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 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 Company A The Board of Directors Company A Company address 1 December 2015 Dear Sirs Tax Adviser Firm s address With reference to your request for advice following the review of the tax affairs of Company A and Company B, we are pleased to set out our comments below: (i) Proposed acquisition of shares in Company C Unutilised trade losses and capital allowances Potentially, by taking a 30% stake in Company C, Company A can benefit proportionately from the $200,000 unutilised trade losses brought forward from previous years. This is provided the shareholding test is satisfied. To pass this test, there must be no substantial (defined as more than 50%) change in the ultimate shareholders and their shareholdings as at the relevant dates. The relevant dates are the last day of the year in which the losses were incurred and the first day of the year of assessment (YA) in which the losses will be deducted. Similarly, Company A can also benefit proportionately from the $300,000 unutilised capital allowances brought forward from previous years. This is provided that in addition to the shareholding test, there has been no change in Company C s trade or principal activities (also known as the business continuity test). To pass the shareholding test in the case of the unutilised capital allowances, the relevant dates are the last day of the YA in which the capital allowances arose and the first day of the YA in which the capital allowances are to be claimed. Given that Company A is considering acquiring only a 30% stake, the shareholding test would be met assuming the remaining 70% shareholding (i.e. at least 50%) remained intact. The business continuity test should also be met, assuming there is no indication of an impending change in the company s trade. Hence, both the $200,000 unutilised trade losses and the $300,000 unutilised capital allowances are likely to be preserved and Company A can benefit proportionately. The amounts paid for goodwill and fees to the tax firm are not deductible as they are capital in nature. Financing costs There is no tax benefit to be obtained for any financing costs incurred to fund the acquisition of the shares, even if Company C were to pay a dividend in the same year. This is because dividends paid by Company C will be exempt under the one-tier corporate tax regime. Consequently, there is no deduction value for the financing costs (interest). Mergers and acquisitions scheme Company A should, however, benefit from the mergers and acquisitions (M&A) scheme. Assuming the acquisition goes ahead as planned, Company A will qualify for the M&A scheme because: Company A is incorporated in Singapore and a tax resident in Singapore; and its ultimate holding company (Company B) is also incorporated and a tax resident in Singapore. Company A will be carrying on a trade or business in Singapore on the date of the share acquisition. Company A has at least three local employees (excluding the company s directors) throughout the 12-month period before the date of the share acquisition. Company A (the acquiring company) has not been related to Company C (the target company) for at least two years before the date of the share acquisition. The share acquisition will take place in December 2015, i.e. in the period from 1 April 2015 to 31 March Company A has never previously owned any ordinary shares in Company C and following the share acquisition Company A will own 30% (i.e. at least 20%) of the ordinary shares of Company C. It should be noted that the 20% threshold must be maintained at the end of the basis period or financial year in which the qualifying share acquisition is made, i.e. until 31 December 2015, and there is no indication that this will not be the case. Accordingly, Company A will be able to claim the following benefits under the scheme: An M&A allowance based on 25% of the acquisition value of the shares of the company, capped at $20 million spread equally over five years of assessment. This will result in a total allowance of $1 million (i.e. 25% of $4 million) spread over the five years commencing with YA

3 Stamp duty relief, capped at $40,000 per year of assessment. Based on the consideration of $4 million, the stamp duty will be $8,000 (i.e. 0 2% of $4 million) so the cap will not be breached and this relief can be claimed in full in YA2016. A 200% deduction on qualifying transaction costs, subject to a $100,000 cap. This will translate into a deduction of $50,000 (i.e. 200% of $25,000) in YA To claim the M&A allowance, Company A needs to indicate its intention to do so when lodging its income tax return for the YA relating to the basis period in which the qualifying share acquisition took place. (ii) Research and development (R&D) activities in Company A To be eligible to benefit from the R&D tax measures, Company A must be able to demonstrate that it benefits from the R&D activities. In general, a beneficiary of R&D activities is expected to: bear the financial burden of carrying out the R&D activities; and effectively own and be able to commercially exploit the know-how, intellectual property (IP) or other results of the R&D activities. Company A will hold legal ownership of the IP which is created from any new technology successfully developed. In addition, it will be able to commercially exploit the IP by manufacturing and selling the new