Professional Level Options Module, Paper P6 (SGP)

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2 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 2016 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 Unique Bakery Singapore Pte Ltd (UBSPL) The Board of Directors of UBSPL Company address 1 December 2014 Dear Sirs Tax Adviser Firm s address We refer to your request for advice on various Singapore tax matters relating to your company, Unique Bakery (Singapore) Pte Ltd (UBSPL), and are pleased to set out our comments below: (i) Deductibility of interest expenses and transfer pricing concerns UBSPL would incur annual interest of $1 6 million for the loan of $20 million. Generally, the interest expense incurred on capital employed in acquiring income chargeable to tax is allowable against the income earned. Similarly, where a borrowing is used to finance a capital asset and the asset is employed in acquiring taxable income, the interest expense incurred in respect of the borrowing applied to acquire the income would be deductible against the taxable income earned. Since the loan proceeds are to be used for specific purposes, the deductibility of the interest expense of $1 6 million will depend on the utilisation of these proceeds. The $2 million to be utilised to acquire the latest kitchen equipment is applied to acquire assets which are employed in the company s bakery business. Since it is incurred for the production of income for the bakery business, the attributable interest of $0 16 million is eligible for a tax deduction against UBSPL s trade income. The interest attributable to the $3 million to be used to take up the share capital of Fragrance Catering Pte Ltd (FCPL) is related to the equity investment and thus, to any income arising from that investment. As FCPL is expected to be immediately profitable, it is envisaged that there will be dividends distributed to UBSPL in the near future. However, being a Singapore tax resident company, FCPL will be distributing one-tier dividends which will be exempt from tax in the hands of UBSPL. Therefore, although the attributable interest expense of $0 24 million will be deductible, it has no deduction value since it can only be claimed against this tax-exempt dividend and not against any other income. As for the $7 million to be used to take up the share capital of Wasabe Pudding Ltd (WPL) in Country W, the attributable interest expense of $0 56 million will similarly be deductible against any income arising from the investment and this would be beneficial in the event that the foreign dividends which are remitted to Singapore are taxable. However, again as above, the interest will have no deduction value to the extent that it is claimed against foreign dividends which are exempt from tax when remitted to Singapore. Foreign-sourced dividends are exempt from Singapore income tax under the foreign-sourced income exemption (FSIE) scheme, provided the following conditions are all met: in the year the foreign income is received in Singapore, the headline tax rate of the foreign country from which the income is remitted is at least 15%; and the foreign income has been subject to tax in the foreign country from which it was remitted; and the Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore. Country W s headline tax rate is 20%, so the first condition is satisfied. To meet the second condition, there must be underlying tax paid in Country W on the income out of which the dividends are paid. Therefore, the second condition would appear to be met so long as the dividends are paid out of profits which have suffered corporate tax.. The third condition is generally not a concern as it is included to give the taxpayer an option to opt out of the exemption if it is more beneficial to do so. This may happen if UBSPL can claim a higher foreign tax credit by subjecting the foreign dividends to tax under the foreign tax credit pooling method, even though it qualifies for tax exemption under the FSIE scheme. Due to the uncertainty on whether the second or third conditions may be met, there is a possibility that the foreign dividends may not qualify for exemption under the FSIE scheme and when this happens, the interest expense will have deduction value. The $8 million utilised to provide the two separate loans of $4 million each to FCPL and WPL will in turn produce interest income. Therefore, the total interest incurred of $0 64 million will be prima facie eligible for tax deduction as the interest expense is wholly and exclusively incurred to produce the interest income. However, UBSPL, FCPL and WPL are all related parties, given that both FCPL and WPL are wholly-owned subsidiaries of UBSPL. Accordingly, the transfer pricing rules in Singapore must be addressed. The loan extended to FCPL is a related domestic loan. On the premise that UBSPL is not in the business of borrowing and lending, it does not need to determine the interest rate it charges FCPL based on an arm s length basis. However, the IRAS 15

