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Singapore – Tax Update – Budget 2012

31 March, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Tax

 

The tax practice at ATMD Bird & Bird LLP provides you the highlights of significant tax changes for businesses in the 2012 Budget delivered by Deputy Prime Minister & Finance Minister Mr Tharman Shanmugaratnam on Friday 17 February 2012. The Budget was aimed at building a fair and inclusive society caring especially for the elderly, the disabled and lower income Singaporeans while helping companies restructure to achieve sustainable economic growth and create more jobs despite an uncertain economic outlook in the year ahead. The taxes covered in this update are administered by the Inland Revenue Authority of Singapore (IRAS) as agent of the Government.
 
Income Tax changes
 
Enhancement of Productivity and Innovation Credit (PIC) Scheme
 
Four areas of the PIC scheme have been enhanced in the 2012 Budget. The PIC scheme was introduced in the 2010 Budget for Years of Assessment (YAs) 2011 to 2015 for six areas of qualifying activities, i.e. research and development (R&D), acquisition of intellectual property (IP), registration of IP, investments in approved design, investments in automation equipment, and training of employees. The scheme also has a cash payout option. The four enhancements are:
 
  • R&D: Qualifying expenditure incurred on R&D cost sharing agreements can qualify as deductible expenses from YA 2012. The qualifying expenditure is to be deemed as 60 per cent of the shared costs like outsourced R&D and count towards the expenditure cap of S$400,000 for this qualifying activity. The previous requirement for R&D expenditure to develop software that the software should be sold, rented, leased, licensed or hired to two or more third parties (multiple sales requirement) will be removed from YA 2012, so that R&D expenditure on software development not intended for sale will qualify under the PIC scheme. But expenditure on development of software for internal routine administration of business will not qualify.
  • Automation equipment: With effect from YA 2012, qualifying automation equipment acquired on hire purchase with a repayment schedule straddling two or more financial years will be eligible for the cash payout option.
  • Training: Enhancements have been proposed in two areas, for in-house training courses and training of agents. Accreditation or certification will no longer be required for expenditure incurred on qualifying in-house training up to an amount of S$10,000 per YA. However, this S$10,000 cap cannot be combined across YAs. Excess expenditure on in-house training above S$10,000 may yet qualify under the PIC scheme up to the cap of S$400,000 if the courses are accredited, approved or certified by the relevant authority. On training of agents, the expenditure incurred by the principal (such as on insurance agents, financial advisors or real estate agents) may qualify for deduction subject to certain conditions, e.g. the principal is not to charge or recover the training expenses from the agent.
  • Cash payout option: The cash payout rate will be increased from 30% to 60% for up to S$100,000 of qualifying expenditure from YA 2013 to YA 2015. Companies can also claim the payout after the end of each quarter of their financial year, but no later than the due date for filing of their income tax returns for the relevant year, instead of only at the end of their financial year. This would be attractive to companies with limited taxable income or facing cash-flow problems.
 
Enhancement to merger & acquisition (M&A) scheme
 
The M&A scheme, also introduced in Budget 2010, provides for both an M&A income tax allowance and a stamp duty relief on qualifying M&A completed from 1 April 2010 to 31 March 2015. The income tax allowance is improved for M&A completed from 17 February 2012 to 31 March 2015, as follows:
 
  • Tax allowance of 200% on transaction costs: Despite transaction costs being generally regarded as capital in nature and hence not tax deductible, the scheme grants a 200% tax allowance capped at S$100,000 per YA for transaction costs incurred, such as professional fees on due diligence, legal fees and valuation fees. At the 17% corporate tax rate, this translates into tax savings of S$34,000. The allowance on transaction costs is proposed to be written down in one year.
  • Scope of qualifying M&A: It is proposed that the acquiring company will be able to acquire shares of the target company through multiple tiers of Tax update – Singapore Budget 2012March 2012
  • wholly-owned subsidiaries, instead of just one tier. The relevant conditions that a target company has to satisfy can be satisfied by any of the multiple tiers of wholly-owned subsidiaries of the target company.
  • Extension of M&A scheme to headquarters incentive schemes: The M&A scheme will be available, on a case-by-case basis, as an additional feature for existing headquarters incentive schemes administered by the Economic Development Board (EDB). The EDB may waive the qualifying condition that acquiring company must be held by an ultimate holding company which is incorporated and tax resident in Singapore, subject to conditions.
 