product, and has full discretion as to the number of the units to manufacture for sale. Hence, it will satisfy the second condition. However, although Company A is the legal entity conducting the in-house R&D in Singapore and incurring the qualifying R&D expenses (salaries and consumables), any attempt to seek reimbursement from Company B will be detrimental, as it will then not be able to satisfy the first condition that it and not another entity bears the financial burden. Hence, Company A should not seek reimbursement of the R&D expenses from Company B. In addition, to qualify for R&D tax benefits the project itself must satisfy certain conditions as follows: Have as its objective the acquisition of new knowledge; the creation of new products or processes; or the improvement of existing products or processes; which is met, as the objective in Company A s case of developing and introducing special feeds for rearing chicken seeks to improve the quality of chickens. Involve novelty or technical risk; which is met, as there is technical uncertainty as to whether the special feeds will enhance the growth and immune system of the chickens. Moreover, this is the first of its kind in Singapore. Involve a systematic, investigative and experimental (SIE) study in a field of science or technology; which is met, as the proposed project entails a series of planned activities to test or find out something which is not known or readily deducible in the field of science or technology. Not fall into one of the categories on the excluded list; which is met, as the R&D activities planned by Company A does not fall within the scope of these exclusions, which essentially relate to routine activities in respect of quality control, testing of materials, devices or products and data collection; or post-manufacturing activities, such as efficiency surveys or management studies and market research or sales promotion. Tutorial note: Candidates were not expected to reproduce the complete list of exclusions. As Company A is carrying on an active business, it can benefit from the productivity and innovation credit (PIC) scheme. Under this scheme, the company can potentially claim a 400% tax deduction of the qualifying R&D expenditure, subject to an expenditure cap. In addition, qualifying R&D expenditure exceeding the cap will enjoy a 150% tax deduction if the R&D is done in Singapore; and any other R&D expenditure, including expenditure pertaining to R&D done outside Singapore, will enjoy a 100% deduction. For R&D conducted overseas, it must be related to Company A s trade to be eligible for the enhanced 300% deduction under PIC. For YA 2016, the expenditure cap is $400,000 per YA or a combined cap of $1,200,000 for the period from YA 2016 to YA Although a higher cap applies under the PIC+ scheme, this scheme is only of benefit to qualifying SMEs. A qualifying SME is one whose revenue is not more than $100 million, or employment size is not more than 200 employees, but these criteria are applied at the group level if a business is part of a group. Therefore, Company A will not qualify because although its own revenue for YA 2016 is only $30 million and it employs only 180 employees, these numbers rise to $120 million (i.e. more than $100 million) and 210 employees (i.e. more than 200 employees) after including those of its parent company, Company B. Hence, at best, Company A will only qualify for the normal PIC scheme. Company A expects to incur local R&D expenditure of $1 million and overseas R&D expenditure of $2 million. Assuming it wants to maximise its claim, Company A should utilise the combined cap of $1,200,000 for the period from YA 2016 to YA 2018 and claim a total deduction of $7,100,000, arrived at as follows: Qualifying R&D expenditure Percentage claim Amount claimed $ For the first $1,200,000 of overseas R&D expenditure 400% 4,800,000 For the remaining $800,000 of overseas R&D expenditure 100% 800,000 For the $1,000,000 of local R&D expenditure 150% 1,500,000 Total claim 7,100,000 14

4 This will yield total tax savings at 17% of $1,207,000. It should be noted that once the combined cap of $1,200,000 is utilised in the YA 2016, Company A can no longer claim a 400% deduction for any R&D expenditure incurred in YA 2017 and YA (iii) Management services provided to Company A by Company B Generally, Company A should be able to claim a deduction for the management fees payable to Company B provided it can substantiate that the expenses are: for genuine services which are rendered and expected to benefit Company A; incurred wholly and exclusively in the production of Company A s income; revenue in nature and not specifically prohibited under the Income Tax Act; charged to Company A for the provision of services based on an equitable method which is not excessive; and charged on a basis which is consistently applied from year to year and (if applicable) across Company B s group of companies. However, as Company A is wholly owned by Company B, the charging for management services from Company B to Company A would be viewed as a related party transaction for which transfer pricing issues need to be addressed. The current transfer pricing (TP) guidelines in Singapore lay down certain requirements for companies engaged in related party transactions to support the pricing of their transactions. Although the guidelines also provide safe harbour thresholds which exempt companies from preparing such