3 will apply an interest restriction in place of the arm s length methodology by restricting the claim for deduction for the interest expense to the interest charged on the loan. As UBSPL only charges FCPL $0 24 million, its claim for deduction for the interest expense of $0 32 million will be limited to $0 24 million. The loan extended to WPL is a cross border loan as WPL is a foreign related party. The proposed 6% interest rate is prima facie not an arm s length basis as it is lower than the cost of borrowing of 8%. Regardless of whether UBSPL is in the business of borrowing or lending, it has to determine the interest rate it charges WPL based on an arm s length basis. This will involve the following steps: Conducting a comparability analysis, i.e. considering all the relevant facts and circumstances relating to the loan. Identifying the most appropriate transfer pricing method. The comparable uncontrolled price (CUP) method is the preferred method for determining the arm s length pricing for related party loans although other methods can be used if there is documentation maintained which can justify why the use of another method is more suitable. Determining the arm s length results. The arm s length rate is usually made up of a base reference rate (such as the SIBOR or prime rates offered by banks) and a credit spread or margin to compensate the lender for bearing the credit risk of the borrower defaulting on the loan, As above, USBPL s claim for deduction for the interest expense of $0 32 million will be limited to the 6% loan interest received from WPL. It should be noted that although UBSPL is required to maintain transfer pricing documentation relating to its basis of determining the interest rate charged to WPL, it is not required to prepare the full transfer pricing documentation as the cross border loan of $4 million falls below the safe harbour threshold of $15 million. (ii) (iii) Purchase of assets of HCB Pte Ltd (HCB) FCPL cannot claim a deduction for the purchase consideration it incurs to buy over the assets of HCB as this constitutes a capital expenditure. It is also not entitled to claim a merger and acquisition allowance as this is only possible for share acquisitions. However, FCPL is entitled to claim capital allowances on the catering assets qualifying as plant and machinery, including enhanced capital allowance under the productivity and innovation credit (PIC) scheme for prescribed automation equipment. FCPL would have to incur input GST on the purchase consideration. The transaction would not qualify to be treated as a transfer of going concern since the purchase involves assets and not the entire business. FCPL can, however, claim a refund for this input GST, if as stated it becomes registered for GST prior to acquiring the assets from HCB. As the assets purchased included an industrial property, FCPL as the buyer would have to incur basic buyer s stamp duty based on the higher of the consideration paid for the property and the market value of the property, at rates ranging from 1% to 3%. There is no additional buyer s stamp duty. Financing the acquisition of automated kitchen equipment Our analysis of the relative merits of the three alternative methods of financing the acquisition of the automated kitchen equipment, based on the three aspects of cash outflow, available tax deductions and the ownership status of the equipment at the end of the fourth year, is set out below. Outright purchase If UBSPL acquires the automated kitchen equipment outright, the $2 million incurred will relate to qualifying plant and machinery and 100% capital allowances may be claimed in the year of acquisition. As $2 million of borrowed money will be utilised to pay for the equipment, the attributable interest expense of $0 16 million per annum will be deductible in addition to the claim of capital allowances. The upfront cash outflow of $2 million under this method is significantly higher than under the other two methods where the payments are staggered over three years/44 months respectively. However, UBSPL will own the equipment immediately from day one, although ownership also means that UBSPL will have to bear the repairs and maintenance costs from this date as well. UBSPL should establish whether the automated kitchen equipment it would be acquiring is included in the productivity and innovation credit (PIC) information technology and automation equipment list. If so, in addition to the 100% base capital allowance of $2 million, it can also claim enhanced capital allowance under the PIC scheme. If the equipment is not currently included on this list, then an application should be made immediately for it to be included. UBSPL as a group currently employs fewer than 200 employees. Hence, as a qualifying SME, it is entitled to claim an annual additional enhanced PIC capital allowance based on 300% of the qualifying expenditure