Legal and Regulatory Framework
Corporate Income Tax
Annual Returns and Accounts
Deductions and Allowances
Treatment of Losses
Tax Changes for the Financial Sector
Tax Incentives for Specific Industries
Legal and Regulatory Framework
Singapore's Income Tax Act (ITA) was enacted in 1948 and is based on the Model Colonial Territories Income Tax Ordinance of 1922, which was drawn up for the then British colonies. Consequently, there are similarities between the income tax statutes of Singapore, Malaysia, South Africa, Australia and New Zealand. To this day, decisions of the courts of these other jurisdictions interpreting similarly worded legislation continue to provide useful guidance for the interpretation of the ITA.
Another act relevant to income tax in Singapore is the Economic Expansion Incentives (Relief from Income Tax) Act (EEIA). This act offers companies tax incentives to encourage the development of specific sectors of Singapore's economy. There is extensive subsidiary legislation that has been enacted pursuant to the ITA and the EEIA which implement the schemes and arrangements authorized by these two acts.
Another important feature of Singapore income tax law is the double tax agreements entered into with various countries. Singapore has signed full double tax agreements with 38 countries and has signed restricted double tax agreements with another five countries. While most of these agreements are based on the OECD model agreement, some appear to be based on the UN model convention.
Since 1993, the Inland Revenue Authority of Singapore (IRAS) has issued interpretation and practice notes on certain tax provisions. These do not have the effect of law but provide useful guidance in interpreting the law. It is also possible to obtain a ruling from the IRAS on the interpretation of the provisions of the ITA and the tax effects of certain transactions.
All stamp duty was abolished with effect from February 28 1998 except for stamp duty on documents relating to shares and immovable property.
Goods and services tax
A goods and services tax was introduced in April 1994 with the enactment of the Goods and Services Tax Act. A 3% tax is levied whenever a registered business supplies goods or services in the course of its business.
Tax incentives are often used in Singapore as a means of encouraging the development of particular industries. Singapore's tax incentives generally concern corporate income tax rates rather than individual taxes. Most of the incentives are provided under the EEIA, with some special concessions available under the ITA. Double tax treaties also provide tax relief that may benefit certain economic sectors.
Finally, pioneer, pioneer service, post-pioneer, and development and expansion incentives are perhaps the most important contributors to the development of particular economic sectors in Singapore. These incentives are provided for by the EEIA.
Pioneer status incentives
The first provisions granting pioneer benefits were introduced in 1959. Pioneer status is awarded to companies in order to encourage the manufacture of certain products or the development of certain services. Most companies that have been given pioneer status manufacture high technology products or provide engineering, medical or financial services. Companies that are awarded pioneer status are exempt from income tax for a period of five to 10 years.
In April 1996 the post-pioneer incentive was introduced to provide continued relief for companies awarded pioneer status. Companies with post-pioneer status enjoyed a concessionary tax rate of not less than 10% for up to 10 years following the tax-exempt period provided by the pioneer incentive scheme.
Development and expansion incentive
The development and expansion incentive was introduced in 1997 to replace the post-pioneer incentive. Any company that is engaged in a qualifying activity may apply for the benefits of this incentive scheme (ie, they need not have pioneer status). The tax relief is a concessionary tax rate of not less than 10% on 'expansion income' - the income derived from qualifying activities which exceeds the taxpayer's 'average corresponding income' (ie, the average yearly income from qualifying activities over the three preceding years).
Other government measures
The Singapore government set up the Committee on Singapore's Competitiveness (CSC) in May 1997 to examine Singapore's prospective economic competitiveness over the next 10 years. With the onset of the regional economic crisis in July 1997, the scope of the committee was expanded to include proposals to help the Singapore economy cope with the crisis.
In his 1998 budget speech the minister of finance specifically mentioned a number of measures to be taken to ensure the competitiveness of the Singapore economy including the recommendations of the CSC and other off-budget measures as may be needed. In June 1998 a S$2.5 billion package of off-budget measures was announced. The objectives of these measures were to reduce business costs, to build economic infrastructure and capabilities, and to help stabilize specific sectors of the economy.
