Tax Singapore Client Alert March 2015 For more information, please contact: Eugene Lim eugene.lim@bakermckenzie.com +65 6434 2633 Allen Tan allen.tan@bakermckenzie.com +65 6434 2681 Dawn Quek dawn.quek@bakermckenzie.com +65 6434 2599 Peter Tan peter.tan@bakermckenzie.com +65 6434 2669 Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1, Singapore 018981 www.bakermckenzie.com Singapore's 2015 Budget: Corporate Tax Implications The 2015 Budget was delivered by the Finance Minister on 23 February 2015. This Budget is a continuation of Singapore's long-term strategy of restructuring Singapore's economy by encouraging innovation and raising productivity and building a fair and equitable society by strengthening social safety nets. In addition, this Budget also seeks to encourage the internationalisation of Singapore companies. In line with this theme, the 2015 Budget features initiatives such as the introduction of a new International Growth Scheme, an enhanced tax deduction for internationalisation and a revised mergers and acquisitions ("M&A") scheme. It also contains a number of important changes to existing tax concessions, especially with regard to preserving Singapore's competitiveness in the financial and maritime sectors. We highlight the key changes below. 1. Introduction of the International Growth Scheme Following the 2015 Budget, the Government will introduce a new International Growth Scheme ("IGS") to support larger and high potential Singapore companies expanding overseas while continuing to anchor key functions in Singapore. The IGS will grant qualifying Singapore companies a 10% concessionary tax rate for a period of up to five years on their incremental income from qualifying activities. Such companies will be required to engage in internationalisation activities and provide opportunities for Singaporean employees to gain greater international exposure. The IGS will be administered by International Enterprise Singapore ("IE Singapore") and the approval window will be from 1 April 2015 to 31 March 2020. IE Singapore will release further details by May 2015. Comments: Pending the release of further details by IE Singapore, it remains to be seen whether foreign multinational companies ("MNCs") headquartered in Singapore will fall within the scope of the rules of the IGS and qualify for the tax concessions therein. 2. Enhancement of the Double Tax Deduction for Internationalisation Scheme The current Double Tax Deduction ("DTD") for Internationalisation Scheme, also administered by IE Singapore, provides businesses with a 200% tax deduction on qualifying expenditure incurred on qualifying market expansion and investment development activities, subject to conditions.
Following the 2015 Budget, the DTD for Internationalisation Scheme will be enhanced to include qualifying manpower expenses incurred from 1 July 2015 to 31 March 2020 for Singaporean employees posted to new overseas entities. However, the amount of qualifying manpower expenses will be subject to a cap of S$1 million and other conditions. Businesses will have to apply to IE Singapore to enjoy the DTD on qualifying manpower expenses. IE Singapore will release further details by May 2015. 3. Extension of the Enhanced-Tier Fund Tax Incentive Scheme to Fund Special Purpose Vehicles Currently, the Enhanced-Tier Fund ("ETF") incentive scheme grants a tax exemption to approved fund vehicles on specified income derived from designated investments. The funds must be managed in Singapore by a Singapore fund manager. In addition, each fund vehicle must meet certain economic conditions in order to obtain the approval of the Monetary Authority of Singapore ("MAS") for the scheme. As a concession, the ETF incentive scheme is currently available to all master and feeder funds in a master-feeder fund structure through a one-time application for MAS approval, provided that the master and feeder funds meet the economic conditions on a collective basis and the feeder funds do not trade. However, special purpose vehicles ("SPVs") do not fall within the scope of this current concession and will need to meet the conditions independently under a separate application in order to enjoy the tax exemption. Following the 2015 Budget, the ETF tax incentive will be extended to accommodate master-feeder fund structures with master funds using SPVs to hold onto investments, subject to conditions. It appears that such master and feeder funds and SPVs will be able to apply for the ETF incentive scheme through a one-time application and meet the conditions on a collective basis. This change will take effect for applications made from 1 April 2015. MAS will release further details by May 2015. Comments: It remains to be seen whether MAS will need to approve an additional SPV each time one is added to a master-feeder fund structure that is already approved for the ETF incentive scheme. This is currently the case for additional feeder funds, but it should be noted that feeder funds are used for fund-raising, while SPVs are used to execute trades. It is also unclear if this extension will only apply to SPVs held by a master fund within a master-feeder fund structure and not to structures without any feeder funds. If so, the definition of SPVs should be clarified in the legislation. 4. Extension of the M&A Scheme The M&A Scheme was introduced in 2010 to encourage companies to grow through M&A. It was scheduled to lapse after 31 March 2015. Following the 2015 Budget, the M&A Scheme will be extended to 31 March 2020 and revised to enable SMEs making smaller acquisitions to also enjoy the benefits under the scheme. Companies that make qualifying acquisitions under the M&A Scheme can enjoy an M&A allowance in respect of the value of the acquisition to be written 2 Client Alert March 2015
