Seminar on Taxation of Investment Holding …...7 Filing of Corporate Income Tax Returns * Waiver to file ECI: Companies with financial year ending in or after Jul 2017 will qualify

1

Seminar on Taxation of

Investment Holding Companies

Presentation by Inland Revenue Authority of Singapore

For tax seminar held on 23 Oct 2018

Twitter.com/IRAS_SG Facebook.com/irassgiras.gov.sg

2

Agenda

Corporate Tax Obligations

Investment Holding Company

Basis of assessment

What is an investment holding company

Types of income earned by an investment holding company

Deductible expenses

Things to note

Common mistakes

Investment Dealing Company

What is an investment dealing company

Company in the Business of Making Investments

What is a company in the business of making investments

S10E Restriction

3

Agenda

Tax Exemption for Foreign-Sourced Income

Foreign tax credit

Double taxation issue

What is a double taxation agreement

Calculating the foreign tax credit

Foreign Tax Credit Pooling System

Case Studies

Question & Answer

4

Objective of the Seminar

Understand a company’s annual tax filing obligations

Understand basic taxation of investment holding company

Be able to prepare a tax computation and e-File your Form C-S/ C for an investment holding company

Corporate Tax Obligations

6

Compulsory e-Filing: Starting from YA 2018

• e-Filing of Corporate Income Tax returns (including ECI, Form C-S and Form C) is made compulsory in phases from YA 2018

• With compulsory e-Filing, we strongly encourage you to e-File now

YA Target Group

2018 Companies with revenue more than $10m in YA 2017

2019 Companies with revenue more than $1m in YA 2018

2020 All companies

7

Filing of Corporate Income Tax Returns

* Waiver to file ECI: Companies with financial year ending in or after Jul 2017 will qualify for ECI waiver if their annual revenue is ≤$5 million and ECI is NIL.

• Companies that meet both of the criteria do not need to file their ECI for that particular YA, even though the company’s ECI filing status for the YA at myTax Portal shows “Ready to File”. There is no need to seek confirmation from or inform IRAS.

• Two corporate tax returns to be filed each year:

To e-File By the fling due date

Estimated Chargeable Income (ECI)* Within 3 months after end of financial year end (FYE).E.g. FYE 30 June 2018

ECI for YA 2019 must be filed by 30 Sep 2018

Form C-S/ C (for qualifying companies)Or Form C (with financial statements, tax computation and supporting schedules)

15 Dec (if you e-File)

[If you are unable to e-File, please submit the paper Form C-S/ C by 30 Nov]

8

e-Filing of Form C-S

• Form C-S is a simplified 3-page Income Tax Return for small companies

• NOT required to submit financial statements, tax computation andsupporting schedules with Form C-S but still need to prepare and submit toIRAS upon request

• e-File your Form C-S at mytax.iras.gov.sg

• Companies claiming writing-down allowances for Intellectual Property Rightsunder S19B are required to submit the Declaration Form* to IRAS at thetime of lodgment of the Form C-S

You are encouraged to submit the Declaration Form to IRAS via the

‘Submit Document’ e-Service at mytax.iras.gov.sg

* To obtain the Form, refer to IRAS’ website at iras.gov.sgHome > Quick Links > Forms > Businesses > Corporate Tax forms

https://www.iras.gov.sg/irashome/Quick-Links/Forms/Businesses/Corporate-Tax-forms/

Qualifying conditions for Form C-S

To file Form C-S:

Company:Does not claim any of the following:

• Is incorporated in Singapore • Has an annual revenue* of

$5 million or below • Derives only income taxable

at 17%

• Carry-back of Current Year Capital Allowances/ Losses

• Group Relief• Investment Allowance • Foreign Tax Credit and

Tax Deducted at Source

* Revenue of a company refers to the main income source of the company excluding separate source income such as interest

• The annual revenue threshold for filing Form C-S was increased from $1 million to $5 million with effect from YA 2017

• Companies that do not meet the conditions have to submit to IRAS a full set of tax return comprising the Form C, financial statements, detailed profit and loss statement, tax computation and supporting schedules.

