Professional Level Options Module, Paper P6 (SGP)

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2 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2018 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 Tax advice to Mr Umar Pollard Mr Umar Pollard Client Address 7 June 2018 Dear Sir Singapore income tax implications arising from your establishment of a legal presence in Singapore Tax Adviser Firm s address I understand that you would like to establish a legal presence in Singapore and are deciding whether to incorporate a subsidiary company or to register a branch. You would also like to take advantage of certain tax incentives. Initially, you are contemplating a holding structure in Singapore as a base to acquire share stakes in three companies in the region, namely companies in each of Countries A, B and C. You may also add some trading activities in the near future. The funding for your Singapore operations will be provided through equity or debt, either directly in your own name or indirectly through Ultimato Corporation Limited (UCL). As requested, I am pleased to set out my advice below: (i) Tax treatment of a subsidiary company versus a branch The following similarities apply to the tax treatment of a subsidiary and a branch: The profits of both types of entity are subject to tax at the prevailing corporate income tax (CIT) rate of 17%. Both types of entity are eligible for partial tax exemption up to the first $300,000 of chargeable income. Both types of entity are eligible for the 20% CIT rebate for the year of assessment (YA) 2018, capped at $10,000. Foreign income derived by both types of entity is taxed when remitted or deemed remitted to Singapore. There is no withholding tax on either the payment of dividends (for a subsidiary) or the remittance of profits by a branch. A wholly-owned Singapore subsidiary cannot qualify for the start-up tax exemption (SUTE) scheme. Similarly, a branch cannot qualify for the SUTE scheme so long as it is regarded as a non-resident. A Singapore subsidiary can receive payments free of withholding tax, assuming it is tax resident in Singapore. The same applies for a Singapore branch. However, the following differences in tax apply to the treatment of a subsidiary and a branch: A subsidiary can be regarded as tax resident in Singapore if it conducts its board of directors meetings in Singapore, whereas a branch would generally be treated as tax resident in the foreign country where its head office is located. Assuming it is your intention for any subsidiary company to be tax resident in Singapore and it is engaged in trading activities, then it: Will enjoy the benefits and privileges available under the comprehensive tax treaties concluded by Singapore, whereas a Singapore branch cannot enjoy such benefits. May potentially qualify for the foreign sourced income exemption (FSIE), whereas a branch does not have these benefits. Can potentially claim foreign tax credits, whereas a branch does not have these benefits. Therefore, as the entity you will set up will hold share stakes in three companies located in Asian countries, it is better for you to incorporate a subsidiary, because: (1) Foreign sourced dividends received by a Singapore entity are subject to tax in Singapore at 17% unless they qualify for tax exemption under the FSIE regime, which is only possible in the case of tax resident entities. In addition, for the exemption to apply all of the following conditions must also be satisfied: The foreign income must have been subject to tax in the foreign jurisdiction from which it was received. This condition is satisfied for all the potential dividends receivable from the companies in Countries A, B and C. At the time the dividends are remitted to Singapore, the headline tax rate in the country from which the foreign income is derived must be at least 15%. This condition is satisfied for Countries A and B, but not for Country C, as its underlying tax rate is only 10%. 13

3 The Comptroller must be satisfied that the exemption is beneficial to the Singapore entity. The facts in this case do not suggest that this condition cannot be met. (2) Even if exemption under the FSIE is unavailable, a tax resident entity can still claim foreign tax credits, and as stated above, this is likely to be the case for a Singapore subsidiary company but not for a Singapore branch, so long as its control and management is exercised in the foreign head office. In conclusion, using a Singapore tax resident subsidiary company will result in the dividends from Company A in Country A and Company B in Country B qualifying for exemption under the FSIE regime as in their case all the necessary conditions are satisfied. Furthermore, although the dividends from Company C in Country C will not be exempt under the FSIE regime, because the headline tax rate condition cannot be met, as a tax resident, the subsidiary company will be able to claim a tax credit for the 10% underlying tax suffered, so that it will only suffer an incremental tax of 7% when the dividends from Company C are remitted to Singapore. But it should be noted that so long as the dividends are used offshore and so not deemed remitted, they would not be subject to tax in Singapore, even if the