up to $600,000 (instead of $400,000 for a non-qualifying SME) of the qualifying expenditure for each year of assessment (YA) from YA 2016 to YA As a combined cap of $1 8 million is available for the period from YA 2016 to YA 2018, it makes sense for UBSPL to claim the maximum $5 4 million enhanced PIC allowance in addition to the $2 0 million base capital allowance. The alternative of claiming a PIC cash payout in lieu of the 100% capital allowance and enhanced 300% PIC allowance would not be attractive as such a claim will be capped at $60,000, based on 60% of up to $100,000 qualifying PIC expenditure. Operating lease Under this option, the operating lease payments made during the duration of the lease period are fully tax deductible as a revenue expense. No interest is incurred under this option, but the total lease payments of $2 4 million are comparable with 16

4 the cost inclusive of interest incurred in the case of outright purchase of $2 48 million ($2 million plus (3 x 8% x $2 million)). Thus the 100% tax deduction under this option is almost as good as under the outright purchase method, except that the total cash outflow and therefore the claim for deduction is staggered over the three-year period. Moreover, UBSPL will not bear the cost of repair and maintenance during the three years of the lease agreement, however, at the end of the three years UBSPL will not own any asset at all. Similar to the outright purchase method, UBSPL can possibly claim an additional enhanced PIC deduction based on 300% of up to $600,000 of qualifying expenditure on the operating lease payments made for each year of assessment, i.e. a combined cap of $1 8 million for the period from YA 2016 to YA Based on the facts, UBSPL can claim $3 2 million (i.e. 400% of $0 8 million) for each of YA 2016 and YA 2017 and $1 4 million (i.e. $0 8 million plus 300% of $0 2 million) for YA Hire purchase Under this option, the finance lease payments are tax deductible as and when they are incurred. Similar to the outright purchase method, UBSPL can claim a 100% base capital allowance, but this is restricted to only the principal repayments including any deposit during the relevant basis period. Hire purchase interest can be claimed separately as a revenue expense. As for the operating lease method, the cash outflow is staggered rather than made as a lump sum payment upfront, but as in the case of outright purchase, UBSPL will own the equipment at the end of the hire purchase period and be responsible for its maintenance and repair from day one. Similar to the outright purchase method, UBSPL can possibly claim an additional enhanced PIC capital allowance based on 300% of up to $600,000 of qualifying expenditure on the principal repayments made for each YA from YA 2016 to YA It can also utilise a combined cap of $1 8 million for the period from YA 2016 to YA 2018 to claim the maximum $5 4 million enhanced PIC allowance in addition to the $2 0 million base capital allowance. This is provided the equipment is not onward leased to another party during the same basis period. Although the repayment schedules may extend beyond the basis period for the last qualifying YA, i.e. YA 2018, UBSPL can continue to claim enhanced PIC capital allowance on the qualifying equipment based on the repayment schedules. The amount of enhanced allowance is locked in as long as the qualifying equipment is acquired during the basis periods relating to any qualifying YAs (i.e. YA 2011 to YA 2018). We hope the above advice is helpful. Should there be any questions or further advice you require, please contact me. Yours sincerely Tax Adviser 2 Lawrence and Josephine (a) Comments on Joanna s advice Advice for father, Lawrence Joanna is only partially correct. As a general rule, all benefits-in-kind are taxable unless they are exempted from income tax under an administrative concession. 1. Under normal circumstances, an employee is subject to tax on the full income he derives from employment exercised in Singapore, notwithstanding that he may need to travel overseas frequently in the course of his work. Such overseas travel is regarded as incidental to his Singapore employment. Hence, merely arranging for a portion of his salary to be paid to an overseas bank account income will not save Lawrence tax as this portion is not attributable to overseas income which is not taxable in Singapore when received by an individual. To save Singapore tax legally, Lawrence must be able to justify that he has an overseas employment and he is exercising an overseas employment besides his Singapore employment. Only with a proper dual employment structure in place can he save tax. Sufficient documentation in the form of dual employment contracts would need to be put in place with two sets of distinct and separate employment responsibilities. 