The tax practice at ATMD Bird & Bird LLP provides you the highlights of significant tax changes for businesses in the 2011 Budget delivered by Singapore’s Finance Minister on Friday 18 February 2011.
INCOME TAX CHANGES
YA 2011: corporate income tax rebate or SME cash grant
With the corporate tax rate remaining at 17% for the year of assessment (YA) 2011, companies are to be granted the higher of a one-off corporate income tax rebate of 20% capped at S$10,000, and an SME cash grant based on 5% of the company’s revenue capped at S$5,000 provided the company made CPF contributions in YA 2011.
Enhancement of Productivity and Innovation Credit (PIC) Scheme
Four main areas of the PIC scheme, introduced in the 2010 Budget, are enhanced for YAs 2011 to 2015:
- The quantum of tax deduction or allowance is increased from 250% to 400% and for the first S$400,000 (increased from S$300,000) of expenditure incurred on any of the six broad categories of qualifying activities;
- The benefits of the PIC scheme will be available for R&D done overseas, not just in Singapore as is the case at present;
- The combined expenditure cap is increased. Businesses can combine their expenditure limit of S$400,000 up to a new cap of S$1,200,000 over 3 years for YAs 2013, 2014 and 2015. The combined expenditure cap for YAs 2011 and 2012 has been increased to S$800,000;
- The cash payout option has been revised to an amount of S$30,000 for the first S$100,000 of the company’s expenditure, up from the current maximum grant of S$21,000.
Further details of the enhancements to the PIC scheme are to be provided by IRAS by the end of June 2011.
Foreign Tax Credit Pooling system
Remittance of foreign income is being encouraged by having foreign tax credits (FTCs) computed on a pooled basis, instead of on a source-by-source and country-by-country basis for each stream of income. With pooling, the amount of FTC granted will be based on the lower of the pooled foreign taxes paid on the foreign income and the pooled Singapore tax payable on that foreign income. The IRAS is to provide further details by the end of June 2011. The change is effective from YA 2012.
Streamlining of double and further deduction for overseas market and investment development expenses
Sections 14B and 14K of the Income Tax Act allow approved companies double or further tax deduction for eligible expenses incurred on qualifying market development activities and qualifying investment development activities respectively. Given their common objective of encouraging businesses to expand overseas, these regimes will be merged into a single regime and simplified to allow more businesses to benefit from it. The changes apply to applications made on or after 1 April 2011. The merged regime is to be subject to a sunset clause, 31 March 2016. IE Singapore is to provide more details by the end of March 2011.
Enhancement of deduction for pre-commencement expenses
Expenses need to be wholly and exclusively incurred in the production of income to be deductible for tax purposes. Under an existing tax concession, expenses incurred before the commencement of business are allowed tax deduction subject to conditions. With effect from YA 2012, revenue expenses incurred in the accounting year immediately preceding the accounting year in which the business earns its first dollar of trade receipts are allowed tax deduction. More details are to be provided by the IRAS by the end of June 2011.
Tax deduction for cost of acquisition of shares through SPV for Employee Equity-Based Remuneration (EEBR) scheme
Currently, a company can obtain a tax deduction for costs incurred on shares in fulfilling its obligations under its EEBR scheme if the company itself buys back its own shares from the market or buys shares of its parent company from its parent company. Other costs are not allowed tax deduction, such as where the parent company issues new shares so that the company can fulfill its EEBR obligations, and the company claims tax deduction for the costs recharged to the company by its parent company. With effect from YA 2012, a tax deduction will be granted to a company for costs incurred to acquire its parent company’s shares through a Special Purpose Vehicle (SPV) set up as trustee. The SPV must:
- be set up as a company or trust solely to administer the EEBR scheme for companies within the group, and
- acquire the parent company’s shares from the parent company or the market and hold them in trust for the employees of the companies within the group for the EEBR scheme.
The deduction is restricted to the lower of the amount paid by the company to the SPV or the costs incurred by the SPV to acquire the parent company’s shares.
The costs recharged to the company for the newly issued shares of the parent company are still not allowed for deduction. Neither will any deduction be allowed for costs incurred by the company in purchasing its parent company’s newly issued shares through the SPV. This change is effective from YA 2012. Further details are to be provided by the IRAS by the end of June 2011.