9

10

e-Filing of Form C

• Online Form C (similar to e-Form C-S)• Complete the Form C template online and upload the relevant

attachments at mytax.iras.gov.sg

• Form C (Upload)• Download from IRAS’ website a softcopy of Form C (PDF format) onto

your PC/ laptop• Complete it at your convenience• Upload the original completed Form C (PDF format) and relevant

attachments at mytax.iras.gov.sg• Do NOT upload scanned or printed copy of Form C

• External Value Network• Bulk submission by tax agent through a dedicated platform, which

bypasses CorpPass

11

Tips on e-Filing Form C

• For softcopies that are not in PDF format, convert them to PDF format using a software convertor (e.g. PrimoPDF)

• Ensure that hardcopy documents are scanned into PDF format and the images are clear

• Use font size of at least 11 for your attachments

• When reducing file size of attachments, the recommended resolution is 100dpi black and white

Note: Do NOT submit your revised tax computations for past YAs together with the current year e-Filing (i.e. YA 2018). Please submit it using the Revise/ Object to Assessment option at mytax.iras.gov.sg

Refer to IRAS’ website at iras.gov.sgBusinesses > Companies > Filing Taxes (Form C-S / C) > Tips on e-Filing Form C

https://www.iras.gov.sg/irashome/Businesses/Companies/Filing-Taxes--Form-C-S-Form-C-/Guidance-on-Completing-Form-C-S-C/Tips-on-e-Filing-Form-C/

12

Guidance for New Companies

• Visit our Basic Guide for New Companies to find outabout:

– Filing obligations of a company (i.e. forms to submit,deadlines)

– How to determine income taxable for the period

– Mode of submission of the forms

– FAQs by companies

https://www.iras.gov.sg/irashome/Businesses/Companies/Learning-the-basics-of-Corporate-Income-Tax/Basic-Guide-for-New-Companies/

13

Non-Filing of Corporate tax returns

Enforcement Actions for Non-filing of ECI / Form C-S/ C

IRAS may:

• Estimate the company’s income and issue an assessment

Payment has to be made within one month from the date of Notice of Assessment

Any objection to the assessment will be reviewed only upon submission of the tax return

• Impose a composition fee not exceeding $1,000

• Summon the company or director to Court

If the company fails to file a return for two years or more, a summon may be issued and upon conviction, the company may be ordered to pay:

• A penalty that is twice the amount of tax that IRAS may have assessed for that Year of Assessment (YA); and

• A fine of up to $1,000

Refer to IRAS’ website at iras.gov.sgBusinesses > Companies > Filing Taxes (Form C-S/ C) > Late Filing / Failure to File

14

Accurate Filing of Corporate tax returns

Make truthful and accurate declaration of income

The company is responsible for all declarations made notwithstanding that it has engaged the services of tax agents

• Companies must pay the tax stated in the Notice of Assessment (NOA) within one month from the date of the NOA

• Only companies that are on GIRO qualify to pay the estimated tax on their ECI by instalments

• More instalments will be granted if the ECI return is submitted early and filed electronically

Within 1 month from FYE

Within 2 monthsfrom FYE

Within 3 monthsfrom FYE

e-File by 26th ofthe month

10 8 6

Paper File by 24th

of the month5 4 3

When and How to Pay Your Tax

Note: FYE refers to financial year end

15

• Companies that do not agree with the tax assessment raised by IRAS must file the objections within two months from the date of NOA

• If no objections are received within that period, the assessments will be treated as final

Objecting to Your Notice of Assessment (NOA)

16

An objection should provide the following details:

• Year of Assessment

• Date of NOA

• Description of the item(s) under objection

• Amount of income/deduction for each item under objection

• Reason to explain why deduction/ allowance/ relief ought to be allowed

• Reason why income should not be subject to tax

• Supporting documents

Note: CIT may request for a revised income tax computation as it will help expedite the review process

Refer to IRAS’ website at iras.gov.sgBusinesses > Companies > Getting the Notice of Assessment After Filing

Objecting to Your Notice of Assessment (NOA)

17

18

• Companies are required to keep proper business records and accounts

Regardless of whether the tax assessment is finalised, records have to be kept and retained for:

• At least 5 years e.g. Records for period 1 Jul 2016 to 30 Jun 2017 (YA 2018) should be kept up to 31 Dec 2022.