2. As a guide, all perquisites or benefits-in-kind which are granted to an employee are taxable based on the full market value of these assets. The tax treatments of the various alternative forms of employment benefits as proposed by Joanna are as follows: Long service awards are fully taxable if they are cash awards or take the form of gift vouchers. For non-cash awards, they are not taxable only if the values do not exceed $200. Gifts provided to employees during festive or special occasions such as Chinese New Year red packets and birthday gifts are not taxable only if the respective values do not exceed $200 and these are generally available to all staff. As a concession, door gifts and lucky draw prizes given out to employees during the company s dinner and dance are not taxable. Although the $200 threshold is strictly not applicable here, the quantum involved must still be reasonable. Contrary to Joanna s advice, holiday reimbursements are fully taxable regardless of the amounts involved. Staff discounts offered by employers as well as discounts extended to staff s family members, relatives and friends are not taxable provided the value of the item offered does not exceed $500 and the staff discount is available to all staff. Where the value of the item exceeds $500, the full amount of the staff discount is taxable. 17

5 Full or partial subsidies for course fees are not taxable on the basis that this is part of training provided by the employer and the benefits are available to all staff. 3. Whether or not Lawrence is taxable on the severance package he receives does not depend on whether this is provided for in his employment contract. Rather it depends on whether the amount is given to compensate him for loss of office. If so, the amount is not taxable. On the other hand, benefits such as salary in lieu of notice, leave pay and gratuity payments are fully taxable. Advice for mother Josephine 1. Joanna is correct to say that Josephine is entitled to claim expenses incurred to earn her income under self-employment. However, the claim can only be made on actual expenses incurred and estimates are not acceptable. Documentation must be maintained to substantiate the claim. The travelling claim may be hard to justify given that Josephine s students travel to her home to receive tuition. Also, one would expect minimal entertainment expenses to be spent on students. As her residential house is used to carry out the tuition, it is possible for Josephine to claim for a portion of the expenses incurred on utilities and telephone which are attributable to the floor area used for her business. On the other hand, the claim for rental expenses cannot be supported since the bungalow is fully paid for. 2. All businesses, regardless of revenue, are required to prepare a statement of accounts and keep proper records of their business transactions. Joanna is only partially correct in saying that a two-line statement declaration is acceptable only for annual revenue not exceeding $100,000. As Josephine s business income is greater than $500,000, she is required to report a four-line statement and also submit a certified statement of accounts as well as a tax computation to show the computation of adjusted profit/loss for her business. Advice on property purchase It is correct to say that buying a commercial property avoids the addition buyer s stamp duty applicable to purchases of residential properties as well as the seller s stamp duty. However, another option would be to purchase a residential property in the sole name of Joanna, as no additional buyer s stamp duty is levied on a Singaporean s first property. Josephine did not set up a company to carry on her tuition business and as a sole proprietor, whose annual taxable turnover does not exceed $1 million, she is not required to register for goods and services tax (GST). If Josephine wants to recover the input tax payable on any purchase of commercial property, she can choose to register the property under her sole proprietorship business and apply for GST voluntary registration for the sole proprietorship business. Alternatively, she can set up a company and buy the property after applying for GST voluntary registration. In either case, the approval for voluntary registration rests with the Comptroller who can reject the application if there is little or negligible GST output tax which can be collected. Josephine will need to compare the benefits derived from claiming the input tax payable on the purchase of the commercial property with the compliance costs which come with GST registration. She also has to consider the impact of GST registration on her tuition business, as her students will suffer an increase in their tuition fees because of the additional 7% output tax which will be charged. Comparing these two options, it may be better and easier for Josephine to set up a company as a sole shareholder to carry on her tuition business and also to derive the rental income. Under this option, it is easier for Josephine to make an application to voluntarily register for GST. Once