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 2014 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 Willowstad Pte Ltd (WPL) Tax Adviser Firm s address The directors of WPL Company address 6 June 2014 Dear Sirs I refer to your enquiry on various pertinent Singapore tax issues in relation to your company, Willowstad Pte Ltd (WPL). As requested, I am pleased to advise as follows: (i) Taxability of income Singapore adopts a modified territorial basis of taxation, i.e. taxpayers in Singapore are assessed on income of a revenue nature which is sourced in Singapore and foreign-sourced income which is sourced outside Singapore but received in Singapore. Income is assessed on a preceding year basis. The basis period for any year of assessment (YA) is the financial year ending in the year preceding that YA. The prevailing corporate tax rate for companies is 17%. Although the headline corporate tax rate is 17%, WPL s effective corporate tax rate will be considerably lower after taking into account the tax exemption scheme for new start-up companies, the partial tax exemption scheme for companies and the corporate tax rebate for the YAs 2013, 2014 and 2015; these are discussed below. Tax exemption scheme for new start-up companies (SUTE scheme) Under this scheme, a newly incorporated company which meets the qualifying conditions can claim full tax exemption on the first $100,000 of normal chargeable income and a further 50% exemption on the next $200,000 of normal chargeable income for each of its first three consecutive YAs. The conditions for the SUTE scheme are as follows: the company must be incorporated in Singapore; the company must be a tax resident in Singapore for that YA; and the company must have no more than 20 shareholders throughout the basis period for that YA where: all of the shareholders are individuals beneficially and directly holding the shares in their own names; or at least one shareholder is an individual beneficially and directly holding at least 10% of the issued ordinary shares of the company. A company is resident in Singapore if the control and management of its business is exercised in Singapore. Control and management is generally regarded as exercised at the place where the company s board of directors meets regularly to hold their board meetings where strategic policies are discussed and formulated. The place of incorporation or place of a company s trading activities or physical operations is not necessarily where it is tax resident. WPL is incorporated in Singapore and its shareholders are all individuals. It is carrying on an active business in Singapore and does not fall under the exceptions for the SUTE scheme, i.e. it is not an investment holding or property development company. Therefore, provided it conducts its board meetings in Singapore so as to qualify for tax resident status, WPL should be eligible for the SUTE scheme for each of the first three consecutive YAs. However, WPL will be unable to fully enjoy the tax exemption for three years as its first accounting period of 18 months will be split into two YAs YA 2014 for the period from 2 July 2013 to 31 December 2013 where there is no income and YA 2015 for the year ending 31 December Partial tax exemption scheme for companies In the event that WPL is not eligible for the SUTE scheme and for YAs subsequent to the first three YAs, it will enjoy a partial tax exemption of up to $300,000 of its normal chargeable income as follows: 75% exemption on the first $10,000 of normal chargeable income and a further 50% exemption on the next $290,000 of normal chargeable income. Corporate income tax rebate for companies In addition to the above, WPL will also enjoy a 30% corporate income tax rebate capped at $30,000 for each of the YAs 2013, 2014 and This rebate is granted to all companies and is computed on the tax payable after deducting any tax set-offs. 13

3 Tax incentives available for the organising of business conferences Currently, there are no tax incentives specifically targeted at companies involved in the organising of conferences. (ii) Deductibility of operating expenses WPL should be able to claim a deduction for the operating expenses and outgoings which it incurs in the production of its income subject to the rules of deductibility which are provided for under ss.14 and 15 of the Singapore Income Tax Act (SITA). To qualify for tax deduction, the following conditions must be met: the expenses must be incurred in the production of income during the period in which the income is assessable to tax; the expenses must be revenue in nature; and the deduction must not be statutorily prohibited under s.15 of the SITA The expenses which are statutorily prohibited under s.15 of the SITA include the following: expenses of a domestic or private nature; expenses not wholly and exclusively incurred for the purpose of acquiring the income; expenses which are capital in nature; expenses in relation to the use of private motor vehicles; and goods and services tax (GST) paid or payable by a person required to register under the GST Act, who has failed to do so, or by a person who is entitled under the GST Act to claim the GST as input tax. Administrative concessions for enterprise development Based on the strict interpretation of s.14 of the SITA, expenses incurred prior to the commencement of business (referred to as pre-commencement expenses ) are not deductible for income tax purposes. However, the Inland Revenue Authority of Singapore ( IRAS ) has granted an administrative concession to treat a business as having commenced its operations on the first day of the accounting year in which it earns its first dollar of business receipts. The effect of this concession is that pre-commencement expenses which are revenue in nature which are incurred in the same accounting year will be treated as deductible for income tax purposes. With effect from the YA 2012, the concession for enterprise development was further enhanced by the IRAS to allow a deduction for pre-commencement expenses which are revenue in nature and incurred one year prior to the deemed date of commencement of business. In this regard, WPL s revenue expenses incurred in the financial period from 2 July 2013 to 31 December 2013 can be deducted against the company s profits for the financial year ending 31 December Per diem allowances WPL can claim for per diem allowances paid to its employees provided that the rules of deductibility under ss.14 and 15 of the SITA are satisfied. However, per diem allowances paid to employees are cash allowances and will be considered to be taxable perquisites in the hands of those employees. As an administrative concession, the IRAS has granted exemption on per diem allowances paid to employees which are within the prescribed acceptable rates published by the IRAS annually. Any per diem allowances given in excess of the prescribed rates will not be deductible for the company and, in addition, they will be taxable in the hands of the employees. Productivity and innovation credit (PIC) scheme The objective of the PIC scheme is to encourage businesses to invest in the following activities to innovate and improve productivity: the acquisition or leasing of PIC information technology (IT) and prescribed automation equipment; the acquisition and in-licensing of intellectual property rights; the registration of patents, trademarks, designs and plant varieties; research and development (R&D) activities; the training of employees; and the design projects approved by the Design Singapore Council. The tax benefits under the PIC, effective for YAs 2011 to 2015, allow businesses to enjoy enhanced deductions/allowances at 300% of the qualifying expenditure on each of the six qualifying activities listed above, subject to an expenditure cap for each activity of $400,000, in addition to the deductions/allowances allowable under the current income tax rules. The combined expenditure cap for each activity for the YAs 2013 to 2015 is, therefore, $1,200,000. Eligible businesses may also, subject to certain conditions, opt for a cash payout (i.e. to convert the qualifying expenditure of up to $100,000 for each qualifying YA at a conversion rate of 60% for the YAs 2013 to 2015). One of the conditions for the cash conversion is that the company must employ at least three local employees (i.e. Singapore citizens or permanent residents excluding sole proprietors, partner under contract for service and shareholders who are directors of the company) with CPF contributions in the last month of its basis period for the qualifying YA. For quarterly application which is available for YAs 2013 to 2015, the relevant month for determining the three local employees is the last month of the quarter or combined consecutive quarters to which the cash payout option relates. 14

4 For the YAs 2013, 2014 and 2015, businesses may also enjoy a PIC bonus, i.e. a dollar-for-dollar matching cash bonus subject to an overall combined cap of $15,000 over the three-year period. This cash bonus is given on top of the existing 400% tax deductions/ allowances and/or 60% cash payout. To be eligible for the PIC cash bonus, WPL must have: incurred at least $5,000 in qualifying expenditure, net of subsidy during the basis period for the YA in which a PIC bonus is claimed; an active business; and at least three local employees with CPF contributions (as defined above). Training includes both internal and external training. For internal training expenditure to qualify for the PIC, the training must have been conducted on one of the following qualifying training programmes: an accredited Workforce Skills Qualification (WSQ) training course by a WSQ in-house training provider; a structured Institute of Technical Education (ITE) course by an approved training centre (ATC); on-the job training by a Certified On-the-Job Training Centre (COJTC); or any other in-house training courses prescribed by the Minister for Finance by regulation. For non-qualifying internal training expenses, a cap of $10,000 is applicable for the YAs 2012 to Based on the $50,000 spent on training for the year 2014, WPL will be entitled to claim a total deduction of $200,000 comprising a 100% base claim and another 300% enhanced claim under the PIC. It is not entitled to claim the PIC bonus or the alternative PIC cash payout of 60% as it does not employ at least three local employees. (iii) (iv) Goods and services tax (GST) issues GST is a consumption tax 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. A person is required to be registered for GST purposes and charge GST if the taxable turnover of the business exceeds $1 million. A company is required to register for GST when: the company s taxable turnover (i.e. standard rated and zero rated supplies) for the previous four quarters is more than $1 million; or the company is making or intends to make taxable supplies and the company can reasonably expect its taxable turnover in the next 12 months to be more than $1 million. Business turnover for the previous four quarters is determined at the end of any quarter and consists of