documentation, potentially none of these are applicable to Company A and Company B because: Strictly speaking, both companies are not subject to the same effective Singapore tax rate. Although both companies pay tax at the same prevailing tax rate of 17%, unlike Company B, Company A s profits are below the level at which the maximum partial tax exemption of $152,500 and maximum corporate tax rebate of $20,000 can be claimed. There is therefore an incentive for the group to arrange for a lower management fee to be paid from Company A to Company B. The current mark-up of 5% in respect of the routine support services provided by Company B to Company A complies with the safe harbour threshold for standard services of 5% and is thus acceptable to the Inland Revenue Authority of Singapore (IRAS). But using a mark-up of less than 5%, as proposed, will fall below the safe harbour threshold and so should be avoided if operationally and economically feasible. The provision of services to or from Company A and Company B (the related parties) is currently between $1,200,000 and $1,500,000 per annum, which exceeds the safe harbour threshold of $1 million. Given that the transactions between Company A and Company B do not or potentially will not fall within any of the safe harbour rules, then TP documentation would need to be prepared. In this context the following should be noted: The current guidelines are explicit in requiring taxpayers to prepare and keep contemporaneous records and these are to be part of the record-keeping requirements for tax. By contemporaneous documentation, the IRAS requires taxpayers to prepare TP documentation on a timely basis, which specifically is no later than the tax return filing date for the financial year in which the transaction takes place. The guidelines require that the date of creation or update of each document should be stated in the document. The IRAS has also stressed that in preparing contemporaneous documentation, a taxpayer may use the latest available information at the point of preparation. If the taxpayer is subject to an audit from the IRAS or is required to submit documentation subsequently, the information used at the time of preparation will be accepted. The current guidelines contain an expanded list of information required, and this includes information at both the group level and entity level. We shall be happy to advise further on these if necessary. Although the contemporaneous TP documentation needs to be prepared no later than the tax return filing date of the financial year in question, taxpayers are not required to submit their TP documentation when their tax returns are filed. The TP documentation should be kept by the taxpayer and submitted to the IRAS within 30 days when requested to do so. No extension of this 30-day period is mentioned in the new guidelines, and it is unclear whether an extension would be granted on a case-by-case basis. 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 15

5 2 Cheryl Elizabeth (a) (c) Tax obligations of the Singapore branch as employer The Singapore branch is required by law to prepare Cheryl s Employee s Return of Remuneration (Form IR8A) and the relevant appendices by 1 March each year. It also has to keep proper records and accounts for a period of at least five years to substantiate the details of income paid to Cheryl. Although there is no requirement to withhold any part of the salary paid to Cheryl, when Cheryl ceases employment or plans to leave Singapore for more than three months, it will have the responsibility to ensure that she pays all taxes through a tax clearance process. This includes notifying the Comptroller and filing a Notice of Cessation of Employment or Departure from Singapore (Form IR21) at least one month before the cessation of employment or departure. Taxation of Cheryl s employment income The salary and the one-off cash allowance of $100,000 are taxable. By concession, the cost of the air tickets is not taxable as it is a relocation passage to enable her to take up employment in Singapore. The accommodation provided to her is taxable, with a taxable amount equal to the $72,000 annual value of the property. In addition, as it is fully furnished with both fittings and furniture, another 50% of the annual value ($36,000) is taxable. Gains from the exercise of employee share options are generally taxable at the point of exercise if they are granted while the employee is exercising an employment in Singapore. Although Cheryl does not intend to exercise these options during her stay in Singapore, she will be deemed to have exercised the share options at the time of cessation of her Singapore employment. The taxable gain is the difference between the open market value of the shares as at one month before the cessation of her employment less the exercise price or amount paid by her, if any. Tax residence and implications for Cheryl s tax liability Under the quantitative test which is applicable to foreigners, an individual who is physically present in Singapore or exercising an employment in Singapore for at least 183 days in any calendar year will be considered as a Singapore tax resident for that particular year of assessment (YA). Cheryl arrived in Singapore for an 18-month contract on 1 September 2015, therefore under the general rules, her residence status would be as follows: Calendar year Period of presence Number of days YA Residence status September to 31 December