Professional Level Options Module Advanced Taxation (Singapore) Friday 7 June 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 United Diversified Group Limited (UDGL) is the parent company of a diversified group, all of whose companies currently operate only in Country A. Country A has a standard corporate tax rate of 30% and so far has not concluded a comprehensive double taxation agreement with Singapore. The UDGL group chairman has heard that because of its competitive tax regime, Singapore will be an ideal location to expand the Group s business in Asia. To start with, the Group is looking to form an overseas holding company in Singapore which will eventually be the headquarter base for a number of operating companies, both in Singapore and elsewhere in the Asia Pacific region. In Singapore, the companies would most likely focus on the medical sector, as the Group is looking at transferring the software and systems technologies it has developed relating to the cross-border sharing of medical information, including intellectual properties (IPs), from the UK to Singapore. Once it has become more established in the region, the Group will also consider developing its own research and development (R&D) capabilities in the medical field in Singapore. It is envisaged that some of the companies in Singapore will be in tax paying positions whilst others may not be. Whilst exploring the various tax incentives in IP transfer and R&D, the Group would also like to optimise its overall tax position, taking into account the group relief system in Singapore. As an external tax advisor, you have been tasked to advise the group chairman of United Diversified Group Limited on all pertinent Singapore tax issues in relation to the Group s planned activities in Singapore. Specifically, you have been asked to provide him with a letter which addresses the following tax issues: (i) the reasons why Singapore is generally regarded as an ideal country in which to locate overseas holding companies; (7 marks) (ii) the tax incentives available for qualifying headquarters companies; (10 marks) (iii) the tax incentives available for the setting up of research and development (R&D) activities; (iv) the tax incentives available for the transfer of intellectual properties to Singapore; and (6 marks) (5 marks) (v) whether there would be any tax disadvantages from the setting up of a separate company to undertake the R&D activities. (3 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 In January 2012, Green Ultrotech Pte Ltd (GUPL) commenced the manufacture of a green product which has been designated as a pioneer product in Jurong Island. GUPL was awarded pioneer status for five years with the production day set on 1 January 2012. In addition to the pioneer product, GUPL was allowed to carry on a separate trade. The following are details of the net profits for the year ended 31 December 2012 for both GUPL s pioneer and non-pioneer trades: Pioneer Non-pioneer Total $ $ $ Sales 4,000,000 1,000,000 5,000,000 Interest on fixed deposit account 6,400 4,600 11,000 Donations to approved institutions of public character (8,000) (2,000) (10,000) Non-deductible expenses (1,230,000) (15,000) (1,245,000) Other deductible expenses (2,400,000) (980,000) (3,380,000) Net profit 368,400 7,600 376,000 Capital allowances available $50,000 (a) (b) (c) Compute the pioneer profits and tax payable by Green Ultrotech Pte Ltd (GUPL) for the year of assessment 2013, assuming abatement of the pioneer income applies to the company. (13 marks) Recalculate the pioneer profits and tax payable by GUPL for the year of assessment 2013, assuming that: due to a higher quantum of deductible expenses, the company incurs a non-pioneer loss of $46,000 (instead of $7,600 profit); and the Comptroller is NOT satisfied that this loss was not incurred to obtain a tax advantage. Note: All other factors remain the same as in part (a). (8 marks) State the reasons which may satisfy the Comptroller that the loss under (b) was not incurred to obtain a tax advantage. (4 marks) (25 marks) 6
Section B TWO questions ONLY to be attempted 3 Rejuvenate Conglomerate Pte Ltd (RCPL) is a construction company incorporated and tax resident in Singapore since 2008. In addition to undertaking its own construction projects in Singapore, RCPL also sells related construction materials and provides construction-related services to customers in Asia. During the year 2012, personnel from RCPL travelled frequently to Asian countries in search of further business opportunities and to liaise with end-customers directly or indirectly through a network of agents or brokers. All of the Asian countries concerned have concluded comprehensive double taxation agreements with Singapore. From 1 July 2012, RCPL decided to second a country finance manager and a country general manager, both Singaporean citizens, to Country X for a three-year period to oversee the day-to-day operations relating to a construction project there. To ensure that the two Singaporeans are not worse off as a result of their posting, RCPL would like to implement any tax policies which will help them. Amongst other initiatives, RCPL is considering a tax equalisation or tax protection policy. Country X has concluded a comprehensive double taxation agreement with Singapore which follows the OECD model. The corporate tax rate of Country X is 25%. Individual tax rates in Country X are higher than those in Singapore for comparable chargeable incomes. (a) (i) Discuss how the existence of a permanent establishment (PE) is determined in the case of a country with which Singapore has concluded a double taxation agreement. (7 marks) (ii) Explain the Singapore tax consequences for Rejuvenate Conglomerate Pte Ltd (RCPL) if its activities are considered to constitute a permanent establishment in one or more Asian countries. Your explanation should include the situation where RCPL incurs tax losses on its Singapore activities. (6 marks) (b) (i) Assuming the two employees of RCPL who are seconded to Country X are exposed to individual income tax in Country X, outline the potential protection they can seek from the Singapore/Country X tax treaty; (3 marks) (ii) Explain the effect of (1) a tax equalisation policy; and (2) a tax protection policy and state, with reasons, whether or not in the case of the two employees, the chosen policy will make any difference to RCPL. (4 marks) (20 marks) 7 [P.T.O.
