The Minister for Finance, Mr Tharman Shanmugaratnam, delivered the Budget Statement for the Financial Year (“FY”) 2015 (“Budget 2015”) on 23 February 2015. Budget 2015 heavily emphasised the allocation of resources and provision of incentives for the continued growth of small and medium enterprises (“SMEs), in particular, with a view to expanding regionally and internationally. A number of incentives with sunset clauses, or which were close to expiry, were also reviewed and refined, thus underscoring the Government’s commitment to ensuring that Singapore’s present tax framework remains relevant to the country’s core economic drivers.
This article highlights a number of significant tax changes announced in Budget 2015.
Corporate tax rebate
The 30% corporate income tax rebate which was granted to companies from the Year of Assessment (“YA”) 2013 to YA 2015, will be extended for another two years, but the rebate in respect of YAs 2016 and 2017 will be capped at S$20,000. Notwithstanding the lowered cap, it appears that SMEs with relatively lower levels of chargeable income, would still stand to benefit substantially from the continued grant of the rebate.
Enhancing the Mergers and Acquisitions (“M&A”) Scheme
The M&A Scheme, which is generally intended to help Singapore-based companies with substantive business operations and local employees in Singapore to grow through acquisitions, will be extended till 31 March 2020, with the following enhancements which would mainly be attractive to SMEs (given the applicable caps):
(i) The M&A allowance rate will be increased such that 25% of the value of a qualifying acquisition may now be written down over five years, subject to a revised cap of S$20 million on the value of qualifying acquisitions for each YA.
(ii) Stamp duty relief on the transfer of unlisted shares will be capped at S$40,000 per financial year.
(iii) Shareholding eligibility tiers are revised such that an acquiring company must acquire ordinary shares in a target company (whether directly or indirectly) that results in the acquiring company holding:
- at least 20% of the ordinary shares in the target company if the acquiring company’s original shareholding in the target company was less than 20%; or
- more than 50% of the ordinary shares in the target company, if the acquiring company’s original shareholding in the target company was 50% or less.
The Inland Revenue Authority of Singapore (the “IRAS”) has also stipulated that where companies claim M&A allowances based on the 20% shareholding threshold referred to in (iii)(a): (1) such companies should have at least one director represented on the board of directors of the target company; and (2) post-acquisition, the target company should be considered an associate of the acquiring company under Singapore Financial Reporting Standard (FRS) 28 or the Singapore Financial Reporting Standard for Small Entities. The lowered thresholds referred to in (iii)(a) in particular, should have the effect of incentivising SMEs to expand through mergers.
(iv) Acquisitions of ordinary shares that result in the acquiring company owning at least 75% of the ordinary shares of the target (if the acquiring company’s original shareholding was more than 50% but less than 75% at the beginning of the relevant basis period for a YA or FY) will no longer qualify under the M&A scheme.
(v) Acquiring companies may no longer consolidate ordinary share acquisitions made during a 12-month period, in order to qualify for benefits under the M&A Scheme.
These changes will take effect for qualifying acquisitions made from 1 April 2015, and the IRAS is expected to release more details (including those pertaining to transitional arrangements) by May 2015.
Enhancing the double tax deduction for internationalisation scheme
Under section 14K of the Income Tax Act (the “ITA”), businesses may claim a 200% tax deduction on qualifying expenditure incurred on market expansion and investment development activities, subject to conditions. The scope of qualifying expenditure will be expanded to include qualifying manpower expenses (capped at S$1 million per approved entity per year) incurred from 1 July 2015 to 31 March 2020, in respect of Singaporeans posted to new overseas entities. Further details will be released by International Enterprise Singapore (“IE”) by May 2015.
The International Growth Scheme (“IGS”)
The IGS is a new scheme which aims to support high potential companies in their growth overseas, while they continue to anchor their key functions in Singapore. The expectation is that incentivised companies will engage in internationalisation activities and provide opportunities for Singaporeans to gain greater international exposure. Under the IGS, qualifying Singapore companies which are approved under the scheme during the period 1 April 2015 to 31 March 2020 will enjoy a concessionary tax rate of 10% for a period not exceeding five years, on incremental income derived from certain qualifying activities. This new scheme will be administered by the IE and further details are expected to be released by May 2015.
Extending and Enhancing the Angel Investors Tax Deduction (“AITD”) scheme
The AITD scheme which generally grants investors in qualifying start-ups a tax deduction of 50% of the cost of a qualifying investment under section 37K of the ITA, will be extended till 31 March 2020. The scheme will now be expanded to apply to qualifying investments made from 24 February 2015 to 31 March 2020, which are co-funded by the Government under the SPRING Start-up Enterprise Development Scheme (SEEDS) or the Business Angel Scheme (BAS), where previously such co-funded amounts were not included.