Non-resident January to 31 December Resident January to 28 February Non-resident For calendar year 2016, as a tax resident Cheryl can claim personal tax reliefs and will be taxed at graduated tax rates. If she were classed as a non-resident in calendar years 2015 and 2017, Cheryl would be taxed at whichever is higher of the tax which a tax resident would pay and the amount payable at the non-residents flat rate of 15%. However, since Cheryl is a foreign national who is employed in Singapore over at least three consecutive YAs, under the three-year concession the practice of the Comptroller is to regard her as resident for all three YAs, irrespective of the days of presence in the years of arrival (calendar year 2015) and departure (calendar year 2017). This would therefore allow her to benefit from the personal tax reliefs and graduated tax rates of a resident for all three years. YA 2016 $ Salary ($80,000 x 4) 320,000 One-off cash allowance 100,000 Accommodation benefit: Annual value of apartment (4/12 x $72,000) 24,000 Value of furniture and fittings (50% of $24,000) 12,000 Assessable income 456,000 Less: earned income relief (1,000) Less: qualifying child relief (4,000) Chargeable income 451,000 Tax on first $320,000 42,350 Tax on the next $131,000 at 20% 26,200 Total tax payable if tax resident 68,550 Tax payable if non-tax resident ($456,000 x 15%) 68,400 Tutorial note: Working mother child relief is only claimable for children who are Singaporeans. 16

6 Since the tax payable is similar whether or not Cheryl is treated as a tax resident, there is no advantage to being treated as a tax resident in YA YA 2017 She will taxed as a tax resident YA 2018 As she will have exercised an employment in Singapore for less than 60 days in the calendar year 2017, Cheryl will be better off as a non-resident, as she will then be exempt from tax on the employment income she earns for the period 1 January 2017 to 28 February (d) Suggestions to reduce Cheryl s Singapore tax liability Home leave passage As Cheryl is a foreigner, only 20% of the cost of one home leave passage per year paid for by her employer is taxable. Hence Cheryl should consider the inclusion of such a passage in her contract of employment, at least for the year 2016, even at the cost of a corresponding drop in her salary. Accommodation The formula for computing the taxable value of the actual accommodation provided is fixed. However, if the furniture were purchased or leased directly by Cheryl and only the fittings are provided as a benefit, she would only be taxed on 40% of the annual value of the property. But as the annual tax savings of $1,440 (i.e. 10% of $72,000 multiplied by her tax rate of 20%) is fairly insignificant, this measure might not be worthwhile unless the furniture is not very costly. Stock options Although she will be subject to tax on her employee share options on a deemed basis, Cheryl can still apply for a re-assessment of her actual tax liability within six years following the year of assessment (YA) in which the deemed exercise rule is applied, if the actual gain turns out to be lower. Not ordinarily resident scheme Since she was not a resident of Singapore prior to her deployment to the Singapore office, Cheryl may consider applying for the not ordinarily resident (NOR) scheme. She may benefit from this NOR scheme since her annual income is at least $160,000, so if as stated her employment in Singapore requires her to travel for up to 100 days per calendar year, she is likely to be able to meet the condition that she spends at least 90 days outside Singapore for business reasons. Under the NOR scheme, the following favourable tax treatments may be obtained: Time apportionment of her Singapore employment income. Tax exemption of any employer s contribution to a non-mandatory overseas pension fund or social security scheme. Supplementary retirement scheme Contributions to the supplementary retirement scheme (SRS) qualify for tax relief subject to a cap of $29,750 for foreigners. Contributions do not have to be made on a regular basis, and can be made by the individual or their employer. For the purpose of claiming tax reliefs on the contributions made to their SRS, the following conditions must be satisfied: the individual must be a tax resident of Singapore; the SRS account is not suspended as at 31 December of the year prior to the YA; and the individual has not made a withdrawal from their SRS account in the year prior to the YA. However, 100% of the withdrawals made from an SRS account will be taxable in the year of withdrawal, unless the foreigner maintains the SRS account for at least ten years, in which case only 50% of the withdrawals are taxable. Life assurance premium relief Even as a foreigner, Cheryl can claim for premiums paid on life insurance policies taken on her own life. To be eligible for this relief, the premiums must be paid to an insurance company with an office or branch in Singapore. The relief is capped at the lower of 7% of the capital sum assured or $5,000. Working mother child relief and parenthood tax rebate Currently, Cheryl is not entitled to claim working mother child relief (WMCR). However, she will potentially be able to claim this relief if she takes up the citizenship offer in the case of any future children who are Singaporean on the last day of the basis period for the relevant year of assessment. The WMCR which she can claim for the second child is 20% of her earned income. In addition, provided again that the child is a Singaporean on the last day of the basis period for the relevant year of assessment, once Cheryl is a citizen she will be able to claim the parenthood tax rebate, in the case of the birth of a second child of $10,000. Additional buyer s stamp duty If Cheryl takes up the offer of citizenship and is a Singaporean when she buys her first residential property in Singapore, she will obtain a saving in stamp duty, as she will only pay buyer s stamp duty of up to 3% of the purchase price or market value, whichever is the higher, rather than the 15% rate of additional buyer s stamp duty payable by a foreigner. 17