Liberalisation of withholding tax regime for banks
Exemption from obligations to withhold tax on interest and other qualifying payments are currently given to banks for payments made to their branches or other banks outside Singapore by way of remission. The banks need to be licensed under the Banking Act and be “Approved Banks” under the Income Tax Act. The scope of the exemption is widened with effect from 1 April 2011, to cover interest and other qualifying payments made to all non-resident persons, excluding permanent establishments in Singapore, if the payments are made for the purpose of their trade or business. The new exemption will also be available to banks licensed under the Banking Act or approved under the Monetary Authority of Singapore (MAS) Act, finance companies licensed under the Finance Companies Act, and approved financial institutions licensed under the Securities and Futures Act that engage in lending as part of their regulated activity of dealing in securities in Singapore such as investment banks. MAS is to provide further details by the end of March 2011.
The enhanced exemption applies until 31 March 2021 (under a sunset clause to be introduced) to:
- payments liable to be made during the period from 1 April 2011 to 31 March 2021 on contracts taking effect before 1 April 2011; and
- payments liable to be made on contracts taking effect on or after 1 April 2011 to 31 March 2021.
Extension of captive insurance tax incentive scheme
This scheme allows captive insurers a 10 year tax exemption on qualifying income from the carrying on of offshore insurance business. It was set to expire on 16 February 2011, but has been extended till 31 March 2018. Insurers on the scheme can avail themselves of an award renewal framework which is effective from 19 February 2011. MAS is to release further details by the end of April 2011.
Extension of marine hull and liability insurance tax incentive scheme
This scheme allows insurers tax exemption for up to 10 years on qualifying income from the carrying on of marine hull and liability insurance business. It will be subject to a sunset clause, date 31 March 2016 but the recipients of the incentive can avail themselves of an award renewal framework which is effective from 19 February 2011. MAS is to release further details by the end of April 2011.
Extension and enhancement of specialised insurance tax incentive scheme
This scheme provides insurers on it a 5 year tax exemption on qualifying income from the carrying on of qualifying offshore specialised insurance business. The scheme has been extended till 31 March 2016. Two enhancements are made. First, a new qualifying specialised business line for agricultural insurance is added. Secondly, insurers on the scheme can avail themselves of an award renewal framework which is effective from 19 February 2011. MAS is to release further details by the end of April 2011.
Extension of tax incentive schemes for project finance
The present tax incentives for project finance are due to expire on 31 December 2011. These include:
- tax exemption on qualifying income derived from qualifying project debt securities (QPDS);
- tax exemption on foreign-sourced interest income received by approved entities listed on the Singapore Exchange (SGX) from qualifying infrastructure projects/assets;
- remission of stamp duty payable on the instrument of transfer relating to qualifying infrastructure projects/assets to qualifying entities listed or approved to be listed on the SGX;
- concessionary tax rate of 5% on qualifying income derived by a financial sector incentive project finance (FSI-PF) company from arranging, underwriting and distributing and qualifying QPDS, qualifying project loan and from provision of project finance advisory services related to a qualifying infrastructure project; and
concessionary tax rate of 10% on qualifying income derived by an approved trustee manager/fund manager from managing qualifying SGX-listed Business Trusts/Infrastructure Funds in relation to qualifying infrastructure projects/assets; The existing package of tax incentives for project finance will be extended to 31 March 2017, except for the FSI-PF which will lapse on 31 December 2011. Financial institutions can continue to enjoy similar tax benefits of the FSI-PF scheme under the FSI-Credit Facilities Syndication and FSI-Bond Market tax incentive schemes. More details will be released by the MAS by the end of April 2011.
Extension of tax incentive schemes for trustee company
Approved trust companies enjoy a concessionary tax rate of 10% on income derived from the provision of qualifying trustee and custodian services, trust management and administration services.
The scheme will be streamlined and aligned with other tax incentive schemes through the following measures:
- introduction of a sunset clause – 31 March 2016;
- a 10-year award tenure will be offered to award recipients approved on or after 1 April 2011;
- all existing award recipients will automatically transit to the new framework on 1 April 2011 and enjoy the scheme for a period of 10 years until 31 March 2021; and
the list of qualifying services will be expanded to include the provision of trustee and custodian services for the issue of units to foreign Collective Investment Schemes and foreign Business Trusts from 1 April 2011. More details will be released by the MAS by the end of April 2011.
Renewal of tax exemption scheme for income derived from structured products
Non-resident persons (other than individuals) currently enjoy tax exemption on income derived from any structured product offered by a financial institution in Singapore, subject to conditions. This exemption is applicable to income from structured products where the contracts take effect, are renewed or extended, during the period from 1 January 2007 to 31 December 2011. The tax exemption will be extended to 31 March 2017 with all other existing conditions of the scheme remaining. The current tax exemption for individuals will continue.
Withdrawal of withholding tax exemption scheme for financial guaranty insurers
This scheme where financial guaranty insurers enjoy an exemption from withholding of tax on claim payments made under financial guaranty insurance policies to qualifying non-residents will be discontinued from 19 February 2011. The reason given is that the objective of the scheme has been assessed to be no longer relevant to merit a tax incentive.