Tax incentives for venture capital funds and venture capital fund management companies
Under section 13H of the ITA, tax exemption is granted on the following income of approved venture capital funds: (i) gains arising from the divestment of approved portfolio holdings, (ii) dividend income from approved foreign portfolio companies, and (iii) interest income arising from approved foreign convertible loan stock. A review date of 31 March 2020 will be legislated for this incentive.
Venture capital fund management companies which are approved during the period 1 April 2015 to 31 March 2020, and which manage section 13H approved venture capital funds, will be granted a new 5% concessionary tax rate on their specified income from managing such funds. Accordingly, the Pioneer Service tax exemption available to venture capital fund management companies in respect of management fee and performance bonus income will be withdrawn with effect from 1 April 2015. However, Pioneer Service incentives already granted to existing venture capital fund management companies will not be affected. The Government’s recognition of the importance of venture capital activity in supporting entrepreneurship is apparent. By contrast, it may be noted that income derived from managing or advising qualifying funds under the Financial Sector Initiative - Fund Management (FSI-FM) incentive, is subject to a higher concessionary tax rate of 10%.
Investment Allowance - Energy Efficiency (“IAEE”) Schemes
The IA-EE scheme and IA-EE for Green Data Centres scheme award investment allowances to energy efficient or green data centre projects where the capital expenditure incurred results in more efficient energy utilisation. Both schemes will be combined into one scheme known as the “Investment Allowance - Energy Efficiency scheme” from 1 March 2015, and will be extended till 31 March 2021. The consolidated scheme will be solely administered by the Economic Development Board.
Development and Expansion Incentive for International Legal Services (“DEI-Legal”) scheme
Under the DEI-Legal scheme, approved law practices which are incorporated as companies are granted a 10% concessionary tax rate on incremental income derived from the provision of certain qualifying international legal services (as defined under section 21(3) of the Goods and Services Tax Act) for a period of five years. This scheme will be extended till 31 March 2020.
Approved Royalties (“AR”) Incentive and Approved Foreign Loan (“AFL”) incentive
Under the AR incentive, a company which enters into an agreement with a foreign person to obtain cutting-edge technology and know-how for the purposes of its substantive activities in Singapore may, if approved by the Minister for Trade and Industry, benefit from a tax exemption or a concessionary tax rate in relation to the royalties, technical assistance fees or contributions to research and development costs payable to that foreign person.
The AFL incentive provides for a tax exemption or a concessionary tax rate to be granted on interest payments made to a non-tax-resident for loans of at least S$200,000 to a company to purchase productive equipment. This threshold for the minimum loan quantum will now be increased to S$20 million with effect from 24 February 2015, with the Minister for Trade and Industry retaining the discretion to grant approval for the incentive in respect of loans below the S$20 million threshold, presumably in order to preserve some amount of flexibility in the administration of the incentive (for example, where a substantial amount of productive equipment is procured through a number of separate loans, with each individual loan falling below the legislated threshold).
A review date of 31 December 2023 will be legislated for both the AR and the AFL incentives in order to ensure their relevance.
Tax deductions for collective impairment provisions made under the Monetary Authority of Singapore (“MAS”) Notices
Under section 14I of the ITA, banks, finance companies or merchant banks may claim tax deductions for collective impairment provisions made by such entities under MAS Notices 612, 811 and 1005 respectively, subject to conditions.
With effect from the financial year beginning on or after 1 January 2018, the Singapore Accounting Standards Council has adopted the International Financial Reporting Standard on Financial Instruments (“IFRS 9”) as Singapore Financial Reporting Standard on Financial Instruments (“FRS 109”), which sets out requirements for recognising and measuring financial assets, and the impairment requirements relating to the accounting for an entity’s expected credit losses on its financial assets and commitments to extend credit.
As banks and finance companies need to maintain adequate levels of impairment provisions under the relevant MAS Notices as they transit to the new accounting standard on impairment in Singapore, the existing tax deductions will be extended till YA 2019 or YA 2020 (depending on the financial year end of the relevant bank or finance company).
Tax incentive scheme for insurance businesses
Under section 43C of the ITA, approved general, life and composite insurers and reinsurers may enjoy a concessionary tax rate of 10% for 10 years on qualifying income derived from qualifying insurance and reinsurance business activities conducted from Singapore. The scheme will be re-named the Insurance Business Development Incentive and extended till 31 March 2020. A renewal framework will be introduced with effect from 1 April 2015 to encourage existing recipients of the incentive to continue further expansion of their operations in Singapore.
The MAS is expected to release further details by May 2015.
