APAC Tax Matters: November 2012
At a glance
The Ministry of Finance (MOF) held a public consultation exercise from 24 July to 13 August 2012 on the draft Income Tax (Amendment) Bill 2012 (Amendment Bill) which incorporates the Budget 2012 tax changes as well as other non-Budget tax changes.
The non-Budget tax changes are to refine existing tax policies and tax administration arising from on-going reviews of the income tax system.
Some key proposed Budget and non-Budget tax changes include:
A copy of the draft Amendment Bill may be obtained from the MOF website.
The current tax legislation provides that a taxpayer may claim capital allowances (CA) on capital expenditure incurred on plant and machinery (P&M) for the purpose of his trade, profession or business. In practice, CA claims are allowed by the IRAS if the P&M are used by a toll manufacturer to produce goods for the taxpayer, with the taxpayer maintaining title to the goods during the manufacturing process.
Prior to the case of ATG v CIT, the IRAS would generally not grant CA on the P&M used in a contract manufacturing arrangement (or buy-sell arrangement).
Following the decision in the ATG case, the IRAS will allow CA on the P&M used by a subcontractor in an outsourcing arrangement. This is provided that the P&M is used for the purposes of the company’s business - there must be a connection between the capital expenditure incurred on the provision of the P&M and the company’s business. Such a connection is a question of fact.
A finding of the purpose is not affected by the fact that the expenditure on the P&M also benefits a third party to some extent.
Where the P&M is used partly for the taxpayer’s business and partly for another person’s, the IRAS is prepared to consider allowing the CA to the taxpayer if the arrangement is driven by commercial reasons. Rather than using a de minimis benchmark which in its view is arbitrary, the IRAS prefers to consider all the facts to determine whether the P&M is indeed used for the purpose of the taxpayer’s business.
When examining claims for CA, the IRAS may ask for information on the outsourcing arrangement, how the P&M is used for the purposes of the taxpayer’s business, the level of control maintained by the taxpayer over the P&M, the basis of charge in the outsourcing arrangement and a breakdown of the payments made to the sub-contractor.
The arm’s length principle should also be complied with for all arrangements between related parties. Taxpayers should therefore ensure that they maintain sufficient documentation to enable them to substantiate their claim.
Companies with outstanding issues on CA claims in respect of P&M placed with their sub-contractors may want to review their cases with the IRAS in the light of the above developments.
DTAs signed by Singapore with Spain and Switzerland were ratified in 2012:
- The DTA signed with Spain on 13 April 2011 entered into force on 2 February 2012
- The revised DTA signed with Switzerland on 24 February 2011 entered into force on 1 August 2012
Both DTAs have effect, in the case of Singapore, in respect of tax chargeable for any YA beginning from YA 2014.
The key provisions of the DTAs include:
|Dividends %||Interest %||Royalties %||Capital gains||Others|
|Spain||5 (a) (b)||5 (c)||5||Taxable only in the country of residence (with exceptions)||(f) (g)|
|Switzerland||5/15 (c) (d)||5 (c)||5 (e)||Taxable only in the country of residence (with exceptions)||(f) (g)|
- (a) The dividends Article also covers real estate investment trust (REIT) distributions and the withholding tax rate is 5% if the beneficial owner of the distributions holds, directly or indirectly, less than 10% of the value of the capital in such trust
- (b) 0% if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends
- (c) Exempt in certain circumstances
- (d) 5% if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends
- (e) Payments received as a consideration for the use of, or the right to use industrial, commercial or scientific equipment will constitute business profits i.e., not treated as royalties
- (f) The DTA incorporates the internationally agreed Standard for the exchange of information
- (g) The limitation of relief clause will not apply to income received from Spain or Switzerland (whichever the case) which is exempted from tax under Singapore domestic law
The Protocols to the DTAs signed by Singapore with the following countries to incorporate the internationally agreed Standard for the exchange of information have been ratified:
|Country||Date of signing||Effective date|
|Bahrain||14 October 2009||29 September 2012|
|Canada||29 November 2011||31 August 2012|
|Estonia||3 February 2011||30 March 2012|
|Italy3||24 May 2011||19 October 2012|
3 The Additional Protocol also incorporates amendments to certain Articles of the DTA such as, for example, an increase in the threshold period for a PE and the removal of the tax sparing provision for dividends, interest and royalties income.