Further details should be provided by IRAS and EDB by 30 June 2012. These changes make it attractive for foreign holding companies with headquarters incentive compliant structures in Singapore to make acquisitions.
 
Enhancement of renovation and refurbishment deduction scheme
 
Instead of expiring on 15 February 2013, this scheme is to be made a permanent feature in our tax system, with a doubling of the expenditure cap from S$150,000 to S$300,000 for each three-year period and the other terms and conditions remaining. More details are due from IRAS by 30 June 2012. This new expenditure cap is likely to make this scheme useful to Small and Medium sized Enterprises (SMEs) who can benefit most from the higher expenditure cap.
 
Tax certainty for certain gains from disposal of equity investments
 
While it is certain that there is no capital gains tax in Singapore, what has been a worrying bone of contention for decades between taxpayers and IRAS are the circumstances in which disposals of equity investments (shares) are to be properly regarded as income which is subject to taxation. This has impeded company restructuring involving share disposals where the tax costs involved have been unclear. Following lobbying by various interested groups, gains by companies from disposals of shares from 1 June 2012 will not be taxed if the disposing company holds a minimum shareholding of 20% in the company whose shares are being disposed of, for a minimum period of 24 months. The details that are due from IRAS by 1 June 2012 should clarify whether any types of restructuring in which such share disposals occur, are excluded.
 
New Integrated Investment Allowance (IIA) scheme
 
Persons carrying a trade, business or profession who incur capital expenditure on the provision of plant and machinery for the purpose of the trade, business or profession are granted capital allowances. Moreover, a company incorporated and resident in Singapore could seek to come under the Integrated Industrial Capital Allowance (IICA) scheme, introduced in 2003, for capital allowances in respect of fixed capital expenditure for certain approved projects through an overseas subsidiary. Interestingly, following a recent decision of the income tax board of review in ATG v Comptroller of Income Tax [2011] SGITBR 2, the IICA scheme has been withdrawn in the 2012 Budget and a new IIA scheme has been proposed. In the ATG case, the board decided that capital allowances are available to a company for capital expenditure incurred on plant or machinery used by its sub-contractors under a manufacturing outsourcing arrangement, including sub-contractors who carried on their business outside Singapore, as long as such plant or machinery is used for the purposes of the company’s trade or business.
 
Following the board’s decision, which the IRAS decided not to appeal against, capital allowances are generally allowable to companies for capital expenditure incurred on plant and machinery used by their sub-contractors overseas and whether or not these sub-contractors were wholly-owned subsidiaries of the company. The board’s decision confirmed what a number of tax practitioners considered was the correct tax treatment all along.
 
The new IIA scheme also allows companies to apply to EDB for an additional allowance (on top of the capital allowance) to be granted for fixed capital expenditure incurred on or after 17 February 2012 for productive equipment placed overseas on all approved projects. Details are to follow. The new scheme runs for 5 years from YA 2013.
 
Enhancement of double tax deduction (DTD) for internationalisation scheme
 
The DTD scheme confers double or further tax deduction on companies and firms for qualifying expenses incurred for approved market development and investment development activities. The approving authorities are International Enterprises Singapore (IES)(formerly Trade Development Board) and the Singapore Tourism Board. Going forward, approval is no longer required in respect of qualifying expenditure of up to S$10,000 per YA, incurred on 4 activities, namely, overseas business development trips/missions, overseas investment study trips/missions, participation in overseas trade fairs and participation in approved local trade fairs. IES and STB are to provide more details by 31 March 2012.
 
SME cash grant
 
With the corporate tax rate remaining at 17% for the YA 2012, companies are to be granted a one-off cash grant based on 5% of the company’s revenue capped at S$5,000. This is provided the company made Central Provident Fund (CPF) contributions for at least one employee who was not a shareholder during the basis period for YA 2012. This cash grant is not available to dormant or inactive companies, nor to trusts, including real estate investment trusts (REITs).
 