7 3 Lucky Laksa Corporation (a) (c) Payments from Famous Noodles Pte Ltd (FNPL) to Lucky Laksa Corporation (LLC) (1) Sum of $120,000 The one-off sum of $120,000 represents payment for the management or assistance in the management of the franchisee business. Since it is borne by Famous Noodles Pte Ltd (FNPL), a Singapore resident company, the sum is deemed to be derived from Singapore [under s.12(7)(c)]. Withholding tax based on 17% of the gross amount is applicable as the payment was made to a non-resident, LLC. The tax rate of 17% is non-final and LLC can file a tax return and have the income assessed on a net basis, i.e. after claiming all tax deductible expenses, and in the process seek a refund for any tax withheld in excess of the eventual tax liability. (2) Sum of $60,000 The $60,000 payable by instalments is for the supply of know-how. As the amount is borne by FNPL, a Singapore resident company, it is also deemed to be sourced in Singapore [under the first limb of s.12(7)]. The amount is income in nature to LLC as the grant of the three-year franchise was merely a method of trading by LLC and did not result in the loss of any source of profit. Withholding tax based on 10% of this gross amount is applicable as the payment was made to a non-resident, LLC. Due to the absence of a tax treaty, there is no reduced rate available. The tax rate of 10% is final and is on the premise that the know-how is not derived by LLC from any trade or business carried on or exercised by LLC in Singapore and is not effectively connected with any permanent establishment of LLC in Singapore. (3) Sum of $50,000 The lump sum of $50,000 represents payment for show-how, i.e. the rendering of assistance or service in connection with the application or use of know-how, i.e. the secret recipe. As it is again borne by FNPL, a Singapore resident company, it is also deemed sourced in Singapore [under the second limb of s.12(7)]. Withholding tax based on 17% of this gross amount is applicable as the payment was made to a non-resident, LLC. The tax rate of 17% is non-final and (as in (1) above) LLC can file a tax return and have the income assessed on a net basis. As the employees salaries and allowances in Singapore are borne by FNPL, LLC cannot claim a deduction for such expenses against either this show-how payment of $50,000, or the management fee of $120,000 (as in (1) above). In all three cases, FNPL will need to account for the withholding tax to the Comptroller by the 15th of the second month following the date of payment, i.e. by 15 June Failure to account for the withholding tax will expose FNPL to a late payment penalty of up to 20% of the withholding tax due. The one-off payment of $120,000 is not deductible as it is capital in nature. But the other two payments of $60,000 and $50,000 are tax-deductible for FNPL because they are wholly and exclusively incurred in the production of its income, revenue in nature and not specifically prohibited under the Income Tax Act. Reimbursement of salaries and expenses by FNPL to LLC The two employees will be in Singapore for less than 183 days in 2015, so will not be tax resident in Singapore. However, they will be exercising their employment in Singapore for ten weeks (i.e more than 60 days) in 2015, so their Singapore income will be taxable, not exempt. Therefore, they will be taxed as non-residents on their employment income in Singapore, i.e at the higher of 15% and the tax a tax resident would pay. Withholding tax is not applicable to the reimbursement of accommodation, meals and transportation expenses provided the payer can obtain a detailed breakdown of the expenses showing that they were reimbursed at the actual costs incurred. FNPL can claim a deduction for the reimbursement of salaries and expenses as this was incurred in the production of its income, revenue in nature and not specifically prohibited under the Income Tax Act. Sale of machines to FNPL by LLC LLC is not taxable on the profits arising from the sale of the two machines to FNPL, as LLC is merely trading with Singapore. FNPL will be able to claim capital allowances on the purchase price inclusive of any installation cost of the machines. In the event that this is qualifying automation equipment, FNPL can claim an additional enhanced productivity and innovation credit (PIC) allowance based on 300% of up to $400,000 of qualifying expenditure. Alternatively, in lieu of the 100% capital allowance and enhanced 300% PIC allowance, FNPL can opt for a PIC cash payout for one of the machines. If approved, FNPL will receive a cash payout of $60,000, based on 60% of up to $100,000 qualifying PIC expenditure. This is assuming FNPL has not claimed any PIC allowances or PIC cash payouts for other equipment purchases which will affect its current claim based on the respective limits. 18