Enhanced-Tier Fund (“ETF”) tax incentive scheme
Broadly, the ETF scheme and other similar fund management incentives, serve to encourage fund management activities to be performed in Singapore by granting tax exemption on funds managed by fund managers in Singapore where the relevant conditions are met. In the absence of such incentives, a fund (whether based in Singapore or overseas) managed by a fund manager in Singapore would ordinarily be exposed to Singapore tax on income and gains derived by the fund by virtue of the activities of the Singapore fund manager.
The ETF scheme under section 13X of the ITA is presently applicable to master-feeder fund structures. Where feeder funds invest solely in the master fund and do not trade, the master-feeder fund structure as a whole may meet the applicable economic conditions (such as having a minimum fund size of at least S$50 million) on a collective basis. However, this concessionary treatment does not extend to Special Purpose Vehicles (“SPVs”) held by the master fund. To accommodate master-feeder fund structures which hold their investments via SPVs, the existing concession for master-feeder fund structures will now be enhanced to include SPVs held by the master fund, subject to conditions. In other words, master and feeder funds, and SPVs within a master-feeder fund structure, may apply for the ETF scheme on the basis that the relevant economic conditions are met on a collective basis.
The effect of this change is that such an SPV will also be accorded exemption from Singapore tax liabilities in respect of any income and gains derived from the investments held by it to the same extent as the master and feeder funds (i.e. tax exemption on specified income from designated investments). This change is welcomed as funds often use SPVs to make specific investments, and had to previously seek specific tax exemption for such SPVs (whether under the ETF Scheme or the fund exemption schemes under sections 13CA or section 13R of the ITA).
This change will take effect in respect of ETF applications made from 1 April 2015, and the MAS is expected to release further details by May 2015.
Tax concessions for listed real estate investment trusts (“REITs”) and registered business trusts (“RBTs”)
The following tax concessions available to REITs listed on the Singapore Exchange Securities Trading Limited (“SGX-ST”) which were due to expire on 31 March 2015, have now been extended till 31 March 2020:
(i) The concessionary withholding tax rate of 10% applicable to non-tax resident non-individual unitholders on distributions from a Singapore REIT.
(ii) Tax exemption on qualifying foreign-sourced income (i.e. dividend income, interest income, trust distributions and branch profits), derived from overseas properties, property-related activities or other permitted activities, received in Singapore by listed REITs, or their wholly-owned Singapore tax resident subsidiaries, subject to the fulfillment of prescribed conditions.
However, stamp duty remissions which were previously available on (i) the transfer of a Singapore immovable property to a REIT; and (ii) on the transfer of the issued share capital of a Singapore-incorporated company that holds immovable properties situated outside Singapore, to a REIT, will lapse after 31 March 2015 as the policy object behind these concessions has been fulfilled.
The expiry of the stamp duty remissions will increase business costs for REITS. Stamp duty is presently payable on the transfer of shares of a Singapore company and Singapore immovable property, at the rate of 0.2% and approximately 3% respectively, of the market value, or consideration payable on such transfers.
The MAS will release further details by May 2015.
Goods and Services Tax (“GST”)
The tax concession available to SGX-ST listed REITs and RBTs which carry on qualifying businesses (i.e. infrastructure businesses, aircraft leasing and ship leasing) where such REITS or RBTs were allowed to claim GST on their business expenses regardless of whether they hold underlying assets directly or indirectly through multi-tiered structures such as SPVs or sub-trusts, which was due to expire on 31 March 2015, has now been extended till 31 March 2020.
In addition, the above GST remission has been enhanced so that qualifying REITs and RBTs will be allowed to claim GST on the business expenses of SPVs used solely for fund raising activities, and which do not hold qualifying assets of the REITs or RBTs. Previously, GST incurred on costs to set up SPVs that did not hold qualifying assets fell outside of the scope of the GST remission. The enhancement to the GST remission will take effect for GST incurred from 1 April 2015 to 31 March 2020.
Extending and enhancing the Maritime Sector Incentive (“MSI”)
The following enhancements are made to the MSI, and will take effect for existing and new award recipients from 24 February 2015:
- The automatic withholding tax exemption regime will be extended to qualifying payments made on qualifying loans taken on or before 31 May 2021, and will now cover payments in respect of finance leases, hire-purchase arrangements, and loans used to finance equity injections into wholly-owned SPVs or intercompany loans to wholly-owned SPVs for the SPVs’ purchase or construction of vessels, containers and intermodal equipment.
- The definition of “qualifying ship management activities” will be updated to keep pace with industry changes.
- The MSI-Shipping Enterprise (Singapore Registry of Ships) and MSI-Approved International Shipping Enterprise (“MSI-AIS”) awards will be expanded to include mobilisation fees, demobilisation fees, holding fees, and incidental container rental income that are derived in the course of qualifying shipping operations.
- Qualifying profits remitted from approved foreign branches by MSI-AIS entities will be tax-exempt.
