Professional Level Options Module Advanced Taxation (Singapore) Friday 5 December 2014 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 5 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (SGP) The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the year of assessment 2014 will continue to apply for the foreseeable future. 2. All apportionments should be made to the nearest month. 3. Calculations and workings need only be made to the nearest $. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Goods and services tax Standard rate 7% Registration threshold $1 million Buyer s stamp duty for all properties Purchase or transfer of immovable property Purchase price or market value Every $100 or part thereof of the first $180,000 $1 Every $100 or part thereof of the next $180,000 $2 Thereafter, every $100 or part thereof $3 Additional buyer s stamp duty for residential properties From 8 December 2011 to 11 January 2013 Foreigners and entities buying a first and subsequent residential property 10% Singapore permanent residents buying a second and subsequent residential property 3% Singapore citizens buying a third and subsequent residential property 3% From 12 January 2013 onwards Foreigners and entities buying a first and subsequent residential property 15% Singapore permanent residents buying a first residential property 5% Singapore permanent residents buying a second and subsequent residential property 10% Singapore citizens buying a second residential property 7% Singapore citizens buying a third and subsequent residential property 10% From 20 February 2010 to 29 August 2010 Property disposed of within one year of purchase From 30 August 2010 to 13 January 2011 Property disposed of within one year of purchase Property disposed of within two years of purchase Property disposed of within three years of purchase Seller s stamp duty for residential properties Same stamp duty as payable by buyer Same stamp duty as payable by buyer Two-thirds of the stamp duty payable by buyer One-third of the stamp duty payable by buyer From 14 January 2011 onwards Property disposed of within one year of purchase 16% Property disposed of more than one year and up to two years of purchase 12% Property disposed of more than two years and up to three years of purchase 8% Property disposed of more than three years and up to four years of purchase 4% Seller s stamp duty for industrial properties From 12 January 2013 onwards Property disposed of within one year of purchase 15% Property disposed of more than one year and up to two years of purchase 10% Property disposed of more than two years and up to three years of purchase 5% 2
Stamp duty on transfer of shares Purchase price or net asset value: every $100 or part thereof $0 20 Corporate income tax Rate Year of assessment 2014 17% Corporate income tax rebate (capped at $30,000) 30% Partial tax exemption $ First $10,000 of chargeable income is 75% exempt 7,500 Next $290,000 of chargeable income is 50% exempt 145,000 Total 152,500 Full tax exemption for new start-up companies $ First $100,000 of chargeable income is 100% exempt 100,000 Next $200,000 of chargeable income is 50% exempt 100,000 Total 200,000 Central Provident Fund (CPF) Contributions for individuals below the age of 50 years and earning more than $1,500 per month Employee Employer Rates of CPF contributions 20% 16% Maximum monthly ordinary wages (OW) attracting CPF $5,000 For the year 2013 (i.e. from 1 January 2013 to 31 December 2013) Maximum annual ordinary wages (OW) attracting CPF $60,000 Maximum annual additional wages (AW) attracting CPF $85,000 less OW subject to CPF 3 [P.T.O.
