Chapter 1 Review of Basic Tax Concepts Person-Definition -Company -Individuals -Body of persons (Trust) Year of Assessment (YA) & Basis Period (BP) -Year of Assessment is tax year which income is calculated and charged while the basis period is the period which income is earned. -BP for individual is the preceding calendar year while basis period for businesses is the preceding financial accounting year end. Terms of Income in Taxation -Statutory Income refers to total income from each source (net of deductible expenses and capital allowances) for the basis period of any year of assessment. -Assessable Income is the amount remaining after deducting donations or losses from Statutory Income. -Chargeable Income is the “ultimate income” which Singapore income tax rate applies. CI for individual is after deduction of personal reliefs while CI for business is after applicable exemptions Exemption and Rebate for companies 1. SUTE -New start-up companies are eligible for SUTE on its chargeable income up to $200,000. -Exemption: [first 100k 75%, second 100k 50%] -Qualifying Conditions: 1-5 1. Applicable for first 3 consecutive year of assessment after incorporation 2. Must be Singapore incorporated company 3. Must Singapore resident 4. The company has no more than 20 shareholders where: -all of the shareholders are individual beneficially and directly holding shares in their own names. -at least one of the shareholders is an individual beneficially and directly holding at least 10% of the issued ordinary shares of the company. -Must not be property developer or investment holding companies 2. PTE -PTE is granted on its normal chargeable income which subject to prevailing corporate tax rate up to 200,000. Exemption: [first 10k 75%, following 190k 50%] Residency Status The tax treatment is generally more favorable to tax resident. For Individuals -The residency status for individual is defined in S2 of the ITA implied that there are two mutually exclusive tests to be applied, namely Qualitative test and Quantitative test. 1st Test: Qualitative test -An Individual is considered resident who resides in Singapore except for such temporary absences in the year preceding the year of assessment. 2nd Test: Quantitative test - An Individual is considered resident who physically present or exercised an employment in Singapore for 183 days or more in the year preceding the year of assessment. Exception to 2nd Test: For individual who fails the 183 days requirement possible to avail concession as follow. 3-year concession: Physically present or working in Sg for 3 consecutive years 2-year concession: _for continuous period of at least 183 days (straddle over 2 calendar years) For Companies -A company is considered resident where the control and management of whose business is exercised in Singapore. For example, the place where business hold their board meetings. -Benefits: -It is entitled to conferred under the avoidance of DTA that Singapore has concluded with treaty countries. -It can enjoy tax exemption on foreign sourced dividend, foreign branch profits, and foreign service income under S13(8) of ITA. -It can enjoy tax exemption scheme for new start-up companies. Dual Residency Status -A person normally resident in one country may also be resident in other country which potentially giving rise to dual residency. Where DTA exists between two countries, there will be tie-breaker rules to resolve the conflict such that the person normally be deemed to be resident in only one of the two countries. -OECD Extract (Individuals/Non-Individuals) Where an individual/non-individual is a resident, he/it shall deemed to be resident only if the state: For Individuals: Follow the sequences to break the tie. 5 1. Has his permanent home 2. Which his personal and economic relations are closer -Centre of vital interests 3. Habitual abode 4. Nationality 5. Last resort: the competent authorities shall settle the question by mutual agreement For Non-Individuals: Legal Person-6 factors to consider -has its place of effective management is situated. 1. where is the board meeting usually held 2. where the chief executive officer and other senior executives usually carry on their activities 3. where the senior day-to-day management carry on 4. where is the headquarter is located 5. which country’s law govern the legal status 6. where its accounting records are kept. 7. Last resort: the competent authorities shall settle the question by mutual agreement Scope of tax Charge of income tax: Section 10 (1)(a)-(g) [S10(1)] Income tax shall be payable at the rates specified for each year of assessment upon the income of any person accruing in or derived from Singapore or received in territory of Singapore from outside Singapore in respect of: (a) Gains or profits from any trade, business, professional or vocation (b) Gains or profits from any employment (c) NA (d) Dividends, Interests, Discounts (e) Any pensions, charge or annuity (f) Rents, royalties, premiums, and any profits arising from property (g) Any gains or profits do not fall within the above paragraph Only Income is taxed Singapore does not impose tax on capital gains. Concept 1: Tree vs fruits concept Capital>Not taxable Income>Taxable Concept 2: Fixed vs circulating capital Fixed capital refers to the assets kept and used in the business