approved, the company will then be able to claim a refund of the input tax paid. Incorporating a new company to carry on her tuition business will also enable Josephine to claim exemption of up to $200,000 for the first three years of assessment after incorporation under the start-up tax exemption scheme, partial tax exemption of up to $152,500 beyond the first three years of assessment as well as the 30% corporate income tax rebate of up to $20,000. Another possibility is for Josephine to set up a company solely to derive rental income and derive her tuition income as a self-employed person. The advantage is that she does not need to include GST when charging her students their tuition fee. The downside is that the taxable supply derived solely from rental income may not be substantial enough to secure approval of her voluntary GST registration. Consequences of following Joanna s advice It appears that Joanna has not understood the various tax implications well, and if her parents proceeded to adopt all of Joanna s tax planning ideas, the consequences could be quite serious. Any resulting errors made in their tax returns could be regarded as attempts to understate income or overstate the claim for expenses. Where there is negligence involved, or where there is no reasonable excuse for the offence, penalties of up to 200% of the tax undercharged may be levied. In addition, a fine of up to $5,000 and a maximum jail term of three years may be levied. 18

6 3 Permanent establishments (PEs) (a) (c) Circumstances in which PEs may be created Physical PE In determining if a company has a physical PE, businesses have to determine if the place of business has some permanence and is at the disposal of the company. It does not need to be a venue which the Singapore company owns or rents. It could even be a space within the customer s premises which the Singapore company uses at its disposal. Some of the examples provided in the Model Convention are a branch, a factory and a mine, oil or gas well. The list is not exhaustive. Construction PE A construction PE does not solely refer to a building or a road, it also refers to any installation of equipment. A construction PE is created if a project lasts for more than 12 months. However, companies should be mindful to take reference from the specific double taxation agreement (DTA) as it may state a different time frame. Service PE Service refers to the furnishing of services, including consultancy services, by a business through its employees or other personnel engaged by the company for such purpose. The term personnel refers to a natural person, be it the venturing company s employee or an individual engaged by the company. A service PE may be created if the above activity (for the same or a connected project) continues within a specific overseas jurisdiction for a period or periods aggregating more than six months within a 12-month period. Again, companies should take reference from the specific DTA with regard to the time frame as it may vary across different DTAs. Substantial equipment PE Some DTAs include a provision for a substantial equipment PE. This refers to companies with substantial equipment installed in another country, which is equipment leased to a client in that country. This arrangement may create a PE for the Singapore company. Agency PE Where a Singapore company has a person acting on its behalf overseas who habitually exercises an authority to conclude contracts in its name, the Singapore company shall be deemed to have a PE in that country in respect of the activity which that person undertakes for the enterprise. A person could be an individual, a firm or any body of persons, other than an agent with an independent status. Again, companies should refer to the specific DTA for the specific technicalities on the definition of agency. If the Singapore company engages an independent agent overseas to carry out its obligations and this agent provides this activity in his ordinary course of business of which he has other clients and is not financially dependent on the Singapore company, the agent may not constitute a PE for the Singapore company if it can be proved that he is acting independently. Actions which can be taken by Scaling Pte Ltd (SPL) to mitigate PE risks One way for SPL to avoid a service PE is to consider staff secondment as opposed to staff travelling overseas from the Singapore entity for the provision of services. By seconding staff to the overseas entity, the staff would be rendering the services as an employee of that local company and not as an employee of the Singapore company, thus avoiding a service PE for SPL. In overseas contracting arrangements, the project may comprise both offshore and onshore activities where part of the activities is rendered in the home country and the remainder in the overseas jurisdiction. In such cases, where possible, it may be advisable for SPL to have the portion of the overseas project