Financial sector
 
Five enhancements or extensions have been proposed for the financial sector in Budget 2012, which are as follows:
 
  • Enhancement of exemption from withholding tax for financial institutions: The liberalised withholding tax exemption regime for financial institutions has been enhanced in that they need not withhold tax on any interest or other payments relating to any loan or indebtedness made to permanent establishments in Singapore. The institutions need to be licensed under the Banking Act, the Finance Companies Act, the Securities and Futures Act or approved under the Monetary Authority of Singapore Act. For contracts already in force before 17 February 2012, the exemption from withholding tax applies to payments to be made from 17 February 2012 to 31 March 2021. For contracts effective on or after 17 February 2012 to 31 March 2021, the exemption applies to all such payments.
  • Extension of exemption from withholding tax for certain financial derivatives payments: The exemption from withholding tax for over-the-counter (OTC) financial derivatives payments to persons who are neither resident in Singapore nor a permanent establishment in Singapore is being extended beyond its current expiry date of 19 May 2012 to 31 March 2021.
  • Extension of deduction for collective impairment provisions: The tax deduction for collective impairment provisions made under Monetary Authority of Singapore Notices by banks and finance companies is being extended for 3 years until YA 2016 or YA 2017, depending on the financial year end of the financial institution.
  • Enhancement of designated investment and specified income lists for Financial Sector Incentive (FSI) schemes: The designated investment and specified income lists for FSI schemes will be enhanced by revisions of these lists and the changes should be effective from 17 February 2012. While the list of designated investments is to be rationalised and expanded, the list of specified income is to be revised into an exclusionary list.
  • Enhancement of tax transparency in distribution for REITs: The rule is that for the REIT to qualify for tax transparency treatment, it must distribute in cash 90% of its taxable income in the same financial year in which the income is earned. Tax transparency treatment means that the distribution will be taxed only in the hands of the unitholders and not upon the trustee of the REIT. It is proposed that with effect from 1 April 2012, the distribution can take the form of units in the REIT. Notably, the unitholders are to be given a choice whether to opt for distribution in cash or in units. The trustee of the REIT must have sufficient cash available on the date of distribution to fund the whole distribution in cash. This is obviously to cover the situation where all the unitholders opt for cash distribution.
 
Aviation sector
 
The aircraft leasing scheme, under which a concessionary tax rate of 5% or 10% has been available, was due to expire on 29 February 2012. It is being extended for 5 years till 31 March 2017. Applications for exemption from withholding tax on interest and qualifying payments, previously given on a case-by-case basis, need no longer be made as such exemptions will be granted automatically, although still subject to conditions. This change applies to payments made on or after 1 May 2012 for qualifying foreign loans entered into on or before 31 March 2017 for the purchase of aircraft or aircraft engines.
 
Marine sector
 
Three changes are proposed for the marine sector, in regard to gains from disposal of vessels, to charter fees and to leasing of containers, which are as follows:
 
  • Gains from disposal of vessels: With retrospective effect from 1 June 2011, the date of commencement of the Marine Sector Incentive (MSI) award, qualifying ship operators and ship lessors under the MSI award can enjoy automatic tax exemption on gains made from the disposal of vessels, without having to opt for the exemption. The exemption extends to gains from the disposal of vessels under construction and new building contracts.
  • Charter fees: It is proposed that charter fees for bareboat, voyage and time charters paid on or after 17 February 2012 to non-residents, excluding permanent establishments in Singapore, will be exempt from withholding tax. This change is expected to resolve another long-standing area of dispute between taxpayers and the IRAS, provided the legislative amendments do not contain exceptions to the exemption.
  • Leasing of containers: The MSI-Maritime Leasing (Container) award is enhanced in 3 more ways, as set out below:
    • Automatic exemption from withholding tax: Interest and related payments made on or after 17 February 2012, arising from loans taken to finance qualifying containers and intermodal equipment (e.g. trailers) are to be granted automatic exemption from withholding tax following self-assessment of the qualifying conditions.
    • Concessionary rate of tax: With effect from YA 2013, income derived from the leasing of intermodal equipment which is incidental to the leasing of qualifying containers is to enjoy a concessionary tax rate of 5% or 10%.
    • Scope of qualifying containers: With effect from YA 2013, qualifying containers should refer to containers which adhere to the standards defined by the International Organisation for Standardisation, the Institute of International Container Lessors or any equivalent organisation.
 
