Tax System in Singapore

UNIVERSITATEA DE VEST DIN TIMISOARAFACULATEA DE ECONOMIE SI ADMINISTRAREA AFACERILORINTERNATIONAL CORPORATE FINANCE

1.1.2014Ana BulgaruCorporate Taxation

Tax System in Singapore

Content

1.General facts about Singapore22.Introduction to the tax system of Singapore34.Individual Income Tax54.1.Income tax for residents54.2.Income tax for non-residents75.Corporate Income Tax85.1.General Corporate Tax Incentives (for residents)95.1.2. One time non-taxable cash grant95.1.3 Tax exceptions for New SMEs105.1.4. Productivity and Innovation Credit (PIC)105.1.5. Withholding tax145.1.6. Global Trader program155.2.Corporate tax regulations165.2.1.Estimated Chargeable Income (ECI)175.2.2.Income Tax return (Form C / Form C-S)176.Predictions: Singapore vs Switzerland207.Summary208.Bibliography22

1. General facts about Singapore

Today, Singapore has a highly developed market economy, based historically on extended entrept trade. Along with Hong Kong, South Korea, and Taiwan, Singapore is one of the original Four Asian Tigers. The Singaporean economy is known as one of the freest, most innovative, most competitive, and most business-friendly. The 2013 Index of Economic Freedom ranks Singapore as the second freest economy in the world, behind Hong Kong. According to the Corruption Perceptions Index, Singapore is consistently ranked as one of the least corrupt countries in the world, along with New Zealand and the Scandinavian countries.Singapore is often cited as the leading example of countries that continues to reduce corporate income tax rates and introduce various tax incentives to attract and keep global investments. Effective tax rates as one of the lowest in the world and the general business friendliness of Singapore are the two important factors contributing to the economic growth and foreign investment into the city-state.The governing statute regarding corporate and individual taxation matters is The Income Tax Act of Singapore and the responsible authority for tax collection is a statutory board under the Ministry of Finance of the Singapore Department called Inland Revenue Authority of Singapore or shortened: IRAS.The Inland Revenue Authority of Singapore (IRAS), was formed in 1960 and was formerly known as the Inland Revenue Department. It integrated all the key revenue collection agencies into one body, enabling the administration and collection processes to become more streamlined and better managed. IRAS has also made its mark as an efficient tax administrator and a service-friendly tax collector.The IRAS is responsible for collecting income tax, property tax, goods & services tax, estate duty (abolished since 15 Feb, 2008), betting taxes and stamp duties. As the main tax administrator for the Ministry of Finance, IRAS plays a role in tax policy formulation by providing policy inputs, as well as the technical and administrative implications of each policy. IRAS also actively monitors developments in external economic and tax environment to identify areas for policy review and changes. It aims to foster a competitive tax environment that encourages enterprise and growth. The other non-revenue functions performed by IRAS include representing the government in tax treaty negotiations, providing advice on property valuation and drafting of tax legislation.In Singapore, the long-term objectives of government budgetary policy are (followed by IRAS) are: to promote and support sustained, non-inflationary economic growth; to maintain a balanced budget, i.e. to finance total operating and development expenditures from operating revenue over the course of the business cycle; and to focus government expenditure on delivering essential public goods and services, e.g. education, healthcare, infrastructure, housing and programs to protect the environment.Underlying the above objectives are the recognition of market forces in driving the economy, financial prudence and emphasis on human & infrastructure investment.

Tax policy on the other hand, is an integral part of fiscal policy. The main objectives of tax policy in Singapore are: Revenue Raising. This is the traditional aim of tax policy. Tax revenue is a substantial source of funding for government operations. Promotion of Economic and Social Goals. Tax has been used to influence behavior towards desirable social and economic goals. For instance, to encourage mechanization and automation, the government allows accelerated capital allowance for most assets used for business purposes. To encourage Singaporeans to have more children, tax rebates are given for the first to fifth child(ren).

