Paying corporate taxes is unavoidable in Singapore, but proper tax planning yields a definite payoff to any firm, consultants told BT.
Said Paul Cornelius, tax partner at PricewaterhouseCoopers Singapore: 'Get it right and a Singapore company can pay less tax or defer its tax payments. Get it wrong and a company can underpay taxes and find itself with tax debts, penalties and interest.'
Ernst & Young's Choo Eng Chuan said: 'As we run businesses, we want to maximise returns to our stakeholders. To the extent that businesses can minimise paying these taxes, they are maximising returns to their stakeholders and they would have more resources to reinvest.'
Relevant taxes
So what are some of the taxes that firms face here?
According to Deloitte's tax partner Sum Yee Loong: 'The common tax that a company in Singapore has to face is corporate tax, and if the company has overseas income, then overseas tax, including withholding tax.'
The standard rate of income tax on a company in Singapore is 18 per cent but a partial tax exemption is available - that means that some companies face an effective tax rate of only 8.9 per cent on their first $300,000 of chargeable income.
As a result of the rise in the partial tax exemption threshold to $300,000 last year, some 80 per cent of Singapore companies now pay tax at an effective tax rate of less than 10 per cent, according to the Economic Development Board.
'As a general comment, the income tax rates faced by companies in Singapore are very competitive from both a regional and global perspective,' said Mr Cornelius.
'Even with the drop in Hong Kong's corporate tax rate to 16.5 per cent, Singapore remains competitive as many companies can take advantage of tax incentives that can reduce tax rates to below 18 per cent or even exempt them from tax for a period of time.'
Government agency IE Singapore cited a study by Canadian think-tank CD Howe Institute, which estimates Singapore's effective tax rate on manufacturing to be as low as 6.4 per cent, and 9.3 per cent overall.
The low headline tax rate supported by targeted tax incentives gives Singapore a competitive edge in attracting new businesses.
Many multinational companies have located their business functions, assets and risks in Singapore to take advantage of its internationally competitive tax regime.
Besides income tax, companies face a variety of other tax burdens.
These include withholding taxes from payments made to non-resident entities, even if they are operating here; the goods and services tax (GST) is a broad-based value-added tax imposed at a rate of 7 per cent on the domestic consumption of goods and services in Singapore.
GST is a particular cashflow issue for exporters.
Other taxes in Singapore include stamp duty imposed on transfers of immovable property situated in Singapore and shares in Singapore companies, as well as property tax imposed on the gross annual value of properties owned in Singapore.
While there are very few import restrictions in Singapore, customs and excise duties are imposed on liquor, tobacco products, motor vehicles and petroleum products.
Tax strategies
Fortunately, there are various strategies to minimise the tax burdens.
One way is to accelerate tax deductions and defer taxable income, explained Mr Cornelius.
'There are many techniques to do this in Singapore, such as claiming accelerated capital allowances (CAs) or not remitting foreign sourced income.'
Mr Sum agrees, adding that small firms 'should maximise on the partial exemption applicable to the first $300,000 of taxable income. They should also maximise on the claim of capital allowances'.
The partial tax exemption exempts 75 per cent of the first $10,000 of income from tax and 50 per cent of the next $290,000.
The start-up scheme provides a full exemption from tax on income of up to $100,000 during the first three years of operations and a 50 per cent exemption on the next $200,000.
Careful tax planning can optimise the use of these exemptions and partial exemptions.
'For example, it may make sense for one company to claim accelerated capital allowances to reduce income to the $300,000 threshold. Other companies may look to defer capital allowances when income is under the threshold in the current year but is growing strongly in the future. It is very much horses for courses. Tax planning is very much specific to the business circumstances of each company,' said Mr Cornelius.
Tax-efficient financing is an area of focus for all companies, large and small.
If a company borrows funds to acquire an asset that does not produce any income that is subject to tax, then interest on those funds will not be tax-deductible.
Interest on debt used to fund the working capital of the business or to acquire an asset that will be used to generate future chargeable income should be tax deductible.
Interest on debt used to acquire the shares of a company that will produce tax-exempt dividends will not be tax-deductible.
It is important to understand the tax rules on interest deductions and structure financing tax efficiently to maximise tax benefits.
Tax incentives are not just for the large multinational companies.
Many incentives are aimed at or are equally applicable to small companies, such as the research and development (R&D) incentive scheme for start-up enterprises and the R&D tax allowance introduced in the 2008 Budget.
Said Mr Choo: 'In addition, agencies like Spring Singapore provide cash grants or tax incentives to enterprising companies to help propel them for growth. These grants and incentives must be applied for and approval is given after reviewing the applications. Overall, Singapore already has quite a low tax regime but every dollar counts and so these grants and incentives do help SMEs minimise taxation.'
Tax deductions
Singapore's general deduction provision allows a deduction for outgoings and expenses wholly and exclusively incurred for the production of income.
Where a taxpayer incurs dual-purpose expenditure and the amount is divisible, a deduction is allowed for a part of the expenditure that is apportioned on a reasonable basis.
Specifically, Mr Sum says, expenses that are tax deductible include salaries, bonuses, employers' CPF, rental, interest expense, utilities and R&D expenses.