down over a period of five years and an additional allowance in respect of transaction costs (e.g., professional fees on due diligence, legal fees, and valuation fees) incurred on the acquisition to be written down over a period of one year. Companies may also obtain stamp duty relief on the transfer of shares in unlisted companies. In this regard, the M&A allowance rate will be increased to 25% (from the current 5%) of the value of the qualifying acquisition. However, the value of qualifying acquisitions per Year of Assessment ("YA") will be reduced to a cap of S$20 million (from the current S$100 million). The allowance on transactions costs will remain at 200% and be subject to the same expenditure cap of S$100,000 per YA. Stamp duty relief will also be reduced, following the cap of S$20 million (from the current S$100 million) on the value of qualifying acquisitions per financial year ("FY"). This translates to a reduced cap of S$40,000 (from the current S$200,000) on stamp duty relief per FY. The shareholding eligibility rules will also be relaxed. Currently, the acquisition must result in the acquirer holding (a) more than 50% ordinary shareholding in the target if the acquirer's original shareholding in the target was 50% or less (the "50% Shareholding Threshold"); or (b) at least 75% ordinary shareholding in the target if the acquirer's original shareholding in the target was more than 50% but less than 75% (the "75% Shareholding Threshold"). Following the 2015 Budget, the 50% Shareholding Threshold will remain but the 75% Shareholding Threshold will be removed. Taking its place will be a lower shareholding threshold for acquisitions resulting in the acquirer holding at least 20% ordinary shareholding in the target where the acquirer's original shareholding in the target was less than 20% (the "20% Shareholding Threshold"). IRAS has announced that acquirers qualifying under the 20% Shareholding Threshold must also have: at least 1 director represented on the Board of Directors of the target company; and acquired a shareholding of at least 20% in the target and the target must also be considered an associate of the acquirer under Singapore FRS 28 or Singapore FRS for Small Companies. It should be noted that prior to the 2015 Budget, acquirers could elect for its ordinary share acquisitions in a target made during a 12-month period to be consolidated to qualify for the M&A Scheme, even if the acquisitions straddled across FYs. Following the 2015 Budget, this 12-month look-back period will be removed to simplify the M&A Scheme. IRAS will release more details by May 2015, including details of relevant transitional arrangements. Comments: With the reduced cap on the value of qualifying acquisitions and the relaxed shareholding eligibility rules, the changes to the M&A Scheme will benefit companies making smaller acquisitions. For larger acquisitions, the maximum M&A allowance remains unchanged at S$5 million (which can be written down over 5 years) but stamp duty relief for any given FY has been reduced. It is also hoped that acquirers with non-singapore ultimate holding companies can continue to approach the Economic Development Board ("EDB") for its approval for the M&A Scheme. However, it is likely that EDB's approval (if granted) will continue to have conditions attached. 3 Client Alert March 2015
5. Refinement of Venture Capital Tax Incentives Section 13H of the Income Tax Act ("ITA") provides a tax exemption on certain income for approved venture capital funds. Venture capital fund management companies managing Section 13H funds may also be granted a tax exemption under the Pioneer Service incentive on their respective management fees and performance bonus earned. Following the 2015 Budget, a 5% concessionary tax rate will be accorded to approved venture capital fund management companies managing Section 13H funds on their specified income. The approval window will be from 1 April 2015 to 31 March 2020. Correspondingly, the Pioneer Service incentive for venture capital fund management companies will be withdrawn from 1 April 2015, as venture capital is no longer considered a pioneering activity in Singapore. Nonetheless, pioneer certificates already issued to venture capital fund management companies will not be affected by the change. 