APAC Tax Matters: November 2012

Singapore

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Public consultation on draft Income Tax (Amendment) Bill 2012

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:

Enhancement to the Productivity and Innovation Credit (PIC) Scheme

  • Extending the cash payout option from year of assessment (YA) 2013 to YA 2015 and increasing the cash payout rate from 30% to 60% for up to S$100,000 of qualifying expenditure for each YA
  • Allowing non-certified in-house training expenditure (capped at S$10,000 per YA) and extending the training expenditure to include the training of prescribed individuals who are not employees
  • Extending the R&D expenditure for PIC purposes to include expenditure incurred on R&D cost-sharing agreements

Certainty of non-taxation of companies' gains on disposal of equity investments

To provide upfront tax certainty1 , gains derived from the disposal of ordinary shares2 by companies made during the period 1 June 2012 to 31 May 2017 will not be taxed if the qualifying divesting company had held directly and beneficially owned at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months prior to the disposal of the shares.

 The tax exemption will however not apply to a divesting company whose gains or profits from disposal of shares are included as part of its income from its insurance business. Disposals of shares in an unlisted investee company that is in the business of trading or holding Singapore immovable properties (other than the business of property development) will also not qualify.

Gains from disposals of ordinary shares in situations which do not meet the specified conditions will continue to be determined based on the facts and circumstances of each case.

Notes:
1 Singapore does not impose a capital gains tax and the determination of whether the gains from disposal of shares in a company are income or capital in nature is based on a consideration of the facts and circumstances of each case.
2 Excludes shares of a preferential nature or which have redeemable or convertible features, as stated in a circular issued by the IRAS on 30 May 2012.

Enhancement to the Mergers and Acquisition (M&A) scheme

For qualifying M&A completed from 17 February 2012 to 31 March 2015:

  • A 200% tax allowance (to be written down in one year) will be granted on the transaction costs on qualifying M&A, subject to an expenditure cap of S$100,000 per YA.
  • For acquisition through subsidiaries, the acquiring company may acquire shares of the target company through multiple tiers, instead of just one tier, of wholly-owned subsidiaries.
  • The qualifying conditions that the target company carries on a trade or business and has at least three employees may be satisfied by any of the multiple tiers of wholly-owned subsidiaries of the target company.
  • The scheme will, on a case-by-case basis, be available as an added feature for existing Headquarter incentive schemes administered by the Singapore Economic Development Board (EDB).

Enhancing the Double Tax Deduction for Internationalisation scheme

Tax deduction of up to 200% may be allowed on qualifying expenditure incurred on or after 1 April 2012 (up to S$100,000 per YA) on the following four activities, without the need for approval from International Enterprise Singapore or the Singapore Tourism Board:

  • Overseas business development trips/missions
  • Overseas investment study trips/missions
  • Participation in overseas trade fairs
  • Participation in approved local trade fairs

For qualifying expenditure incurred beyond S$100,000, approval will need to be sought with the respective government agencies on a case-by-case basis.

Exemption of withholding tax on charter fee payments

Payments made to non-residents excluding permanent establishments (PEs) in Singapore for the charter of ships will be exempted from tax. It has also been clarified that payers making charter payments to PEs in Singapore of a non-resident are also not required to withhold tax. These changes are effective for payments liable to be made on or after 17 February 2012.

Extending the filing and payment deadline for withholding tax

For specified payments made to non-residents on or after 1 July 2012, taxpayers are allowed an additional month to file and account for the withholding tax, i.e., by the 15th of the second month following the date of payment to the non-resident.

For example, if the date of payment to the non-resident is 1 September 2012, the withholding tax can now be accounted for by 15 November 2012, instead of 15 October 2012 previously.

A copy of the draft Amendment Bill may be obtained from the MOF website.


Capital allowances for plant and machinery used by persons other than the taxpayer

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.


New Avoidance of Double Taxation Agreements (DTAs)

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

Protocols to DTAs

 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.

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