Professional Level Options Module, Paper P6 (SGP) 1 XO Furn Pte Ltd

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2 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) December 2011 Answers 1 XO Furn Pte Ltd Tax Advisor Firm s address Mr Lester Pan Managing Director XO Furn Pte Ltd Company s address 9 December 2011 Dear Sir We refer to your request to seek advice on the Singapore income tax implications to the company, the directors and the shareholders of XO Furn Pte Ltd (XOFurn) arising from the specific transactions brought to our attention. Our comments are as follows. (i) Singapore tax implications of directors fees, legal fees, director s loan and dividends Directors fees and fee waiver Directors fees are treated as income and therefore subject to Singapore income tax. They are regarded as income of the year in which they become due and payable. Generally, director s fees are deemed to be income of the director on the date they are voted and approved at the company s annual general meeting (AGM). Applying these principles to the director s fees approved by XOFurn s 30 April 2011 AGM: The fees of $600,000 for the financial year ended 31 December 2010 would be regarded as taxable income of the year of assessment 2012 since these fees were approved on 30 April Similarly, the fees of $350,000 for the first half of the financial year ending 31 December 2011 should also be taxable in the hands of the directors in the year of assessment However, the provisional fees of $310,000 pertaining to the second half of the financial year ending 31 December 2011 and subject to approval in the AGM to be held on 31 March 2012, should be subject to tax in the hands of the directors in the year of assessment The position of the individual director s fees is thus as follows: In the case of Lester Pan, director s fees of $330,000 and $180,000 would be regarded as his taxable income for the year of assessment 2012, whilst director s fees of $170,000 would be subject to income tax in the year of assessment Similarly, in the case of Theresa Tay, director s fees of $80,000 and $50,000 would be regarded as her taxable income of the year of assessment Further, as she is a tax resident of Malaysia, Singapore withholding tax is payable on these fees. The Singapore withholding tax rate applicable is 20%. This means that withholding tax of $16,000 (being 20% of $80,000) and $10,000 (being 20% of $50,000) was required to be withheld and accounted to the Inland Revenue Authority of Singapore (IRAS) by 15 May 2011 and 15 August 2011 respectively, together with the completed Forms IR 37. Failure to settle the withholding tax within the prescribed times will result in the imposition of late payment penalties. However, on 8 October 2011 Theresa Tay wrote to the company to forgo her total director s fees of $90,000 relating to the financial year ending 31 December Accordingly, an application can be made to the IRAS to obtain its approval not to regard the director s fees forgone as taxable income and providing the reasons to support this non-taxability contention. Notwithstanding the fact that Theresa Tay has forgone her director s fees, the IRAS could argue that the fees are her entitlement but she chose not to collect payment. If so, the directors fees would remain as her taxable income and therefore the withholding tax liabilities should still be payable. Alternatively, if the IRAS accepts that by forgoing her director s fees, Theresa Tay has not derived any benefit therefrom, it may agree not to subject her foregone director s fees to tax. If so, the IRAS should refund the tax withheld of $10,000 which was settled by the company in relation to her director s fees of $50,000 (paid on 31 July 2011 but repaid later), and agree not to collect the withholding tax on the director s fees forgone of $40,000, proposed as payable on 31 March If the IRAS rules the forgone director s fees of $40,000 (which are due payable on 31 March 2012) as income subject to tax, the company would need to settle the withholding tax of $8,000 (being 20% of $40,000) with the IRAS by 15 April 2012, together with the completed Form IR 37, in order to avoid late payment penalties. In view of the potential late payment penalties involved, we would recommend that the company continues to settle the withholding tax liabilities with the IRAS by the due dates unless it has received prior confirmation from the IRAS on the non-taxability of Theresa Tay s foregone director s fees. In relation to the director s fees payable to PS Kam, we understand that PS Kam is merely a nominee of KS Kam Sdn Bhd, and such fees are for the benefit and the entitlement of KS Kam Sdn Bhd. Accordingly, the director s fees payable to PS Kam should be deemed to be the income of KS Kam Sdn Bhd. With this in mind, the director s fees of $40,000 and $30,000 would be assessed to income tax on the company in the year of assessment 2012 whilst the fees of $20,000 would be assessed in the year of assessment