8 4 (a) Purpleland Realty Sdn Bhd (PRSB) Generally, an entity incorporated and conducting its business outside Singapore will not be taxed in Singapore on its trading profits. This is unless the entity is trading in Singapore and deriving profits which are attributable to this Singapore source income. Whether a person is trading in is a question of fact. The main factors which would give rise to a trading in Singapore situation would include inter alia: Whether there is a permanent establishment in Singapore. Whether there is capital employed in any way, e.g. ownership of trading stock or property. Whether its business operations are carried on in Singapore (e.g. performance of acts under contract). The location where the contracts are signed. The location where services are performed. The location where titles of goods or properties pass. Payment for the goods or properties. Presence of one or more of these factors would create a risk of taxable presence. PRSB s sales executives were authorised to give a 10% discount and to conclude the contracts with the five buyers, which they did in Singapore, and to collect the initial payments. Therefore their activities in Singapore would amount to the carrying on of a business by PRSB partly in Singapore. This is particularly so if the sale and purchase agreements were signed in Singapore. The employees activities and the conclusion of the five contracts in Singapore would give rise to a deemed source of trading profit in Singapore, despite the real property being located in Malaysia. As for the two buyers who were given a 15% discount, they only paid a booking fee of 1%. Although PRSB approved the transaction and relayed the message to these two buyers through the sales executives, subsequent signing of the sales and purchase agreement, which is the important document evidencing a sale for property transactions, took place in Malaysia. Further, the balance of 19% was collected at that time and only then did title pass. Hence, the sales to these two buyers should not be regarded as concluded in Singapore. Consequently, profits from the sales to these two buyers will not be taxable in Singapore. Even if profits are determined to arise in Singapore, the tax may be relieved through the operation of an applicable tax treaty. In this case, there is an applicable tax treaty with Malaysia. Under the business profits article of the tax treaty, profits derived by a Malaysian entity from a business will not be subject to tax in Singapore unless the business is carried on through a permanent establishment (PE) in Singapore, and the profits are attributable to that PE. Where, however, the business is carried on through a PE, the treaty partner (i.e. the country of source) has the full right to tax all the profits directly attributable to the PE as if it were an independent enterprise. In arriving at the taxable profit, the enterprise is allowed to deduct expenses which are reasonably attributable to the PE. In this case, the hotel ballroom used to host the seminar may not amount to a fixed place of business in Singapore as it does not possess a certain degree of permanence, through which PRSB s business is wholly or partly carried on. However, the ten sales executives have arguably habitually exercised their authority to conclude contracts, having concluded seven transactions. Accordingly, this may give rise to a dependent agent PE in Singapore and to the extent that such a PE in Singapore exists, it will result in the profits attributable to the PE being liable to tax in Singapore. Betterfield Holding Pte Ltd (BHPL) In general, a goods and services tax (GST) registered business can claim input tax incurred on goods and services used or to be used to make taxable supplies in Singapore after GST registration. The following conditions must be satisfied before such claims are allowed: the goods and services must have been supplied to the business; the goods and services are used or to be used for the purposes of the business; the goods and services must be used for the making of taxable supplies; and the input must not be disallowed under the GST Regulations. GST incurred before GST registration is generally not claimable. However, businesses which register for GST on or after 1 July 2015, can also claim pre-registration input GST in full in the following situations: The goods are acquired within six months before the GST registration date and the goods are still held (i.e. they are not sold, transferred or disposed of) by the business at the GST registration date. The goods have not been consumed or supplied by the business before the GST registration date in the case where the goods are acquired more than six months before the GST registration date. Property rental, utilities and services which are acquired within six months before the GST registration date and are not directly attributable to supplies made by the business before the GST registration date. Applying the above to the transactions of BHPL: BHPL will be able to claim the input tax of $210,000 incurred on the commercial property as the property was still held by the company on 1 September 2015, the date of GST registration. BHPL cannot claim the $140 input GST incurred for the consultancy services as it is incurred for a non-business purpose, i.e. advice on the personal tax liability of the seller of the property. 19

