A broad-based tax grant first announced during Budget 2010 on 22 February 2010 and enhanced during Budget 2011, Budget 2012 and Budget 2013

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1 CLOUD COMPUTING FOR LAW FIRMS CHRIS LOH DIRECTOR ASCENTIATAX SERVICES PTE LTD 13 SEPTEMBER 2013 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME A broad-based tax grant first announced during Budget 2010 on 22 February 2010 and enhanced during Budget 2011, Budget 2012 and Budget 2013 This PIC Scheme also applies to small medium enterprises and multinationals. Law firms also benefit from this PIC Scheme regardless of whether you are a sole-proprietorship, partnership or corporation. PIC expanded to include Cloud Computing. 1

2 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME R&D Acquisition of IP / In-house licensing 400% tax deduction for S$400,000 of qualifying expenditure on R&D conducted in Singapore and overseas per year of assessment (YA) and 150%/100% for balance expenditure. 400% allowance for S$400,000 of qualifying cost from acquiring IP rights / in-house licensing incurred per YA and 100% allowance for balance expenditure. Registration of IP Rights Investments in IT and Automation Investments in Design 400% tax deduction for S$400,000 of qualifying costs of registering patents, trademarks, designs and plant varieties incurred per YA and 100% tax deduction for balance expenditure. 400% allowance for S$400,000 of expenditure incurred on qualifying investments in automation per YA and 100% allowance for balance expenditure. 400% tax deduction for S$400,000 of qualifying expenditure on eligible design activities done in Singapore per YA and 100% tax deduction for balance expenditure. Training 400% tax deduction for S$400,000 of qualifying training expenditure for external training and Certified in-house training per YA and 100% tax deduction for balance expenditure. PRODUCTIVITY AND INNOVATION CREDIT SCHEME CLOUD COMPUTING Which category does cloud computing fall under? Answer: IT and Automation equipment. How is cloud computing different from the rest of the PIC categories? Answer: Cloud computing is a service and not an equipment. 2

3 PRODUCTIVITY AND INNOVATION CREDIT SCHEME CLOUD COMPUTING Definition of Cloud Computing Defined under section 14T of the ITA as: cloud computing service means any information technology service delivered by means of cloud computing. PRODUCTIVITY AND INNOVATION CREDIT SCHEME CLOUD COMPUTING Source: Wikipedia Cloud computing providers offer their services according to several fundamental models: - infrastructure as a service (IaaS), - platform as a service (PaaS), and - software as a service (SaaS) 3

4 PRODUCTIVITY AND INNOVATION CREDIT SCHEME CLOUD COMPUTING Source: IRAS slide 38 of the Slide show Productivity and Innovation Credit Scheme &Budget 2013 Highlights for Businesses OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Qualifying Persons or Companies? Section 37I(21) defines "qualifying person" to be any company or firm (including a partnership) that (a) carries on a trade or business in Singapore; and (b) employs and makes contributions to the Central Provident Fund in respect of not less than 3 local employees based on the payroll for the last month (or such other month as the Comptroller may determine) of its basis period for the qualifying year of assessment in question. Point to note: A sole-proprietorship or partnership can claim for enhanced deductions for registration costs of IPRs but not WDA on acquisition of IPRs! 4

5 WHO CAN CLAIM CLOUD COMPUTING Who can claim a tax deduction on cloud computing? Answer: Everyone! QUALIFYING CAP Enhanced tax deduction (ETD) Vs Cash conversion (CC) Under the ETD, the cap is S$400,000 per YA. However, 3 YAs can be combined to S$1.2 million. Under the CC, the cap is S$100,000 per YA. No combine cap over the YAs. 5