• IRAS encourages you to use Accounting Software as it improves record-keeping and tax compliance

• You will also be able to use the information captured in the software to ensure that operations are effective and efficient

Maintaining Proper Records

19

• IRAS’ Accounting Software Register lists the accounting software that meet IRAS’ technical requirements


Refer to IRAS’ website at iras.gov.sg

(1) Businesses > Companies > Learning the basics of Corporate Income Tax > Business Records That Companies Must Keep

(2) Businesses > Companies > Getting it right > IRAS Accounting Software Register

20

Enforcement Actions for Failing to Keep Proper Records

• Failure to do so is an offence under the Income Tax /GST Act and could result in:

IRAS exercising best judgment to estimate the income earned

Claims for expenses, capital allowances or GST input tax being disallowed

Imposition of penalties



22

Basis of Assessment

Income is assessable on a preceding financial year basis

Year of Assessment (YA)

• year in which income tax is charged

• current YA is YA 2018

Basis Period for a YA

• the period of income relevant to the YA

• e.g. 1 Jan 2017 to 31 Dec 2017 (YA 2018)

1 Apr 2016 to 31 Mar 2017 (YA 2018)

1 July 2017 to 30 June 2018 (YA 2019)

Singapore-sourced

Income accruing in or derived from

Singapore

(i.e. income sourced in Singapore)

Foreign-sourced (remitted)

Income received in Singapore from

outside Singapore

(i.e. income sourced outside

Singapore)

E.g. Trade income of a company

carrying on business in Singapore

E.g. Interest income from

a foreign bank outside Singapore

that is remitted to Singapore

Taxable Income

Income Tax is payable on:

Foreign Source Income unremitted

• Tracking of unremitted income- Disclosed in tax computation schedule

23

24

• Principal activity is the passive holding of investments

• Owns investments such as properties and shares for the long-term

• Derives investment income, passive in nature, such as:

• Dividend [S10(1)(d)]

• Interest [S10(1)(d)]

• Rental income [S10(1)(f)]

What is an Investment Holding Company?

25

Dividend Income - S10(1)(d)

Singapore-sourced Dividend Income

Current Tax Treatment

• Singapore adopts a one-tier corporate tax system

Tax paid by a Singapore company on its chargeable income is the final tax

Therefore, all dividends paid by a Singapore company are exempt from tax in the hands of the shareholders

26


Foreign-sourced Dividend Income


• Foreign-sourced dividend received in Singapore is taxableat 17% (i.e. current corporate tax rate) unless tax exempt

• For Singapore tax residents, double taxation is relieved by:

Double taxation relief under tax treaties or

Unilateral tax relief

27

Tax Exemption for Foreign-sourced Dividend

• Granted to all persons resident in Singapore

• Provided the following conditions are met:

Foreign-sourced dividend income has been subjected to tax in foreign jurisdiction;

Headline tax rate of foreign jurisdiction is at least 15%; and

Beneficial for tax exemption


28


Concessionary “group” Treatment

All investments in shares and stocks are divided into 4 groups

Group 1 Non-income producing shares (whether local or foreign shares)

Group 2 Shares which generate tax-exempt dividend income (e.g. one-tier and foreign-sourced dividend income remitted to Singaporein the year and exempted from tax)

Group 3 Income producing shares in overseas companies wheredividend income is remitted to Singapore in the year andtaxable in Singapore.

Group 4 Income producing shares in overseas companies wheredividend income is not remitted to Singapore in the year.

29



Group 1

• Expenses are not deductible as the expenses incurred on the shares do

not produce dividend income taxable in Singapore

Group 2

• Allows the deficit (expenses in excess of dividend income) arising within a

group from any block of shares for a particular year to offset against the

net dividend income for the same year from other blocks of shares within

the same group

• Net deficit of any group shall be disregarded and cannot be set-off against

net dividend income of another group or other sources of income

30


Group 3

• Allows the deficit (expenses in excess of dividend income) arising within a

group from any block of shares for a particular year to offset against the

net dividend income for the same year from other blocks of shares within

the same group

• Net deficit of any group shall be disregarded and cannot be set-off against

net dividend income of another group or other sources of income

Group 4

• Expenses are not deductible as the expenses incurred on the shares do

not produce dividend income taxable in Singapore but may be carried

forward*

* Refer to e-Tax Guide “Liberalised treatment of expenses incurred in Singapore to derive

foreign income” on IRAS’ website: www.iras.gov.sg


31

Example of the Concessionary “group” Treatment

Shares in company

Net dividend income / (deficit)

Withoutconcession

Withconcession

A S$1m S$1m S$1m

B (S$2m) Disregarded ($2m)

Net dividend income: S$1m NIL*

A company remits the dividend income it receives from foreign companies A and B (i.e. same group).