9 BHPL can claim the $35 input GST incurred on the mobile phone charges on the premise that the sales manager is acting as an agent of the company and incurring these charges on behalf of the company. There is no requirement to account for output tax as it is incurred for a business purpose. BHPL can claim the $28 input GST incurred on the subscription fee on the premise that the membership is relevant to the accountant s job and he is acting as an agent of the company and incurring these charges on behalf of the company. There is no requirement to account for output tax as it is incurred for a business purpose. BHPL can claim the $21 input GST incurred as it is for the staff and hence for a business purpose. There is no requirement to account for any output tax. 5 Singco, BeeCo and CeeCo (a) (i) Taxes arising in Country C and Country B Country C (country of source) The underlying trading profits out of which the dividend is paid will have been subject to corporate tax in Country C at the rate of 25%. The dividend paid will be subject to the standard rate of withholding tax of 10%. This rate cannot be reduced to a lower treaty rate because the recipient, BeeCo, is resident in Country B which does not have a tax treaty with Country C. Country B (intermediary country) No corporate tax or withholding tax is payable in Country B. (ii) Tax position in Singapore The dividend paid from BeeCo to Singco will not be eligible for exemption as a foreign dividend (s.13(8)) because no tax has been paid in the country from which it was received, Country B. Therefore, neither the subject to tax nor headline tax conditions under the foreign sourced income exemption (FSIE) scheme can be satisfied. However, the dividend will be exempt from tax in Singapore on the grounds that the income will benefit the economic and technological interest of the Singapore economy (s.13(12)) as the particular circumstances fall within one of the scenarios specified by the Inland Revenue Authority of Singapore (IRAS) in the e-tax Guide on this topic. Specifically: the dividend received in Singapore by Singco originated from profits derived from substantive business activities carried out in a foreign tax jurisdiction, i.e. Country C; Country C has a headline tax rate of at least 15%, i.e. 25%; and tax was paid on those originating profits in Country C. The fact that the dividend from CeeCo has passed through the hands of another company (BeeCo) in a third jurisdiction (Country B) where no tax was imposed is not relevant provided Singco is able to track the source of the income from CeeCo through BeeCo. To satisfy the IRAS that this is the case, Singco must submit a s.13(12) declaration form. The declaration form must be submitted on or before the tax return filing date for the year of assessment (YA) relating to the basis period in which the tax exemption is first claimed. As the first such dividend is paid by CeeCo in November 2016, and so presumably received by Singco in its year ended 31 December 2016, the declaration must be submitted by the tax return filing date for YA 2017 of 30 November It is not necessary to submit further declaration forms in respect of the same foreign income source received in subsequent years. Tutorial note: The relevant e-tax guide is Tax Exemption under Section 13(12) for Specified Scenarios, Real Estate Investment Trusts and Qualifying Infrastructure Project/Asset (Third Edition). (c) Tax inefficiency of the current structure The current structure of the Singco group is not tax efficient with respect to the payment of dividends by CeeCo because the full withholding tax rate of 10% applies to dividends paid from CeeCo to BeeCo in Country B, whereas a dividend paid directly from CeeCo to Singco in Singapore would only be subject to withholding tax at the reduced rate of 5% applicable under the Singapore/Country C tax treaty. This tax inefficiency could be eliminated by removing the Country B intermediate holding company (BeeCo) from the group structure. However, doing this may incur costs in the form of tax in Country C on any capital gain arising on the deemed sale of CeeCo to Singco by BeeCo; plus transaction costs, including stamp duty and legal fees. The total costs involved will depend on the net asset value of CeeCo and the size of any gain arising since its acquisition by BeeCo. Direct v indirect investments into a foreign entity Singapore has a favourable tax regime whereby the remittance of foreign dividends can potentially qualify for tax exemption if certain conditions are satisfied. In addition, Singapore has concluded comprehensive tax treaties with many countries which may accord favourable benefits such as capital gains protection and reduced withholding tax rates for certain payments. Hence, a direct investment would in most cases produce a tax efficient result, whereas a structure involving an intermediate 20

10 holding company may give rise to inefficiencies (as identified in the case of SingCo). Thus, direct investment would normally be recommended as the base case for comparison. However, this will not always be the case and in some circumstances investment through an intermediate holding company may be considered to the extent that it achieves a tax outcome better or no worse than the base case scenario. Tax factors favouring the use of intermediate holding companies include: Ensuring that the parent company is not tainted with share dealing. Taking advantage of favourable tax treaties in the country where the intermediate holding company is located, e.g. capital gains protection. Consolidation of tax losses in certain countries. Non-tax factors include: Insulating the parent company from legal suits. Facilitating a future restructuring without having to seek approval from the authorities in the overseas jurisdiction. Facilitating the reinvestment of profits without having to repatriate cash to a parent company, especially when there are issues regarding the repatriation of funds. Familiarity with the intermediate company jurisdiction (by the investors or target). 21