Furthermore, a CSC report completed in October 1998 included short-term measures to deal specifically with the economic crisis, and long-term recommendations to ensure Singapore's competitiveness in the Asia-Pacific region. In response to the report, the government announced a S$10.5 billion cost-cutting package in November providing mainly short-term measures to reduce business costs in order to help companies survive and to preserve jobs.
Sources of income
In Singapore, tax is imposed only on income; there is no tax on capital gains. There is however no definition of 'income' in the ITA and consequently, in certain ITA cases involving the sale of properties, the dividing line between income and capital gains may be difficult to discern.
Section 10(1) of the ITA lists the various types of corporate income subject to tax, including:
- gains or profits from any trade, business, profession or vocation;
- dividends, interests or discounts;
- charge or annuity;
- rents, royalties, premiums and any other profits arising from property; and
- gains or profits not falling within the defined sections of the ITA.
Singapore imposes tax on a territorial basis for both resident and non-resident companies. Only income accruing in or derived from Singapore is subject to tax. Foreign-sourced income is not taxable in Singapore unless it is received in Singapore.
A company is 'resident' in Singapore if control and management of the company is exercised in Singapore. Control of a company lies with the governing body vested with superior directing authority (ie, authority to decide whether the company carries on business, the nature of the company's business, and the company's policies). Companies that are not resident in Singapore are subject to the following tax treatment:
- they are not subject to the dividend franking requirements of Section 44 of the ITA;
- they may not benefit from Singapore's double taxation agreements; and
- they may not claim unilateral tax credits in relation to income derived from countries with which Singapore does not have a tax treaty.
The rate of corporate income tax for the year of assessment 1999 is 26% - the same as for the two previous years. However, as part of a package of cost-cutting measures, the government announced in November 1998 that it would provide a 10% tax rebate for the year of assessment 1999. Generally, a concessionary rate of 10% may be enjoyed by companies in respect of qualifying offshore income.
All companies are required to file an annual tax return with the IRAS together with (i) a copy of the audited accounts of the company which have been certified by an auditor and signed by the directors, and (ii) a statement of any dividends paid.
The comptroller has wide powers including the authority to do the following:
- gain access to books of accounts (Sections 63 to 70 of the ITA);
- direct the taxpayer to make available all books of accounts and other related documents for inspection (Section 65 of the ITA);
- gain access to particulars of bank accounts and assets and liabilities (Section 65A of the ITA); and
- direct a company to keep proper accounting records (Section 67 of the ITA)
Section 67(1)(a) requires that the books of accounts be sufficient to enable income and
allowable deductions under the act to be readily ascertained.
Expenses incurred in the production of revenue are deductible from taxable income. Expenses incurred in the production of capital gains are not. Capital allowances in respect of depreciation of certain fixed assets (ie, industrial buildings, plant and machinery) are also deductible from taxable income. Companies may elect to accelerate allowances over a three-year period. In addition, a 100% write-off is available for computers and prescribed automation equipment.
Losses may be carried forward indefinitely but they must be revenue (as opposed to capital) losses. In addition, generally there must be continuity of ownership of the company (ie, the same shareholders must own at least 50% of the paid-up capital on the first day of the year or basis period in which the loss occurred and the first day of the assessment year in which the loss is claimed). An exception to this rule is that if the minister of finance is satisfied that a change in ownership was not for the purpose of deriving a tax benefit, he may exempt a company from the continuity of ownership requirement. Losses may then be carried forward and deducted from future taxable income derived from the same trade or business.
Certain payments including interests, royalties and technical assistance fees are subject to withholding tax if they are made to non-resident persons. The tax rate for interest and royalty payments is 15%. Fees for personal services are generally subject to withholding tax of 26%. However, services that are wholly performed outside Singapore may qualify for an administrative exemption. Exemptions or reduced rates of withholding are also available under the ITA and the EEIA for payments that are considered to be for the economic or technological benefit of Singapore. These exemptions and concessions are granted on a case-by-case basis.