6. Enhancement and Extension of the Maritime Sector Incentive Currently, there are a variety of schemes and awards available to various shipping-related enterprises under the Maritime Sector Incentive ("MSI") regime. For example: Under the MSI-Shipping Enterprise (Singapore Registry of Ships) ( MSI- SRS ) scheme, shipping enterprises can enjoy an automatic tax exemption on qualifying income derived mainly from operating Singaporeflagged ships. Under the MSI-Approved International Shipping Enterprise ( MSI-AIS ) award, approved international shipping enterprises can enjoy tax exemption on qualifying income derived from operating foreign-flagged ships, subject to certain conditions being met. Under the MSI-Shipping-related Support Services ( MSI-SSS ) award, approved companies can enjoy a concessionary tax rate of 10% on qualifying income derived from carrying out approved shipping-related support services. Under the MSI-Maritime Leasing ( MSI-ML ) award, approved enterprises can enjoy tax exemption or concessionary tax rates (as the case may be) on qualifying income derived from the leasing of ships, qualifying sea containers and intermodal equipment. Approved managers of such enterprises can also enjoy a concessionary tax rate of 10% on qualifying income derived from such management. Qualifying enterprises under the MSI-SRS scheme, MSI-AIS or MSI-ML awards can enjoy automatic withholding tax exemption on qualifying payments to made non-singapore tax residents in respect of qualifying foreign loans taken to finance the purchase or construction of qualifying assets (e.g., ships, containers), subject to conditions. This exemption is granted in respect of qualifying loans entered into on or before 31 May 2016. The following key changes have been announced in the 2015 Budget: a) The automatic withholding tax exemption will now apply to qualifying payments made in respect of: 4 Client Alert March 2015
i. finance leases, hire-purchase arrangements and loans used to finance equity injection into wholly-owned SPVs; or ii. intercompany loans to wholly-owned SPVs; for the SPVs purchase or construction of qualifying assets. The automatic withholding tax exemption will be extended to apply to qualifying loans taken on or before 31 May 2021. b) The definition of qualifying ship management activities for the purpose of the MSI-SRS scheme and the MSI-AIS and MSI-SSS awards will be updated to keep pace with industry changes. c) The scope of qualifying income under the MSI-SRS scheme and the MSI-AIS award will now include mobilisation fees, demobilisation fees, holding fees and incidental container rental income that are derived in the course of qualifying shipping operations. d) The scope of qualifying income under the MSI-ML award will now include income derived from finance leases treated as sales. e) Qualifying profits remitted from approved foreign branches by MSI- AIS entities will now enjoy exemption. f) Existing MSI-SSS award recipients can renew their award tenure for another 5 years, subject to qualifying conditions and higher economic commitments. g) The approval window to grant MSI-AIS awards to qualifying entry players, MSI-SSS, and MSI-ML awards will be extended from 31 May 2016 to 31 May 2021. The above enhancements to the MSI regime will take effect for existing and new award recipients from 24 February 2015. The Maritime Port Authority will release further details by May 2015. Comments: These enhancements to the MSI regime are welcome as they help to provide clarification and relevance to the existing MSI regime in light of changing industry practices. For example, the liberalisation of the automatic withholding tax exemption to apply to a wider range of financing instruments (e.g., finance leases, and intercompany loans) will cater to a wider range of financing arrangements used for the acquisition or construction of ships. Previously, such arrangements did not fall within the scope of the withholding tax exemption. 7. Goods and Services Tax Changes A. Simplification of Pre-Registration Goods and Services Tax Claim Rules In general, Goods and Services Tax ("GST") registered businesses may claim input GST incurred on purchases of goods and services prior to GST registration to the extent that the goods or services purchased are used or to be used for taxable supplies made after GST registration, subject to the satisfaction of certain conditions. Where goods have been partially consumed or supplied, or services have been used to make supplies before and after GST registration, businesses are required to apportion the pre-registration GST incurred. Only the portion of GST that is attributable to taxable supplies made after GST registration is 5 Client Alert March 2015
claimable. Businesses also need to apply different apportionment formulae depending on the nature of the goods and services in respect of which preregistration GST was incurred. Following the 2015 Budget, businesses that are GST-registered from 1 July 2015 will no longer need to apportion pre-registration GST on the following goods and services acquired within 6 months before the date of GSTregistration: Goods held by the business at the point of GST registration; and Property rental, utilities and services, which are not directly attributable to any supply made by the business before GST registration. However, the use of the above goods and services after GST registration must be for the making of taxable supplies and not exempt supplies. The Inland Revenue Authority of Singapore ("IRAS") will release further details by June 2015. Comments: This change is welcome as it will reduce compliance costs for newly GST-registered businesses. However, we would note that goods and services acquired more than 6 months before the date of GST registration will still be subject to the current rules for pre-registration GST claims. B. Extension of GST Remission for Listed REITs and Listed Registered Business