Personal income tax for the year of assessment 2014 Chargeable income Tax rate Tax $ % $ On the first 20,000 0 0 On the next 10,000 2 0 200 On the first 30,000 200 On the next 10,000 3 5 350 On the first 40,000 550 On the next 40,000 7 0 2,800 On the first 80,000 3,350 On the next 40,000 11 5 4,600 On the first 120,000 7,950 On the next 40,000 15 0 6,000 On the first 160,000 13,950 On the next 40,000 17 0 6,800 On the first 200,000 20,750 On the next 120,000 18 0 21,600 On the first 320,000 42,350 Above 320,000 20 0 Personal income tax reliefs for the year of assessment 2014 Earned income Normal (max) Handicapped (max) Below 55 years $1,000 $4,000 55 to 59 years $6,000 $10,000 60 years and above $8,000 $12,000 Spouse relief Handicapped dependent spouse relief $2,000 (max) $3,500 (max) Qualifying child relief (per child) $4,000 Handicapped child relief (per child) $5,500 Working mother s child relief (WMCR) % of mother s earned income First child 15% Second child 20% Third and subsequent child 25% Maximum cumulative WMCR 100% Maximum relief per child $50,000 Parent relief Normal parent (max) Handicapped parent (max) Not living in the same household $4,500 $8,000 Living in the same household $7,000 $11,000 Grandparent caregiver relief $3,000 Dependent handicapped siblings relief $3,500 Life assurance relief Voluntary CPF contribution of self-employed Course fees $5,000 (max) Capped at $30,600 or 36% of assessable trade income whichever is lower $5,500 (max) 4
NSman Normal appointment Key appointment holder holder Active NSman $3,000 $5,000 Non-active NSman $1,500 $3,500 Wife/widow/parent of NSman $750 $750 Foreign maid levy $6,360 (max) Supplementary retirement scheme Foreigners Singaporeans and Singapore permanent residents $29,750 (max) $12,750 (max) 5 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 Lavender Oil Limited (LOL) and Hector Oriental Holdings (HOH) are both companies incorporated and tax resident in Country X. On 1 July 2014, LOL received an offer from HOH to acquire the entire share capital of LOL. Prior to the sale to HOH, LOL intends to carry out an internal reorganisation to eliminate the minority interests in its two Singapore subsidiaries. The two Singapore subsidiary companies of LOL are as follows: Lavender Oil Pte Ltd (LOPL): LOPL s principal activity is as a broker for the sale and purchase of crude oil and related products. LOPL has been registered for goods and services tax (GST) since 2001. LOPL was granted the Global Trader Programme incentive for a period of five years effective from 1 January 2012 and all of its income derived from qualifying activities is subject to a concessionary tax rate of 5%. For the year ended 31 December 2013, LOPL had current year unutilised trade losses and current year unutilised capital allowances of $300,000 and $500,000 respectively. LOL holds 80% of the shares in LOPL. The remaining interest of 20% in LOPL has been held by Peter Lim, the resident director of LOPL, since 2003. Lavender Futures Pte Ltd (LFPL): LFPL s only income is derived from the renting of a commercial property. LFPL is not registered for GST. LOL holds 96% of the shares in LFPL. The remaining interest of 4% is held by Peter Lim. The plan is for Peter Lim to exchange his shareholdings in LOPL and LFPL for shares in LOL as part of the pre-transaction reorganisation, such that LOL will own 100% of the share capital of both Singapore subsidiary companies. Immediately after these pre-transaction reorganisations, HOH will acquire the entire share capital of LOL in two phases, with each phase involving exactly half of the entire issued capital. The consideration to be paid by HOH for the shares in LOL will be in the form of newly issued shares in HOH. 50% of the consideration shares will be issued immediately, and the remaining 50% will be issued three years after the date of the transaction, subject to the following conditions being satisfied: the continued employment of all existing employees, except in the event of death, ill-health, redundancy or retirement at normal age; and the LOL group continues to generate an annual turnover broadly equal to its current level during the three-year deferment period. Due to an excess of human resource capacity, LOPL seconded one of its permanent staff to help out in the accounts department of LFPL from January to March 2014. A tax invoice of $40,000, covering this employee s salary and CPF cost for the three months, was raised by LOPL to LFPL on 1 April 2014. No mark-up on cost or GST was charged on this invoice. 6
As the company s external tax adviser, write a letter to the board of directors of Lavender Oil Pte Ltd (LOPL) advising on the following Singapore tax issues: (i) (ii) The tax implications, including any compliance requirements, of the exchange of Peter Lim s shares in LOPL for shares in Lavender Oil Limited (LOL) for both Peter Lim and LOPL. Note: You are not required to comment on the implications relating to the acquisition of Peter Lim s shares in Lavender Futures Pte Ltd (LFPL). (17 marks) The tax implications of the acquisition of the entire share capital of LOL by Hector Oriental Holdings (HOH) immediately after the exchange of shares, for both Peter Lim and LOL. (8 marks) (iii) Whether LOPL was correct not to charge goods and service tax (GST) on the invoice relating to the secondment of its employee to Lavender Futures Pte Ltd (LFPL). (6 marks) Professional marks will be awarded in question 1 for the appropriateness of the format, presentation and structure of the letter, the effectiveness with which the information is communicated and its logical flow. (4 marks) (35 marks) 7 [P.T.O.
