Professional Level Options Module Advanced Taxation (Singapore) Friday 6 December 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 4 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (SGP) The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the year of assessment 2013 will continue to apply for the foreseeable future. 2. All apportionments should be made to the nearest month. 3. Calculations and workings need only be made to the nearest $. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Goods and services tax Standard rate 7% Registration threshold $1 million Stamp duty Purchase or transfer of immovable property Purchase price or market value Every $100 or part thereof of the first $180,000 $1 Every $100 or part thereof of the next $180,000 $2 Thereafter, every $100 or part thereof $3 Transfer of shares Purchase price or net asset value Every $100 or part thereof $0 20 Corporate income tax rate Year of assessment 2013 17% Partial tax exemption $ First $10,000 of chargeable income is 75% exempt 7,500 Next $290,000 of chargeable income is 50% exempt 145,000 Total 152,500 Full tax exemption for new start-up companies $ First $100,000 of chargeable income is 100% exempt 100,000 Next $200,000 of chargeable income is 50% exempt 100,000 Total 200,000 2
Central Provident Fund (CPF) Contributions for individuals below the age of 50 years and earning more than $1,500 per month Employee Employer Rates of CPF contributions (from 1 September 2011) 20% 16% Maximum monthly ordinary wages (OW) attracting CPF (from 1 September 2011) $5,000 For the year 2012 (i.e. from 1 January 2012 to 31 December 2012) Maximum annual ordinary wages (OW) attracting CPF $60,000 Maximum annual additional wages (AW) attracting CPF $85,000 less OW subject to CPF Personal income tax for the year of assessment 2013 Chargeable income Tax rate Tax $ % $ On the first 20,000 0 0 On the next 10,000 2 0 200 On the first 30,000 200 On the next 10,000 3 5 350 On the first 40,000 550 On the next 40,000 7 0 2,800 On the first 80,000 3,350 On the next 40,000 11 5 4,600 On the first 120,000 7,950 On the next 40,000 15 0 6,000 On the first 160,000 13,950 On the next 40,000 17 0 6,800 On the first 200,000 20,750 On the next 120,000 18 0 21,600 On the first 320,000 42,350 Above 320,000 20 0 3 [P.T.O.
Personal income tax reliefs for the year of assessment 2013 Earned income Normal (max) Handicapped (max) Below 55 years $1,000 $4,000 55 to 59 years $6,000 $10,000 60 years and above $8,000 $12,000 Spouse relief $2,000 (max) Qualifying child relief (per child) $4,000 Handicapped child relief (per child) $5,500 Working mother s child relief (WMCR) % of mother s earned income First child 15% Second child 20% Third and subsequent child 25% Maximum cumulative WMCR 100% Maximum relief per child $50,000 Grandparent caregiver relief $3,000 Life assurance relief Voluntary CPF contribution of self-employed Course fees $5,000 (max) Capped at $30,600 or 36% of s.10(1)(a) assessable income whichever is lower $5,500 (max) NSman Normal appointment Key appointment holder holder Active NSman $3,000 $5,000 Non-active NSman $1,500 $3,500 Wife/widow/parent of NSman $750 $750 Foreign maid levy $6,360 (max) 4
Section A BOTH questions are compulsory and MUST be attempted 1 Hori Construction Private Limited (HCPL) is an engineering and construction services company incorporated and tax resident in Singapore since 2007. It is owned equally by two Singapore individual shareholders, who are also directors of the company. HCPL has been registered for goods and services tax (GST) in Singapore since 2008. HCPL has had an impressive track record of profitability in recent years and is now contemplating a public listing in Singapore. To prepare for the initial public offer (IPO), HCPL will contract with a number of external professional service providers such as lawyers, accountants and IPO advisers from 2012. The two existing HCPL shareholders each propose to transfer their shareholding in HCPL to a newly incorporated company, Hori Holdings Limited (HHL), in return for an equivalent shareholding in HHL. HHL will operate as the listing vehicle for the IPO. Rather than operating as a mere investment holding company, HHL will, for a fee, provide management services to HCPL and any other future subsidiaries, which will encompass accounting, information technology, legal and human resource services. Key personnel with the relevant skills to provide these services currently employed in HCPL will also be transferred to HHL. As the listing will take place in Singapore, the potential investors in HHL may be individuals or companies and may or may not be tax residents in Singapore. As the company s tax adviser, draft a letter to the Board of Directors of Hori Construction Private Limited (HCPL) advising them on all the pertinent Singapore tax issues relevant to the following: (i) (ii) the transfer of shares from HCPL to Hori Holdings Limited (HHL) by the existing HCPL shareholders; (5 marks) for the potential investors in HHL (corporate and individual, resident and non-resident): their general Singapore income tax position, and the specific tax issues relating to their purchase, ownership and disposal of shares in HHL; (18 marks) (iii) the related goods and services tax (GST) issues relevant to HCPL and HHL. (8 marks) Professional marks will be awarded in question 1 for the appropriateness of the format, presentation and structure of the letter, the effectiveness with which the information is communicated and its logical flow. (4 marks) (35 marks) 5 [P.T.O.