6 CLOUD COMPUTING IS PART OF IT AND AUTOMATION EQUIPMENT Total = $1,700,000 Example: Cloud computing expenditure incurred for $500,000 Balance of expenditure incurred in excess of $400,000 will enjoy deduction at current level $100, $400,000 Expenditure $100,000 (100% deduction) $1,600,000 (400% * $400,000) PER EQUIPMENT CONCEPT NOT APPLICABLE ON COMPUTING Law Firm A acquires server of $400,000. Law Firm A cannot choose to convert part of it to cash. If CC is selected, the remaining balance of $300,000 is forfeited for capital allowance purposes. Cloud computing is a service, the cost can be split for both CC and ETD i.e. $100k for CC and balance of S$300k for ETD. 6

7 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Why convert when allowances/deductions are forfeited? Per IPR basis / Per equipment basis / Per application basis Illustration on cash grant conversion (YA 2013) Amount ($) Qualifying expenditure incurred for a server (automation) 168,000 Cap on qualifying expenditure 1,200,000 Amount of deductions/allowances 400% x $168,000 Less: Amount converted to cash grant Balance of deductions/allowances for the YA Total cash grant ($100,000 x 60%) 672, ,000 (capped) Forfeited 60,000 (capped) OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Partial conversion Illustration on cash grant conversion (YA 2013) Amount ($) Qualifying expenditure incurred cloud computing services 20,000 Cap on qualifying expenditure 1,200,000 Amount of deductions/allowances 400% x $10,000 40,000 Less: Amount converted to cash grant 10,000 Balance of deductions/allowances for the YA 40,000 Total cash grant ($10,000 x 60%) 6,000 7

8 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Food for thought -Company spending $100 on cloud computing services can enjoy $68 in tax savings -400% deduction on $100 = $400 -Tax savings = 17% x $400 = $68 OR should this be effective tax rate x $400? $100 $400 $68 Cash conversion saving = 60% x $100 (17% x $100) = $43 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Cash Conversion 1. Conditions: Businesses with at least 3 local (Singapore citizens and SPRs with CPF contribution) employees may convert up to $100,000 (not less than $400) of the expenditure under the scheme into non-taxable maximum cash grant of $60,000 ($100,000 at 60%) per YA 2. For YA 2013 to 2015, businesses cannot convert up to a combined total 3. Hire purchase equipment with repayment period over 2 basis period do not qualify but will qualify with effect from YA Only arm s length transaction between related parties are eligible for the cash payout. 8

9 OVERVIEW OF PRODUCTIVITY AND INNOVATION CREDIT SCHEME Administrative Procedures (2013) Submit PIC Cash Payout Application Form and relevant Annexes (+ CPF record of payment for 10 or less employees businesses) Current year quarterly claim available Revenue figure for the qualifying period Cash = $250 x 60% = $150 $250 Expenditure $1000 Tax Deductions $150 Cash WITHHOLDING TAX As cloud computing service is a service, Singapore withholding tax may apply if the payments are made to a NR for services rendered in Singapore. 9

10 DISPELLING MYTHS Faq 15 Do I need to give a breakdown of the cloud computing payment? IRAS reply: No. The full cloud computing payment will qualify for PIC. In practice, we have received the following queries:- A. Copies of the invoice B. Copy of the agreement contract signed between company and supplier C. Function and features of the expenditure and flowchart for the automation process D. How has cloud computing improved your Company s productivity PIC FOR IT AND AUTOMATED EQUIPMENT Definition of Prescribed Automation Equipment Prescribed automation equipment listed in Income Tax (Automation Equipment) Rules 2004, PIC Automation Equipment List List includes existing Section 19A(2) Prescribed Automation Equipment with further additions, including: 1. Computers and peripherals; 2. Software etc 3. IRAS now allows taxpayers to submit application for approved automated equipment on a case-by-case basis, subject to conditions. Purchased Equipment Given on due claim Partial claim allowed on 1 equipment so as to cap $300,000 Taxpayer can choose to claim 100% accelerated allowances, 3 years/ 2 years (for YA 2011)/ tax useful life or defer the claim No enhanced allowances shall be made if equipment is leased out 10