* Net deficit is disregarded

32

Interest Income - S10(1)(d)


• Taxable at 17% (i.e. current corporate tax rate) when accrued in or remitted to Singapore

• For Singapore tax residents receiving foreign-sourced interest, double taxation is relieved by:



33

Rental Income - S10(1)(f)


• Taxable at 17% (i.e. current corporate tax rate) when accrued in or remitted to Singapore

• For Singapore tax residents receiving foreign-sourced rental income, double taxation is relieved by:



Block Basis Concession

• The income producing properties form a single “block” where netrental loss from one property is deductible against net rental incomefrom other properties

• This excludes owner-occupied or vacant properties (non-income producing properties)

34

Rental Income - S10(1)(f)

Example of the “Block Basis Concession”

Without concession

With concession

Property A:Net rental income of S$30,000 S$30,000 S$30,000

Property B: Net rental loss of S$40,000 Disregarded (S$40,000)

Net rental income S$30,000 NIL*

A company rented out its properties A and B.

* Net loss will be disregarded

35

Type of Income

Tax Treatment

Dividend

All dividends paid by a Singapore resident company are exempt from tax in the hands of the shareholders

Foreign-sourced dividend received in Singapore is taxable at 17% (i.e. current corporate tax rate), with tax exemption or tax relief available subject to qualifying conditions

Concessionary “group” treatment for dividend income

Interest Interest income is taxed when accrued in or remitted to

Singapore

Rental

Source of rental income is based on where the property is situated

Block basis concession for rental income

Summary of Common Types of Passive Source Income

36

Deductible expenses

Direct expenses Statutory and Regulatory expenses

Indirect expenses

What is it? • Expenses directly incurred to earn investment income

• Expenses incurred in accordance with statutory and regulatory provisions

• Expenses not directly incurred to earn investment income

Deductibility • Deductible against the respective source of investment income

• Before YA 2014, allowed as an administrative concession

• From YA 2014, deductible under S14X of the ITA

• Apportion to the respective source of investment income

• Generally not deductible• As a concession, indirect

expenses not exceeding 5% of the total gross investment income is deductible

• Apportion to the respective source of investment income

Examples • Custodian fees (for income producing shares)

• Property tax, insurance, repairs & maintenance (for rental properties)

• Interest expense (on loan taken to acquire shares / property)

• Accounting fees• Annual listing fees• Audit fees• Bank charges• Income tax service fees• Printing and stationery• Secretarial fees

• Directors' fees• Office rental• Office telephone charges• Office water and light• Staff salaries• Transport expenses

(exclude expenses incurred on S-plated cars which are not deductible)

37

Example 1 (One source of income)

Investment income S$

Rental income 3,000

Expenses S$

Property tax 300

Repair of property 500

Audit fee 2,000

Secretarial fee 1,000

Bank charges 500

Staff salaries & CPF 1,000

Direct expenses

Statutory /Regulatory expenses

YA 2018

Indirect expenses

38

Rental income

Less: Direct expensesProperty tax Repair of property

Less: Statutory and regulatory expensesAudit fee Secretarial feeBank charges

Less: Indirect expensesLess: Staff salaries & CPF (Lower of actual

expense or 5% of gross rental income)

300500

2,0001,000

500

3,000

(800)

(3,500)

(150)

Net rental income / loss

Chargeable income before exempt amount

Tax payable @17%

NIL

NIL

NIL

Tax computation (One source of income)

(Net rental loss is disregarded)

S$ S$

39

Example 2 (Multiple sources of income)


Rental income 2,000

Interest income 8,000

Total 10,000

Expenses S$

Property tax 300

Repair of property 1,200

Audit fee 2,000


Bank charges 500

Staff salaries & CPF 1,000

YA 2018

Indirect expenses


Direct expenses

40

Common expenses S$

Audit fee 2,000


Bank charges 500

Staff salaries & CPF (capped at 5% of total investment income of S$10,000)

500

Total 4,000

Source of income

Share of common expenses

S$

Rental 4,000 x (2,000 / 10,000) 800

Interest 4,000 x (8,000 / 10,000) 3,200

Apportion common expenses to each source of income:

Tax computation (Multiple sources of income)


Indirect expenses

41

Rental income Less: Direct expenses

- Property tax - Repair of property

Less: Share of common expenses

Net rental income

S$

3001,200

S$2,000

(1,500)(800)

NIL*


* Net rental loss is disregarded

Interest income

Less: Direct expenses


Net interest income

8,000

NIL

(3,200)

4,800

42


What is exempt amount?

