SINGAPORE is commerce, industry, heritage, culture and entertainment all rolled into a little island of slightly over 700 square kilometres with a population of 5.4 million. Here at the crossroads of Asia, SINGAPORE s excellent facilities and melting pot of different races, religions and cultures, make it an excellent destination for business and investments. SINGAPORE is one of the most stable political climates in the world. However there are a number of issues which you must consider when you are looking to set up your business in SINGAPORE. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider. What type of Business Structure should we use? There are advantages and disadvantages to all of them, and there is no one correct answer, it s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below: Establishment (a branch of your overseas business) Not a separate legal entity but an extension of the overseas parent company The foreign parent company is liable for the acts, losses and debts of its branch office A Singapore branch office is considered a non-resident company for tax purposes, and therefore are not eligible for any tax exemption or incentives for new start-up Required to submit annual report and annual accounts of its Singapore Branch Office within two months of its annual general meeting Limited Company: A legal entity separate and distinct from its shareholders and directors Members have Limited liability Perpetual Succession Gives a perception of a local business, with longevity Ease of raising capital and transfer of ownership Corporation tax to be paid on company profits Required to file Annual Return annually Accounts require auditing if Revenues > S$5million
Limited Liability Partnership: A separate legal entity from its partners Partners have limited liability Partners can be individual or body corporate (company or LLP) Perpetual existence No annual return filing required Profits are allocated to members who then pay Income Tax on these profits personally How much Corporation Tax will the business pay? Current Corporation Tax rates in SINGAPORE is 17%. A company is taxed on its chargeable income regardless of whether it is a local or foreign Company. Full tax exemption will be granted on normal chargeable income of a qualifying company up to first $100,000, for any of its first three consecutive Year of Assessments (YA). The first Year of Assessment refers to the Year of Assessment relating to the basis period during which the company is incorporated. The next S$200,000 of the chargeable income, 50% is tax exempted. The balance will be taxed at 17%. To qualify for the tax exemption for new start-up companies, your company must: a) be incorporated in SINGAPORE (other than a company limited by guarantee); b) be a tax resident in SINGAPORE for that YA; c) have no more than 20 shareholders throughout the basis period for that YA where all of the shareholders are individuals beneficially holding the shares in their own names; OR where at least one shareholder is an individual beneficially holding at least 10% of the issued ordinary shares of the company.
The Tax Exemption scheme does not apply to the following companies :- a. A company whose principal activity is that of investment holding; and b. A company whose principal activity is that of developing properties for sale, for investment, or for both investment and sale. Investment holding companies derive only passive incomes such as dividend and interest income, while the real estate industry typically incorporates a new company for each new property development. The start-up tax exemption for encouraging entrepreneurship is not intended for such companies. These companies will be given partial tax exemption. Any company that does not meet the qualifying conditions would still be eligible for partial tax exemption. The effective rates on the first S$10,000 and the next S$290,000 of taxable income will correspondingly be 4.5% and 9% respectively. This partial tax exemption will not apply to SINGAPORE dividends which will be taxed at 17%. What if we use SINGAPORE to set up our holding company? SINGAPORE s tax legislation means that it is a very attractive place to set up a holding company. A SINGAPORE holding company, like all SINGAPORE-registered companies, enjoys extensive tax benefits borne out of SINGAPORE s healthy bilateral relations with various economies as well as its simple domestic tax structure. Firstly, SINGAPORE has established a wide network of 74 comprehensive and 8 limited Avoidance of Double Tax Agreements (DTAs). It has also inked 20 Free Trade Agreements (FTAs) with 31 trading partners and is in the process of negotiating eight more with economies like Canada and Mexico. These agreements not only pave the way for uninterrupted movement of business personnel and goods; they also extend tax privileges such as doing away with erroneous double taxation across borders. Secondly, a SINGAPORE holding company stands to benefit from the absence of capital gains tax in SINGAPORE. Additionally, outbound dividends declared to foreign shareholders are not subject to the SINGAPORE withholding tax. SINGAPORE holding companies may also repatriate capital gains from overseas divestitures to their parent companies or group without being subject to taxation in SINGAPORE.