11 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2016 Marking Scheme 1 Company A Available Maximum (i) (ii) Acquisition of Company C Conditions for carry forward of unutilised trade losses 2 0 Conditions for carry forward of unutilised capital allowances 2 0 Application and logical conclusion 2 0 Payment for goodwill and fees to tax firm not deductible 1 0 Financing costs have no deductible value, with reason 1 5 M&A scheme conditions and application 4 0 Benefits of M&A scheme 3 0 How/when to claim R&D activities in Company A Conditions to demonstrate benefit from R&D and application 3 0 Conditions for satisfying a qualifying project and application 4 0 PIC benefits, including YA 2016 expenditure caps 3 0 Does not qualify for PIC+, with reason 2 0 Computation of maximum claim (iii) Management services provided by Company B General conditions for claiming deduction 2 5 Related party transaction, so transfer pricing arises 1 0 Safe harbour rules and their application (1 mark each) 3 0 Key requirements for documentation (1 mark each, maximum 3) Appropriate format and presentation of the letter 1 0 Structure including relevant headings 1 0 Effectiveness of communication 1 0 Logical flow

12 2 Cheryl Elizabeth Available Maximum (a) (c) (d) Tax obligations of the Singapore branch Prepare Form IR8A 1 0 Keep records for at least five years 1 0 Seek tax clearance for foreign employees Taxation of Cheryl s employment income Salary and cash allowance 1 0 Cost of air tickets not taxable, with reason 1 5 Accommodation benefit 1 5 Employee share options Tax residence and impact on tax liability Quantitative test and application 2 0 Tax resident v non-resident 1 5 Three-year administrative concession and impact 1 5 Tax computation for YA 2016, including conclusion 3 5 Reasoned conclusion re YA Suggestions to reduce Cheryl s Singapore tax liability Only 20% of home passage taxable 1 5 Furnished accommodation made unfurnished 1 5 Reassessment of gain on share options 1 5 Not ordinarily resident scheme 2 0 Supplementary retirement scheme 2 0 Life assurance premium relief 1 5 Working mother child relief and parenthood tax rebate 2 0 Additional buyer s stamp duty 1 5 Any SIX required

13 3 Lucky Laksa Corporation (LLC) Available Maximum (a) (c) Payments from Famous Noodles Pte Ltd (FNPL) to LLC Sum of $120,000 Nature of payment 1 0 Withholding tax rate 1 0 Non-final and can file tax return 1 0 Sum of $60,000 Nature of payment 1 0 Income to LLC 1 0 Withholding tax rate 1 0 Final tax, with reason 2 0 Sum of $50,000 Nature of payment 1 0 Withholding tax rate 1 0 Non-final and can file tax return 1 0 Common elements Employees salaries, etc, non-deductible, with reason 1 0 Deadline for paying withholding tax 1 0 Penalty for failure to account 1 0 Deductibility of the payments Salaries and reimbursement of expenses Taxation of employees 1 0 No withholding tax if no mark-up 1 0 Need for supporting documentation 1 0 Reimbursement of salaries and expenses deductible to FNPL Sale of the two machines No tax for LLC on sale of machines 1 0 FNPL can claim capital allowances and enhanced PIC allowance (if has not already used PIC limit on previous claims) 2 0 FNPL can opt for PIC cash payout for one machine (a) Purpleland Realty Sdn Bhd (PRSB) Foreign entity taxable only if it derives Singapore source income 1 0 Factors pointing to a trading in situation (½ mark each, maximum 3) 3 0 Application to PRSB for the sales with a 10% discount 2 0 Application to PRSB for the sales with a 15% discount 2 0 Effect of tax treaty provisions Betterfield Holding Pte Ltd (BHPL) General rules for claiming input GST 2 0 Conditions for claiming pre-registration input GST 3 0 Application to: Initial purchase of property 1 0 Consultancy fee 1 0 Mobile phone 1 5 Subscription fee 1 5 Pantry food

14 5 Singco, BeeCo and CeeCo Available Maximum (a) (i) Tax in Country C and Country B Country C Corporate income tax 0 5 Withholding tax, with reason 2 0 Country B No taxes (ii) Tax in Singapore Explanation why FSIE (s.13(8)) not applicable 2 0 Exempt as beneficial to the economy (s.13(12)) 1 0 Specific circumstances and how met 2 0 Position in intermediate company/country not relevant 1 0 Requirement to be able to track income source 1 0 Need to submit declaration form 1 0 Timeline including application to Singco 1 5 Not required in subsequent years for same source/receipt (c) Tax inefficiency Inefficient due to higher withholding tax on dividends 2 0 Eliminate by removing BeeCo from structure 1 0 Discussion of potential costs of restructuring Direct v indirect investments Advantages of direct investment 2 0 Recognition that alternative may still sometimes achieve a better result 1 0 Possible tax factors favouring the use of intermediate holding companies (any two, 1 mark each) 2 0 Possible non-tax factors favouring use of intermediate holding companies (any one)