3 In addition, as KS Kam Sdn Bhd is a tax resident of Malaysia, the director s fees payable to KS Kam Sdn Bhd should be subject to withholding tax, again at the rate of 20%. The tax withheld and the deadlines for settling the tax with the IRAS, if late payment penalties are to be avoided, are as follows: Amount of fees Tax to withhold (20% of fees) Due date to IRAS $40,000 $8, May 2011 $30,000 $6, August 2011 $20,000 $4, April 2012 With regards to the director s fees payable to Patrick Newton, the fees of $150,000 and $90,000 would be assessable in the year of assessment 2012 whilst the fees of $80,000 will be subject to tax in the year of assessment In addition, as he is a tax resident of Australia, Singapore withholding tax is applicable on his director s fees, again at the rate of 20%. The tax withheld and the deadlines for settling the tax with the IRAS, if late payment penalties are to be avoided, are as follows: Amount of fees Tax to withhold (20% of fees) Due date to IRAS $150,000 $30, May 2011 $90,000 $18, August 2011 $80,000 $16, April 2012 From XOFurn s perspective, the directors fees should be granted a tax deduction against the trading income of the company. Fees totalling $600,000 should be claimed for tax deduction in the year of assessment Whilst the fees incurred for the year ending 31 December 2011 should be claimed for a tax deduction in the year of assessment With regard to the treatment of the director s fees of $90,000 foregone by Theresa Tay for the year ending 31 December 2011, the amount foregone and credited to the profit and loss account of the company for the year ending 31 December 2011 should also reduce the total directors fees claimable as a tax deduction by the company for the year ending 31 December This is notwithstanding the treatment accorded by the IRAS on the foregone director s fees in the hands of Theresa Tay. Legal and professional fees The legal and professional fees of $40,000 incurred by the company to engage legal and professional firms to mediate and settle the dispute over the amount of director s fees payable to Patrick Newton may be argued to be a trade related expense. So such fees should be claimed for tax deduction by XOFurn in the year of assessment Waiver of director s loan The waiver of a genuine loan due from Patrick Newton of $400,000 should not be granted a tax deduction in the hands of the company as it is not incurred in the production of income. However, depending on the circumstances of the loan arrangement and the reasons for the waiver, it may be viewed by the IRAS as a benefit derived by Patrick Newton from his employment as a director of the company, especially if there is no supporting evidence. Genuine loans arrangements would normally indicate the repayment schedules/terms. Also the IRAS would suspect why the director s fees could not be used to settle (in part) the outstanding loan. Thus, if the IRAS is not satisfied with the answers provided, it could treat the loan waived as a taxable benefit on Patrick Newton. There is also the element of the undercharged interest on the loan. Where the interest charged on a loan is below the average prevailing lending rate, the loan is regarded as a subsidised loan. In the case of a subsidised loan provided to a director of a company, such as in the case of Patrick Newton, the director is likely to be viewed as having derived a taxable benefit as an employee of the company. This means that the difference between the interest calculated (based on the average prevailing prime lending rate) and the amount of interest payable would constitute a taxable benefit to Patrick Newton. This is essentially the value of the 1% interest rate calculated on the loan amount. Such value would be subject to tax in the hands of Patrick Newton. Write-back of uncollected dividends The write-back of the one-tier tax exempt dividends that were uncollected by the previous shareholders of the company would not be taxable in the hands of the company. (ii) Director s loan wrongly claimed for deduction The director s loan provided to Lester Pan in 2006 of $230,000 was wrongly expensed as cost of sales in the profit and loss account for the