Professional Level Options Module Advanced Taxation (Singapore) Friday 7 December 2012 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 2012 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 2012 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 2010 to 28 February 2011) 20% 15 0% Rates of CPF contributions (from 1 March 2011 to 31 August 2011) 20% 15 5% Rates of CPF contributions (from 1 September 2011) 20% 16 0% Maximum monthly ordinary wages (OW) attracting CPF prior to 1 September 2011 $4,500 from 1 September 2011 $5,000 For the year 2011 (i.e. from 1 January 2011 to 31 December 2011) Maximum annual ordinary wages (OW) attracting CPF $56,000 Maximum annual additional wages (AW) attracting CPF $79,333 less OW subject to CPF Personal income tax for the year of assessment 2012 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 2012 Earned income Normal (max) Handicapped (max) Below 55 years $1,000 $2,000 55 to 59 years $3,000 $5,000 60 years and above $4,000 $6,000 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 Unique Design Pte Ltd (UDPL) is a company incorporated, goods and services tax (GST)-registered and tax resident in Singapore since 1995. It is in the business of providing interior design services as well as the manufacture and sale of furniture. UDPL entered into the following transactions in the year 2011: (i) (ii) Sale and leaseback of factory UDPL currently owns the leasehold interest in a factory located at Tuas. This leasehold property had been acquired in the year 2008 and UDPL claimed industrial building allowances immediately. The property has been classified as long-term investment property in UDPL s balance sheet since 31 December 2008. The acquisition was financed by an eight-year term loan from a local bank. To raise funds for the expansion and development of its business, at the end of December 2011, UDPL entered into a sale and leaseback arrangement to sell its interest in respect of this leasehold property to a Singapore real estate investment trust (REIT). On the same date, UDPL leased back the same property from the REIT, and continued with the industrial usage of the factory. The sale gave rise to an exceptional gain of $12 million in UDPL s profit and loss account, and from January 2012 onwards, the monthly rental payable to the REIT will be reflected in its accounts as an operating expense. UDPL had entered into a similar sale and leaseback transaction previously and derived a net gain from the disposal of another similar factory after holding it for over ten years. The gain on this previous transaction was regarded as a capital receipt and not taxable by the Inland Revenue Authority of Singapore (IRAS). Purchase of equity investments In July 2011, UDPL purchased 20% of the shares of Plentywood Pte Ltd (PPL), a company incorporated and tax resident in Singapore. PPL has an overseas subsidiary, Plentywood Corporation (PwC), a company incorporated, tax resident and listed in Country X with which Singapore does not have a tax treaty. PwC owns a sizeable piece of forested land in Country X and carries on the business of logging timber and processing it into a semi-finished state for export to companies in the region. UDPL purchased its 20% stake in PPL with the specific purpose of minimising any potential disruption to its supplies of hardwood and its exposure to price fluctuations. Country X, however, changed its laws in November 2011 to prohibit any foreign participation in companies in forestry and other primary industries. To comply with those laws, PPL sold its entire stake in PwC in December 2011, and UDPL similarly sold its 20% stake in PPL, suffering a loss of $3 million. (iii) Payment for special trade secrets In September 2011, UDPL made a one-time payment of $5 million to Special Design Incorporated (SDI), a company incorporated and tax resident in Country Y with which Singapore does not have a tax treaty. In return for this consideration, SDI will share with UDPL special trade secrets relating to the design and manufacture of special high-grade furniture. This is the first time UDPL had ever invested in such capital expenditure. A preliminary tax computation prepared by the accountant showed that UDPL had a small tax loss position for the year 2011, before considering this $5 million expenditure. Write a letter in your capacity as external tax advisor to the board of directors of Unique Design Pte Ltd (UDPL), advising them on the pertinent Singapore tax implications for the year 2011 and future years of each of the above three independent scenarios. Your advice should consider the income tax, stamp duty, property tax, goods and services tax (GST) and withholding tax implications, as appropriate. 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) The following mark allocation is provided as guidance for this question: (i) 16 marks (ii) 3 marks (iii) 9 marks (28 marks) (32 marks) 5 [P.T.O.