S$

Chargeable income before exempt amount 4,800

Less: Exempt amount (S$4,800 @ 75%) (3,600)

Chargeable income after exempt amount 1,200

Tax payable @ 17% 204.00Less: Corporate income tax rebate (40% x S$204) (81.60)Net tax payable 122.40

What is CIT rebate?

For a sample of tax computation for investment holding company, you can refer to

IRAS’ website at iras.gov.sg

Businesses > Companies > Working out Corporate Income Taxes > Specific Industries >

Investment Holding Companies > Basic Format of Tax Computation for An Investment

Holding Company

43

• Granted to a qualifying new company for its first 3 consecutive YAs from its incorporation

• Exemption granted on normal chargeable income taxed at 17%:

For any YA of the first

3 YA that falls in

Exempt Income

2010 to 2019 First S$100,000 @ 100% = S$100,000

Next S$200,000 @ 50% = S$100,000

S$300,000 S$200,000 (maximum per YA)

Tax Exemption Scheme for New Start-up Companies

For any YA of the first 3

YA that falls in

Exempt Income

2020 onwards

(as announced in

Budget 2018)

First S$100,000 @ 75% = S$75,000

Next S$100,000 @ 50% = S$50,000

S$200,000 S$125,000 (maximum per YA)

44

Tax Exemption Scheme for New Start-up Companies

• The following companies incorporated after 25 Feb 2013 are noteligible for the tax exemption scheme:

1) Property development companies Any company that buys or leases land and arranges for a

building to be built on land in order to lease, manage or sellthe building

2) Investment holding companies A company whose principal activity is that of investment

holding Derives investment income such as rental, dividend or interest

income

• Companies that do not qualify for this scheme will still be eligible forpartial tax exemption

• From YA 2010 to YA 2019, PTE is granted on normal chargeable income (i.e. chargeable income taxed at 17%) up to S$300,000:

First S$10,000 @ 75% S$7,500

Next S$290,000 @ 50% S$145,000

Total S$300,000 S$152,500

(maximum per YA)

Partial Tax Exemption (PTE)

• In Budget 2018, it was announced that from YA 2020 onwards, PTE is on normal chargeable income of up to S$200,000:

First S$10,000 @ 75% S$7,500

Next S$190,000 @ 50% S$95,000

Total S$200,000 S$102,500 (maximum

per YA)

45

Corporate Income Tax (CIT) Rebate

Note:

Companies need not factor in the CIT rebate when filing their Estimated Chargeable Income (ECI) and Income Tax Returns (Form C-S/ C) as the rebate will be computed by IRAS automatically

CIT rebate is computed on the tax payable after deducting tax set-offs (e.g. foreign tax credit)

46

As announced in Budget 2018, the CIT rebate will be as follows:

• YA 2018: 40% CIT rebate capped at S$15,000

• YA 2019: 20% CIT rebate capped at S$10,000

47

Things to Note

1. Expenses attributable to non-income producing investments are not deductible

Example:

1. Interest expense incurred to acquire shares that did not yield dividend

2. Property tax incurred for vacant property not rented out

48

Things to Note

However, an investment holding company can claim current year loss items transferred to it by a related company under the group relief system.

2. Deficit/loss (expenses in excess of income) from any source of investment is to be disregarded, and cannot be:

Set-off against the income of another source

Carried forward to offset against future income

Transferred out under the group relief system

Carried back to the immediate preceding YA

49

Things to Note

3. Not eligible to claim capital allowances on plant and machinery purchased (e.g. computers).

4. Not eligible to claim for tax benefits under the Productivity & Innovation Credit (PIC) scheme.

Reason: An investment holding company is not carrying on a trade or business

50

Things to Note

5. Is income distribution from Real Estate Investment Trusts (REITs)

taxable?

The nature, tax treatment and applicable period/Year of assessment of

each REIT distribution are reflected in the Annual Distribution

Statement issued by the Central Depository Pte Ltd (CDP).