dividends do not qualify for exemption. (ii) Tax incentives (1) Start-up tax exemption (SUTE) scheme Under the SUTE scheme, qualifying new companies are granted full exemption from tax on the first $100,000 of normal chargeable income and a further 50% exemption from tax on the next $200,000 of normal chargeable income for the first three consecutive YAs. To qualify for the SUTE scheme, the following conditions must be satisfied: The company must be incorporated in Singapore. The company must be tax resident in Singapore for that YA. The company must not have more than 20 shareholders throughout the basis period for that YA where either: 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. The company s principal activities must not be investment holding or the developing of properties for sale or investment or both. Therefore, to be eligible for the SUTE scheme, the new Singapore entity cannot be a wholly-owned subsidiary of UCL, so you will need to either incorporate a new Singapore company wholly owned by yourself or alternatively hold at least 10% of the ordinary shares of the new Singapore company separately from any holding held by (or through) UCL. In addition, in order to maximise the potential benefits under the scheme, the new entity should commence at least some trading activities right from its first year of incorporation, assuming these will be profitable from the outset. (2) Mergers and acquisitions (M&A) scheme Under the M&A scheme, an acquiring company can claim the following benefits if the necessary qualifying conditions are satisfied: An M&A allowance based on 25% of the acquisition value of the shares of the target company, capped at $40 million spread equally over five YAs. Stamp duty relief, capped at $80,000 per YA. A 200% deduction on qualifying transaction costs, subject to a $100,000 cap. The necessary qualifying conditions for the acquiring company (i.e. the new Singapore company) are as follows: It is a Singapore company which is incorporated and tax resident in Singapore. Where the acquiring company belongs to a corporate group, its ultimate holding company must also be a Singapore company incorporated and tax resident in Singapore, unless the acquiring company both applies and is approved under the headquarters tax incentive programme and the relevant agency also waives the condition that the ultimate holding company must also be a Singapore company incorporated and tax resident in Singapore. Therefore, the easiest way for you to meet this condition is to incorporate a new company which is owned directly by yourself, which is incorporated and tax resident in Singapore. It carries on a trade or business in Singapore on the date of the share acquisition. To satisfy this condition, you would have to bring forward the plan to carry out trading activities before you proceed with the three share acquisitions. It has in its employment at least three local employees, excluding company directors, throughout the 12-month period prior to the date of the share acquisition. To satisfy this condition, you would need to add at least one more local employee to the proposed headcount. In addition, the share acquisitions could not happen until the three local employees have served for a continuous period of at least 12 months. It has not been connected to the target company for at least two years prior to the date of the share acquisition. This should not pose a problem as all the three intended target companies are new to you and UCL s business activities. 14

4 In addition, the share acquisition has to take place during the period from 1 April 2010 to 31 March 2020 and where the acquiring company owns less than 20% of the target company before the acquisition, the acquisitions must result in it owning at least 20% to 50% of the target company after the acquisition. These conditions should not pose a problem in the case of Companies A and B since the percentage stakes to be acquired are 45% and 30% respectively. However, the planned 15% stake to be acquired in Company C falls short of the minimum 20% required, so you will need to consider whether it is operationally feasible to increase the size of this acquisition stake from 15% to at least 20%, in order to avoid losing the benefits under the scheme in the case of Company C. With regard to the target company, it or a subsidiary wholly owned (whether directly or indirectly) by it must carry on a trade or business in Singapore or elsewhere on the date of the share acquisition; and it must have in its employment at least three employees throughout the 12-month period prior to the date of the share acquisition. It is presumed that all three of the intended target companies (Companies A, B and C) will satisfy these conditions. (iii) Equity versus debt financing If the new Singapore company is financed through equity, it will be able to pay dividends to its shareholders out of its retained earnings. Whether these dividends are paid directly to yourself or to UCL, no further Singapore tax will be payable on payment of the dividends, in addition to the corporate income tax payable, if any, on the underlying profits of the company. In the case of debt financing, there are no thin capitalisation rules in Singapore. So any payment of interest by the new Singapore company, whether directly to yourself or to UCL, would, unlike dividends, ordinarily be deductible, provided the loans are used to finance income producing activities and the amount has been determined on an arm s length basis in compliance with the transfer pricing guidelines in Singapore. However, as there is no tax treaty between Singapore and Country U, any payment of interest will be subject to withholding tax at the rate of 15%. (iv) Goods and services (GST) tax implications arising from the operation of the new company GST is 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. Where the company has not commenced any trading activities and is merely holding the share investments, then it is unlikely to derive any taxable supplies and, consequently, there will be no obligation on the part of the company to register for GST. On the other hand, if the new company is involved in the provision of services or in trading activities, then such activities will constitute taxable supplies in Singapore if the supplier is considered to belong to Singapore as a result of having a business or other fixed establishment in Singapore. Given that it is intended for the Singapore company to have a permanent office space (though small), it will certainly have either a business establishment or a fixed establishment in Singapore and so any fees it earns would constitute taxable supplies if such services are connected to this establishment. Under the GST Act, every person who makes an annual turnover of taxable supplies (i.e. standard or zero rated supplies) of goods and services exceeding or expected to exceed $1 million in value is required to register for GST within 30 days from the date of liability to register. In determining whether this threshold is met, two bases are used: Retrospective basis Under the retrospective basis, registration is compulsory if at the end of any quarter, the total value of all the taxable supplies made in Singapore in that quarter plus the previous three quarters has exceeded $1 million. Prospective basis Under the prospective basis, registration is compulsory if at any time, there are reasonable grounds to believe that the total value of the taxable supplies in the next 12 months will exceed $1 million. Being a new entity, the relevant test for the proposed Singapore company will be the prospective test and the company will need to register for GST should it believe it will make taxable supplies of more than $1 million. Therefore, whether or not the Singapore company will be required to register for GST compulsorily will depend on the extent of the trading activities it undertakes and how rapidly these are expected to develop. Even if the Singapore company is not liable to register for GST compulsorily based on the two tests, it can still opt for voluntary registration in order to reclaim any input GST incurred but this should only be undertaken following a cost-benefit analysis taking into account the GST compliance costs. Applications for voluntary registration are reviewed on a case-by-case basis and the Comptroller has the discretion to approve or reject them. Where a voluntary registration is approved, the business must remain registered for at least two years. I hope the above is useful. Please do not hesitate to contact me if you need further clarifications. Yours sincerely Tax adviser 15

5 2 Anna (a) Validity of Kevin s advice to Anna Kevin is right when he advised his mother that there is an overall cap on personal reliefs of $80,000 for the year of assessment 2018 and regarding the taxability of the special performance bonus of $50,000. However, his remaining comments/interpretations of the tax law are incorrect as follows: 1 Working mother child reliefs for her first and second children are computed based on 15% and 20% respectively of the mother s earned income, and not just her employment income. As Anna incurred losses in respect of her sole proprietorship business, this will be set off against her earned income, resulting in a substantially lower income overall. 2 The sign-on bonus of $60,000 is taxable income in the year in which it was received, even though it is subject to a condition that Anna needs to be employed for at least two years and this time period has not yet been fully completed. This is because she has been paid this bonus amount upfront. 3 The director s fee should be considered as sourced outside Singapore as it was paid by a company not resident in Singapore. Consequently, this foreign sourced income is not taxable when received in Singapore. 4 Anna can claim a deduction for the salary of $100,000 paid to her husband, Fred. This amount is reasonable as Fred is a qualified accountant and was earning much more than this amount in a similar role in As Fred will have taxable income of his own of $100,000, it would be beneficial for Anna to let him claim the qualifying child relief of $4,000 each for the two children, if the total personal reliefs she can claim will already exceed $80,000 without taking this relief into account. 6 The ABC partnership cannot claim the enhanced 300% productivity and innovation credit (PIC) deduction for training expenses spent on the partners as they are the owners of the business and such claims are not permitted under the PIC scheme. Instead, Anna is able to claim personal relief for the course fees paid but the claim is capped at $5, Although an individual is not taxed on all foreign income even when it is remitted to Singapore, the exemption does not apply to an individual who earns the foreign interest income through a partnership in Singapore. 8 Not all interest income is fully exempt from tax when received by an individual. The exemption from tax applies only to interest income earned by an individual through placing a deposit in an approved bank or finance company in Singapore, and does not apply to interest charged to a friend. 9 Despite the lack of documentary evidence for her property tax and maintenance fees, Anna would still be eligible to claim an amount of deemed expenses based on 15% of the gross rental income derived from her residential property. 10 Given her higher tax bracket and the fact that her total personal reliefs would have exceeded $80,000, Anna should not be the one claiming parent relief in respect of Peggy. Instead, her husband Fred should be claiming entirely or sharing the relief with Ariel, Anna s sister. The higher relief quantum of $9,000, instead of $5,500, is possible because Peggy stays in the same household as Fred. 16

6 (b) Anna s individual income tax computation for year of assessment 2018 $ $ Marks Employment income: Salary (12 x $30,000) 360,000 Sign-on bonus (2 x $30,000) 60,000 Special bonus 50,000 Director s fee 0 470,000 Less: Trade loss from sole proprietorship (300,000) Less: Share of trade loss from ABC partnership Trade loss from ABC Partnership (50,000) Add: Training cost 10,000 (40,000) Less: Share of interest income (20,000) (60,000) Adjusted share of loss (50%) (30,000) Earned income 140,000 Interest from loan to friend (not tax exempt) 20,000 Share of interest from partnership 10,000 Rental income: Gross rents (12 x $5,000) 60,000 Less: 15% deemed expenses (9,000) Adjusted rental income 51,000 Statutory income 221,000 Less: Donation of shares ($1,000 x 250%) (2,500) 1 0 Assessable income 218,500 Less personal reliefs: Earned income relief 1,000 Qualifying child relief (to be claimed by husband) 0 Working mother child relief ((15% + 20%) x $140,000) 49, Parent relief (to be claimed by husband) 0 Grandparent caregiver relief (not eligible children over 12 years) 0 CPF ordinary wages (20% x $6,000 x 12) 14, CPF additional wages (20% x $30,000) 6, Foreign maid relief (2 x $265 x 12) 6, NSman relief for wife 750 Course fees relief 5,500 Total personal reliefs (capped) (80,000) Chargeable income 138,500 Tax on first $120,000 7,950 Tax on the next $18,500 at 15% 2,775 Net tax payable 10, Ovict Pte Ltd (OPL) (a) Choice of transfer pricing methods There are five internationally accepted methods for evaluating a taxpayer s transfer prices or margins against a benchmark based on the prices or margins adopted in similar transactions by independent parties. The five methods can be categorised as follows: Traditional transaction methods: the comparable uncontrolled price (CUP) method; the resale price method; and the cost plus method. 17

7 Transactional profits methods: the transactional profit split method; and the transactional net margin method (TNMM). Traditional transaction methods compare the price of related party transactions with that of the transactions between independent parties. Transactional profits methods compare the profit arising from related party transactions with that generated in independent party transactions. Generally, the traditional transaction methods are preferred to the transactional profit methods, because they provide for a more direct comparison with independent party transactions. Ultimately, the choice of the most appropriate transfer pricing method depends on the facts and circumstances of each case and the following are the relevant factors normally considered: The strengths and weaknesses of each of the five methods. The nature of the transaction and appropriateness of the method applied to the transaction. The availability of reliable information needed to apply the method. The degree of comparability between the related and independent party transactions, and the accuracy with which comparability adjustments can be made to eliminate any differences. The Inland Revenue Authority of Singapore (IRAS) does not have a specific preference for any of the transfer pricing methods. The method which produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments, will be selected. Taxpayers may also choose other more appropriate methods or use a combination of various methods to comply with the arm s length principle. But whichever method the taxpayer chooses as appropriate, transfer pricing documentation should be maintained to demonstrate that the transfer prices used have been established in accordance with the arm s length principle. (b) Appropriate method for sales of Brand A massage chairs Given OPL s role as a distributor who buys from a related party before re-selling to an independent party, the most appropriate transfer pricing method in this case is the resale price method. The resale price method seeks to value the functions performed by the reseller of a product. The resale price to the independent party is reduced by a comparable gross margin (the resale price margin ) to arrive at the arm s length price of the product transferred between the related parties. Under arm s length conditions, the resale price margin should allow the reseller to recover its selling and operating costs, and earn a reasonable profit based on an analysis of the functions it performs, any assets it uses and any risks it assumes (FAR analysis). As gross profit margins represent the gross compensation (after cost of sales) for specific FAR, product differences are less critical than under the CUP method. Therefore, where the related and independent party transactions are comparable in all aspects except the product, the resale price method is likely to be more reliable than the CUP method. Nonetheless, the more comparable the products, the more likely the resale price method will produce better results. If there are material differences which affect the resale price margin earned in the related and independent party transactions, adjustments should be made to eliminate the effects of those differences. Consequently, the resale price method is most appropriate where the reseller adds relatively little value as the more value the reseller adds to the properties (for example, via complicated processing or assembly with other products), the more adjustments are required and the harder it is to apply the resale price method. This is especially so where the reseller contributes significantly to creating or maintaining intangible properties, such as trademarks or trade names, in its activities. Internal comparables should be used as far as possible for such adjustments, although external comparables may be used if no reliable internal comparable transactions exist. Using the resale price method, the arm s length price for the related party transaction between OPL and its parent company, Povict Hongkong Limited (PHL), is computed as follows: $ OPL s sales of Brand A massage chairs to unrelated parties 7,000 Less: Arm s length resale price margin based on Revict Pte Ltd s (RPL s) transactions (10% x $7,000) 700 6,300 Less: Arm s length price of promotional and marketing functions performed by OPL for PHL 160 Transfer price (based on resale price method) 6,140 18

8 4 Allied Singapore Kingsmen Pte Ltd (ASKPL) (a) Deductibility for ASKPL (as employer) and taxability for employees/related personnel (as recipient) (1) Refreshments provided during internal training sessions for junior staff will be tax deductible for ASKPL as they are incurred in the production of income. Moreover, the company can claim an additional enhanced 300% deduction under the productivity and innovation credit (PIC) scheme. For each year of assessment, the cost incurred for in-house training which is not accredited is restricted to $10,000, as well as being subject to a $400,000 overall cap for training expenditure per year of assessment during the qualifying period. The employees are not taxed on this fringe benefit as a concession. (2) Expatriate employees taxes borne by the employer and professional fees charged by the tax agent to prepare their returns of employees remuneration (Form IR8a) are both tax deductible for ASKPL as these are staff costs incurred in the production of income. The tax borne by ASKPL constitutes an additional taxable benefit to the employee and this results in tax on tax, with the ultimate tax burden being borne by the company. On the other hand, the tax agent fee is not taxable to the employee concerned as this is an obligation of the company. (3) Reimbursement of the managers monthly mobile phone bills, including the private portion of usage included therein, is fully tax deductible to ASKPL. The business portion is clearly incurred in the production of income, whereas the private portion is a staff cost incurred which is also allowable. The employee is taxable on the reimbursement of the private portion. (4) Reimbursement of medical expenses incurred by a member of staff during a visit to a traditional Chinese medicine clinic is deductible as it is a staff cost, provided such reimbursement is available to all staff. The employee is not taxed by concession even though this may be classified as non-basic medical care. (5) A hotel stay of ten days for a regional internal audit manager during his visit to ASKPL to perform audit functions is deductible as this is for a business purpose and it is incurred in the production of income. The recipient should not be taxed as he does not derive any benefit as the stay is related to an employment exercised in Singapore. (b) Goods and services tax (GST) implications (1) Input tax incurred on refreshments provided during training sessions is claimable provided similar benefits are also provided to other staff in other similar training sessions. This satisfies the close nexus test under the indicator directly maintains or promotes the efficiency of your business. There is no need to deem output tax as the supply relates to food items. (2) Expatriate employees taxes borne by an employer do not attract input tax, whereas any input tax incurred on the professional fees charged by the tax agent to prepare returns of the employees remuneration (Form IR8a) is claimable as it is the employer s responsibility to prepare this form. It is not a fringe benefit, so there is no need to deem output tax. (3) Reimbursement of the managers monthly mobile phone bills will include the input tax incurred thereon. Strictly speaking, only the input tax attributable to the business portion is claimable whilst that attributable to the private portion is not claimable, and if the business cannot identify the business portion, then it potentially cannot claim any portion of the input tax. However, in practice, as a concession, four-sevenths of the input tax is claimable where the company cannot identify the private portion. The claim on the business portion satisfies the close nexus test under the indicator is necessary for the proper operation of your business. There is no need to deem output tax since the claim is based on a business purpose. (4) The input tax on the medical expenses reimbursed to a member of staff incurred during a visit to a traditional Chinese medicine clinic is strictly blocked and so ASKPL cannot claim any part of it. There is no need to deem output tax since the input tax is not claimable. (5) Input tax incurred on a hotel stay for ten days for a regional internal audit manager during his visit to perform audit functions is claimable by ASKPL as it is attributable to a business purpose. There is no need to deem output tax as this is not a fringe benefit provided to staff. 5 Charismatic Pte Ltd (CPL) (a) General anti-avoidance provision The purpose of general anti-avoidance legislation is to enable the tax authorities to challenge the actions of a taxpayer seeking to reduce their tax liability other than through the use of bona fide transactions. In Singapore, the relevant provision is contained in s.33 of the Singapore Income Tax Act (SITA), which applies to all arrangements which directly or indirectly alter the incidence of tax; or relieve any person of liability to pay tax; or reduce or avoid any tax liability. The section grants the Comptroller power to counteract the effect of such an arrangement either by disregarding it entirely; or by varying it; or by making such adjustments as he considers appropriate to the computation of profits/gains or tax liability. 19

9 The objective is to counteract blatant cases of tax avoidance where some element of artificiality or steps which lack substance are involved but not to penalise legitimate transactions, even if these result in a tax saving. Accordingly, the provisions of the section do not apply where it can be shown that the arrangement or transaction was carried out for a bona fide commercial reason and did not have as one of its main purposes the avoidance of tax in Singapore. (b) CPL s income tax position Based on past practice and as agreed with the Comptroller, CPL is not subject to tax on any of the expenses incurred by CPL which are reimbursed by Charismatic Corporation Limited (CCL), only on the service fee received of 5% of the total expenses reimbursed. With respect to this service fee, CPL is subject to tax without any adjustment for any non-tax deductible expenses. Hence the payment of $200,000 by CPL for the proposed consultancy services rendered to Deborah would not result in a lowering of the tax liability of CPL. But the additional service fee of $10,000 (5% of $200,000) will be taxable, resulting in a corresponding tax liability of $1,700 ($10,000 x 17% (the prevailing corporate tax rate)), ignoring the partial tax exemption and the corporate income tax rebate. It is therefore unlikely that the Comptroller will invoke s.33 since the payment arrangement will result in an increase rather than a decrease in CPL s corporate tax liability in Singapore because of the cost-plus arrangement agreed with the Comptroller. Regardless of whether this arrangement is considered as artificial by the Comptroller, its purpose is the avoidance of Australian tax and not Singapore tax. Consequently, it will fall outside the purview of the general anti-avoidance provisions in Singapore. Tutorial note: Despite falling outside the scope of the general anti-avoidance provisions in Singapore, the arrangement could be challenged by the Australian tax authorities. (c) Withholding tax position A payment for the management or assistance in the management of any trade, business or profession will be deemed to be derived from Singapore if it is borne directly or indirectly by a person resident in Singapore or by a permanent establishment in Singapore or is deductible against income accruing in or derived from Singapore [s.12(7)(c)]. A person making such a payment to a non-resident is obliged to withhold tax at a prescribed tax rate (i.e. currently 17%) [s.45a] unless it can be supported that such payment is made at arm s length and the services have been rendered exclusively outside Singapore. As Deborah is a non-resident professional, the withholding tax rate, if applicable, should be 15% on the gross payment unless she opts to be taxed at 22% on a net basis, i.e. after claiming deductible expenses. Where the requirement to withhold tax applies, the person making the payment is required to withhold the tax and pay it to the Comptroller by the 15th day of the second month from the actual or deemed payment date, whichever is the earlier. Otherwise, a late payment penalty of up to 20% of the withholding tax due may be imposed. The nature of the consultancy services to be rendered by Deborah is not specified in the scenario, but they are likely to come within the definition of management or technical services. However, it is unlikely that they will come within a strict definition of derived from Singapore given that the amount is reimbursed in full to CPL by CCL, a US tax resident, and given the arrangement with the Comptroller, that the amount is not deductible against CPL s income taxable in Singapore. Further, even if the payment were deemed to be derived from Singapore, the clear intention of the arrangement is that the services by Deborah are to be rendered after her return to the US and, thus, presumably from outside Singapore. If this is the case, then no withholding tax obligation should arise. Therefore, provided CPL can substantiate both the nature of the payment and that the services were rendered exclusively from outside Singapore, it is unlikely that the Comptroller will challenge the non-application of withholding tax. But CPL should be aware that if there is an obligation to withhold tax, then the Comptroller will have recourse to CPL, as payer, for both the tax plus any late payment penalties due. 20

10 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) June 2018 Marking Scheme 1 Tax advice to Mr Umar Pollard Available Maximum (i) Tax treatment of subsidiary versus branch Similarities in tax treatment ( each) 3 5 Differences in tax treatment ( each) 1 5 Different bases for determining tax residence 1 0 Explanation and application of foreign sourced income exemption (FSIE) regime 4 0 Explanation and application of foreign tax credit (ii) Tax incentives (1) Start-up tax exemption (SUTE) scheme Benefits of the scheme 1 0 Conditions ( each) 2 0 Holding and operating structure necessary to qualify (2) Mergers and acquisitions (M&A) scheme Benefits of M&A scheme (1 mark each) 3 0 Conditions for acquiring company and application: Incorporation and tax resident in Singapore 2 5 Trade or business/local employees/not connected (1 mark each) 3 0 Conditions for timing and quantum of acquisition and application 2 0 Conditions for target company (iii) Equity versus debt financing Tax implications of equity financing 1 5 Tax implications of debt financing (iv) Goods and services tax (GST) implications No obligation to register for GST if the company is merely holding the investments and not trading 1 0 Place of supply rules and conclusion 2 0 Liability to register for GST compulsorily 2 0 Voluntary registration option 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 Anna Available Maximum (a) Comments on advice given by Kevin Correct re $80,000 cap and performance bonus ( each) 1 0 Explanation of each incorrect comment (1 mark each) (b) Individual income tax for YA 2018 See answers for detailed allocation of marks Ovict Pte Ltd (a) Choice of transfer pricing methods Identification of five methods ( each) 2 5 Comparison of traditional transaction methods and transactional profits methods 3 0 Factors to consider (1 mark each) 4 0 Approach of IRAS/taxpayer (b) Appropriate method for Brand A chairs Use resale price method based on role as distributor 1 5 Justification by reference to: Comparable gross margin basis 1 0 Recovery of selling and operating costs 1 0 More reliable than CUP method, with reasons 1 5 Need to adjust for material differences 1 0 Caveats re extent of value added 1 0 Use of internal v external comparables 1 0 Computation of transfer price

12 4 Allied Singapore Kingsmen Pte Ltd (ASKPL) Available Maximum (a) Income tax issues Refreshments: Deductible, with reason 1 0 Productivity and innovation credit (PIC) claim, including limits 1 5 Not a taxable benefit, with reason 1 0 Expatriate taxes and agent s fees: Both deductible, with reason 1 0 Tax is a benefit including tax on tax effect 1 5 Agent s fees not a benefit, with reason 1 0 Mobile phone bills: Deductible, with reasons 1 0 Taxable benefit re private usage only 1 0 Medical expenses: Deductible, with reason 1 0 Not a taxable benefit, with reason 1 0 Hotel stay: Deductible, with reason 1 0 Not a taxable benefit, with reason (b) Goods and services tax (GST) issues Refreshments: Input tax 1 5 Output tax Expatriate taxes and agent s fees: Input tax 1 5 Output tax Mobile phone bills: Input tax 1 5 Output tax Medical expenses: Input tax 1 0 Output tax Hotel stay: Input tax 1 0 Output tax

13 5 Charismatic Pte Ltd (CPL) Available Maximum (a) General anti-avoidance provision (GAAP) Purpose of GAAP 1 0 Applies to arrangements 2 0 Powers of the Comptroller 2 0 Need for artificiality 1 0 Not if bona fide commercial 1 0 OR if main purpose not tax avoidance (b) Income tax position Payment not deductible 1 0 Increase in taxable service fee 1 0 Corresponding increase in tax payable 1 0 Comptroller unlikely to invoke s.33, with reason (c) Withholding tax (WHT) position Definition of derived from Singapore 2 0 Obligation to deduct at prescribed rate 1 0 Exceptions re arm s length and outside Singapore 2 0 Payment mechanism and timing 1 0 Penalties up to 20% Discussion re applicability of WHT 2 0 Risk of challenge by the Comptroller