Recent Tax Changes Proposed in Singapore’s Budget 2020
-By Audrey Ong
Deputy Prime Minister and Minister for Finance, Mr. Heng Swee Keat introduced tax changes in his Budget Statement for the Financial Year 2020.
Income tax in Singapore is calculated on the preceding year. For example, income of a company with a financial year ending on 30 June 2019, will be taxed in the Year of Assessment (YA) 2020.
The following is an overview of Singapore’s recent tax changes proposed in Budget 2020:
- YA 2020 Corporate Income Tax Rate and Rebate
Singapore’sCorporate Income Tax Rate (CIT) of 17% remains unchangedas it is viewed as competitive next to Hong Kong’s16.5%. Hong Kong has an effective tax rate of 8.25% on its 1st HKD 2 million (S$366,000) profits with Singapore scoring a close 9.2%.
A 25% CIT Rebate capped at $15,000 is granted for the YA 2020. A company having a chargeable income (CI) of S$455,441 and a partial income tax exemption on its first 200,000 of CI will reap a maximum of CIT Rebate of S$15,000.
|YA 2020||Effective Tax Rate *|
* After partial tax exemption of S$102,500 on the 1st S$200,000 of CI and tax rebate.
- Carry-Back Relief Scheme
For YA 2020, the Carry-Back Relief (CBR) Scheme has been enhanced to allow for qualifying deductions to be carried back up to the preceding 3 YAs (Up from the usual 1 YA). In other words, qualifying deductions may be carried back for YA 2017 to YA 2019 and capped at $100,000, subject to terms and conditions.
An election can be made on the enhanced or current CBR scheme for YA2020 current year CA/losses. When one elects the enhanced CBR scheme, the order of setoff is strictly against YA 2017 profits, followed by YA 2018 then YA2019. Compared to YA 2017’s high CIT rebate of 50% versus the YA 2019’s 20%, it may be worthwhile to simply carry back to YA 2019 profits instead of YA 2017, depending on the CI for each YA.
Unless your CI is above S$446,618 in YA2017, a S$100,000 carry back of YA2020 QD to YA2017 will not yield the maximum SS17,000 in tax refund.
|YA||CIT Rebates||CI for Max Rebate*|
*After Partial Tax Exemption of S$152,500 on the 1st S$300,000 of CI.
- Merger & Acquisition Scheme
The Merger & Acquisition (M&A) scheme, a strategy for growth and internationalisation),has been proposed to beextended to cover qualifying acquisitions (QA) made on or before 31 December 2025.
The M&A scheme provides the following benefits:
- An allowance (to be written down over 5 years) equal to 25% of the value of a QA, subject to a S$40 million cap on all QA (i.e.a maximum allowance of S$10 million) per YA.
- Stamp duty (SD) relief on the instruments for the acquisition of ordinary shares under an M&A deal, capped at S$80,000 of SD per financial year.
- 200% tax deduction on transaction costs such as legal or valuation fees, incurred on qualifying share purchases, up to S$100,000 per YA.
Since 2012, conditions requiring the ultimate holding company of an acquiring company to be incorporatedand a tax resident of Singapore (i.e. SG UHS condition) have been waived on a case-by-case basis.
The M&A scheme is extended to QA made on or before 31December 2025, with the following changes:
- Removing the SD relief for instruments executed on or after 1April 2020.
- Waiver is no longer granted to the acquiring company on the SG UHC condition for qualifying M&A made on or after 1April 2020.
The proposed extension echoes the Government’s sentiment to encourage and propel local small and medium enterprises (SME) to grow overseas.The removal of SD relief should not impact local companies looking to grow via overseas acquisitions. This resonates with the Government’s move towards encouraging internationalisation of local SMEs. For SMEs acquiring local companies, the stamp duty will be 0.2% the purchase price or open market value of the share transfer, whichever is higher.
The SG UHC condition that will no longer be waived will limit this scheme to benefit local companies, in line with the Government’s intent.
- S13Z Safe Harbour Rules: Non-Taxation of Gains on Disposal of Shares
Singapore does not have a capital gains tax. Nevertheless, gain on sale of shares may be considered revenue in nature and brought to tax unless IRAS is satisfied that the gain is capital in nature. To ascertain if the gain is revenue or capital in nature, IRAS normally looks to the ‘badges of trade’ test such asmotive of the seller, length of period of ownership of the shares disposed, frequency of similar transactions, reasons for the disposal and means of financing the acquisition of the shares.
Section 13Z tax exemption scheme was introduced in Budget 2012 to lend certainty to non-taxationon gains from disposal of ordinary shares by companies, if the divesting company:
- Holds a minimum shareholding of 20% in the investee company, and
- Maintained a shareholding of at least 20% for a minimum24-month period before the disposal.
The investee companies can be incorporated in Singapore or elsewhere, listed or non-listed.
The scheme,which was due to lapse after 31 May 2022, does not apply to:
- The disposal of unlisted shares in an investee company that is in the business of trading or holding Singapore immovable properties (other than the business of property development) or
- A divesting company that is an insurance company.
A proposal has been made for the scheme to be extended to disposals made on or before 31 December 2027.
The investee companies can be incorporated in Singapore or elsewhere, listedor non-listed.
However, with effect from 1 June 2022, the scheme will not apply to the disposal of unlisted shares in an investee company that is in the business of trading,holding or developing immovable properties located in Singapore or abroad. All other conditions and exclusions remain unchanged.
While it is understandablethat Singapore real properties are not in the equation, it is not clear why overseas immovable properties are excluded moving forward.Real estate holding companies with foreign properties may already be subject to overseas taxes, not to mention Singapore income taxes now as well, unless the badges of trade tests are satisfied, and the gain is seen as capital.
Insurance companies will continue to face uncertainty over the tax treatment of share disposals unless the disposal is seen as being made on capital assets.
- Double Tax Deduction for Internationalisation Scheme
Under the current Double Tax Deduction for Internationalisation Scheme(DTDi) scheme, businesses are given a 200% tax deduction on qualifying expenses (e.g. airfare, accommodation, meals of up to 2 employees per trip) incurred for market expansion and investment development activities capped at S$150,000 each YA on the following activities:
- Overseas business development trips or missions
- Overseas investment study trips or missions
- Overseas trade fairs
- Local trade fairs that have been approved by ESG/STB
The DTDi scheme which was to have lapsed on 31 March 2020 has been enhanced and is now extended to 31December 2025.
The expanded scope (i.e. new eligible expenses) takes effect for expenses incurred on or after 1April 2020. Businesses will need to apply to Enterprise Singapore directly for these enhancements.
Overseas Business Development (New activity)
This is aimed at helping companies overcome challenges in the early stages of internationalisation.
- New eligible expenses include third party consultancy cost (for overseas markets) to: Identify suitable talent; or
- Identify potential business partners, licensee/franchisee agents and distributors or JV partners; or
- Secure and manage customers in–markets.
Overseas Market Development Trips/Missions (Expanded scope
- The enhancements provide greater support to sustain a business’ internationalisation efforts.
- Fees paid to secure speaking spots at overseas business/trade conferences to pitch products/ services to attendees.
- Logistics costs of transporting materials/samples used during the business missions
- Third party consultancy costs to arrange business networking events to promote products/services.
All materials have been prepared for general information purposes only. The information presented in this document is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. Professional advisory should be sought before taking or refraining from any action as a result of the contents of this document.