Enhancement of Global Trader Programme (GTP)
The GTP currently allows qualifying companies a concessionary tax rate of 5% or 10% on income from qualifying trades in these qualifying derivative instruments:
- exchange-traded and over-the-counter (OTC) commodity derivatives in a commodity which is on the approved GTP company’s list of approved commodities; and
- exchange-traded and OTC freight derivatives.
The existing list of qualifying derivative instruments will be expanded to cover all derivative instruments. This enhancement will apply to income derived from qualifying trades in new qualifying derivative instruments, derived by a GTP company from YA 2012.
A sunset clause will be introduced for the GTP – 31 March 2021. The existing sunset clauses for GTP enhancements will be aligned to a common sunset clause at the scheme level (i.e. 31 March 2021). Companies can be approved as a GTP Company or a GTP (Structured Commodity Finance) Company on or before 31 March 2021. The GTP company can enjoy the benefits under the various enhancements during their award tenure of up to five years. Further details will be provided by IE Singapore by the end of April 2011.
Enhancement of Finance and Treasury Centre (FTC) incentive
The FTC incentive grants a concessionary tax rate of 10% on income derived from undertaking qualifying activities and providing qualifying services to approved network companies. To include associated companies located in Singapore as approved network companies of a FTC (such companies to be known as local network companies or LNCs) the total annual revenues of these LNCs must not exceed 10% of the Group’s annual total revenue globally (known as the revenue ratio). The Economic Development Board (EDB) determines this revenue ratio when the application is made and reviews it at the mid-term of the tenure of the FTC award.
The change is that the revenue ratio used to determine the inclusion of LNCs will exclude related party transactions. A sunset clause will also be introduced for the FTC Incentive – 31 March 2016.
Marine Sector Incentive (MSI)
All existing tax incentives for the maritime sector will be streamlined and consolidated under a new Maritime Sector Incentive (MSI) with effect from 1 June 2011. Existing incentive recipients will transit automatically to the MSI from 1 June 2011. New enhancements will also be introduced under the MSI, subject to a sunset clause-31 May 2016, including:
- international shipping operations
- automatic exemption from withholding of tax on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase or construction of both Singapore-flagged or foreign-flagged ships, subject to conditions; and
- tax exemption for a non-renewable tenure of 5 years on income derived by qualifying entry players from owning or operating Singapore or foreign ships.
- Maritime (ship or container) leasing: automatic exemption from withholding of tax on qualifying payments made in respect of qualifying loans taken to finance the purchase or construction of Singapore-flagged or foreign flagged ships, subject to certain conditions;
- Supporting shipping services
- a new 5 year award will offer a concessionary tax rate of 10% on incremental qualifying income derived from the provision of qualifying supporting shipping services which include
- ship management, ship agency, and shipping freight/logistic services;
- ship broking and Freight Forward Agreement (FFA) trading;
- qualifying corporate services
Further details will be provided by the Maritime and Port Authority by the end of May 2011.
GOODS & SERVICES TAX (GST) CHANGES
GST measures for the Marine Industry
Sale and rental of goods (including stores and merchandise) A new GST scheme will be introduced, effective 1 October 2011, which allows “approved marine customers” to buy or rent goods without having to pay GST, as long as they are for use or installation on a commercial ship that is wholly for international travel. The supplier can zero-rate the supply of such goods to an “approved marine customer” without having to maintain the requisite documentary proof.
Repair and maintenance services
With effect from 1 October 2011, zero-rating of repair and maintenance services will be extended to:
- repair or maintenance services performed on ship parts or components which are delivered to:
- shipyards in Singapore; or
- approved marine customers; and
- where a supplier provides a reconditioned ship part or component in exchange for the faulty part to his customer (for example, a one-to-one exchange), such arrangements will be treated as a single supply of repair services.
Ships temporarily in Singapore
Two changes will be introduced, with effect from 1 October 2011, to ease GST compliance for ships which are in Singapore only for a temporary period of time and intend to leave Singapore as soon as possible:
- removal of documentary requirements for GST import relief for a qualifying ship engaged in pleasure, recreation, sports or other similar events;
- grant of GST import relief (with waiver of documentary requirements) on goods shipped and remaining on board a qualifying ship.
Singapore Customs will publish circulars, explaining the changes and operational details, by 1 September 2011.
GST measures for the Biomedical Industry
Import of clinical trial materials
The import of clinical trial materials into Singapore for local testing by local intermediaries on behalf of overseas persons does not currently enjoy GST import relief. For local clinical trial materials that are imported for re-export or disposal, there are various means where the importing intermediary may either claim back the GST paid or be relieved of import GST, but this entails GST compliance cost for the local intermediary.