Tax Changes for the Financial Sector
The Sub-Committee on Finance and Banking, formed under the auspices of the CSC, completed a report (the banking report) in January 1998 setting out certain tax benefits specifically designed to stimulate the financial sector. Four of these initiatives deserve special mention including those relating to the following:
- fund management;
- the bond market;
- syndicated offshore credit and underwriting facilities; and
- general provisions.
Singapore's commitment to the development of fund management began in 1983 with the implementation of a tax exemption for gains earned from funds managed on behalf of non-resident investors and managed by fund managers with Asian currency unit licences. (The fund managers' fees were also taxed at a concessionary rate of 10%.) In 1986 the scope of this incentive was expanded to include all fund managers approved by the Monetary Authority of Singapore. In 1995, the tax concession was amended to allow approved fund managers managing at least S$5 billion worth of non-resident funds to enjoy a 5% concessionary rate of tax on the incremental income. Finally, in 1997 the scope of the scheme was further expanded to allow fund managers managing at least S$10 billion in non-resident funds a tax exemption.
Recognizing that the fund management industry has potential for growth, the government announced in February 1998 that the Government of Singapore Investment Corporation would place a further S$25 billion with private fund managers in order to promote Singapore's position as a fund management centre in Asia. The minister of finance announced complementary measures in the 1998 budget.
Approved fund managers before the 1998 budget received the following tax benefits:
- a 10% concessionary tax rate on income earned from managing non-resident funds;
- a 5% concessionary tax rate on incremental income for those managing a least S$5 billion of non-resident funds; and
- a tax exemption for those managing at least S$10 billion of non-resident funds. With the 1998 budget, this exemption was expanded to include those managing at least $5 billion of non-resident funds. In addition, fund managers who were already managing S$5 billion of non-resident funds and had "made strong commitments to further the level of their fund management activities in Singapore" can now enjoy a longer exemption period of up to 10 years.
Fund managers managing less than S$5 billion of non-resident funds can also qualify for the tax exemption for up to five years if they have increased their fund management activities in Singapore substantially.
The Monetary Authority was given the discretion to negotiate these conditions with individual fund managers on a case-by-case basis from year of assessment 1999.
With the 1999 budget speech, boutique fund managers were also given some incentives. ('Boutique fund managers' is defined as primarily indigenous fund management companies set up and run by professionals with considerable expertise in the industry.) The finance minister announced that income derived by foreign investors from funds managed by qualifying boutique fund managers would be exempt from tax for five years from February 27 1999. This exemption has the effect of bringing the tax treatment of offshore investors whose funds are managed by boutique fund managers in line with those whose funds are managed by approved fund managers.
The banking report commented on the underdeveloped status of the Singapore bond market and suggested that government-linked companies and the statutory board take the lead in borrowing from the debt market. The government accepted this recommendation and in his 1998 budget speech, the finance minister announced a package of new incentives to promote an active bond market. These include:
- tax exemption on fee income earned by financial institutions in Singapore from arranging debt securities in Singapore, including the underwriting and distribution of such securities;
- a 10% concessionary rate of tax on interest income earned by financial institutions and corporations in Singapore from debt securities arranged by financial institutions in Singapore;
- automatic withholding tax exemption on interest from debt securities arranged by financial institutions in Singapore and earned by non-residents who do not have a permanent establishment in Singapore; and
- a 10% concessionary rate of tax on income earned by financial institutions in Singapore from trading in debt securities.
Debt securities issued within five years beginning February 28 1998 may enjoy these new tax rates and/or exemptions. The incentive for income earned from trading in debt securities was also granted for five years from February 28 1998.