2 The PH group comprises Parental Holdings Pte Ltd (PHPL) and its two wholly-owned subsidiaries: Subsea One Pte Ltd (SOPL) and Subsea Two Pte Ltd (STPL). All three entities are active trading companies, registered for goods and service tax (GST) and tax resident in Singapore since their incorporation in 2009. The table below shows the chargeable income (before partial tax exemption) of the three companies for the years of assessment (YA) 2013 and 2014: PHPL SOPL STPL YA 2013 $900,000 $200,000 (Note 2) $300,000 YA 2014 Nil (Note 1) $150,000 (Note 3) $600,000 Note 1: For YA 2014, PHPL has the following current year unutilised loss items: Unutilised capital allowances $150,000 Unutilised trade losses $100,000 Unutilised donations $50,000 Note 2: In arriving at its chargeable income (before partial exemption) of $200,000 for YA 2013, SOPL had claimed the following amounts of capital allowances and productivity and innovation credit (PIC) cash payouts for the assets it had purchased in the financial year ended 31 December 2012: Date of acquisition Assets acquired Cost of Capital allowances PIC cash purchase claimed payouts January 2012 Office equipment $30,000 $10,000 Not applicable May 2012 Two Fujitsu computer $5,000 Not applicable $3,000 notebooks (i.e. $2,500 x 2) October 2012 Two HP computer $6,000 Not applicable $3,600 notebooks (i.e. $3,000 x 2) Note 3: On 1 July 2013, SOPL transferred the office equipment to STPL at its net book value of $24,000 which was close to the open market value. On the same date, SOPL sold all four of the computer notebooks to an unrelated company for $2,000 each. The tax effects of these transfers and sales have been accounted for in arriving at SOPL s chargeable income (before partial tax exemption) of $150,000 for YA 2014. The total PIC bonus of $15,000 had been fully claimed in the YA 2013 in respect of training costs incurred in sending employees for external training. Answer the following two parts independently: (a) Identify and explain the options available to Parental Holdings Pte Ltd (PHPL) to utilise its current year tax loss items. Determine the maximum relief available under each option and recommend the most tax efficient course of action. (15 marks) (b) (i) Explain the tax implications for Subsea One Pte Ltd (SOPL) of its disposal of assets (office equipment and notebook computers) in the year of assessment 2014. (5 marks) (ii) Determine whether it would have been beneficial for the PH group to have elected to transfer any or all of the assets disposed of in the year of assessment 2014 at their tax written down values (under s.24). (5 marks) (25 marks) 8
Section B TWO questions ONLY to be attempted 3 (a) Eve, aged 50, is a high income earner Singapore citizen with two children aged 22 and 23, both of whom have just started working. Eve has been advised by Jennifer, an accountant friend, that she can save a considerable amount of tax by topping up her Central Provident Fund (CPF) account, as well as the CPF accounts of her relatives. This is an extract from an email sent to Eve from Jennifer: The tax savings are tremendous! You get a $1 tax break for every $1 you contribute to your and your relatives CPF accounts. Better still, instead of saving your money in the banks to earn meagre interest, pass it to each of your two children for them to top up your CPF account and you can save even further taxes. Explain the relief(s) available for topping up a Central Provident Fund (CPF) account and advise on the validity of Jennifer s comments. (10 marks) (b) Adam is a foreigner who has been working in Singapore since 2012. He expects to leave Singapore by the end of 2015 after completing his three-year employment contract. During the calendar year 2013, Adam s chargeable income was $400,000 and he expects to derive a slightly higher chargeable income in the calendar year 2014. As he has excess funds after winning $5 million from Singapore Sweep, Adam is contemplating the following investments by the end of the calendar year 2014: 1. A structured deposit with an approved bank with guaranteed interest of 3 0% per annum. 2. A deposit with a reputable pawnshop at a special interest of 3 5% per annum. 3. Qualifying debt securities with interest of 4 0% per annum. 4. A loan to a new start-up Singapore company with interest of 4 5% per annum. 5. Opening a supplementary retirement account which pays interest of 1 0% per annum. Advise Adam of the tax consequences of each of the investments and comment on which investment(s) may be the most attractive to him. (6 marks) (c) State the conditions which a foreigner must satisfy to qualify for the not ordinarily resident (NOR) scheme and explain the tax concessions available. (4 marks) (20 marks) 9 [P.T.O.