which needs to be carried out in the overseas jurisdiction performed by the local entity, and the portion which needs to be carried out in Singapore performed by SPL so that SPL does not establish a PE by creating a presence overseas. Activities which are preparatory should generally not result in a PE. SPL can avoid a PE by making sure that the warehouse is used solely for storage, display or delivery of goods or maintaining goods solely for the purpose of processing by another company. This should not generally result in a PE overseas, unless the relevant DTA specifically provides otherwise. Minimisation of the tax liability where a PE exists When a PE exists, tax will be imposed in the foreign jurisdiction on the profits attributable to the PE. Such attributable profits should be calculated as if the PE were an independent enterprise dealing at arm s length with the company of which it is a PE. A deduction is allowed for any expenses incurred which are reasonably attributable to the PE, regardless of where the expense is incurred. The tax exposure of a PE, at least in part, will be dependent on the strictness of the stance of the foreign tax authority in determining the amount of profit attributable to the PE and thus taxable in the foreign jurisdiction. In the case of a one-off activity, the most feasible (and cheapest overall) option may be to simply pay the overseas tax on the profits attributable to the PE as computed by the foreign tax authorities. However, if SPL plans to venture into Country X on a long-term basis, it may be better to set up a local company, in order to ring fence the profits so that only the profits attributable to the foreign jurisdiction, i.e. those of the Country X company are taxable in Country X. 19

7 4 (a) Clarity Seminars Pte LTD (CSPL) (i) Individual income tax implications for Steve Gordon If CSPL engages the foreign university and the university sends Steve to perform the services for CSPL, he will be treated as an employee performing employment duties. Accordingly the employment income derived by him will be subject to tax in Singapore, but the actual amount of tax paid will depend on the duration of the exercise of the employment in any year. As Steve is a non-resident, in the case of a short-term employment of 60 days or less in a calendar year, his employment income will be exempt from tax in Singapore. Where the duration of the employment exercised in Singapore is for a period from 61 to 182 days, Steve will be taxed on his employment income at either the non-resident rate of 15%, or at the graduated rates which a resident would pay, whichever is the higher amount. If his employment is exercised for a duration of more than 182 days, then Steve will be taxed as if he is a tax resident based on the graduated tax rates. Such salaries, if taxable, are not subject to withholding tax. However, the employer must inform the Comptroller at least one month before the cessation of the employment and withhold all moneys due to the employee until tax clearance is given or upon expiry of 30 days after the Comptroller has been notified, whichever is the earlier. If CSPL engages Steve directly, he will be treated as a non-resident professional and the tax exemption for short-term employment will not apply to him. Instead, he will be subject to withholding tax. As the payer, CSPL will have to withhold tax either at 15% of the gross fees payable or alternatively, at 20% of the net income in the event that this option is exercised by Steve. Under the 15% withholding tax treatment, the gross income subject to withholding tax will include the airfare and accommodation provided or reimbursed by CSPL. On the other hand, under the 20% withholding tax treatment, such airfares and accommodation provided by CSPL will not be taxable on Steve in the case of a short-term engagement of 60 days or less in a calendar year. (ii) Tax implications for CSPL Corporate income tax implications The income derived from conducting seminars in Singapore is sourced in Singapore. Accordingly, the seminar fees should be taxable in Singapore, regardless of whether they are derived from Singaporeans or foreigners. On the other hand, the expenses incurred to earn the seminar fees will be deductible, as they are wholly and exclusively incurred to earn income. These expenses will include the fees paid, as well as the travelling and accommodation expenses incurred for the professor during his official trips to Singapore. Goods and services tax (GST) implications As CSPL is GST-registered, it has to charge 7% output GST to all the participants who attend the seminars conducted in Singapore. None of the fees, including those of any foreigner who travels to Singapore to attend the seminar, can be zero rated. This is because although the service may be under a contract with and directly benefits an overseas participant, the overseas participant receives the service in Singapore. Zero rating only applies in