2. Introduction to the tax system of Singapore

The fundamental tenet of Singapore's tax policy is to keep tax rates competitive both for corporations as well as individuals. Keeping the corporate rate competitive will help to continue to attract a good share of foreign investment. Keeping the individual rates low will encourage the people to work hard. It will also make risk-taking worthwhile and encourage entrepreneurship.

There are three main sources of government operating revenue: tax revenue, fees and charges and other receipts. Tax revenue accounts for around 75% of the government operating revenue per year. The most significant is tax revenue from the various taxes imposed by the government, which are as follows: Individual Income Tax which is chargeable on income of individuals. Corporate Tax - which is chargeable on income of companies. Withholding tax for any payments to non-residents or non-resident companies Property Tax which is imposed on owners of properties based on the expected rental values of the properties. As of 2014, the amount levied will vary according to the type of property in question, and will operate within a banded system, starting with a 10% tax. Goods & Services Tax. GST is a tax on consumption. The tax is paid when money is spent on goods or services, including import (7 %, paid every quarter if the taxable turnover exceeds $1MM). Businesses effectively pay two kinds of GST: output tax, which they collect on goods and services that they sell (paid to IRAS); and input tax, which they pay on goods and services that they buy (paid to the seller at the point of sail). Estate Duty (Removed for deaths occurring on or after 15 Feb 2008). It is levied on the value of a deceased's net assets in excess of a threshold amount. Stamp Duties, imposed on commercial and legal documents relating to stock & shares and immovable property. It is calculated at varying rates depending on the document involved, and usually as a percentage of a transaction cost rather than as a fixed fee Betting Taxes. These are duties on private lottery, betting & sweepstake. Casino Tax - a new tax levied on the casinos gross gaming revenue. Motor Vehicle Taxes. These are taxes, other than import duties, that are imposed on motor vehicles. These taxes are imposed to curb car ownership and road congestion. Customs & Excise Duties. Singapore is a free port and has relatively few excise and import duties. Excise duties are imposed principally on tobacco, petroleum products and liquors. Also, very few products are subject to import duties. The duties are mainly on motor vehicles, tobacco, liquor and petroleum products. Others. The two main taxes are the foreign worker levy and the airport passenger service charge. The foreign worker levy is imposed to regulate the employment of foreign workers in Singapore.There are no Wealth or gift taxes.IRAS (Inland Revenue Authority is responsible for collecting income tax, withholding tax, property tax, goods & services tax, stamp duty, estate duty (for deaths occurring before 15 Feb 2008) and betting taxes.

According to Doing Business 2014, Singapore is the 5th country in the world by best practices in the tax payments and regulations (the best country is United Arab Emirates with 0% profit tax).There are only 5 main groups of taxes to be paid 5 times (in total) per year (each of them is paid ones per year):

Tax or mandatory contributionNotes on payments Time (h) spent/ yearStatutory tax rateTax baseTotal tax rate (% of profit)

Employer paid - Social security contributionsOnline filling1016%Gross salaries17.6

Corporate income taxOnline filling3217%Taxable profit4.9

Property tax010%Property value4.7

Road tax0Fixed feeEngine size0

Value added tax (GST)Online filling407%Value added0

Totals8227.1

Taxable income includes: gains or profits from any trade or business; income from investment such as dividends, interest and rent; royalties, premiums and any other profits from property; and other gains of an income nature accrued in or derived from Singapore, or income received in Singapore from outside of the jurisdiction. Capital gains (e.g. gains realized on the sale of fixed assets, or on foreign exchange on capital transactions) are not liable to corporate income tax. Certain income is exempt from tax under the Income Tax Act; examples of exempt income include shipping income derived by a shipping company, and foreign-sourced dividends, branch profits and service income received by a resident company that satisfies the qualifying conditions.Deductible expenses must have been wholly and exclusively incurred in the production of income, and must also be revenue in nature and not prohibited under the Income Tax Act. Capital expenditure is not allowable as a tax deduction. Non-deductible expenses include amortization and depreciation (although capital allowances are allowed), bad debts, the write-off or acquisition costs of fixed assets, legal and professional fees, medical and motor vehicle expenses, and penalties and fines.