In his 1999 budget speech, the finance minister announced two changes to these 1998 incentives. First, the automatic withholding tax exemption on interest received from qualifying debt securities was extended to non-residents with permanent establishments in Singapore, provided that such non-residents do not purchase the securities with funds from their Singapore operations. Second, because there was some ambiguity as to what constituted 'qualifying debt securities', an approved bond intermediary scheme was introduced. Under this scheme, the Monetary Authority evaluates a financial institution's debt origination and trading capabilities in Singapore on an overall basis and awards approved bond intermediary status accordingly. Any debt securities lead managed by such an institution are automatically treated as qualifying debt securities, eliminating the requirement of 'substantial arrangement in Singapore'.
Syndicated offshore credit and underwriting facilities
The Income Tax (Income from Syndicated Offshore Credit and Underwriting Facilities)
Regulations contain a tax incentive scheme to encourage offshore loan syndication in Singapore. Under this scheme, income derived by financial institutions and approved securities companies from offshore syndication activities is tax exempt. The duration of the scheme was extended by the minister of finance for five years from April 1 1998. The scope of the scheme has also been expanded to cover credit and debt facilities syndicated by financial institutions in Singapore for Singapore borrowers, provided the funds were used outside Singapore.
The Monetary Authority's previous practice was to approve the tax exemption for each syndicated facility on a case-by-case basis. In order to give arrangers certainty as to whether a facility qualifies for tax exemption, the finance minister in 1999 announced the introduction of an automated procedure. As a result, facilities satisfying certain defined criteria are automatically granted tax exemption. This new procedure took effect from February 27 1999.
Banks and merchant banks were previously allowed to claim an annual tax deduction on general provisions of up to 25% of qualifying profits or 0.5 % of qualifying loans and investments, whichever was lower (subject to an overall cumulative limit on qualifying loans and investments of 3%). In the 1998 budget these limits were suspended for two years with effect from the year of assessment 1998 in order to give banks greater flexibility to make as much general provisions as they deem prudent, irrespective of how much profit they make.
In June 1998, as part of the government's off-budget measures, the 3% cumulative limit was lifted for the 1999 year of assessment, subject to the approval of the Monetary Authority. General provisions exceeding the 3% mark will be taxed when they appear on a bank's profit and loss account. If general provisions still exceed the 3% level at the end of five years, provisions in excess of the 3% level will be taxed.
Since the 1997 year of assessment, finance companies have been allowed to make deductions for general provisions. The deduction for doubtful debts was the lower of 25% of qualifying profits or 0.5% of the prescribed value of loans and investments (subject to an overall cumulative cap of 2% of the value of the qualifying loans and investments). In the 1999 budget speech, the finance minister announced that for the years of assessment 1999 and 2000, the annual limits of 25% and 0.5% will be temporarily suspended and the 2% overall cap will be increased to 3%.
Tax Incentives for Specific Industries
The cyber trader scheme was announced in the 1998 budget and provides approved companies with a concessionary tax rate of 10% on offshore trading income derived from transactions made over the Internet. These companies also enjoy an investment allowance of up to 50% of the cost of qualifying new fixed investments and full or partial exemption of withholding tax on qualifying payments.
This scheme is administered by the Economic Development Board and will be available for five years from the year of assessment 1999.
Shipping and transport
In order to add to the number of ship owners in Singapore, a shipping enterprise scheme was introduced with effect from the year of assessment 1992. Under this scheme, the income of an approved shipping company's non-Singapore flag ship's activities outside Singapore is granted tax exemption. Qualifying dividends from its approved subsidiaries and associated shipping companies are also granted the tax exemption. Income derived by the company from the uplift of freight in Singapore by its non-Singapore flag ships is subject to the normal corporate tax.
The Singapore Trade Development Board administers this scheme and grants initial periods of exemption for 10 years, but tax-exempt status may be extended.
In his 1999 budget speech, the minister of finance announced that the benefits of this scheme will be extended to cover income derived from the operation of floating production storage offloading vessels and floating storage offloading vessels. This will be done in order to complement Singapore's role as the world's third largest oil refinery and trading centre. Companies intending to apply for the incentive must have substantial operations and a team of professional experts in Singapore. The incentive will be granted for 10 years and will take effect from the year of assessment 2000.