- Existing MSI-Shipping-related Support Services (“MSI-SSS”) award recipients can renew their award tenure for another five years, subject to qualifying conditions. However, higher economic commitments will now be required.
- The MSI-Maritime Leasing award will now cover income derived from finance leases treated as sale.
- The approval window to award MSI-AIS for qualifying entry players, MSI-Maritime Leasing (Ship), MSI-Maritime Leasing (Container) and MSI-SSS will be extended till 31 May 2021.
The Maritime Port Authority of Singapore will release further details by May 2015.
Withdrawal / Non-renewal of Existing Schemes
- The concessionary tax rate of 10% on income derived from offshore leasing of machinery and plant under section 43I of the ITA will be withdrawn, and any such income derived from 1 January 2016 will be subject to tax at the prevailing corporate tax rate.
- The Approved Headquarters incentive under Section 43E of the ITA will be withdrawn with effect from 1 October 2015, and companies performing qualifying headquarters activities or services in Singapore to network companies may instead apply for the Development and Expansion Incentive (“DEI”). It may be noted that tax benefits under the DEI are not identical to those accorded under the Approved Headquarters incentive. For example, under the DEI, concessionary tax rates are available in respect of income derived from qualifying activities, and there is no express requirement that services should be rendered to approved offices or associated companies (as is the case under the Approved Headquarters incentive). However, concessionary rates of tax are only applicable to “expansion income” under the DEI (i.e. amounts in excess of the average annual income derived from the provision of qualifying activities, in the preceding three years), while no similar express restrictions exist under the Approved Headquarters incentive. Notwithstanding this, the Approved Headquarters incentive may be less relevant to local businesses, with the introduction of the IGS.
- The tax concession granted in respect of royalties derived from approved intellectual property or innovation, or innovation by the inventor or creator of the said property or innovation, or by a company wholly owned by such inventor or creator under section 10(16) of the ITA will be withdrawn with effect from YA 2017.
- The Productivity and Innovation Credit (“PIC”) Bonus available under section 37IA of the ITA, which grants businesses a dollar-for-dollar matching cash bonus where at least S$5,000 in qualifying expenditure has been incurred for a relevant YA, will be allowed to lapse after YA 2015. Businesses will however continue to benefit from the PIC scheme and the PIC+ scheme.
Review of existing schemes
- The tax exemption available to non-tax-resident arbitrators on income derived on or after 3 May 2002 from arbitration work carried out in Singapore, under section 13(1)(r) of the ITA, will continue to apply until 31 March 2020, and will then be reviewed.
- Under section 19D of the ITA, a person carrying on a trade, business or profession may be entitled to claim writing-down allowances in respect of capital expenditure incurred on the acquisition of an indefeasible right to use any international telecommunications submarine cable system. The grant of this allowance will continue to apply until 31 December 2020, and will then be reviewed.
- Personal income tax rates will be increased with effect from YA 2017, with the highest marginal tax rate increasing from 20% to 22%. A personal income tax rebate of 50%, capped at S$1,000 per taxpayer, will be granted to all tax resident individual taxpayers for YA 2015.
- Subject to conditions, individuals may now choose to claim a specified amount of expenses (amounting to 15% of the gross rental income) against their passive rental income derived from residential properties in Singapore, instead of claiming the actual amount of deductible expenses incurred in producing such rental income. This change will not be applicable to rental income derived by an individual through a partnership in Singapore, or from a trust property. The IRAS is expected to release further details on these changes by May 2015.
- Income derived by a non-tax-resident mediator for mediation work carried out in Singapore from 1 April 2015 to 31 March 2020 will be exempt from tax, and will no longer be subject to withholding tax in Singapore. This brings the tax position of non-resident mediators in line with that of non-resident arbitrators, whose income is presently exempt under section 13(1)(r) of the ITA.
- The 250% tax deduction available to donors under section 37 of the ITA, in respect of qualifying donations made to Institutions of a Public Character and other recipients, will continue to be available to qualifying donations made from 1 January 2016 to 31 December 2018. In conjunction with the SG50 jubilee celebration, the tax deduction rate for qualifying donations made in 2015 will be increased from the current 250% to 300%.
- Businesses which are newly-registered for GST purposes from 1 July 2015 onwards will be able to claim the full amount of GST incurred within the 6-month period before GST-registration on (i) purchases of goods held by the business at the point of registration; and (ii) property rental, utilities and services not attributable to any pre-registration supply. While other acquired goods and services will be subject to the existing pre-registration GST claim rules, these changes simplify the GST pre-registration regime considerably, and ensure that newly-registered businesses will not be subject to an overly-onerous GST compliance framework. The IRAS will release further details on this change by June 2015.
The Budget Speech for the Financial Year 2015 is available from the Budget 2015 website www.singaporebudget.gov.sg