Deductions are specifically provided for certain types of expenditure.
For example, a specific deduction is available for interest payable on capital employed in acquiring chargeable income and for rent payable in respect of any land or building occupied for the purpose of acquiring chargeable income.
The cost of repairs to plant, machinery or premises, the cost of replacing implements and utensils, bad and doubtful debts arising from trading receipts of the company and certain contributions to approved pension or provident funds are specifically deductible.
As well as providing for specific deductions, the Singapore Income Tax Act also specifies that certain types of expenditure will not be tax deductible.
For example, deductions are not allowed for expenses of a private or domestic nature, expenditure that is capital in nature, capital employed on improvements to assets, losses recoverable under an insurance or indemnity contract, Singapore or foreign income tax payments, motor car expenses and GST output tax borne by a GST-registered entity.
Note that the Inland Revenue Authority of Singapore has granted a concession under which pre-commencement expenses incurred would be deductible, if these expenses qualify for deduction rules.
This is particularly important for property investment companies that construct premises for future rental.
Based on Singapore case law, the business of such companies will not commence until the Temporary Occupancy Permit (TOP) is granted.
This can be many months or years after construction has commenced and a significant amount of pre-commencement expenditure can be incurred by then, including interest expenses in particular.
Tax losses from trading activities and unabsorbed capital allowances can be carried forward for offset against future income provided certain conditions are met (for example, continuity of ownership and/or continuity of same trade or business).
Singapore also has a group relief system that applies to current year tax losses and unabsorbed CAs.
Tax incentives for capital investments
Singapore has favourable tax rules on investments in capital assets.
CAs are available for capital expenditure incurred on plant and machinery acquired for the purpose of a trade or business.
Broadly, 'plant and machinery' refers to the fixed assets employed in the company's business which fulfil a functional role in the business activity and which are not merely part of the setting of the business.
On due claim, there is an initial allowance of 20 per cent of the cost of the asset and annual allowances for the remaining cost on a straight-line basis over the working life of the asset.
In lieu of initial and annual allowances, taxpayers often choose the accelerated allowance regime, whereby an accelerated CA of 33.33 per cent per annum is available for a period of three years or 100 per cent over one year for some assets (for example, computers or other prescribed automation equipment).
The disposal of plant and machinery on which CAs have previously been claimed will generally give rise to an assessable balancing charge or deductible balancing adjustment, depending on the sale price.
There are special allowances for qualifying capital expenditure incurred on the construction of an industrial building (used for one of a number of specified trades), referred to as industrial building allowances.
On due claim, there is an initial allowance of 25 per cent of the qualifying expenditure, followed by a 3 per cent annual allowance of the relevant expenditure.
Generally, the disposal of industrial buildings will also give rise to balancing adjustments.
Claiming a tax deduction or CAs in respect of expenses incurred on fixtures, fittings and installations has long been the subject of debate in Singapore.
It was announced in the 2008 Budget that a special allowance over three years will be available for expenditure incurred on fixtures, fittings and installations.
This allowance is subject to a cap of $150,000 for every three years and is applicable to qualifying expenditure on attached fixtures incurred during the period from Feb 16 this year to Feb 15, 2013.
It is worth noting that expenditure on 'structural works' and 'expansion of space' have been excluded and such expenses would not qualify for the special allowance.
No balancing adjustments will apply to recapture allowances if the relevant asset is disposed.
Examples of items that do not qualify for CAs but qualify for special allowances may include general electrical installations and wiring to supply electricity, general lighting for premises and gas systems.
Unrestricted CAs should still be available on items such as air conditioning in a building used for business purposes as the air conditioning can be classified as a separate unit of machinery or plant.
Tax amortisation on a straight-line basis over 5 years (that is, 20 per cent a year) may be available for capital expenditure to acquire Intellectual Property (IP) rights for use in a taxpayer's trade or business.
If the relevant IP rights are divested, there will be a recapture of previously claimed tax amortisation.
Tax deductions or allowances may also be available for certain other categories of capital expenditure, for example, certain expenditure on research and development activities and research and development cost sharing payments.
There is also a tax incentive in Singapore known as the investment allowance scheme whereby a company can be granted an Investment Allowance (IA) based on an approved percentage of the fixed capital expenditure incurred on plant, machinery and factory buildings for an approved project.
The types of projects that may be considered for the award of IAs include the manufacture of a product, provision of specialised engineering or technical services and construction operations.
Take note though: IAs have to be first approved, and generally approval must be obtained from the Economic Development Board, says Mr Sum.
And approvals are granted on a case-by-case basis depending on the merits of each case.
'Things to be considered include the rise in value-add per worker after the purchase of the equipment and it is best to properly evaluate the total capital expenditure for the next few years.'
Therefore, 'if there are to be expenditures to be incurred for specific projects, consideration should be given to the possibility of applying for investment allowance,' he added.
This is the last of a four-part SME series on how to gain a competitive advantage through more effective business planning, cash flow management, strategic marketing and tax planning, sponsored by CPA Australia.
The CPA Australia SME Workshop Series on these topics will be launched in July 2008. To find out more please contact 68361233 or elizabeth.briggs@cpaaustralia.com.au
This article was first published in The Business Times on 24 June 2008.