Trusts in the Infrastructure Business, Ship Leasing and Aircraft Leasing Sectors SGX-listed REITs, as well as Singapore-listed Registered Business Trusts ("RBTs") in the infrastructure business, ship leasing and aircraft leasing sectors ("Qualifying RBTs"), are currently granted GST remission allowing them to claim GST incurred on business expenses, regardless of whether they hold assets directly or indirectly through SPVs or sub-trusts. The concession was scheduled to end on 31 March 2015. However, SGX-listed REITs and Qualifying RBTs are not allowed to claim GST on costs incurred to set up SPVs which do not hold qualifying assets of the SGX-listed REITs and Qualifying RBTs, directly or indirectly. The SGXlisted REITs and qualifying RBTs are also not allowed to claim GST on the business expenses of such SPVs. Following the 2015 Budget, the existing GST remission will be extended to 31 March 2020. In addition, SGX-listed REITs and Qualifying RBTs will be allowed to claim GST on business expenses incurred to set up SPVs used solely to raise funds for the SGX-listed REITs or Qualifying RBTs and which do not hold qualifying assets of the SGX-listed REITs and Qualifying RBTs, directly or indirectly. The SGX-listed REITs and Qualifying RBTs will also be allowed to claim GST on the business expenses of such SPVs. IRAS will release further details by March 2015. 8. Extension of Other Existing Tax Concessions A. Extension of the Corporate Income Tax Rebate to YAs 2016 and 2017 Under the 2013 Budget, the Government granted a corporate income tax rebate of 30% capped at S$30,000 per YA for YAs 2013 to 2015. Under the 2015 Budget, the Government has recognised that companies will continue to 6 Client Alert March 2015
face cost pressures and has extended the 30% corporate income tax rebate to YAs 2016 and 2017, but with a reduced cap of S$20,000 per YA. B. Extension of Tax Deduction for Collective Impairment Provisions Made under MAS Notices Currently, banks may claim tax deductions for collective impairment provisions made under MAS Notice 612, subject to caps as stipulated under Section 14I of the ITA. Additionally, finance companies and merchant banks may claim tax deduction for collective impairment provisions made under MAS Notice 811 and MAS Notice 1005 respectively. These tax concessions were scheduled to lapse after YA 2016 or YA 2017, depending on the financial year end of the bank or finance company. The tax concessions will be extended till YA 2019 or YA 2020, depending on the financial year end of the bank or finance company. C. Extension of Tax Concessions for Listed Real Estate Investment Trusts An SGX-listed Real Estate Investment Trust ("REIT") or its wholly-owned Singapore tax resident subsidiary company enjoys tax exemption on qualifying foreign-sourced income fulfilling certain conditions. In addition, nontax resident investors (other than an individual) enjoy a concessionary tax rate of 10% on the gross amount of any distribution by the trustee of the listed REIT. Both tax concessions were scheduled to lapse after 31 March 2015. Following the 2015 Budget, the income tax concessions will be extended to 31 March 2020. However, it should be noted that the stamp duty concession will be allowed to lapse after 31 March 2015, such that there will no longer be stamp duty remission in respect of documents executed on the following transfers: transfer of Singapore immovable property to a REIT; and transfer of 100% of the issued share capital of a Singapore-incorporated company that holds immovable properties situated outside Singapore, to the REIT. MAS will release further details by May 2015. D. Extension of the Investment Allowance - Energy Efficiency Schemes The Investment Allowance - Energy Efficiency ("IA-EE") scheme awards investment allowances to companies carrying out projects for improving energy efficiency, where the capital expenditure incurred results in more efficient energy utilisation. The IA-EE scheme is jointly administered by EDB and the National Environment Agency. The IA-EE for Green Data Centres scheme awards investment allowances to green data centre projects where the capital expenditure incurred results in more efficient energy utilisation. The IA-EE for Green Data Centres scheme is administered by the Infocomm Development Authority of Singapore. Both schemes were scheduled to lapse after 31 March 2015. 7 Client Alert March 2015
From 1 March 2015, the two schemes will be combined into a single IA-EE scheme and the scheme will be solely administered by EDB. EDB will release more details by March 2015. E. Extension of the Tax Incentive Scheme for Insurance Businesses Currently, approved general, life and composite insurers and reinsurers may enjoy a 10% concessionary tax rate on qualifying income derived from qualifying insurance and reinsurance business conducted from Singapore for a ten-year award tenure. The scheme is scheduled to lapse after 31 March 2015. Following the 2015 Budget, the scheme will be extended to 31 March 2020 and renamed as the Insurance Business Development Incentive. In addition, a renewal framework will be introduced with effect from 1 April 2015 to encourage existing recipients of the incentive to continue expanding their operations in Singapore. MAS will release further details by May 2015. 9. Introduction of Review Dates for Tax Incentives and Schemes Under the 2015 Budget, the Government will be introducing review dates with respect to certain incentives and schemes. This is inline with the Government's practice of periodically reviewing incentives and schemes to ensure they remain relevant and effective in achieving policy objectives, as well as to avoid portraying Singapore negatively as a tax haven. A. Approved Foreign Loan Incentive The Approved Foreign Loan ("AFL") incentive provides an exemption from or a concessionary tax rate for withholding tax on interest payments made to a non-resident lender for a loan to purchase productive equipment. Currently, a loan must be at least S$200,000 to qualify as an AFL. However, the Minister for Trade and Industry may also approve an application for a foreign loan of less than S$200,000 to be an AFL. Following the 2015 Budget, from 24 February 2015, the minimum loan quantum will be increased to S$20 million. The Minister for Trade and Industry may approve an AFL application on a foreign loan of less than S$20 million. A review date of 31 December 2023 will be legislated for this incentive. Comments: The increase of the minimum loan quantum from S$200,000 to S$20 million is a steep increase, which suggests that the AFL incentive is now more targeted towards advanced manufacturing companies higher up in the value chain. B. Approved Royalties Incentive The Approved Royalties Incentive ("ARI") was first introduced to encourage companies to access cutting-edge technology and know-how for substantive activities in Singapore. 8 Client Alert March 2015
Under the ARI, a withholding tax exemption or a concessionary withholding tax rate may be granted to companies approved by the EDB on approved royalties, technical assistance fees or contributions to research and development costs paid to a non-singapore tax resident. A review date of 31 December 2023 will be legislated for this incentive. C. Section 19D Writing Down Allowance Section 19D of the ITA provides a writing down allowance in respect of capital expenditure incurred for the acquisition of an indefeasible right to use any international telecommunications submarine cable system for the purpose of the business. A review date of 31 December 2020 will be legislated for this writing down allowance. 10. Termination of Tax Concessions A. Withdrawal of Tax Concession on Royalties and other Payments from Approved Intellectual Property or Innovation The tax concession under Section 10(16) of the ITA, which is granted to qualifying individuals or companies on royalties and other payments received as consideration for the assignment of or the rights in approved intellectual property or innovation, will be withdrawn from YA 2017. B. Withdrawal of Concessionary Tax Rate on Income Derived from Offshore Leasing of Machinery and Plant The 10% concessionary tax rate provided under Section 43I for income derived by a leasing company in respect of offshore leasing of machinery and plant will be withdrawn from 1 January 2016. However, this should be mitigated by the introduction of targeted tax incentives for leasing of aircraft, aircraft engines, ships and sea containers. C. Withdrawal of Approved Headquarters Incentive Section 43E provides for tax exemption or a 10% concessionary tax rate on income derived from qualifying headquarter services or certain qualifying activities. This incentive will be withdrawn from 1 October 2015. Nonetheless, headquarter companies may still qualify for tax concessions under the Development and Expansion Incentive as prescribed by the Economic Expansion Incentives (Relief from Income Tax) Act, subject to conditions. D. Lapse of Productivity and Innovation Credit Bonus The Productivity and Innovation Credit ("PIC") Bonus provides a dollar-fordollar matching cash bonus, up to S$15,000 across YA 2013 to YA 2015, to businesses with a minimum of S$5,000 in qualifying expenditure under the PIC in a YA. Following the 2015 Budget, the PIC Bonus will not be extended and will lapse after YA 2015. 9 Client Alert March 2015
11. Other Announcements A. Extension and Enhancement of Tax Deduction for Donations The 250% tax deduction for qualifying donations made to Institutions of a Public Character and other qualifying recipients will be extended to 31 December 2018. In addition, the tax deduction will be increased to 300% for qualifying donations made in calendar year 2015. B. Revised Petrol Duty Rates and Extension and Refinement of the Carbon Emissions-Based Vehicle Scheme Petrol duty will be increased from S$0.44 per litre to S$0.64 per litre for premium grade petrol unleaded (RON 97 and above), and from S$0.41 per litre to S$0.56 per litre for intermediate grade petrol unleaded (RON 90 and above but under RON 97). The Carbon Emissions-Based Vehicle Scheme ("CEVS") was introduced in 2013 to encourage the ownership of car models with low carbon emissions. It was scheduled to lapse after 30 Jun 2015. Under the 2015 Budget, the scheme will be extended to 30 June 2017. In addition, there will be two refinements to the scheme: (a) the surcharge and rebate bands will be updated to reflect improvements in vehicle engine technology; and (b) the highest rebate and surcharge quantum will be increased from S$20,000 to S$30,000. 2015 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. 10 Client Alert March 2015