2 Aaron and Belle are the only two individual shareholders of a group of companies (see diagram below) which they founded jointly in 2006. Local Holding Pte Ltd (LHPL), Local One Pte Ltd (LOPL) and Local Two Pte Ltd (LTPL) are all incorporated in Singapore, whilst Foreign One Pte Ltd (FOPL) is incorporated in a foreign country. All four companies adopt the same, 31 December, year end. There has been no change in the business activities of any of the four companies since 2006. Aaron Belle 60% 40% LHPL 20% LOPL 80% 100% FOPL 80% 20% LTPL % refers to the percentage of ordinary shares held. Aaron has decided to transfer all of his shareholdings to his son, Chris, in two tranches: firstly, his entire 60% in LHPL on 1 October 2011, followed by his entire 20% in LOPL on 1 March 2012. The following tax information relates to LHPL, LOPL and LTPL for the years of assessment 2010 to 2012: LHPL LOPL LTPL Year of assessment 2012 Adjusted trade profit/(loss) before capital allowances 8,000,000 10,000 (90,000) Current year capital allowances 1,500,000 (to be calculated) 50,000 Year of assessment 2011 Adjusted trade profit before capital allowances 6,000,000 Nil 550,000 Current year capital allowances 1,500,000 20,000 50,000 Year of assessment 2010 Adjusted trade profit before capital allowances 6,500,000 Nil 450,000 Current year capital allowances 1,000,000 290,000 50,000 Notes: 1. LOPL has two assets Machine #1 (cost: $1 2 million) and Machine #2 (cost: $1 5 million), both bought in 2008. Three year capital allowances were claimed for both machines for the years of assessment 2009 and 2010, but deferred for the year of assessment 2011. 2. On 1 June 2011, Machine #2 was transferred to LHPL for its use at a market value of $800,000. The capital allowances of $1,500,000 for LHPL for the year of assessment 2012 are stated before taking account of any effects of this transfer. Advise how the income tax liabilities of Local Holding Pte Ltd, Local One Pte Ltd (LOPL) and Local Two Pte Ltd can be minimised for the years of assessment 2011 and 2012. Your answer should include an explanation as to whether a s.24 election will or will not be beneficial for the group and a tax computation for LOPL for the year of assessment 2012. (28 marks) 6
Section B TWO questions ONLY to be attempted 3 Solidcare Pte Ltd (SPL) is a wholly-owned Singapore subsidiary of a parent company incorporated outside Singapore. During the year 2011, SPL conducted all its board of directors meetings in Singapore. SPL s adjusted trading profit in the year ended 31 December 2011, after capital allowance claims, is $100,000. Besides its Singapore-sourced income, SPL also derived the following income from non-treaty countries during the year 2011: Dividend income A net dividend of $136,000 was received in Singapore from a company F in Country F. SPL holds a 20% stake in company F s shares. Country F s corporate tax rate is 15% and a 20% withholding tax is applicable to dividends paid out of after-tax profits of companies in Country F. Branch profits A net profit after tax of $270,000 was received from the business operations of SPL s branch set up in Country G. The corporate tax rate in Country G is 10% and this same rate applies to both branches and subsidiaries set up in Country G. Royalties A net royalty of $380,000 was received from Country H. The amount received is net of 5% withholding tax levied in Country H. Country H s corporate tax rate is 20%. (a) (b) Advise Solidcare Pte Ltd (SPL) on the taxability of its foreign-sourced income, including the applicability or otherwise of the foreign tax credit pooling system. (9 marks) Compute SPL s minimum Singapore income tax liability for the year of assessment 2012, assuming the most tax-efficient election for the foreign tax credit pooling is made. (9 marks) (c) State any TWO situations where foreign tax credit pooling is not allowed. (2 marks) (20 marks) 4 Liverham City Limited (LCL) is a company incorporated and tax resident in Country L. In January 2010, LCL incorporated Liverham City Pte Ltd (LCPL), a wholly-owned subsidiary, in Singapore. Approximately 30% of LCPL s labour force are expatriate employees. Under LCL s overseas employee share option plan, a substantial number of expatriate employees exercising their employment with LCPL have been granted employee share options. Under the share option plan, the options can be exercised for a period of up to five years and may be exercised both whilst the employees are still in their Singapore employment or after they have left Singapore. Employees also have the option to cancel the share options for a cash consideration. The employees have been advised that they will have to pay Singapore tax when they sell the shares acquired, but neither LCPL nor its expatriate employees are sure of their tax and other compliance obligations under the employee share option scheme itself. Advise Liverham City Pte Ltd and its expatriate employees on all pertinent Singapore tax implications arising from the operation of Liverham City Limited s employee share options in Singapore. Note: You are not required to consider the applicability or effect of the equity remuneration incentive scheme. (20 marks) 7 [P.T.O.
5 Quebec Trading Limited (QTL), an entity incorporated and tax resident in Country Q, currently holds the trademarks of a particular brand of product. QTL now wishes to license these trademarks to its Singapore subsidiary, Quebec Singapore Pte Ltd (QSPL). The licence agreement will provide for an annual charge due for payment within 30 days after the end of each calendar year. The first annual charge will be invoiced by QTL on 31 December 2011 for the year 2011. The agreement will be stated as subject to annual review. Rather than licensing the trademarks directly to QSPL, QTL is also exploring another alternative whereby the trademarks will be licensed to Romeo Trading Limited (RTL), a subsidiary of QTL in Country R; and thereafter RTL will then sub-license the trademark to the Singapore subsidiary, QSPL. Singapore has a comprehensive tax treaty with Country R, which provides that the withholding tax on royalties may not exceed 8%, but Singapore does not have a comprehensive tax treaty with Country Q. Therefore, QTL is concerned that the alternative indirect structure might be challenged by the Inland Revenue Authority of Singapore (IRAS). (a) (b) Assuming that the trademarks are licensed directly by Quebec Trading Ltd (QTL) to Quebec Singapore Pte Ltd (QSPL), explain the pertinent Singapore income tax and goods and service tax (GST) implications arising from the proposed payment for the trademarks by QSPL. (13 marks) Comment on the effect of the alternative structure, by which the trademarks would be licensed to QSPL indirectly via Romeo Trading Limited, and consider the extent to which QTL s concerns over the possibility of challenge by the Inland Revenue Authority of Singapore are justified. (7 marks) (20 marks) End of Question Paper 8