11 PIC FOR IT AND AUTOMATED EQUIPMENT FOR LAW FIRMS MS Office, Acrobat - Yes Practice Management / Accounting Software - Yes LEAP, Legalpac, Hotdocs, Lawdocs, Worldox - Yes Specialist practice software - Yes Litigation Support Software eg Evidence Organiser, Caseroom, Nextpoint, Nuix - Yes Corp Sec Software - Yes Trademark case Management Software - Yes Cloud Software Subscriptions - Yes Gmail Yes Singnet No Dropbox, Box, Egnyte, Microsoft Yes Cloud Calendaring system - Action-IT - Yes Subscription to Justice Online - Yes Subscription to Court e-filing Systems - No Computers, Servers, Backup Software, (eg MS Exchange) - Yes Scanners, 3 in one copier, scanner, printer - Yes Ipads, Smartphones - Yes PIC FOR IT AND AUTOMATED EQUIPMENT Leasing of software Prior to public consultation of the Income Tax (Amendment) Bill 2010, leasing of software would not have qualified unless it is installed in a qualifying equipment to be leased. Condition to qualify The enhanced deduction is limited to payments where the end-user has no rights to reverse engineer, decompile, or disassemble the software, or exploit the copyright of the software. Only rights to use the software. Points of consideration (1) Does this apply to situation whereby MNCs headquarters sublicence software rights to Singapore related entities on a pay as you use charging basis per annum? (2) Note that maintenance of software (e.g. debugging, helpdesk support) does not qualify for PIC 11

12 PIC FOR IT AND AUTOMATED EQUIPMENT Minimum Ownership Period of Equipment Claw-back provision Base allowances Disposed within 1 year Claim deduction Compute BA/BC Disposed after 1 year Disposed within 1 year Cash conversion Disposed after 1 year Enhanced allowances Deemed as income Remaining balance forfeited Adjustments not required (note) Full recovery subject to waiver (refer to scenarios) No recovery Note: For PIC equipment written off over 3 years or over working life, any enhanced allowances that has yet to be drawn down is fully available to the taxpayer as balancing allowances. PIC BONUS NEW Businesses will get a dollar to dollar matching for expenditure in qualifying expenses, subject to a qualifying cap of S$15,000 for the combined YAs 2013 to This is on-top of the existing PIC benefit. The qualifying conditions are as follows:- Incurred at least S$5,000 in each relevant YA. Have active business operations in Singapore (i.e. Dormant companies are not entitled); You need to contribute CPF to at least 3 employees (excluding SP, directors who are also shareholders and partners); a. At the last month of the relevant YA for businesses claimed the enhanced tax deduction; and b. At the last month of the relevant quarter(s) for PIC cash payout. Disbursement will only take place after July 2013 and October 2013 for cash conversion option and enhanced tax deduction cases respectively. Please note that the PIC Bonus is taxable. 12

13 PIC BONUS NEW YA 2013 YA 2014 YA 2015 Qualifying PIC Expenditure $6,000 $3,000 $12,000 PIC Cash Payout $3,600 $1,800 $7,200 ($6,000 x 60%) ($3,000 x 60%) ($12,000 x 60%) PIC Bonus $6,000 $0 $9,000 Total PIC Benefits $9,600 $1,800 $16,200 Extracted from IRAS website SUMMARY Capping of Expenditure and Cash Conversion Expenditure Cap Cash Conversion Cap Cap on Applied at Qualifying expenditure for each of the 6 categories Sole-proprietorship/ partnership/ company level Expenditure from all the 6 categories YA $800K $60K YA 2013 $60K YA 2014 $1,200K $60K YA 2015 $60K 13

14 SUMMARY Prescribed Automation Equipment Tax treatment (Before YA 2011) PIC (YAs 2011 to 2015) Qualifying costs Ownership period Cash conversion basis Purchase Cloud computing 100% CA 100% deduction Costs of equipment (incl. HP asset) 1 year from date of acquisition Per equipment basis 400% of first $400K incurred 100% on balance Cloud computing service payments NA NA THE END 14