To encourage clinical research activities in Singapore, from 1 October 2011, GST relief will be granted upfront on all clinical trial materials imported into Singapore, regardless of whether the clinical trial materials are being imported for local testing, re-export or for disposal.
Approved Contract Manufacturer and Trader (ACMT) Scheme
The ACMT scheme, which is currently available only to the semiconductor and printing industries, allows an approved contract manufacturer to disregard his supply of value-added services to his overseas client, subject to certain qualifying conditions.
The ACMT scheme will be extended, with effect from 1 October 2011, to qualifying biomedical contract manufacturers. Further enhancements will be made to be available to all approved industries as follows:
- services rendered by local contract manufacturers on failed or excess production under the ACMT scheme will be disregarded; and
- local contract manufacturers will be allowed to recover GST on local purchases of goods made by the overseas client for use in the contract manufacturing process. Both the Inland Revenue Authority of Singapore (IRAS) and Singapore Customs will publish circulars by 1 September 2011, explaining these GST measures for the biomedical sector.
GST measures for the Logistics Industry
Zero-rating scheme for specialised storage and value-added services
Currently, services performed on goods stored in a warehouse in Singapore are standard-rated unless the goods are supplied to overseas persons and the goods are exported. Where goods are stored for an extended period of time, businesses face difficulty in establishing that the goods will be exported when they bill their overseas customer. The provision of space for the warehouse operator’s business of storing goods is also currently standard-rated.
To promote the use of specialised storage facilities, which store high value goods belonging mostly to overseas persons such as art and antiques that are held in the warehouses for eventual shipment abroad, and to promote other supporting services, such as valuation and conservation, zero-rating will be allowed for specified services supplied to overseas persons. This is provided these services are performed on certain goods kept in approved warehouses in Singapore.
To qualify for the zero-rating treatment, amongst other conditions, the specialised warehouse must have at least 90% overseas customers and at least 90% of the goods removed from the warehouse must be exported. The scheme is effective from1 October 2011.
The IRAS will publish a circular by 1 September 2011, explaining the details of the new zero-rating scheme.
STAMP DUTY CHANGES
Relief for conversion of company into LLP
The current stamp duty relief for conversion of an ordinary partnership (firm) into a Limited Liability Partnership (LLP) is extended to the conversion of an existing company into a LLP. The conditions to be met for this relief are that:
- the shareholders of the existing company remain as partners (original partners) of the new LLP as at the date of conversion;
- the assets of the new LLP are those of the existing company as at the date of conversion;
- the percentage of partnership interests of each of the partners in the LLP have to remain the same as the shareholding percentages of each of the shareholders in the existing company as at the date of conversion;
- at least 75% of the composition of partnership interest in the LLP should remain the same for two years from the date of conversion.
There are two events of disallowance, which are:
- the original partners of the new LLP dispose of more than 25% of their partnership interests (whether individually or collectively) within two years from the date of conversion except where the partnership interest of the original partners is disposed of to a 100%-associated entity;
- the LLP disposes to its partners any of its chargeable assets it has acquired from the existing company at conversion.
Remission for aborted leases
Stamp duties paid in excess of S$50 for aborted sale and purchase agreements are currently remitted, where such instruments do not qualify for a refund of duty. The refund does not apply to sale and purchase agreements rescinded or annulled with a view to facilitating transfer of property by the seller to another person. The remission is being extended to similar aborted leases and agreements for lease. Stamp duty in excess of S$50 is to be remitted for aborted leases and agreements for lease subject to 6 conditions, which are:
- the lease or agreement for lease is rescinded or annulled on or after 19 February 2011;
- the lessee has not rescinded or aborted the lease or agreement for lease with a view to facilitate the lease of the property by the lessor to another person;
- the executed lease instrument has not been used for any purpose;
- the lease period of the property has not commenced;
- the application for remission is made within 6 months from the date of annulment or rescission of the lease or agreement for lease (or within such further time as allowed by the Commissioner of Stamp Duties); and
- the original lease or agreement for lease is surrendered to the Commissioner of Stamp Duties for cancellation.
Removal of fixed and nominal duties
Certain instruments which are not liable for ad valorem duty are liable for nominal or fixed duty ranging from S$2 to S$10.
Fixed or nominal duty on a number of these instruments executed on or after 19 February 2011 is removed, but not on a declaration of trust which has to be stamped with a fixed duty of S$10. Details are in an IRAS e-tax guide dated 18 February 2011.
Please note you may contact our tax practice partner should you have any queries of how any of these tax changes could affect your business: