RO only carries on permitted activities 2 0 May have tax exposure if RO engages in trading activities or is a service company 2 0 Dealings with independent agent should not create PE exposure

14 4 Company J Available Maximum (a) Corporate income tax for YA 2017 without foreign tax credit (FTC) pooling Computation (see answer for detailed allocation of marks) 6 0 Explanations: Dividend income 2 5 Royalty income Interest income (b) Corporate income tax for YA 2017 with FTC pooling Computation (see answer for detailed allocation of marks) 5 5 Explanations (c) Advice re election for FTC pooling FTC less beneficial than exemption in YA Elections all on an annual/ya basis Donny Penny Fenny Pte Ltd (DPF) (a) Plant and machinery allowances, productivity and innovation credit (PIC) enhanced allowances and investment allowances (IA) Can claim 100% plant and machinery allowance in all cases 1 0 In addition either PIC or IA but not both 1 0 PIC normally advantageous with reasons 2 0 Circumstances when IA is better (b) (i) IA account Identification of qualifying expenditure (see answer for detailed allocation of marks) 5 0 Movements on IA account (see answer for detailed allocation of marks) (ii) Corporate income tax for YA 2016 and 2017 YA 2016 (see answer for detailed allocation of marks) 5 0 YA 2017 (see answer for detailed allocation of marks)