3. Tax history in Singapore

The income tax had been introduced briefly during World War I and II to raise revenue for the war effort. But the tax was unpopular, and with many opposing the need for it, income tax stayed off the agenda. The end of World War II highlighted the need for new infrastructure and fresh sources of revenue, giving renewed impetus to the introduction of income tax. In 1947 Income Tax was introduced in Singapore under the British colonial government. In 1948 the Income Tax Act was imposed. The Act was based on the Model Colonial Territories Income Tax Ordinance 1922, which was devised for British colonies at that time. Therefore, Singapores tax laws share common historical roots with those of Malaysia, Australia, New Zealand and South Africa. 1960s : With Independence in 1965, Singapore promoted a policy of rapid industrialization and building an export oriented industrial base, to stimulate growth and employment. Hence in the 1960s labor-intensive industries were encouraged by tax incentives. The Economic Expansion Incentives Act was introduced in 1967. Companies which managed to grow their exports enjoyed as much as a 90% tax exemption on the increased export income. Interest paid on foreign loans granted to a local industrial company was tax exempt. 1970s: The growth of the service sector was high on the governments agenda. Shipping was actively promoted. Income from the operation and charter of Singapore ships drew tax exemptions. Tax measures to support urban redevelopment were also introduced. Different property taxes were also phased out. Tax policies in the 1970s were also influenced by social needs. Contributions to the Central Provident Fund were tax deductible and other tax relief measures were introduced. 1980s: As Singapore became more developed, it became a more expensive place for businesses in the 1980s. Measures to revamp the economy, with the aim of making it more competitive was introduced. Changes to government policies, incentives and taxes were considered. The late 1980s marked a significant shift towards lowering both corporate and individual taxes. In 1987 corporate tax rates were lowered from 40% to 33%. 1990s. This period witnessed major changes in tax policies. There was a shift towards lower direct taxes and the focus was on indirect taxes. The trend towards indirect taxation resulted in the introduction of the Goods and Services Tax (GST) in 1994. It is a tax on domestic consumption and applies to all goods and services supplied in Singapore except for financial services and residential properties. It was in this period that the trend of lowering corporate and individual tax rates accelerated. 2000 and beyond. This has been the phase of innovation and entrepreneurship. A number of measures were, and are being introduced to attract foreign talent and investment. Tax rates were further lowered and currently capped at 18% (17% from 2010) for companies and 20% for individuals. This period witnessed the introduction of group relief and the one-tier corporate tax system.4. Individual Income Tax

Individuals resident in Singapore are taxed on a progressive tax rate as listed below. Filing of personal tax return is mandatory if the annual income is S$22,000 or more, you dont need to pay tax if his annual income is less than S$22,000. However, he may still need to file a tax return if he have been informed by Singapore tax department to submit his tax return.

4.1. Income tax for residents

A person is considered a tax resident if he/she is: a Singaporean; or a Singapore Permanent Resident and have established his/her permanent home in Singapore; or a foreigner who has stayed or worked in Singapore for 183 days or more in the tax year.Tax residents pay taxes on their chargeable income as per the tax rate table below. The chargeable income (i.e. income subject to taxation) for tax residents is determined as below:

Total Income Expenses Donations Personal Reliefs = Chargeable Income

Whereas Total income means gains or profits from carrying on any business, trade, profession or vocation either as a sole proprietor or partner in a partnership gains or profits from any employment dividends, interests, investment income rents, royalties, premiums and other profits arising from properties exclude qualified income earned overseas (more deails provided later in the guide). Expenses means qualified employment related expenses qualified rental related expenses are expenses Donations means donations to qualified charitable organizations Personal Reliefs means special personal reliefs such as eligible course fees, earned income relief, parent relief, etc. Chargeable income is this adjusted income after deductions from the total income (as shown in the picture above).The Individual Income tax rates for residents are calculated based on the following table: Chargeable Income Rate Gross Tax Payable