What if we make cross-border transactions between group companies? SINGAPORE follows internationally recognised Transfer Pricing (TP) rules where crossborder trading and financial transactions between affiliated entities have to be conducted on an arm s length basis. The price and terms should be the same as if the transactions had been between completely independent parties. Typical transactions between affiliated entities that are covered by TP regulations are: Sale and purchase of goods Provision of management services Property rental charges Transfer of intangible assets e.g. trademarks, patents Sharing of knowledge, expertise, business contacts etc. Provision of financial support e.g. inter-group loans and charging a market interest on loans A business will need to prepare a Transfer Pricing Report proving the arm s length basis of transactions. The report will include a functional and risk analysis, analysis of the adopted pricing model and benchmarking of the arm s length basis. SINGAPORE s Transfer Pricing Regime LEGISLATION OVERVIEW SINGAPORE does not have specific transfer pricing legislation. The Inland Revenue Authority of Singapore (IRAS), issued The SINGAPORE Transfer Pricing Guidelines on 23 February 2006, and they are consistent with the OECD Transfer Pricing Guidelines. The guidelines are applicable where at least one related party is subjected to tax in SINGAPORE. The guidelines reinforce the OECD stand on transfer pricing that requires adherence to arm s length principle. SINGAPORE endorsed the OECD guidelines realizing that concurrence and compliance with this internationally accepted principle would reduce the incidence of transfer pricing adjustments and improve the resolution of transfer pricing disputes. As a result, the potential for double taxation would also be reduced. The guidelines help to clarify SINGAPORE s position on Transfer Pricing and promote voluntary compliance by spreading awareness about risks of non-compliance while operating across borders. The IRAS does not have a specific preference for any of the five prescribed methods outlined in the OECD guidelines. Although the IRAS guidelines does not explicitly approve a particular method, in practice the regulator is receptive towards the traditional methods and accepts the Cost Plus Method for transactions relating to services and Comparable Uncontrolled Price method for all other transactions.
IRAS REQUIREMENTS IRAS recommends that taxpayers adopt the 3-step approach to apply the arm s length principle in their related party transactions: Step 1 Conduct a comparability analysis Step 2 Identify the appropriate transfer pricing method and tested party Step 3 Determine the arm s length results Comparability Analysis To comprehensively assess the transactions of related and independent parties being compared, to ensure that they have substantially similar economic characteristics. The objective of the step is to determine that 1. None of the differences (if any) between the situations being compared can materially affect the price or margin being compared, or 2. Reasonably accurate adjustments can be made to eliminate the effect of any such differences. Identify the appropriate transfer pricing method and tested party The guidelines recommend the adoption of the method that produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments. A tax payer is also allowed to adopt even a modified version of a method listed above to comply with the arm s length principle, as long as the taxpayer maintains and is prepared to provide sufficient documentation to demonstrate that its transfer prices are established in accordance with the arm s length principle. The use of the transfer pricing methods, excluding the Profit Split Method, would first require identifying the party on which to apply the transfer pricing analysis. This party is known as the tested party. IRAS recommends that the party with the smaller scope of functions and less complex operations be used as the tested party. Such a decision will make it easier to find comparable data and require fewer adjustment and greater accuracy. Determine the arm s length results Once the appropriate transfer pricing method has been identified, the method is applied on the data of independent-party transactions to arrive at the arm s-length result. More likely, the transfer pricing analysis would lead to a range of prices or margins. IRAS is prepared to accept the use of ranges, to determine an arm s length range provided that the comparables are reliable. The outcome of this last and final step will then be used to guide or justify taxpayers transfer pricing practices.
What Employment Taxes and Central Provident Fund will need to be paid? If an individual is resident in SINGAPORE then they are subject to SINGAPORE tax laws. All incomes earned in SINGAPORE are subject to tax. The amount of income tax you need to pay depends on how much you earn in SINGAPORE and whether you are considered a tax resident or non-resident for income tax purposes. You are considered a tax resident for a particular Year of Assessment (YA) if you are: a foreigner who has stayed in SINGAPORE for 183 days or more in the year preceding the YA; or a foreigner (who is not a director of a company) who has worked in SINGAPORE for 183 days or more in the year preceding the YA. If you are a tax resident, your total income less deductions (expenses, donations and tax reliefs) will be subject to tax at progressive rates ranging from 0% to 20%. Non-residents may claim expenses and donations to save tax. However, non-residents are not eligible to claim tax reliefs. If you are a non-resident, your employment income is taxed at 15% or the resident rate, whichever gives rise to a higher tax amount. Director fees, consultant fees and all other incomes are taxed at 20%. We would advise any new entrant to SINGAPORE or person who spends time working in SINGAPORE to take professional advice to determine whether they are SINGAPORE tax resident and other special schemes available.
Current Personal Income Tax rates in SINGAPORE are: Chargeable Income Rate (%) Gross Tax Payable (S$) First S$20,000 0 - Next S$10,000 2 200 First S$30,000-200 Next S$10,000 3.5 350 First S$40,000-550 Next S$40,000 7 2,800 First S$80,000-3,350 Next S$40,000 11.5 4,600 First S$120,000-7,950 Next S$40,000 15 6,000 First S$120,000-13,950 Next S$40,000 17 6,800 First S$200,000-20,750 Next S$120,000 18 21,600 First S$320,000-42,350 Above 320,000 20
Employers and employees have to contribute to SINGAPORE Central Provident Fund: Current Central Provident Fund (CPF) rates are: Salary subject to CPF is capped at SGD5,000. Age Group Employee Employer Total Contribution 35 - below 20.00% 16.00% 36.00% 35 50 20.00% 16.00% 36.00% 50-55 18.50% 14.00% 32.50% 55-60 13.00% 10.50% 23.50% 60-65 7.50% 7.00% 14.50% Above 65 5.00% 6.50% 11.50% It is the employers legal responsibility to pay over employee s social security deductions to the SINGAPORE Central Provident Fund Board. The employer has to deduct the employees portion of contribution from the remuneration and contribute it with the Employer portion to the CPF Board of SINGAPORE. Individuals are personally liable for settling the personal tax with tax authorities. However, for those foreigners who are holding an Employment Pass or Work Permit, the employer should seek a tax clearance before the foreigner ceases employment with in SINGAPORE or plans to leave SINGAPORE for more than three months. As an employer, it is your responsibility to notify IRAS and seek tax clearance for the affected foreign employees. What is Value Added Tax (VAT) and should the business be registered? In SINGAPORE VAT is termed as Goods and Services Tax (GST). VAT is a goods and services tax on supplies made, the standard rate of which is 7%. If a business makes taxable supplies in excess of SGD1 million in any 12 months then it MUST be registered for VAT.