the total value of the turnover in that quarter and the previous three quarters, where quarter refers to a period of three months ending on the last day of March, June, September or December respectively. If a company s turnover exceeds $1 million as defined above, it is required to charge GST on its taxable supplies and account for the GST charged to the Singapore tax authorities on a quarterly basis. As a corollary, the company will also be able to make a claim for the allowable input GST expenses which it incurs. In the event that a company is not required to register for GST but still wishes to claim the allowable input GST expenses which it incurs, it may consider registering for GST on a voluntary basis. However, as WPL s annual turnover is expected to be $1 5 million, the issues relating to voluntary registration will not be relevant. As WPL s current business activities all relate to the provision of business conferences outside Singapore, its supplies will be zero rated for GST purposes. In such circumstances as the company will also have minimal local spending and is unlikely to incur substantial input tax, WPL may apply to the IRAS to be exempt from GST registration. Upon the approval of the IRAS, the company will be exempt from registering for GST. However, in the event that there is a material change in the nature of the supplies made by the company, WPL is duty-bound to inform the IRAS of this: within 30 days of the date on which the material change occurs; or if no particular day is identifiable as the day on which the material change occurs, within 30 days of the end of the quarter in which the material change occurs. Therefore, should WPL commence to provide conferences in Singapore, such that there is a material alteration in the proportion of taxable supplies which are zero rated in any quarter, it must notify the IRAS within 30 days of the end of that quarter. Personal income tax issues relevant to the two executive directors Basis of taxation for individuals An individual resident in Singapore is subject to tax on all locally sourced income. Foreign-sourced income received in Singapore or remitted to Singapore by a resident individual (except through a partnership in Singapore) is exempt from tax. An individual not resident in Singapore is only taxed on income locally sourced in Singapore. Residence tests The residence status of an individual is defined in s.2 of the SITA. Two tests (i.e. the qualitative and quantitative test) will determine whether an individual is resident in Singapore for income tax purpose. The tests are: 15

5 Qualitative test The individual s normal place of dwelling/residence is in Singapore except for temporary absence. Quantitative test 1. The individual is physically present for 183 days or more during the year preceding the YA; or 2. The individual is exercising employment in Singapore for 183 days or more during the year preceding the YA. The employment test is not applicable to non-executive directors as they are not considered to be exercising employment in Singapore. To determine the residence status of such a director, the physical presence test is to be applied. An individual who does not meet both the qualitative and quantitative tests will be regarded as a non-resident of Singapore for income tax purposes. However, the individual may still rely on the administrative concessions granted by the IRAS to be regarded as a tax resident of Singapore. Administrative concessions In the event that the an individual fails to satisfy both the qualitative and quantitative tests described above, the individual may still be regarded as a tax resident for income tax purposes under one of the following two administrative concessions granted by the IRAS: (1) The three-year administrative concession Under this concession, an individual will be regarded as a tax resident for all three years if he is present or exercising employment in Singapore for three consecutive years. The concession will apply even though the number of days in the first and third year is less than 183 days. (2) The two-year administrative concession Under this concession, an individual will be regarded as a tax resident for the two years if he is present or exercising employment for a continuous period of at least 183 days within that period. Advantages of being regarded as tax resident Tax residents of Singapore are subject to tax at graduated scales ranging from 0% to 20%. Non-residents, on the other hand, are subject to tax at a flat rate of 20% (or in the case of employment income 15% or what a resident tax resident would pay, whichever is the higher). Tax residents are also entitled to claim personal reliefs, subject to conditions, against their assessable income to arrive at the income which is chargeable to tax. Some of the more common reliefs available to expatriates are earned income relief, life insurance relief, supplementary retirement scheme relief and course fees relief. As they have been issued with employment passes, it is assumed that WPL s two directors hold executive as opposed to non-executive appointments with the company. Therefore, they will most probably be regarded as tax residents in Singapore on the basis of the two statutory tests, or if this is not the case, under the terms of one or other of the two administrative concessions. Furthermore, considerable tax advantages are likely to accrue from being treated as tax residents. However, more detailed information as to each of their individual circumstances will be needed to confirm this. We hope the