$ (%) $

On the first 20,000 --

On the next 10,000 2% calculation

On the first 30,000 fixed amount200

On the next 10,000 4% calculation

On the first 40,000 fixed amount550

On the next 40,000 7% calculation

On the first 80,000 fixed amount3,350

On the next 40,000 12% calculation

Chargeable Income Rate Gross Tax Payable

$ (%) $

On the first 120,000 fixed amount7,950

On the next 40,000 15% calculation

On the first 160,000 fixed amount13,950

On the next 40,000 17% calculation

On the first 200,000 fixed amount20,750

On the next 120,000 18% calculation

On the first 320,000 fixed amount42,350

Above 320,000 20% calculation

4.2. Income tax for non-residents

You are considered a non-resident for tax purpose if you are a foreigner who stayed or worked in Singapore for less than 183 days in the tax year. As a non-resident, you will be taxed as below:Physical presence (Calendar year Basis)Resident StatusTax rates

60 days or lessnon-residentno tax

61-18 daysnon-residenttaxed on 15% or based on the table below (for Singaporean citizens); Not eligible for tax reliefs

Director's fees, consultation and other incomenon-residentfixed tax of 20%

For calculation of the income tax for non-resident Singaporean citizens, the following table applies:

Chargeable Income Rate Gross Tax Payable

$ (%) $

On the first 2,500 4 % calculation

On the next 2,500 6 % calculation

On the first 5,000 fixed amount 250

On the next 2,500 8 % calculation

On the first 7,500 fixed amount 450

On the next 2,500 10 % calculation

On the first 10,000 fixed amount 700

On the next 5,000 14 % calculation

On the first 15,000 fixed amount 1,400

On the next 5,000 16 % calculation

On the next 5,000 17 % calculation

On the first 25,000 fixed amount 3,050

On the next 10,000 20 % calculation

On the first 35,000 fixed amount 5,050

On the next 15,000 27 % calculation

Above 50,000 15 % calculation

As the Singaporean government would like to attract foreign companies and transform the city state into a business hub for the Asia-Pacific region, the IRAS has introduced special clauses for expat executives who work in Singapore, but have to travel a lot. They can claim certain tax benefits for up to five consecutive years under certain conditions.

5. Corporate Income Tax

Singapore has been facing an urgency to push their efficiencies and productivity in wide range of industries. As a result, several different government agencies in Singapore have been continually providing several grant schemes to aid SMEs to use technology and other resources to achieve that objective.

Under Singapore's tax laws, a "company" means any company incorporated or registered under any law in force either inside or outside Singapore.

As per Income Tax Act of Singapore, corporate tax is imposed on the income that is accruing in or derived from Singapore (income that has a source in Singapore); received in Singapore from outside SingaporeA companys net profit/loss alone does not provide an accurate picture of the taxable income. For instance, some of the expenses incurred by your company may not be deductible for tax purposes or some of the income received may not be taxable or it may be taxed separately as a non-trade source.Since January 1, 2003, Singapore has adopted a single-tier corporate income tax system, which means there is no double-taxation for stakeholders for resident companies. Tax paid by a company on its chargeable income is the final tax and all dividends paid by a company to its shareholders are exempt from further taxation.There is no tax on capital gains in Singapore. Examples of capitals gains include gains on sale of fixed assets, gains on foreign exchange on capital transactions, etc

Singapores headline corporate tax rate is a flat 17% as of 2010. In order to make Singapore as an attractive investment destination, income tax rates in Singapore have been going down consistently as seen below

The effective rate is normally lower than the headline tax rate due to applicable tax exemptions and tax incentives, depreciation rules, etc. which resident companies can benefit from.The local tax system operates on the territorial principle. Therefore the income taxes in Singapore should be paid on local sources. For example, for overseas investments, the capital interest from such foreign accounts would not be taxed in Singapore.

A company is considered as resident in Singapore if the control and management of the business is exercised in Singapore referring to the policy level decision making at the level of Board of Directors and not the day-to-day decision making and operations.