2 Sapphire Pte Ltd (SPL) is a manufacturing company incorporated and tax resident in Singapore since 2010. Due to increased demand for its consumer products and space constraints in its existing factory in Singapore, SPL intends to move the manufacturing of its products to Johor Bahru in Malaysia, by means of an outsourcing arrangement with Company M. Special packaging equipment is needed for the manufacturing of SPL s products and other companies cannot imitate this technology. Therefore, SPL intends that the outsourcing of the manufacture of its products to Company M is done under the company s tight control. As part of the transfer of the manufacturing of its products to Company M, SPL will: 1. Lease the machine currently used for packaging its products to Company M at no consideration. 2. Buy new equipment for the manufacture of its products and lease it to Company M at no consideration. 3. Buy the raw materials for the products and give these to Company M at no consideration to enable Company M to start manufacturing its products. SPL intends to procure these raw materials from a supplier in Malaysia, who is a tax resident in Malaysia, and allow the supplier to deliver the raw materials directly to Company M. The supplier will invoice SPL for the raw materials supplied to Company M. Company M will rent a factory in an industrial park in Johor Bahru (which will be completed in March 2014) especially for the manufacturing of SPL s products. Company M will hire its own staff for the operation of this factory and the related packaging activities and it will also pay for all other expenses, such as electricity and salaries for the staff. After Company M manufactures the products, some of the finished products will be delivered to SPL in Singapore, some will be delivered directly to SPL s customers in Malaysia and some will be exported directly to SPL s overseas customers in countries other than Malaysia and Singapore. SPL intends to pay Company M a pre-agreed commission on a monthly basis as an outsourced processing fee. The monthly commission will be the total of the salaries of the workers hired by Company M and the building rent, utility and other expenses borne by Company M, plus a markup of 5%. Company M in Malaysia will apply to be a licensed manufacturing warehouse (LMW). The packaging machine is likely to be imported into Malaysia in March 2014 and the approval for the LMW licence is expected to be granted in July 2014. SPL s employees will provide technical assistance and advice to ensure proper quality control at Company M s factory premises in Johor Bahru on an ad hoc basis, but especially for the first two months after the transfer of the packaging machine. (a) (b) (c) (d) Advise Sapphire Pte Ltd (SPL) whether it is entitled to claim capital allowances on the existing and new equipment to be used in the manufacture of its products by Company M. (6 marks) Explain the Singapore withholding tax implications of the outsourced fee payment made by SPL to Company M. (7 marks) Advise on the tax implications for SPL arising from each of the two options below in respect of the decision to send Company M s employees for training in Singapore: (i) (ii) Company M pays the costs incurred by its employees first and then includes them in the outsourcing fee charged to SPL; and Company M pays the costs as in (i) and then re-charges the actual amount directly to SPL. Note: You should assume that the costs incurred comprise the cost of travel to and from Singapore, hotel accommodation, meals and public transport while in Singapore. (11 marks) State, with reasons, whether or not Company M s employees coming to Singapore for training at SPL will have any exposure to Singapore income tax. (1 mark) (25 marks) 6
Section B TWO questions ONLY to be attempted 3 (a) Singapore has concluded double taxation agreements with several countries based on the OECD model. Explain the main functions of a double taxation agreement (DTA) and outline the key features which are included in such an agreement. (8 marks) (b) A Ltd carries on its business activities in both Singapore and Country P. A Ltd also receives royalties for the use of a patent which it developed from B Ltd, which is resident and carries on business in Country R. Double taxation agreements (DTAs), based on the OECD model, have been concluded between Singapore and Country P, Singapore and Country R, as well as between Country P and Country R. Discuss the potential taxing rights of Singapore, Country P and Country R with regard to A Ltd s business profits and royalty income. (12 marks) (20 marks) 7 [P.T.O.