Special employment credit (SEC)
 
All employers, including companies, are to receive a SEC of 8% of wages for Singaporean workers who are above 50 years old and earning up to S$3,000 per month. A lower SEC of S$1 20 will be given for such workers who earn a monthly wage of between S$3,000 and S$4,000. These changes apply for YAs 2012 to 2016 and are designed to help employers pay for forthcoming increases in CPF contributions they will be required to make in respect of their employees.
 
Enhancement of earned income relief (EIR) for elderly and handicapped individuals
 
From YA 2013, the amount of EIR is increased in amount for individuals aged 55 years and above who stay employed. The EIR is doubled from S$3,000 to S$6,000 for employees between 55 and 59 years of age. The EIR is also doubled from S$4,000 to S$8,000, for employees aged 60 and above. For handicapped individuals, the EIR is increased from S$2,000 to S$4,000 for those below 55 years of age, from S$5,000 to S$10,000 for those between 55 and 59 years of age, and from S$6,000 to S$12,000 for those aged 60 and above. As the enhanced EIR only applies to elderly employees or the handicapped, it would appear that the self-employed elderly who are not handicapped are excluded.
 
Goods and Services Tax changes
 
Exemption on investment-grade gold and precious metals
 
With effect from 1 October 2012, the import and supply of investment-grade gold and precious metals will be treated as exempt supplies. Exempt supplies currently include supplies of financial services. When a supply is exempt, it means that the input GST on costs attributable to the making of the exempt supply will not be available to the GST-registered trader (supplier) as a credit to offset the output GST that is applicable to his taxable supplies. The goods under the exemption must be imported for approved purposes such as exhibitions, fairs, auctions, repairs, stage performances, testing, experiments and demonstrations. Further details of the new exemption are to be given by IRAS by 1 September 2012, after consulting with the industry.
 
Extension of GST temporary import relief period
 
The temporary import relief scheme applies to goods other than liquor and tobacco. These goods may be imported without payment of GST if they are to be re-exported within 3 months of the date of importation. The 3 month period will be extended to 6 months with effect from 1 April 2012.
 
Extension of GST tourist refund scheme
 
The proposal is that with effect from 1 January 2013, this scheme will be extended to tourists who are international cruise passengers departing from the Singapore Cruise Centre at Harbourfront and the new International Cruise Terminal at Marina South.
 
Increase in GST import relief
 
This tax change would be of interest to many Singaporeans and visitors alike. Both inbound travelers and returning residents are set to enjoy higher GST import relief. For time spent away from Singapore of 48 hours or more, the GST import relief will be set at S$600 regardless of age. For time spent away from Singapore of less than 48 hours, the GST import relief will be set at S$150 regardless of age. These changes take effect from 1 April 2012.
 
GST Voucher
 
One surprise highlight of Budget 2012 was the GST Voucher. Despite the name, this is actually a permanent system of offsets against GST to help lower income Singaporeans through a combination of cash, top-ups to CPF Medisave accounts and U-Save rebates on bills for utilities. It is meant to offset GST costs on the consumption of local goods and services, but outside the structure of the GST Act. Qualifying Singaporeans will receive a letter in July 2012.
 
Stamp Duty change
 
Enhancement of stamp duty relief for merger and acquisition (M&A)
 
The change in M&A income tax allowance is accompanied by a similar change for stamp duty. The stamp duty relief will apply for M&A deals completed from 17 February 2012 to 31 March 2015 where the acquiring company acquires shares of the target company through multiple layers of wholly-owned subsidiaries. The relevant conditions that the target company has to satisfy may be satisfied by any of the multiple tiers of wholly-owned subsidiaries of the target company.
 
Source document
 
The full text of the Budget Statement for 2012 is posted on the Singapore Budget website: www.singaporebudget.gov.sg
 
 
 

 

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