the case of overseas participants who receive services outside Singapore. Withholding tax implications As stated in (i) above, whether or not withholding tax applies depends on whether Steve is rendering his services in Singapore in the capacity as an employee or a professional. Where withholding tax is applicable, CSPL needs to determine the relevant date of payment, which for withholding tax purposes is based on the earliest of the invoice date, the date of accrual of the amount due and the actual date of payment. The withholding tax applicable has to be accounted to the Comptroller by CSPL by the 15th day of the second month following the date of payment. Edmund Maid Agency Pte Ltd (EMAPL) (i) Goods and services tax (GST) implications The Comptroller considers the free use of business premises by a third party to be unconnected with the business of the taxable person. Accordingly, the owner of the business premises is deemed to have made a supply if it has previously been allowed to claim any input tax on the purchase of the property, and has to account for output tax on this deemed supply of service. At the same time, the owner of the business premises can only claim the proportion of input tax attributable to its own taxable supplies, i.e. it has to exclude the proportion based on the floor area used for free by the third party. The output and input tax effect for the quarter ended 30 September 2015 is therefore: Annual value of property $60,000 Fraction of property occupied for free 1/5 Value of deemed supply for quarter ended September 2016 $3,000 ($60,000 * 3/12 * 1/5) Output tax to be borne by EMAPL $210 ($3,000 * 7%) Total input tax incurred on common expenses per quarter $420 Amount of input tax claimable on common expenses (limited to) $336 ($420 * 4/5) 20

8 (ii) Circumstances when the deemed supply rules do not apply There is no requirement to deem the supply of services on the free usage of the property where: a property owner allows a third party to use a common area on a temporary basis for a business purpose which will promote its own business activities; or a property owner allows a third party to use its business premises as part of a corporate event held for the owner s employees. 5 Company One, Company Two and Company Three (a) Allowable deductions for renovation and refurbishment (R&R) costs Relevant three-year periods The start of the relevant three-year period for Company Three will be the year of assessment (YA) 2013 (i.e. based on the earlier of the two relevant periods of Company One and Company Two). The start of Company Three s second relevant three-year period will be YA Qualifying R&R costs The combined R&R costs of Company One and Company Two before amalgamation is $180,000. Therefore, as the deduction is subject to an overall expenditure cap of $300,000, the qualifying R&R cost for Company Three in YA 2015 is $120,000 ($300,000 $180,000). Company Three s qualifying R&R cost in YA 2016 is $240,000 as it does not exceed the $300,000 cap for the second relevant three-year period. The allowable deductions for R&R costs available to Company One, Company Two and Company Three for the relevant YAs are as below: Company One Company Two Company Three YA 2013 ($30,000/3) = $10,000 YA 2014 ($(30, ,000)/3) ($60,000/3) = $40,000 = $20,000 YA 2015 (1 January to 30 June 2014) ($(30, ,000)/3) ($60,000/3) = $40,000 = $20,000 YA 2015 (1 July to 31 December 2014) ($120,000/3) = $40,000 YA 2016 ($(90, , , ,000)/3) = $170,000 YA 2017 ($(120, ,000)/3) = $120,000 YA 2018 ($240,000/3) = $80,000 Total R&R deductions $90,000 $40,000 $410,000 Other tax consequences arising from a qualifying amalgamation Capital allowances The amalgamated company will be allowed to continue to claim capital allowances on plant and machinery, and on industrial buildings transferred from the amalgamating companies on the same basis as those amalgamating companies. In other words, there is a deemed election of s.24 and no balancing charge or allowance is made on the transfer of assets from the amalgamating companies to the amalgamated company. Similarly, the amalgamated company will be allowed to claim writing down allowances on intellectual property rights on the same basis as the amalgamating companies. Assets on capital account For tax purposes, the amalgamated company will be deemed to have held any capital asset from the date the asset was first acquired by the amalgamating company and at the historical cost of acquisition incurred by that amalgamating company. The consultation paper recommends that the amalgamated company should continue to maintain sufficient documentation on the original acquisition of all capital assets. Assets on revenue account For tax purposes, assets on revenue account are transferred at their carrying amounts in the accounts of the amalgamating companies. Hence, no gain/loss should be realised by the amalgamating companies and the amalgamated company takes over the trading stock at the same cost. 21