year ended 31 December 2006 and as a consequence, the company claimed this amount for tax deduction in its tax return filed for the year of assessment This error was only brought to the directors attention on 1 December If the amount of $230,000 is a genuine loan and not additional remuneration for Lester Pan, the error should be immediately rectified in the books of the company, which should recover the amount from Lester Pan. As a director s loan, the question of charging interest thereon may need to be addressed. If as at 31 December 2011, the net position is a loan due to XOFurn from Lester Pan, interest needs to be charged in order to avoid attribution of a taxable benefit to Lester Pan unless it can be shown that the loan to Lester Pan is a genuine shareholder s loan and not intended to be additional remuneration or benefit or disguised as a means of paying a dividend or returning excess contributed capital to him. Also, as a genuine shareholder s loan, there should be a repayment schedule or repayment terms attached. 16

4 Further, the company should quickly report the error to the IRAS under its Voluntary Disclosure Program (VDP) and offer to pay immediately the additional income tax liability, if any, arising from the error. Under the Income Tax Act, a taxpayer who is guilty of making an incorrect tax return by omitting or understating any income or giving incorrect information that affects its own tax liability, shall pay a penalty equal to 100% of the additional tax. If the offence is done without reasonable excuse or through negligence, the penalty shall be 200% of the additional tax and a fine not exceeding $5,000 and/or three years imprisonment. In tax evasion cases, the penalties will be even harsher. Under the VDP, for taxpayers who made genuine errors in their tax returns without any intent to evade taxes, the IRAS will waive or reduce the penalty for cases that meet the qualifying conditions. For cases where the voluntary disclosure is made beyond one year of the statutory filing deadline, the IRAS will impose a reduced penalty of 5% per annum of the additional tax. If the amount of $230,000 paid to Lester Pan is not a loan but additional director s remuneration, then the company has rightly claimed tax deduction of the amount. However, it must rectify, where necessary, its records immediately. From Lester Pan s perspective, the amount should constitute his additional income for the year of assessment The question is whether such additional income was reported to the IRAS and subjected in that year to income tax. If Lester Pan has failed to declare the amount of $230,000 as additional income, he should report this to the IRAS immediately under the VDP (as referred to above). Should there be any questions or further advice you require, please contact me. Yours sincerely Tax Advisor 2 SunPal Pte Ltd (a) MEMORANDUM To: The Directors of SunPal Pte Ltd From: Tax Accountant Date: 9 December 2011 Subject: Singapore income tax treatment of the profits/expenses of the SunCake shop business, the overseas branches and main office. I have reviewed the information provided in relation to the company s SunCake shop business, the three overseas branches and main office s financial results as shown in the preliminary profit and loss account for the year ended 31 December From the Singapore income tax perspective, these are my findings: (i) SunCake shop business and main office The taxable profits generated (or losses suffered) by the SunCake shop business will be aggregated with (or set off against) the taxable profits of the main office for the purpose of computing the income tax liability of SunPal Pte Ltd (SunPal). There are no restrictions for the aggregation of profits or set-off of losses. To arrive at the taxable profit/loss suffered by the SunCake shop business, the sales and management fees transacted between the SunCake shop business and the main office should be eliminated. Thus, the taxable loss of the SunCake shop business for the year ending 31 December 2010 would be $30,000 (being the net loss of $40,000 less management fees of $10,000). As regards the main office, the total management fees of $40,000 need to be adjusted by the management fees of $10,000 charged to the SunCake shop business. Accordingly, the taxable profits for the year ended 31 December 2010 applicable to the main office, before any allowance for the research and development expenditure of $150,000 and without taking into account the results of the Suncake shop, will be $270,000 ($300,000 + $400,000 $400,000 + $30,000 $60,000). The total taxable profits of SunPal for the year of assessment will be subject to income tax at the rate of 17%. (ii) Overseas branches The trading profits generated by SunPal s overseas branches are regarded as foreign sourced income for the purpose of Singapore income tax. Such income is taxable in Singapore only when it is remitted into Singapore. However, such foreign sourced profits may, when remitted into Singapore, qualify for exemption under the foreign sourced income exemption (FSIE) regime in Singapore if it meets the following conditions: the headline tax rate of the foreign country from which the income is received is at least 15% in the year the profits are remitted into Singapore; and the income has been subject to tax in the foreign country. For this purpose, subject to tax means that either: income tax has actually been paid or is payable on the foreign sourced income remitted; or the foreign sourced income has been exempt from income tax as a direct consequence of the foreign country granting a tax incentive for carrying out substantive business activities in that country. 17

5 The profits of the Thailand branch will qualify for exemption under the FSIE regime because the headline tax rate in Thailand in 2011 is 30% and tax has been paid on the remitted profits at this rate in Thailand. The profits of the Thailand branch net of tax of $14,000 (being $20,000 less $6,000) remitted into Singapore in 2011 will therefore be exempt for Singapore income tax purposes in the hands of SunPal in the year of assessment The profits of the Kuwait branch will also qualify for exemption under the FSIE regime, as the headline tax rate in Kuwait in 2011 is 15% and the reason why tax on the branch profits has not been paid in Kuwait is because a tax incentive has been granted to the branch by the Kuwaiti Government for carrying out substantive business activities in Kuwait, i.e. the sale of solar panels. Therefore, the Kuwait branch profits of $60,000 remitted into Singapore in 2011 will also be exempt from Singapore tax in the hands of SunPal in the year of assessment Although the profits of the Macau branch are regarded as foreign sourced income for the purpose of Singapore income tax, these profits will not qualify for exemption under the FSIE scheme, as the headline tax rate in Macau is only 12%, so the remitted Macau branch profits do not meet the qualifying conditions under the scheme. Further, the situation of the Macau branch does not meet the qualifying conditions set out by the Government in any of the six scenarios for the general tax exemption scheme available on application (under s.13(12) of the ITA and IRAS Circular 2006/IT/5) for the exemption from tax of foreign income, i.e. the profits originate in Macau, the headline tax rate in Macau is below 15% and there is no double tax treaty between Macau and Singapore. Thus, the remitted net of tax profits of the Macau branch of $26,400 (being $30,000 $3,600) will be subject to income tax in the hands of SunPal in Singapore for the year of assessment Typically, the Macau profits would be regrossed and such profits, net of related expenses, would be subject to Singapore income tax, at the tax rate of 17%, and the tax relief is claimed for the Macau tax suffered. The relief is restricted to the lower of actual Singapore tax payable on net profits and the actual Macau tax suffered. (b) Research and development expenditure The total amount of research and development (R&D) expenses available for tax deduction under s.14d and 14DA in the year of assessment 2011 is as follows: $ Under s.14d R&D conducted in Singapore: Rent and utilities 30,000 Directors fees 20,000 Staff salaries and related costs 250,000 Consumables 10, ,000 Less: Government grant (200,000) 110,000 Costs of research and development work conducted in Australia 40,000 Total claimed under s.14d 150,000 Under s.14da R&D conducted in Singapore: Staff salaries and related costs 250,000 Consumables 10, ,000 Less: Government grant (200,000) 60,000 Costs of research and development work conducted in Australia nil Qualifying expenditure 60,000 Section 14DA deduction claim based on: 50% of $60,000 30,000 Total claimed under s.14da 30,000 Enhanced deduction claimed under the Productivity and Innovation Credit (PIC) scheme: 100% of $60,000 60,000 Total claimed under ss.14d, 14DA and the PIC scheme ($150,000 + $30,000 + $60,000) $240,000 [Note for markers: marks should still be given if the research and development expenditure claim is based on the proposed changes introduced in the Budget 2011.] 18

6 3 Richie Wong Donation to hotel employees The cash of $100,000 given by Richie to the employees of his hotels should not be granted tax deduction for Richie. This is because the payment is a private expense and the beneficiaries are not approved persons for claiming a tax deduction. In the hands of the recipients, such amounts would not be taxable as remuneration of employees. However, the payments may be taxable as other income arising from the services provided to Richie to prepare his dinner parties. Donation of computers The donation of new computers, purchased by Richie, to an approved educational foundation that has been granted IPC status would not qualify as tax deductible for Richie. This is because only corporate donors can claim such donations as tax deductible expenses. In the hands of the recipient, the computers will form part of the assets of the educational foundation, with nil tax values. Donation to a related company The cash donation of $150,000 by Richie to Axtra Pte Ltd (Axtra) will not qualify for a tax deduction in his hands. This is because the recipient is not an approved person for the purpose of claiming tax deduction of a cash donation. From Axtra s perspective, the payment could be viewed by the Inland Revenue Authority of Singapore (IRAS) as a subsidy by a shareholder of the company to cover its past losses. Such payments may be taxable. In view of the potential adverse tax impact on Axtra, Richie should consider providing the cash sum of $150,000 as a loan or additional capital injection. Donation to a registered charity Generally, cash donations to a registered charity that is granted IPC status would be tax deductible to the donor. However, monies donated to a registered charity with IPC status would not qualify for a tax deduction to the donor if the donations were meant to be used for a foreign charitable purpose. In the hands of the registered charity, the donation received from Richie would be exempt because of its tax exempt status. Losses of horse-breeding farm Normally, a farm that is operated to breed horses could be regarded as a business activity. As a trading activity, the profits and losses would be taxable and tax deductible respectively. However, where the horses are bred to run races and losses are continuously suffered, the IRAS may argue that the activity was conducted for personal enjoyment rather than to make a commercial profit. With this in mind, the IRAS may contest the losses suffered and claimed by Richie. This is notwithstanding that Richie has registered the horse-breeding farm with the Accounting and Corporate Regulatory Authority. Claim of travelling expenses Travelling expenses incurred by Richie for his trips to Myanmar for the purpose of conducting the business of RW Paper Pte Ltd are not admissible for tax deduction by Richie personally as he does not receive any remuneration from the company. So, the claim for travelling expenses of $10,000 should not be made in his tax return. In view of the circumstances, Richie should get reimbursement from RW Paper Pte Ltd for the travelling expenses incurred of $10,000, as these are genuine business expenditure of RW Paper Pte Ltd. The company should be granted a tax deduction for the business travelling costs reimbursed to Richie. Claim of life insurance premium The annual premium paid on the life insurance policy taken up by Richie on his own life can be claimed as a personal relief in his tax return. In his case, the amount claimable is the lower of $5,000; and up to 7% of the insured value or the actual amount of premiums paid (whichever is lower). So, if the actual amount of the premium paid was $4,000, then this amount will qualify as a personal relief. However, it is mentioned that the amount of $4,000 was only an estimate. Accordingly, Richie should verify the actual amount incurred, as supported by receipts and invoices, for the purpose of the claim submitted in his tax return. Penalty for filing incorrect tax return The IRAS takes a serious view of income tax returns filed incorrectly. A taxpayer who files an incorrect tax return, without a reasonable excuse or through negligence, is liable to penalties. 4 BTM Pte Ltd (a) Failed project in Libya BTM Pte Ltd (BTM) suffered losses of USD500,000 as a result of a joint-venture project to develop a bus and rail terminal in Libya. To claim these losses for Singapore tax purposes, it is necessary to establish whether the losses were Singapore sourced or foreign sourced. In this regard, BTM derived its income from the Libyan project from the services it provided in the course of its business of developing civil infrastructure works. Such project work was done through a fixed place of operations in Libya. In Libya, BTM 19

7 had offices, equipment and staff involved actively in the bus and rail terminal project. Accordingly, the income derived by BTM from the Libyan project should be regarded as foreign sourced in nature. Hence, as it would not be possible to remit foreign sourced losses, BTM should not be allowed to claim relief for these losses of USD500,000 for Singapore tax purposes. There is an issue of the non-taxability and non-deductibility of the foreign exchange differences. These arise from the translation of the USD amounts into Singapore dollars and any foreign exchange differences arising from the Libyan project itself. As such differences arose as a result of the Libyan project, these should not be taxable or deductible. The issues to consider with regards to the equipment that was shipped back to Singapore are: The valuation of the equipment for the purpose of computing the goods and services tax (GST) imposed on the re-importation of the equipment into Singapore. The net book value of the equipment may not represent the actual value of the equipment at the date of importation, taking into account the use the equipment was put through in Libya. It may need to be valued by independent valuers. The impact of the actual GST to be charged on the value of the equipment; such input GST should be available for claim by the company. The equipment that was used in Libya should not qualify for wear and tear allowances as it was not used by the company to derive taxable profits in Singapore. In practice, however, this may be difficult to quantify. For the equipment that was used and remained in Libya and later written off, there would be no balancing adjustment if wear and tear allowances have not been claimed previously. In the unlikely event that wear and tear allowances were permitted, a portion of the compensation received of USD100,000 should, strictly, be computed as proceeds attributable to the equipment left behind in Libya, to arrive at the balancing adjustment. (b) (c) Option I v Option II Under Option I, the reduction of the share capital by the losses of USD500,000 would not have any adverse tax impact on the company. However, from the perspective of the shareholders, the exercise will reduce the value of their shares in BTM Pte Ltd (BTM) without being regarded as a disposal. This would be neutral for BTM Holdings Pte Ltd which is holding the shares of BTM as a capital investment. Whereas, for Mr MK Sim, who is a share trader, the loss suffered on his shares held could not be claimed for a tax deduction against the gains from his other portfolio investments generated during the year. The legal and professional fees of $50,000 incurred on the share reduction exercise would not be granted tax deduction for BTM. This is because they would be regarded as capital payments. Under Option II, the subsidy and the writing off of the loan would be regarded as two separate transactions. The subsidy of $375,000 received to cover the losses and credited to the profit and loss account, would likely be regarded as taxable for BTM. While the loan written off of $250,000 would not be tax deductible for BTM. Why Option II is preferred The management of BTM Pte Ltd will prefer Option II for the following reasons: Under Option I, the company is cash-flow neutral, whilst under Option II, it will receive a net cash inflow of $125,000 (being $375,000 less $250,000). The legal fees are lower. ONE reason only required. 5 SusuPro Pte Ltd (a) Impact of goods and services tax (GST) The areas of SusuPro Pte Ltd s (SusuPro) existing business operations where there is an adverse GST exposure are: 1. Competitive pricing Currently, SusuPro s customers are largely traders that are not registered for GST purposes. As such, these customers must absorb the GST charged to them, including by SusuPro. So, if the GST rate is increased from the current 7% to 13%, these unregistered customers will need to bear the additional cost. Consequently, if SusuPro increases the price of its goods by the increased GST, it may drive business away and cause an overall drop in its sales. In view of the potential adverse impact on sales, the management of SusuPro should review their pricing models and look into ways for their customers to avoid having to bear the additional 6% GST charge. One option would be to persuade the customers to register for GST purposes. Another would be for SusoPro to accept the requests from its customers to export the goods direct to the destinations abroad on the customer s behalf, as if SusuPro exports the goods to destinations overseas the sales will be zero-rated for GST purposes. 2. Long-term sales contracts The existing sales contracts that SusuPro has signed with its customers may be restrictive in not allowing SusuPro to pass on any additional GST charge, in which case when the GST rate increases it will be SusuPro who must bear the additional 6% charge. Accordingly, SusuPro should review all of its sales contracts, in particular the long-term ones, that 20

8 may have restrictive clauses which do not allow or would hinder the company from imposing additional GST charges. Where there are such clauses, SusuPro s sales teams should visit the customers to highlight this and seek to resolve the potential conflicts. 3. Exporting the goods Currently most goods are sold and delivered to local destinations. Such sales attract standard-rated GST which is currently at 7%. However, if SusPro exports the goods to destinations overseas on behalf of its customers, the sales would be zero-rated. In this way, the customers would avoid having to bear the GST charge. With this in mind, the management of SusuPro should seriously consider and accept the requests from its customers to export the goods direct to the destinations abroad. 4. Importing of goods Currently, SusuPro pays GST at the standard rate of 7% on the value of all its imports. However, under the Major Exporter s Scheme (MES), where goods imported into Singapore are re-exported or used to manufacture finished products which are then exported, relief from GST is given on the goods imported. If SusuPro were to export the goods direct to destinations abroad on its customers behalf (as per 1 above), it would have sufficient exports to apply to use the MES scheme. This would both alleviate some of the administrative costs of accounting for GST and bring some cash flow savings to the company. 5. Purchase of the packing machine SusuPro s management has received a purchase request for a packing machine that would cost $10 million. If the machine is imported before the GST increase, the standard rate of GST would be 7% and the GST charged $700,000, (being 7% of $10 million). But if the machine is not imported until after the GST increase, the GST payable would be $1 3 million (being 13% of $10 million). Hence, there would be a significant cash flow saving if the machine is imported before the increase in the GST rate, i.e. before 1 January So, the management of SusuPro should hasten the decision process on whether to purchase the packing machine. 6. Blocked items The GST charged on the costs incurred on the club memberships, medical costs, and provision of fruit and gaming machines for the staff are blocked inputs. This means that the GST charges on these items of expenditure are not claimable by the company. Accordingly, SusuPro should take account of the potentially increased GST cost that it will have to bear when deciding whether to implement the proposed programme and/or consider other options to increase productivity and staff retention that may not attract such an adverse GST impact, such as providing bus rides from the train/bus terminals to/from the office. Note: Only five areas required. (b) Singapore income tax implications of staff benefits programme The costs incurred by a company in providing benefits to its staff, including club memberships, medical costs and provision of fruit and gaming machines can be claimed as a tax deduction. However, some costs will be disallowed for deduction purposes as follows: The deduction of medical expenses is capped at 1% of total remuneration (or 2% of remuneration subject to meeting certain qualifying conditions). Any excess medical costs (including the attributable input GST) will not be granted tax deduction. Private expenses (including the attributable input GST) are not granted tax deduction. In the case of SusuPro s proposals, some of the costs incurred on the family members of the staff may be viewed as private expenses. 21

9 Professional Level Options Module, Paper P6 (SGP) Advanced Taxation (Singapore) 1 XO Furn Pte Ltd December 2011 Marking Scheme Marks (i) Directors fees, legal fees, director s loan and dividends Overall taxation guidelines 1 5 Application to 30 April AGM dividends 1 5 Taxation of Lester Pan s director s fees 0 5 Withholding tax on Theresa Tay s director s fees, including due dates 2 0 Discussion of IRAS alternative approaches to Theresa forgoing her director s fees 4 0 Recommendation for company to withhold until advised otherwise 1 0 Taxation of director s fees paid to KS Kam Sdn Bhd via PS Kam 2 0 Withholding tax on director s fees due to KS Kam Sdn Bhd 1 0 Taxation of Patrick Newton s director s fees and withholding tax impact 0 5 Deductibility of directors fees 1 0 Treatment by company on Theresa s director s fees forgone 2 0 Deductibility of legal and professional fees 1 0 Waiver of genuine director s loan non-taxable/capital 1 0 Discussion of alternative treatment as taxable benefit 2 0 Treatment of uncharged interest on waived loan 2 0 Treatment of uncollected dividends written back (ii) Director s loan wrongly claimed If it is a genuine loan: Recommend to rectify records 0 5 Review interest chargeable 2 0 Report to IRAS under voluntary disclosure programme 1 5 Penalties for filing incorrect return 2 0 Reduced penalties for genuine error disclosed via VDP 1 0 If it is additional remuneration: Treatment/deductibility in company 1 0 Need for and additional declaration to IRAS by Lester Pan 1 0 Appropriate format and presentation of the letter 1 0 Effectiveness of communication

10 2 SunPal Pte Ltd Marks (a) Profits/expenses of SunCake, overseas branches and main office (i) SunCake business: Aggregation with main office profits 1 0 Aggregation not subject to any restriction 0 5 Elimination of SunCake main office fees 1 0 Main office: Elimination of SunCake and main office fees 1 0 Taxable profits of SunPal all taxed at 17% 0 5 (ii) Overseas branches: Foreign sourced profits 1 0 Normally taxed when remitted 0 5 Foreign sourced income exemption scheme 4 0 Thailand branch s remitted profits qualify for exemption, with reason 1 5 Kuwait branch s remitted profits qualify for exemption, with reason 1 5 Macau branch does not meet the conditions under the FSIE scheme 1 0 does not meet the specified scenarios under s.13(12) 1 0 remitted profits are taxable 0 5 Appropriate format and presentation of the memorandum 1 0 Effectiveness of communication (b) Research and development expenditure Under s.14d: Qualifying amounts in-house (4 x 0 5 mark) 2 0 Deduct Government grant 1 0 Costs for work outside Singapore qualify 1 0 Under s.14da: Qualifying amounts (2 x 0 5 mark) 1 0 Deduct Government grant 0 5 Costs for work outside Singapore do not qualify 0 5 Correct rate of claim 1 0 PIC claim 2 0 Total amount claimed under s.14d, s.14da and PIC 1 0 [Note for markers: Marks should be given if the research and development expenditure claim is based on the proposed changes introduced in the Budget 2011.]

11 3 Richie Wong Treatment of cash to hotel employees: Richie Wong 0 5 Employees 1 5 Treatment of computer donations: Richie Wong 0 5 Educational foundation 1 0 Treatment of donation to Axtra Pte Ltd: Richie Wong 1 0 Axtra Pte Ltd 1 5 Recommend a loan or capital injection 1 0 Treatment of donation to charity: Richie Wong 2 0 Charity 1 0 Treatment of losses incurred by horse breeding farm 3 0 Treatment of travelling claims: Richie Wong 1 0 Recommend reimbursement and effect 1 5 Treatment of life insurance premium: Generally allowed 1 5 Estimate not acceptable 1 0 Penalty for filing incorrect tax return 1 0 Marks BTM Ltd (a) (b) Failed project in Libya Foreign sourced v Singapore sourced arguments 3 0 Disallowance of loss from Libya project 1 0 Non-taxability and non-deductibility of foreign exchange differences 1 5 Income tax and GST impact on returned equipment 3 5 Balancing adjustment impact on equipment left in Libya 2 0 Option I v Option II Option I: Company is tax neutral 1 0 Adverse impact to Mr MK Sim 1 0 No impact to BTM Holdings Pte Ltd 1 0 Legal fees are non-tax deductible 1 0 Option II: Two separate transactions 1 0 Subsidy likely taxable 1 0 Loan written-off not deductible (c) Why Option II is preferred Any ONE reason

12 5 SusuPro Pte Ltd Marks (a) Impact of goods and services tax Competitive pricing: Identify and explain problem 1 5 Recommend customers register for GST 1 0 Long-term sales contracts: Identify and explain problem 1 0 Recommendation 1 5 Export of goods: Identify and comment 1 0 Recommend delivery directly overseas 2 0 Importing of goods: Identify and explain problem 1 0 Recommendation 2 0 Purchase of packing machine: Identify and explain problem 1 0 Recommendation 2 0 Blocked benefit items: Identify and explain problem 1 5 Recommendation 1 5 Maximum 15 0 (b) [Note for markers: Only five areas required] Singapore income tax implications of staff benefits Cost of benefits generally deductible 1 0 Medical costs restriction (includes attributable input GST) 1 5 Private expenses disallowed (includes attributable input GST)