In general, a company is considered non-resident in Singapore if the directors manage and control the business and hold board meetings from outside Singapore and the lower level operations are taking place in Singapore. A companys residence may change from one year of assessment to the next depending on the circumstances. A Singapore branch of a foreign company is generally not treated as a Singapore tax resident since the control and management is vested with an overseas parent company.

The basis of taxation for a resident company and non-resident company is generally the same with the exception of certain benefits that are available to resident companies. These include: A Singapore resident company is eligible for income tax exemption scheme available for new start-up companies. A Singapore resident company can enjoy income tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income under section 13(8) of the Income Tax Act. A Singapore resident company is entitled to benefits conferred under the Avoidance of Double Taxation Agreements (DTA) that Singapore has concluded with treaty countries (single-tier corporate tax system). Singapore has concluded tax treaties with more 50 countries and the list continues to grow (Romania is one of them). The treaties reflect Singapores continual efforts to help businesses in relieving double taxation and to encourage and facilitate the trade and investment opportunities across-borders. Starting 2008, new policy was adopted based on which, all Singapore companies that earned income from countries that dont have double tax agreement with Singapore, will be allowed a tax credit on their foreign-sourced income from those countries.

5.1. General Corporate Tax Incentives (for residents)

5.1.2. One time non-taxable cash grant

In addition, according to the Singapore Budget 2012, every Singapore company will receive a one-time non taxable SME cash grant amounting to 5% of the companys revenue for YA 2012, capped at S$5,000. However, to qualify for the cash grant, the company must have made CPF contributions for at least one employee who is not a shareholder of the company during the relevant accounting period for YA 2012.

5.1.3 Tax exceptions for New SMEs

A resident company can enjoy tax exemption from its foreign-sourced dividends, foreign branch profits, and foreign-sourced service income that is remitted into Singapore on or after 1st June 2003 if the following conditions are met: The headline tax rate of the foreign country from which income is received is at least 15%; The income had been subjected to tax in the foreign country from which it is received; and The Comptroller of Income Tax is satisfied that the tax exemption would be beneficial to the person resident in SingaporeTax exceptions/incentives have a big impact especially on the small-to-midsize Singapore companies, which encourages entrepreneurship.The following tables are applied for calculation of the corporate taxes:

Taxable Income ($)Tax rate

First 3 years of income Tax fillings0 100 0000%

100 001 300 0008.5%

300 001 - higher17%

After 3 years of income Tax fillings0 300 0008.5%

300 001 - higher17%

The corporate income tax rate is 0% on the first S$100,000 taxable income for each of the first three tax filing years for a newly incorporated company that meets the following conditions: be incorporated in Singapore be tax resident in Singapore has no more than 20 shareholders of which at least one is an individual shareholder holding at least 10% of shares. All Singapore resident companies are eligible for partial tax exemption which effectively translates to about 8.5% tax rate on taxable income of up to S$300,000 per annum. The taxable income above S$300,000 will be charged at the normal headline corporate tax rate of 17%.

5.1.4. Productivity and Innovation Credit (PIC)

PIC was introduced in Budget 2010 to encourage productivity and innovation activities in Singapore. The productivity improvement activities covered under PIC are: Acquisition and leasing of PIC Information Technology (IT) and Automation Equipment; Training of employees; Acquisition and In-licensing of Intellectual Property Rights; Registration of patents, trademarks, designs and plant varieties; Research and development activities; and Design projects approved by DesignSingapore Council.