4 (a) Supreme Apps Limited (SAL) is a company incorporated and tax resident in Country Y. SAL has had a branch registered in Singapore since 2008. The branch operates quite independently from SAL s head office in Country Y. SAL is contemplating entering into a contract with a Singapore tax resident company to help the latter create certain mobile phone applications. The tax accountant of the Singapore company has advised SAL that withholding tax of 17% would have to be accounted to the Inland Revenue Authority of Singapore (IRAS), regardless of whether it contracts with the company s head office in Country Y (i.e. SAL) or with its Singapore branch. (i) (ii) State, with reasons, whether or not you agree with the advice provided by the tax accountant. (4 marks) Assuming withholding tax is applicable, advise Supreme Apps Limited of the actions it might take to either avoid the withholding tax or minimise the cash flow impact caused by the withholding tax. (8 marks) (b) Identify and briefly explain ANY FOUR transfer pricing methods which are recommended in the OECD Transfer Pricing Guidelines which are also endorsed by the Singapore tax authorities. (8 marks) (20 marks) 8
5 Derby Superb Corporation (DSC) is a company incorporated and tax resident in Country Z. To date, DSC has derived its income both from the supply of goods within and the export of goods from Country Z but is now proposing also to provide event management services to customers in Singapore and in other South East Asian countries. As its first of many event management ventures, DSC is pitching for an event with a total income of $1 5 million, which will take place in Singapore. DSC s customer for this event is located in the US, and will be billed for the event by DSC s associate company in Singapore. Initially, DSC received the following advice from an external tax advisor in Singapore: You will need to register for goods and services tax (GST) since your taxable turnover will exceed $1 million. As a result of this advice, DSC believes it will need to add 7% output tax to the total event price. Secondly, DSC received further advice from the accountant of its associated company in Singapore saying that under s.21(3)(k) of the GST Act: You may claim the fees as international services but not the accommodation and entertainment portion therein which you will have to split out, and charge GST only on this latter portion at 7%. From this, it appeared to DSC that if it can segregate the accommodation and entertainment fees from the event management fees, GST need only be charged on the accommodation and entertainment fees, and not on the event management fees. Finally, DSC s US client has advised it as follows: One thing which did come to our attention is that under Singapore tax law, if you are a branding agency in Singapore, you are actually not required to charge GST to your clients. This suggests to DSC that if it could register as a branding agency in Singapore, it would not need to charge any GST to its US client but that it would be able to claim GST on all its costs. DSC is now confused and has sought your advice on the correct GST treatment. DSC would obviously prefer not to charge any GST if this is legitimate. (a) (b) Analyse the above scenario to determine the extent to which the advice Derby Superb Corporation (DSC) has received from the three parties as to the goods and services tax (GST) treatment of the event is correct. (15 marks) State the purpose and effect of the major exporter scheme, together with the conditions which a trader needs to satisfy in order to qualify for the scheme. (5 marks) (20 marks) End of Question Paper 9