4 Mr James Kim is a Korean citizen sent by the Korean head office of Seongnam Holding Limited to work in the company s representative office in Singapore for a period of four years. James started work in Singapore on 1 January 2012 and has been granted area representative status from the same date. The following additional information is available regarding James Kim for the year 2012: 1. Travel schedule of visits made outside Singapore for business purposes Date of departure from Singapore Date of arrival in Singapore Countries visited 3 January 2012 28 February 2012 India 13 March 2012 28 April 2012 Hong Kong 2 June 2012 27 June 2012 China 5 July 2012 25 August 2012 Korea 1 September 2012 31 October 2012 Japan 4 December 2012 22 December 2012 Thailand 2. Income and benefits-in-kind $ Monthly salary of $30,000 360,000 Two months special bonus declared and paid in January 2013 60,000 Three months guaranteed bonus payable in December each year 90,000 Transport and entertainment allowances 25,800 Contributions to overseas social security scheme paid by employer 16,200 Monthly subscription of $150 to Raffles Town Club (family membership) paid by employer 1,800 Monthly rental of $8,000 paid by employer for an unfurnished apartment provided rent free to James 96,000 The apartment was ready for occupation and occupied by James from his first day of work, and he brought in his own furnishings and fittings. 3. Personal information and expenditure James was born in the year 1955 and is divorced. During the year 2012, James: attended an executive management course and paid course fees of $6,000; opened a supplementary retirement scheme (SRS) account with the United Overseas Bank (UOB) Ltd and contributed $25,000 in December 2012. Note: 2012 is a leap year with 366 days. (a) State the conditions which James Kim must have satisfied in order to qualify for area representative status. (4 marks) (b) Calculate the minimum tax payable by James Kim for the year of assessment 2013. (9 marks) (c) Explain the effect on James Kim s chargeable income (as calculated in part (b)) if his December visit to Thailand was made for the purposes of a vacation and not on business. (3 marks) 8
(d) When he opened his supplementary retirement scheme (SRS) account, James intended to make a contribution of $25,000 in each year of his secondment and then withdraw the entire balance in December 2015, immediately prior to his departure from Singapore. However, since signing up for the scheme he has been told that any tax savings could be negated if he were to leave Singapore early. Advise James Kim on the tax efficiency of his supplementary retirement scheme (SRS), assuming that immediately prior to the withdrawal, the investment of his original contributions has grown to $110,000. Notes: 1. You should assume that James s marginal rate of Singapore income tax will remain the same throughout all relevant years of assessment. 2. Ignore the time value of money. (4 marks) (20 marks) 9 [P.T.O.
5 Victory Parade Pte Ltd (VPPL) is a new wholly-owned subsidiary incorporated in Singapore in the year 2011. Its principal activity is trading in rubber and coal. VPPL s parent company in the United Kingdom is a well-established global company involved in the trading of various commodities in Asia and Europe. VPPL s tax agent has advised that it may be tax advantageous for the company to apply to the International Enterprise of Singapore to be a qualifying company under the global trader programme (GTP). VPPL has a wholly-owned subsidiary, also incorporated in Singapore, Winning Ways Pte Ltd (WWPL). Winston, the company accountant of WWPL, paid his annual subscription fees amounting to $535 to the Singapore branch of the Association of Chartered Certified Accountants (ACCA). At the request of Winston, the invoice from ACCA was addressed to Winston personally, but care of VPPL. This arrangement was made because Vivien, the group accountant employed by VPPL, has implemented a policy for all such subscription payments to be made from VPPL. Both VPPL and WWPL are registered for goods and services tax (GST) in Singapore. (a) Explain the key features and qualifying conditions of the global trader programme. (12 marks) (b) Discuss the alternative goods and services tax (GST) treatments which Victory Parade Pte Ltd might apply to the recovery of Winston s subscription fee, without markup, from Winning Ways Pte Ltd after paying the amount invoiced to the Association of Chartered Certified Accountants. Any necessary conditions should be specified. (8 marks) (20 marks) End of Question Paper 10