9 However, as the amalgamated company may be required to revalue the trading stock at fair value for accounting reasons, the amalgamated company may elect to take over the trading stock at fair value. In this case, the amalgamating companies are deemed to have sold the trading stock at fair value on the date of amalgamation and will therefore be subject to tax on the accounting gain. Impairment for accounts receivable The amalgamated company is treated as continuing the businesses of the amalgamating companies and so will be entitled to a deduction for impairments or bad debts resulting from the amalgamating companies businesses. On the other hand, all subsequent recoveries by the amalgamated company, including those in respect of bad debts or impairments previously allowed, would be taxable. Unabsorbed loss items To facilitate corporate amalgamations, the utilisation of unabsorbed capital allowances, losses and donations across entities (i.e. for the benefit of the amalgamated company) may be allowed if the corporate amalgamation is undertaken for commercial reasons and is not tax motivated. 22

10 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 2016 Marking Scheme 1 Unique Bakery (Singapore) Pte Ltd Available Maximum (i) (ii) Deductibility of interest expenses and transfer pricing concerns General deductibility rules for interest 2 0 Interest on loan to acquire equipment deductible 1 0 Interest on loan to set up local company deductible but no deduction value 2 0 Interest on loan to set up foreign company deductible, but may or may not have deduction value, depending on whether foreign dividends are exempt from tax 1 0 Discussion on the three conditions for foreign dividends to qualify for exemption 3 0 Interest on loans on-lent to related companies deductible but subject to TP rules 2 0 Interest on domestic loan need not be arm s length but subject to restriction 2 0 Interest on cross-border loans must meet arm s length requirements 0 5 Discussion of the three steps to arrive at an arm s length rate 3 0 No requirement to prepare full TP documentation based on loan quantum Purchase of assets Income tax considerations Purchase consideration is not deductible as it is a capital expenditure 1 0 Cannot claim merger and acquisition allowance as this is not a share purchase 1 0 Can claim plant and machinery allowances, including PIC enhanced allowances 1 0 GST considerations Need to incur input GST as this is not a transfer of a going concern 1 0 Can claim a refund of the input tax provided it is registered for GST 1 0 Stamp duty considerations Need to incur basic buyer s stamp duty 1 0 No additional buyer s stamp duty 1 0 May have to pay seller s stamp duty if property is sold within three years of purchase (iii) Financing the acquisition of automated kitchen equipment Outright purchase option Basic considerations/factors 2 0 PIC position 3 0 Operating lease option Basic considerations/factors 2 0 PIC position 1 5 Finance lease option Basic considerations/factors 2 0 PIC position Professional marks Appropriate format and presentation of the letter 1 0 Structure including relevant headings 1 0 Effectiveness of communication 1 0 Logical flow

11 2 Lawrence and Josephine Available Maximum (a) Comments on Joanna s advice Lawrence General principle 1 0 Payment of portion of salary overseas 4 0 Replacement of bonus with benefits 6 0 Severance package 2 0 Josephine Claims for business expenses 4 0 Tax reporting 2 0 Property purchase Stamp duty 1 5 GST 4 0 Corporate tax exemptions Consequences of following Joanna s advice Permanent establishments (PEs) (a) (c) Ways in which PEs may be created 2 marks for each (2 x 5) 10 0 Actions to mitigate PE risks 2 marks for each (2 x 3) 6 0 Minimisation of tax liability where a PE exists Determination of attributable profits 2 0 Tax exposure of PE will depend to a large extent on the foreign authority 0 5 May be better to pay the overseas tax for a one-off activity 1 0 Option to form a local entity (a) Clarity Seminars Pte Ltd (i) Individual income tax implications Engaged via university 4 0 Engaged directly (ii) Corporate income tax implications 2 0 GST implications 2 0 Withholding tax implications Edmund Maid Agency Pte Ltd (i) GST implications Free use unconnected to business 1 0 Explanation of output tax position 1 5 Explanation of input tax position 1 0 Calculations (ii) Circumstances when the deemed supply rules do not apply 1 mark each (2 x 1)

12 5 Company One, Company Two and Company Three Available Maximum (a) Allowable deductions for R&R costs Explanation of relevant three-year periods 1 5 Explanation of qualifying R&R costs 2 0 Calculations: YA YA 2014, YA 2015 and YA marks each (3 x 1 5) 4 5 YA 2017 and YA mark each (2 x 1) Other tax consequences arising from a qualifying amalgamation Capital allowances 2 5 Assets on capital account 2 0 Assets on revenue account 3 0 Impairment for accounts receivable 1 5 Unabsorbed loss items