4 (a) Boston Appliances Limited (BAL), a company incorporated and tax resident in Country Z, currently holds all of its inventories at a warehouse located in Country Z. In order to reduce transit time and solidify BAL s position as a preferred supplier to one of its Singapore customers, Prestige Accord Pte Ltd (PAPL), BAL intends to transfer some of its inventories from Country Z to an independent, third party logistics firm, 3PL, which is located in a free trade zone in Singapore. 3PL will bill BAL for the services rendered, such as the handling and storage of the inventories. 3PL is not related to BAL in any way and provides similar services to many other companies in Singapore. All BAL s sales activities and transactions will continue to be negotiated, managed and controlled through BAL s offices in Country Z. These activities include taking orders, management, processing and invoicing. None of these sales activities are undertaken in Singapore, whether at 3PL or any other location in Singapore, or through any employees or agents acting on BAL s behalf in Singapore. Personnel from BAL periodically visit Singapore and 3PL to monitor and review their inventories. Singapore has not concluded a comprehensive tax treaty with Country Z. Advise Boston Appliances Limited (BAL) as to whether its proposed activities in Singapore would give rise to any Singapore tax implications and, if so, any steps it can take to mitigate or eliminate any tax exposure. (12 marks) (b) Westgate Trading Limited (WTL), a company incorporated in India, is looking at setting up a legal presence in Singapore to undertake trading activities. The Singapore entity will also participate in international investments and so may have substantial profits from dividends generated abroad. Based on preliminary research, WTL has ruled out the use of a representative office and has decided either to incorporate a Singapore subsidiary or alternatively, to set up a Singapore branch. Singapore has concluded a comprehensive tax treaty with India. Compare and contrast the tax considerations for Westgate Trading Limited (WTL) setting up a Singapore subsidiary as opposed to a Singapore branch. (8 marks) (20 marks) 10
5 (a) Alabaster Trading Pte Ltd (ATPL), a Singapore tax resident company, provides IT consultancy services to Wannabe Corporation Limited (WCL), a company incorporated and tax resident in Country W. During the year ended 31 December 2013, ATPL sent a tax invoice for $100,000 to WCL for work completed. However, based on the tax laws in Country W, WCL withheld $15,000 at source when paying this invoice, so ATPL only received $85,000. Apart from a representative office maintained in Country W, ATPL has no other entities set up in Country W. Country W has not concluded a comprehensive tax treaty with Singapore. Explain the foreign-sourced income exemption scheme and advise Alabaster Trading Pte Ltd (ATPL) as to whether the income it derives from Wannabe Corporation Limited will qualify for exemption under the scheme. (10 marks) (b) Telepathy Singapore Pte Ltd is a Singapore subsidiary of an international group which is seeking to expand its operations both locally and internationally. Advise Telepathy Singapore Pte Ltd on the tax matters which it should consider when looking to raise funds for its expansion using debt financing or equity financing. (10 marks) (20 marks) End of Question Paper 11