with the object of earning income. Circulating capital refers to the assets acquired in the ordinary course of carrying on trade and is continuously being circulated. Guidelines: 5 Revenue: -Money received in lieu of trading receipts -Receipts with recurrent nature Capital: -Compensation received for destructions of profit-making apparatus -Money received for restriction of income earning activities such as restrictive covenant and sterilisation of assets. -Sales of business assets Territorial system of taxation SG Sourced vs Foreign Sourced-6 factors: The place where -the sales contract is negotiated and concluded -the title of goods passes / services are rendered -the establishment that income can be attributed is located -the sale proceeds is collected -the cost of operations is incurred/charged -the invoice is raised Gain from transaction> Trading gain? Or Investment gains=capital gains (favourable) Indicator to determine: Badges of trade & Other indicators All six badges of trade should be considered but there is no single indicator is conclusive. 1. Motive Trading requires intention to trade at the time of acquisition 2. Subject matter of realisation The nature and volume of transactions should give an indicative of whether it is for trade or personal enjoyment. If it is for personal enjoyment, more likely to indicative of investment intention. 3. Length of ownership period Generally, short period of ownership is indicative of trade. However, itself is not conclusive and requires inference of other facts in support of argument. 4. Frequency of transactions This badge attempts to look at the habitual and systematic operation of taxpayer. Where repetitive of similar transactions exits, it is more likely to trade. 5. Supplementary work done This refers to the enhancement made to assets to make the item more valuable. This is more likely to indicate of trade. 6. Circumstances responsible for realisation Unforeseen circumstances which lead to sales may explain no intention to trade. For example, sudden emergency for ready money and compulsory acquisition. 7. Mode of financing How the purchase of assets is being financed. -Surplus funds are used: more indicative of investment intention. -Borrowing funds are used: short-term financing more indicative of trade compared to long term financing. 8. Other indicators -financial position: ability to hold the assets -feasibility study: If done>Investment intention -Accounting treatment -Availability of documentation Tax Administrative - Offences & Penalties -Table Incorrect Returns % of tax undercharged Without negligence 100% With negligence 200% Tax evasion 300% Serious fraudulent 400% evasion Fine Imprisonment NIL Not>5,000 Not>10,000 Not>50,000 NIL Not>3 years Not>3 years Not>5 years -IRAS VDP: Voluntary Disclosure Program: Purpose: IRAS encourages taxpayers who have made mistakes in their tax returns in the past to voluntarily correct and straighten their tax records. -A voluntary disclosure must be timely, accurately, completed and self-initiated by the taxpayers. Conditions: -must be made before receives a query from IRAS -must be made before receives a notification from IRAS about commencement of audit or investigations -must not be under the immediate scope of the query/ audit or investigation if the cases are already under IRAS’s query Waiver / Reduced penalty Waiver: If VD is made within the grace period. (15th/18th Apr) Reduced penalty: after grace period 5% VDP is available only once and no VDP reliefs for repeated errors unless there are reasonable grounds. As VDP is intended for taxpayers to disclose genuine errors made in the past, it does not apply to taxpayer who wilfully evade tax. Advance Ruling System Tax Evasion Tax Evasion is criminal offence which involves reduction of person’s tax liability or obtainment of tax credits/refunds through illegal means such as under declaring income, claiming fictitious expenses and prepare false accounts. The penalties for tax evasion is based on 300% of tax undercharged, maximum fine up to $10,000 and maximum jail term up to 3 years. Where there is serious fraudulent tax evasion case, the penalties is based on 400% of tax undercharged, maximum fine up to $50,000 and maximum jail term up to 5 years. Tax Avoidance Tax avoidance seeks to minimise tax liability legally but such arrangements is artificial or has little or no commercial substance and is designed to obtain tax advantages. No penalties will be imposed on tax avoidance arrangements, but it should be noted that in accordance to the S33 of the ITA, the comptroller may disregard or vary the arrangement to make adjustment if the purpose or effect of such arrangement is to alter the incidence of any tax payable, or to relieve any person from the tax liability, or to reduce or avoid any tax imposed. However, S33(1) shall not apply if the arrangement is made for bona fide commercial reasons. Tax Planning Tax planning is the process of structuring transaction or a series of transactions so as long to minimise tax liability with commercial substance, usually fulfils both the legal requirements and intent of the income tax law. There are neither penalties nor adjustment made where proper tax planning undertaken by taxpayer as there are valid tax mitigation within both language and spirit of the law.