There are three types of supply Taxable must charge VAT on supplies, can reclaim input VAT Exempt cannot charge VAT nor reclaim input VAT Outside the scope not in the SINGAPORE VAT system The supply of most types of goods and services in SINGAPORE would be classed as Taxable supplies. However when these supplies are made to companies which are outside of the SINGAPORE advice needs to be sought as to what rate of VAT, if any, to use. GST is a broad-based consumption tax levied on the import of goods (collected by SINGAPORE Customs), as well as nearly all supplies of goods and services in SINGAPORE. The only exemptions are for the sale and lease of residential properties, the importation and local supply of investment precious metals and the provision of most financial services. Export of goods and international services are zero-rated. In some countries, After registration, businesses must charge GST at the prevailing rate. This GST that they charge and collect is known as output tax, which has to be paid to Tax Authorities. GST incurred on business purchases and expenses (including import of goods) are known as input tax. Businesses can claim input tax if conditions for claiming are satisfied. This credit mechanism ensures that only the value added is taxed at each stage of a supply chain. A GST-registered business is required to submit GST return to Tax Authorities at the end of each prescribed accounting period (usually on a quarterly basis). The business will report its output tax and input tax for that prescribed accounting period in the GST return. The difference between output tax and input tax is the net GST payable to or refundable from Tax Authorities. Can we provide Share option plans to our staff? Many companies see Share Option plans as being an important way of attracting, motivating and retaining key staff. SINGAPORE has a number of approved share option plans which give tax benefits to employees and employers alike and it is often possible to adapt an overseas stock option plan to fit into one of these approved plans. However this is a very technically complex area and careful planning needs to be undertaken as soon as share option plans are being considered for implementation in SINGAPORE.
Other attractive tax schemes in SINGAPORE Loss Carry Back System Under this system the tax losses and capital allowances (tax depreciation) up to $100,000 incurred by the company in the current year can be carried back or deduct against the assessable income of the immediately preceding year. The above will be applicable only the beneficial ownership of the company remains substantially (at least 50 %) the same. For capital allowances there is an additional requirement that the same trade or business in respect of which these capital allowances arose continues to be carried on. Group Relief A company's current year unutilised capital allowances and losses may be transferred for tax purposes to another company in the same group. Group relief is restricted to current year losses and does not extend to losses brought forward from prior years. Investment allowances and foreign losses may also not be transferred. For tax purposes, a ' group' is to consist of a SINGAPORE incorporated parent company and one or more SINGAPORE incorporated subsidiaries (at least 75 % ownership). Foreign sourced income A SINGAPORE tax resident company can enjoy tax exemption on its specified foreign income that is remitted into SINGAPORE. The three categories of specified foreign income are: 1. Foreign-sourced dividend 2. Foreign branch profits 3. Foreign-sourced service income Qualifying Conditions for Tax Exemption Tax exemption will be granted if all of the three conditions below are met: The highest corporate tax rate (headline tax rate) of the foreign country from which the income is received is at least 15% at the time the foreign income is received in SINGAPORE; The foreign income had been subjected to tax in the foreign country from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in SINGAPORE.
To discuss your requirements please contact the International Office on +44 (0) 1245 449266 or email us directly. Kreston International Kreston International Limited is a global network of independent accounting firms. Offering reliable and convenient access to efficient and seamless advisory and assurance services through member firms located around the globe, Kreston: Is ranked the 13th largest accounting network in the world Covers 104 countries Has 700 offices Has a resource of 21,000 professional and support staff. Our members are accustomed to working together to deliver cohesive international solutions to ensure clients receive the highest quality of expertise available in their respective countries. Beyond assurance, quality and experience, clients will enjoy the unique synergy that stems from the trusted relationships that Kreston members have created globally and which support the consistent delivery of exceptional international service. This information is provided for guidance only and is not a substitute for professional advice. Neither Kreston International Limited nor its member firms accept any liability for any loss arising as a result of actions taken or not taken based on the information contained in this document. The information in this document was prepared as at 30 November 2013.