Certain ship agencies, ship management companies and logistics providers were also granted a concessionary tax rate of not less than 10% on their incremental income from the year of assessment 1999 for a period of five years.
Approved venture capital companies enjoy a 10-year period for tax exemption on gains from the disposal of investments and on certain investment spacing income. This period can be extended on a case-by-case basis for a further five years, but is limited to a concessionary tax rate of not more than 10%.
Fund management companies managing these funds are also usually granted the pioneer service incentive. Under this incentive scheme, these companies enjoy tax relief of up to 10 years in respect of management fees and performance bonuses received from an approved venture capital fund.
The minister of finance announced in the 1998 budget that after the tenth year, these companies will enjoy a concessionary tax rate of not less than 10% (granted under the development and expansion incentive) with effect from February 27 1998.
Global operational headquarters
An operational headquarters scheme was introduced in 1986 to attract multinational companies to Singapore. Under this scheme, income from an approved operational headquarter's activities was taxed at a concessionary rate of 10%. To further encourage the presence of operational headquarters in Singapore, with effect from the year of assessment 2000, those that perform at least one substantive global function in Singapore will be granted tax exemption for a maximum period of 10 years.
New company legislation was passed in 1998 to enable both listed and unlisted companies to purchase their own shares by using distributable profits. For income tax purposes, a company purchasing its own shares will be treated as if it is making a payment of dividends to its shareholders. The franking mechanism provided in Section 44 of the ITA will therefore apply to such transactions.
The tax treatment of the monies received by the shareholders as a result of these buy-backs will depend on whether the buy-backs are off-market purchases or market purchases. In the case of off-market purchases, monies received are treated as dividends. Shareholders will thus be taxed on the amount received grossed up by a factor of 1.35%. A tax credit for tax deducted at source is given as in the case of a regular distribution of dividends to shareholders.
Proceeds received by shareholders selling their shares back to a company through the stock market are treated differently. Since these shareholders will be unaware of the fact that they are selling their shares back to the company, the sale of these shares will be treated like any other sale of shares. Whether or not these proceeds are taxable will depend on whether the proceeds are of an income or capital nature.
In May 1999, the Stock Exchange of Singapore issued a press statement indicating that companies listed on the exchange would be able to buy back their shares through special trading counters. Shareholders who sell their shares over a special trading counter will be treated as receiving a net dividend. The payment received will be grossed up and these shareholders will be taxed on the receipt of the grossed up dividend. However, a tax credit for tax deducted at source will be allowed.
Asset securitization as an alternative mode of financing is still in its nascent growth stages in Singapore. As such, many of the tax issues associated with a securitization transaction have yet to be ironed out. Tax legislation has not been specifically amended to deal with the issues brought up in a securitization transaction and the local tax authorities have yet to come up with a comprehensive practice note dealing with the multiple tax issues that surface in a securitization arrangement. Briefly, these issues include:
- whether payments made by a special purpose vehicle are deductible if it is liable to tax in Singapore;
- whether there is withholding tax on payments made from Singapore;
- whether goods and services tax will be levied on the transfer of receivables from the originator to the vehicle and on other miscellaneous fees paid out by the vehicle;
- whether the provision of administrative services to an offshore special purpose vehicle will be treated as an exempt service under the Goods and Services Tax Act; and
- how certain provisions in Singapore's tax treaties will be interpreted in relation to certain payments made under a securitization transaction.
In the last two years, Singapore has implemented a wide variety of tax measures focusing both on short-term measures to reduce business costs to off-set the effects of the current regional economic difficulties, and other measures to offer substantial incentives to industries identified as potential contributors to Singapore's long-term development.
For further information on this topic please contact Lian-Ee Teoh or Christina Ng at Drew & Napier by telephone (+65 531 2248) or by fax (+65 535 4864) or by e-mail ([email protected] or christina.chua @drew-and-napier.com.sg). The Drew & Napier web site can be accessed at www.drewnapier.com .
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