400% of tax deduction

PIC grants businesses which invest in specified productivity and innovation activities, enhanced deductions and/ or allowances (enhanced deductions). These are in addition to the deductions and/ or allowances allowable under current tax rules. The total deductions and/ or allowances are in effect 400% per dollar of qualifying expenditure.The tax deductions/allowances base is a combined view of several years, according to the PIC tax deduction limit amount announced.For example businesses can enjoy 400% tax deductions/allowances on up to$400,000 for 2013-2015, but this year, it was announced that for 2015-2018, the tax deductions/allowances will be applied on up to $600 000 per year. This new announcement goes under so called PIC+ Scheme.The following table applies:Year of Assessment (YA)Expenditure Cap per Qualifying Activity*Tax Deduction per Qualifying Activity

2011 and 2012(Combined)$800,000(400k*2 years)$3,200,000(400% x $800,000)

2013 to 2015(Combined)$1,400,000(400k * 2 years + 600k * 1 year[2015])$5,600,000(400% x $1,400,000)

2016 to 2018(Combined)New!$1,800,000(600k * 3 years)$7,200,000(400% x $1,800,000)

For example, a company has a Gross Taxable Profit of $1M. It has bought about $100K of IT equipments.It will enjoy PIC 400% tax rebate of $400k. Thus, it lowered the taxable income to $600k. (1MM 400k).Currently, the corporate tax is 17%. Therefore, there is a tax saving of $68k:1MM * 17% = 170k600k * 17% = 102k170k 102k = 68kIn practice, the company will pay $32k for $100k (100k 68k) worth of IT hardware and software.

The expenditure cap for each activity is applicable at the sole-company level. In the case of partnerships, the expenditure cap is applicable at the partnership level regardless of the number of partners.

Example for 2013:

Source: IRAS, http://iras.gov.sg/irashome/uploadedfiles/e-Tax_Guide/etaxguides_CIT_Revised%20PIC%20e-Tax%20Guide_2013_09_20.pdf

Cash payout

In lieu of a deduction, businesses may opt to convert qualifying expenditure of up to $100,000 for each YA into cash. The conversion rate is 30% (for YA 2011 and YA 2012) or 60% (for YA 2013 to YA 2015).

The qualifying conditions for cash payout, except of being part of the 6 activities listed above are: incurred qualifying expenditure and are entitled to PIC during the basis period for the qualifying YA; active business operations in Singapore; and at least 3 local employees (Singapore citizens or Singapore permanent residents with CPF contributions)excludingsole-proprietors, partners under contract for service and shareholders who are directors of the company. A business is considered to have met the 3-local-employees condition if it contributes CPF on the payroll of at least 3 local employees in the relevant months.

Year of Assessment YA)Expenditure Cap for All Qualifying ActivitiesCash Payout RateMaximum Cash Payout

2011 and 2012(Combined)$200,000 (2YAs combined)30%$60,000 combined(30% x $200,000)

2013 to 2018(Cap cannot be combined)$100,000 per YA60%$60,000 per YA(60% x $100,000)

Tax Bonus

In Budget 2013, an additional cash bonus (known as PIC bonus) was announced as part of a 3-year transition support package under the Quality Growth Program.The PIC Bonus gives businesses a dollar-for-dollar matching cash bonus for YAs 2013 to 2015, subject to an overall cap of $15,000 for all 3 YAs combined to sole-proprietorships, partnerships and companies the following qualifying conditions are met: incurred at least $5,000in PIC-qualifyingexpenditure during the basis period for the YA in which a PIC Bonus is claimed; active business operations in Singapore; and at least 3 local employees (Singapore citizens or Singapore permanent residents with CPF contributions)excludingsole-proprietors, partners under contract for service and shareholders who are directors of the company. A business is considered to have met the 3-local-employee condition if it contributes CPF on the payroll of at least 3 localemployees.

Differed tax

Businesses may also opt to defer their tax payments based on qualifying expenditure incurred for YA 2012 to YA 2015. Tax payable of up to $100,000 per YA may be deferred to the following year. IRAS will notify businesses on the payment of the tax deferred when the first assessment for the next YA is raised or three months from the end of the current financial period, whichever is the earlier

Computation of tax refund in case the company opted for PIC Cash Payout as well:YA 2013YA 2014YA 2015

Qualifying PIC expenditure$6 000$3 000$12 000

PIC cash payout$3 600($6000 * 60%)$1 800($300 *60%)$7 200($12000 * 60%)

PIC Bonus$60000(PIC expend.