above advice is helpful to you. Should there be any questions or further advice you require, please contact me. Yours sincerely Tax Adviser 2 Jack and Susan (a) Tax implications arising from Option 1 Prior to the gift, Jack was liable to pay Singapore tax on the full amount of the rental income from the Singapore condominium. Susan derived only foreign-sourced rental income which is subject to tax in Country A only. She is not taxed in Singapore on this foreign income even when it is remitted to Singapore, as all foreign income is exempted from Singapore tax in the hands of an individual. As a gift, Jack s transfer of a half share in the Singapore condominium to Susan should not trigger any potential income tax even if the market value of the condominium has risen considerably from This is despite the short holding period and his track record of buying and selling Singapore residential properties. However, the transfer will attract buyer s stamp duty of $24,600 (3% of $1,000,000 less $5,400) as well as additional buyer s stamp duty of $150,000 (15% of $1,000,000) for Susan. Susan is a foreigner so the applicable additional buyer s stamp duty rate on 1 January 2014 will be 15%. There is no seller s stamp duty payable by Jack as he bought the property in 2009 before the introduction of seller s stamp duty. Given the high stamp duty cost of $174,600, the income tax savings must exceed this amount in order for the transaction to be regarded as tax efficient overall, whereas in fact no income tax savings will be achieved from the transaction. 16

6 Although the original idea of splitting the rental income was to achieve lower marginal tax rates, the planned savings are negated by the non-deductibility of the mortgage interest. The new bank loan will be taken out to repay an existing loan and is therefore capital in nature and not deductible. The couple will also be unable to avail themselves of the administrative concession for refinanced loans as this is applicable only for genuine commercial reasons. The loan refinancing does not achieve an overall reduction in the cost of finance (since the facts show that the interest costs will be higher with the new loan) nor is it due to the financial problems of the borrower. Susan will also not be able to claim working mother child relief as this relief if applicable is based on 15% of earned income, but Susan s only income is rental income which does not come under the definition of earned income. (b) Computation of income tax liabilities for the year of assessment 2015 before and after the gift (assuming current legislation continues to apply) Jack Susan Jack Joint owner Joint owner Total Sole owner $ $ $ $ Property in Country A Net rental income (foreign income not taxable) 0 Condominium in Singapore Net rental income before loan interest [10,000 x 12] 60,000 60, ,000 Less: loan interest [3,000 x 12] 0 0 (36,000) 60,000 60,000 84,000 Less: personal reliefs Earned income relief Spouse relief 0 Child relief (4,000) (4,000) WMCR 0 Supplementary retirement scheme (12,000) (12,000) 48,000 56,000 68,000 Tax on first $40, Tax on next $8,000 at 7% 560 Tax on next $16,000 at 7% 1,120 Tax on next $28,000 at 7% 1,960 1,110 1,670 2,780 2,510 Tutorial note: If there is no transfer of the half-share to Susan, there will be neither the necessity to convert the loan to a joint one nor would it be in the couple s interest to do so. Thus, the loan interest deduction for Jack should be based on the interest payable on the original loan of $3,000 per month. (c) Tax implications arising from Option 2 The stamp duty payable on the transfer of the entire condominium from Jack to the company will be double that payable under option 1 because the consideration will be higher ($2 million instead of $1 million). The total stamp duty payable will therefore be $354,600, comprising buyer s stamp duty of $54,600 (3% of $2 million less $5,400) and additional buyer s stamp duty of $300,000 (15% of $2 million). As stated in part (a), no seller s stamp duty will be payable by Jack. Instead of a prima facie gift, the transfer of the condominium to a company is likely to be treated as a deemed sale. As such, there would now be a potential income tax exposure for Jack on any gains derived from the sale given the short holding period and Jack s track record of buying and selling Singapore residential properties. One possible advantage of setting up a company is the potential full tax exemption available on the first $100,000 of normal chargeable income. However, from 26 February 2013, a company whose principal activity is that of developing properties for sale, for investment, or for both investment and sale is no longer eligible for this exemption. This exclusion will certainly applicable to the proposed new company. In conclusion, the setting up of a company is inefficient for tax purposes, given the additional stamp duty and income tax liabilities. 17

7 3 Fundamental Trading Pte Ltd (FTPL) (a) (i) Tax liability for the year of assessment 2014 (assuming FTC pooling is not elected) $ $ Adjusted trading profit 297,500 Add: Interest from Country X ($85,000/85%) 100,000 Royalty income from Country X ($72,000/90%) 80,000 Interest from Country Y ($9,500/95%) 10,000 Royalty income from Country Y ($11,000/88%) 12, , ,000 Less: partial tax exemption (152,500) Chargeable income 347,500 Tax at 17% 59,075 Singapore effective tax rate (SETR) = % (i.e. 59,075/500,000) Less: foreign tax credits: Interest from Country X (lower of 15% or % x $100,000) 11,815 Royalty income from Country X (lower of 10% or % x $80,000) 8,000 Interest from Country Y (lower of 5% or % x $10,000) 500 Royalty income from Country Y (lower of 12% or % x $12,500) 1,477 (21,792) 37,283 Less: 30% corporate income tax rebate (capped at $30,000) (11,185) Net tax payable 26,098 (ii) Tax liability for the year of assessment 2014 (assuming FTC pooling is elected) $ Tax at 17% (as before) 59,075 Less: foreign tax credits: Lower of: Pooled foreign taxes of $25,000 (i.e. $15,000 + $8,000 + $500 + $1,500) or Pooled Singapore tax payable on total foreign income of $23,925 (i.e % of $202,500) (23,925) 35,150 Less: 30% corporate income tax rebate (capped at $30,000) (10,545) Net tax payable 24,605 (b) Under the source-by-source and country-by-country basis of computing foreign tax credits (FTC), any unrelieved foreign tax for any item of foreign income which is subjected to a foreign income tax rate higher than the Singapore effective tax rate (SETR) is wasted. Any item of foreign income which is subject to a foreign income tax rate lower than the SETR suffers incremental Singapore tax. FTC pooling results in lower Singapore tax than the source-by-source and country-by-country basis of computing foreign tax credits because pooling of the credits allows the Singapore resident company to effectively average out the foreign tax rates with respect to the SETR. This averaging takes place so long as some foreign tax rates are higher, and others lower, than the SETR. If every item of foreign income is subject to a foreign tax rate higher than the SETR, then the FTC pooling results in the same position as the source-by-source and country-by-country basis of computing foreign tax credits (FTC), as no averaging can take place in that situation. 4 Prominence Consulting Pte Ltd (PCPL) and Prominence Consulting Hong Kong Ltd (PCHKL) Income tax implications Based on the venues of the board of directors meetings, PCPL is likely to be regarded as a tax resident of Singapore, whereas PCHKL is likely to be regarded as a non-tax resident of Singapore. A company is resident in Singapore if the control and management of its business is exercised in Singapore. Control and management is generally regarded as exercised at the place where the company s board of directors meets regularly to hold their board meetings where strategic policies are discussed and formulated. The place of incorporation or place of a company s trading activities or physical operations is not necessarily where it is tax resident. 18

8 Under s.12(7)(b) of the Singapore Income Tax Act (SITA), any payment for the rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information is deemed to be sourced in Singapore where the payment is borne by a person resident in Singapore or by a permanent establishment in Singapore, or is deductible against any income accruing in or derived from Singapore. However, under s.12(7a) of the SITA, where the services are performed entirely outside Singapore, then s.12(7)(b) does not apply and accordingly Singapore withholding tax would also not be applicable. Where withholding tax is applicable, under s.45a of the SITA, the payer is obliged to withhold tax at the prescribed rate of 17% on the gross consultancy fees paid to non-residents and settle it with the Inland Revenue Authority of Singapore (IRAS) by the 15th day of the second month following the date of payment to the non-resident. Failure to comply with the withholding tax provisions will attract a non-deductible penalty of up to a maximum of 20% of the withholding tax not paid over to the IRAS. A payment is deemed to have been paid when the amount is reinvested, accumulated, capitalised, carried to any reserve or credited to any account however designated or otherwise dealt with on behalf of the non-resident. The date of payment is defined as the earliest of the following dates: when payment is due and payable based on the agreement/contract; when payment is credited to the account of the non-resident (reinvested, accumulated, capitalised or carried to any reserve) or any other account however designated; and the date of actual payment. The 17% withholding tax suffered is not a final tax. The non-resident is able to file a tax return for the income to be taxed on a net basis, i.e. after claiming all tax-deductible expenses and, in the process, seek a refund for the tax withheld in excess of the eventual tax liability. As a tax resident, the consultancy fees charged by PCPL to Rapid Services Pte Ltd (RSPL), the Singapore client, will not be subject to Singapore withholding tax. However, PCHKL will suffer Singapore withholding tax on the consultancy fees charged to a Singapore customer at the prevailing corporate tax rate of 17%, unless PCHKL is providing the services from outside Singapore. Goods and services tax (GST) implications Services are regarded as being supplied in Singapore if the supplier belongs in Singapore. Where the supplier belongs is based on the location of the business establishment which provides the services or which is directly connected with the supply of the services. As PCHKL does not have a business establishment in Singapore, it should belong outside Singapore, and accordingly a supply of services by PCHKL should not be liable to GST in Singapore. However, the provision of consultancy services by PCPL in Singapore will be a standard supply which is subject to GST at the rate of 7%. Structure 1 Under Structure 1, the work performed by PCHKL outside Singapore should not be considered as Singapore sourced income and accordingly should not attract Singapore withholding tax, i.e. RSPL can pay the fees in full, without having to withhold any tax. As PCHKL does not have a business establishment in Singapore, it has no obligation to collect output GST of 7% from RSPL on the services it provides outside Singapore. However, should PCHKL provide any consultancy services in Singapore, such income is deemed sourced in Singapore as it is paid by a Singapore entity (RSPL) to a non-resident of Singapore. In this case, RSPL will have to withhold tax at 17% and pay only the net amount of 83% to PCHKL. This withholding tax suffered is not a final tax and PCHKL is able to file a tax return for the income to be taxed on a net basis. As PCHKL s services provided in Singapore are not attributable to a business establishment in Singapore, output GST is again not applicable. Should PCHKL decide to subcontract the work performed in Singapore to PCPL, then PCPL will be deriving Singapore sourced income which is subject to Singapore corporate income tax. Withholding tax will still be applicable when RSPL pays the consultancy fees to PCHKL. As PCPL is registered for GST in Singapore, it will have to collect output GST of 7% when it charges its fees to PCHKL. This GST cost is irrecoverable if PCHKL is not a taxable person for GST purposes in Singapore. Structure 2 Under Structure 2, the work performed by PCPL both in and outside Singapore will not attract Singapore withholding tax and RSPL can pay the fees in full without having to withhold any tax. For corporate income tax purposes, the entire income should normally be subject to Singapore tax, notwithstanding that part of the work is performed outside Singapore. This is assuming that the work done outside Singapore is not attributable to a fixed place of business located outside Singapore. As PCPL is GST-registered in Singapore, it has an obligation to collect output GST of 7% from RSPL on the services rendered. However, should PCPL decide to subcontract the work performed outside Singapore to PCHKL, then PCHKL will be deriving Hong Kong sourced income which is subject to profits tax in Hong Kong. There is no Singapore withholding tax when RSPL pays the fees for the consultancy services to PCPL. There is also no withholding tax when PCPL pays PCHKL for the latter s services, assuming they are rendered outside Singapore. 19

9 There are also no Singapore GST implications on the payment of the fees from PCPL to PCHKL, since PCHKL has no business establishment in Singapore. Conclusions on the more tax efficient structure From the perspective of Prominence Consulting Group s Singapore tax efficiency, Structure 2 is preferred to Structure 1, as under this Structure 2, PCHKL will avoid the additional GST and withholding tax burden which arises in the case of Structure 1. 5 Spectrum Asia Pte Ltd (SAPL) and Magnus Asia Pte Ltd (MAPL) (a) Availability of tax loss items for both entities The prior years unabsorbed trade losses and capital allowances accumulated by both of SAPL and MAPL are potentially available to be carried forward indefinitely to set off against the future assessable income of each respective company in subsequent years of assessment. The carry forward provisions are subject to the shareholders continuity test (for unabsorbed trade losses and capital allowances) and business continuity test (for unabsorbed capital allowances) being met. To pass the shareholders continuity test, there must be no substantial (defined as more than 50%) change in the company s ultimate shareholders and their shareholdings as at certain relevant dates. The relevant dates are as follows: For unabsorbed trade losses The last day of the year (i.e. 31 December) in which the loss was incurred; and the first day of the year of assessment (i.e. 1 January) in which the loss would otherwise be deductible. For unabsorbed capital allowances The last day of the year of assessment (i.e. 31 December) in which the capital allowances arose; and the first day of the year of assessment (i.e. 1 January) in which the capital allowances would otherwise be available. The shareholders continuity test requires that the same shareholders (shares held either directly or beneficially) at both relevant dates must own at least 50% of the company s total number of issued shares. If this test is not satisfied, the unabsorbed losses and capital allowances would be disregarded permanently unless a waiver of this test is obtained. Where a company with unabsorbed losses and capital allowances is a subsidiary, the shareholders and the shareholdings of its ultimate holding company have to be examined to determine whether the test is satisfied. The Comptroller normally requires a certificate from the external auditors to confirm that there has been no such change as at the relevant dates. A company may seek a waiver of the shareholders continuity test from the tax authorities if it can be proven to the satisfaction of the authorities that the substantial change in shareholdings was due to genuine commercial reasons and was not tax motivated. In practice, the tax authorities look at a number of factors before concluding if the shareholding change was tax driven. An additional condition for the utilisation of unabsorbed capital allowances is that the company continues to carry on the same trade in respect of which the allowances arose (referred to as the business continuity test). Unlike the shareholders continuity test, there is no waiver of the business continuity test. In the case of MAPL, a substantial change in the shareholdings of its ultimate holding company would have occurred in May 2010, at the time of its acquisition by the Spectrum Magnus Group. Therefore, the utilisation of the unabsorbed losses which arose prior to the financial year ended 2010 would not meet the shareholders continuity test. Additionally, if there has been a change in the nature of the trade of MAPL subsequent to the acquisition, the future utilisation of those unabsorbed capital allowances would potentially also fail the business continuity test. In the case of the shareholders continuity test, the company may be able to seek a waiver of the test if it can prove to the satisfaction of the tax authorities that the acquisition and the resulting substantial change in shareholdings were for genuine commercial reasons and not tax motivated. As stated above, there is no waiver in the case of a failure of the business continuity test. Unfortunately, the prior years unabsorbed losses and capital allowances of one entity are not available for transfer to another entity under the group relief system as such transfers are only allowed for current year unabsorbed trade losses and capital allowances. Similarly, the carry-back provisions are only applicable to current year unabsorbed trade losses and capital allowances. Even if both the shareholders continuity test and the business continuity test are met, these unutilised loss items are only useful if there are future profits accruing to each entity. Should the Group proceed with its plans to consolidate both activities within one entity, then it will require an ordinary business transfer (i.e. asset deal) whereby the business of one entity is transferred to the other entity. The selling entity under such circumstances will not be able to transfer its unabsorbed losses and capital allowances to the buying entity. In other words, the loss items continue to reside with the selling entity and will be forfeited should the entity subsequently be liquidated. Therefore as between the two entities, it would be better to liquidate MAPL. This is because although the loss items for MAPL are higher at $2 6 million compared to $2 2 million for SAPL, $1 8 million of MAPL s unabsorbed trade losses are no longer 20

10 available for carry forward due to the previous acquisition in May 2010, unless a waiver of the shareholders continuity test can be obtained. (b) Effect of the new tax framework and the use of a statutory voluntary amalgamation Under a statutory voluntary amalgamation, two companies are essentially amalgamated into one surviving entity. To facilitate such corporate amalgamations, a new tax framework gives tax effect to qualifying amalgamations as if there is no cessation of the existing businesses by the amalgamating companies (and hence no acquisition of new businesses by the amalgamated company) and all risks and benefits which existed prior to the merger are transferred and vested in the amalgamated company. In other words, qualifying amalgamations will be treated as a continuation of the existing businesses of the amalgamating companies by the single amalgamated company. On the date of amalgamation, the amalgamated company would be treated as having stepped into the shoes of the amalgamating companies and continued with the businesses seamlessly. The tax framework ensures that most of the tax consequences of a continuing business will apply to the amalgamated company. This also extends to the unabsorbed losses and capital allowances of the amalgamating companies. Hence, whilst an ordinary business transfer will likely lead to the forfeiture of the prior years loss items of the amalgamating entities, an amalgamation will potentially result in such loss items being carried forward to the amalgamated entity. There are two possible scenarios here: Scenario 1 In the case where the surviving company is utilising its own unabsorbed tax losses and capital allowances which arose before the amalgamation, the eligibility of utilisation of these items by it will continue to be governed by the shareholding test and additionally in the case of unabsorbed capital allowances, the business continuity test. In the event that a substantial change in shareholding occurs upon amalgamation, it is possible to apply for a waiver of the shareholding test for a qualifying amalgamation which is not motivated by tax reasons and undertaken for commercial reasons. Scenario 2 The utilisation of unabsorbed tax losses and capital allowances across entities will be allowed if the amalgamation is undertaken for genuine commercial reasons and is not tax motivated. The following conditions apply: 1. The amalgamating company from which the unabsorbed tax loss items were transferred must be carrying on a trade or business up to the point of amalgamation. 2. The amalgamated company must continue to carry on the same trade or business on the date of amalgamation as that of the amalgamating company from which the unabsorbed tax losses and capital allowances were transferred. 3. The shareholder s continuity and business continuity tests must be met. In the event that condition (3) is not satisfied, the amalgamated company may apply to the tax authorities for a waiver of the shareholding test. In addition, the unabsorbed tax loss items can only be set off against the income of the amalgamated company from the same trade or business as that of the amalgamating company. It is worth noting that given the more restrictive conditions of Scenario 2, it may be more advantageous from a tax standpoint to ensure that the company with the greater amount of unabsorbed losses and capital allowances (i.e. SAPL) continues as the surviving amalgamated entity in the event that the necessary conditions under Scenario 2 cannot be met. Administrative procedure For the purposes of applying the abovementioned tax framework for qualifying amalgamations, the amalgamated company is required to make an election in writing to the tax authorities to apply the new income tax framework within 90 days from the date of the qualifying amalgamation. 21

11 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2014 Marking Scheme 1 Willowstad Private Limited (WPL) Available Maximum (i) (ii) (iii) Taxability of income derived Modified territorial basis of taxation in Singapore 1 0 Preceding year basis 0 5 Effective corporate tax rate lower than headline rate 1 0 Start-up tax exemption (SUTE) scheme 3 0 WPL can enjoy SUTE but not for the first six months 1 5 Partial tax exemption % corporate income tax rebate 1 0 No special tax incentives for the organising of business conferences Deductibility of operating expenses Conditions for claiming a deduction 1 0 Examples of expenses statutorily disallowed 0 5 Administrative concessions for enterprise development 1 5 Effect on WPL 0 5 Deductibility rules for per diem allowances 1 0 Enhanced deductions under PIC scheme 2 0 PIC cash payout 1 5 PIC bonus 1 0 Special rules for claiming PIC for training 1 5 Application to WPL: $200,000 deduction but not PIC cash payout or PIC bonus Goods and services tax (GST) issues General GST supply rules 0 5 Conditions to satisfy for GST compulsory registration 2 0 Option of voluntary registration not relevant to WPL 1 0 WPL should apply for exemption from GST registration 2 0 Obligations to inform Comptroller of any material change (iv) Personal income tax issues Territorial basis of taxation in Singapore 1 0 Statutory resident status tests 2 0 Administrative concessions 2 0 Advantages of being regarded as tax residents 1 5 Application to WPL s two directors Appropriate format and presentation of the letter 1 0 Structure including relevant headings 1 0 Effectiveness of communication 1 0 Logical flow

12 2 Jack and Susan Available Maximum (a) Tax implications arising from Option 1 Jack is taxed on full share of net rental income from condominium 0 5 Susan is not taxed on foreign rental income 1 0 Jack will not be taxed on the gift of half share 1 5 Buyer s stamp duty and additional buyer s stamp duty for Susan 2 0 No seller s stamp duty for Jack 1 0 Interest for new joint loan not deductible 2 0 Susan cannot claim working mother child relief 1 0 Conclusion that this is not tax efficient due to additional income tax and stamp duty (b) Computations Rental income from property in Country X not taxable 0 5 Gross rental income from Singapore 1 0 Deductibility of loan interest 1 0 No earned income relief 0 5 No spouse relief 1 0 Child relief 1 0 No WMCR 0 5 Supplementary retirement scheme 1 0 Tax liabilities (c) Tax implications arising from Option 2 Higher buyer s stamp duty and additional buyer s stamp duty for company 1 0 Calculation of duty payable by buyer 0 5 Confirmation that still no seller s duty for Jack 0 5 Income tax exposure for Jack on deemed sale 2 0 New company cannot qualify for the start-up tax exemption scheme 2 0 Conclusion that this proposal is not tax efficient Fundamental Trading Pte Ltd (FTPL) (a) (i) Adjusted trading profit 0 5 Taxable income for each income source (4 x 1 mark) 4 0 Partial exemption 0 5 Singapore effective tax rate 1 0 Foreign tax credit for each income source (4 x 1 mark) 4 0 Corporate income tax rebate 1 0 (ii) Tax before claiming foreign tax credits (as in (i)) 0 5 Lower of pooled foreign taxes and pooled Singapore tax payable 3 5 Corporate income tax rebate 1 0 (b) Explanation of why pooling method is more beneficial 2 0 Explanation of when pooling method produces the same outcome

13 4 Prominence Consulting Pte Ltd (PCPL) and Prominence Consulting Hong Kong Ltd (PCHKL) Available Maximum Pertinent income tax implications Resident status for PCPL and PCHKL 1 5 Consultancy fees deemed sourced in Singapore 1 0 Fees not deemed sourced in Singapore if provided from outside Singapore 1 0 Withholding tax applicable rate, due date and potential penalty for late payment 2 0 Definition of date of payment 1 0 Withholding tax not final and option to file tax return 1 0 Conclusion on applicability to PCPL and PCHKL Pertinent GST implications Definition of services supplied in Singapore 1 0 Application to PCPL and PCHKL 1 0 Analysis of Structure Analysis of Structure Conclusion as to preferred structure Spectrum Asia Pte Ltd (SAPL) and Magnus Asia Pte Ltd (MAPL) (a) Availability of tax loss items for both entities Prior years loss items for both entities can be carried forward indefinitely 1 0 Application of shareholding test and relevant dates 3 0 Possibility of waiver of shareholding test 1 0 Business continuity test (no waiver) 1 0 Unabsorbed losses for MAPL prior to acquisition fail shareholding test 2 0 Group relief and carry-back provisions only for current year loss items 1 0 Potential forfeiture of loss items if one company is liquidated 1 0 Better to liquidate MAPL (b) New tax framework for statutory voluntary amalgamation Explanation of the term statutory voluntary amalgamation and its tax impact 2 0 Preservation of losses under the new tax framework 1 0 Scenario 1 for transfer of loss items within a surviving entity 1 0 Scenario 2 for transfer of loss items across entities 3 0 Identify SAPL as surviving entity if Scenario 2 conditions not satisfied 1 0 Administrative procedures