A REIT distribution is taxable in the hands of corporate unit holders

unless stated otherwise* in the CDP statement.

The REIT distribution is taxable in the Year of Assessment as reflected

in the CDP Statement.

* E.g. Distribution is tax-exempt, distribution is a return of capital, etc.

51

Things to Note

6. Declaration in e-Form C-S (No IBA/LIA claims)

Items to Declare in e-Form C-S Investment Holding

“Net Profit/Loss before Tax as per Accounts”

( Row 1 of Part B)

To

“Unutilised Losses brought forward”

(Row 14 of Part B)

Enter "0"

“Separate Source Income”

(Part B, Row 15a to 17)

“Revenue” (Row 21 of Part C) and other rows,

where applicable

52

Things to Note

7. Arm’s length fee for IHC providing routine support services to related companies

All companies, including Investment Holding Companies (IHC) need to charge arm’s length fee on services provided to their related companies.

To ease administrative and compliance burden, IRAS is prepared to accept a 5% mark-up on costs as a reasonable arm’s length charge for certain routine support services provided by companies to their related companies, subject to the conditions:

• the services are those listed in Annex C of the e-Tax Guide on Transfer Pricing Guidelines;

• the same services are not provided to an unrelated party; and • all costs (direct and indirect) relating to the services performed are taken into

account in computing the 5% mark-up

For a IHC which provides services to its related companies, 5% mark-up on its cost base will be accepted as a reasonable arm’s length fees provided it can satisfy the above 3 conditionsThe cost base should include:

- Direct cost relating to the provision of services- Common overheads apportioned on reasonable basis to service income and investment income

Refer to Case Study 2

https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/e-Tax_Guides/etaxguide_CIT_Transfer Pricing Guidelines_4th.pdf

53

Common Mistakes

Claim for non-deductible expenses:

Capital expenditure

e.g. acquisition costs of investments; stamp duties and legal

fees incurred for purchase of investments; advertising and

commission incurred to secure the first tenant for investment

property

Pre-commencement expenses

e.g. Repairs and maintenance incurred prior to

commencement of the tenancy of investment property

Claim for indirect expenses over and above 5% of the total gross investment income

Indirect expenses are allowed as a concession but capped at

5% of gross investment income

54

Common Mistakes

Incorrect completion of the Form C e-Form C

55

Common Mistakes

Unutilised losses arising from investments cannot be carried

forward to future years of assessment e-Form C

56

Summary of Tax Treatment for Investment Holding Company

Items Tax Treatment Method of Claiming

Deductible expenses

1. Direct expensesDeduct against each source of

income

2. Statutory and regulatory expenses

Apportion to each source of income

3. Indirect expenses capped at 5% of gross investment income

Losses

Losses cannot offset against:

N.A. • Other sources of income

• Future income

Capital Allowances

Not allowable, except IBA Claim IBA against rental income

source

Loss Not allowable N.A.

Carry-back

Group Relief loss items

Cannot transfer out loss items (except unutilised current year IBA) but can claim loss items transferred to it

Claim loss items transferred to it to arrive at CI

Investment Dealing Company

Section 10(1)(a) of ITA

58

• Principal activity is to carry on a business of investmentdealing

• Owns investments such as properties and shares as a form oftrading stock

• Derive trade income from purchase and sale of investments[S10(1)(a)] e.g. gain on sale of real properties and shares

What is an Investment Dealing Company?

59

Items Investment Dealing CompanyS10(1)(a)

Taxability/ deductibility of gains/ losses of sale of

investment

Taxable/ deductible

Deductibility of expenses Expenses allowed in accordance with S14 & S15

Trade losses Can offset against other sources of income/ future income

Capital allowances - Can claim CA on qualifying plant ormachinery- Unabsorbed CA can offset against other sources/ future income, subject to same business test and shareholder test

Summary of Tax Treatment for Investment Dealing Company

Company in the Business of Making Investments

Section 10(1)(a) subject to Section 10E of ITA

61

• Principal activity is that of carrying on a business of making investments

• Owns investments such as properties and shares for the business of making investments; e.g. a business of letting immovable properties or service apartments

• To derive investment income as a trade [S10(1)(a)], subject to S10E restriction

What is a Company in the Business of Making Investments?

62

S10E Restriction

a. Any outgoings or expenses incurred in respect of investments which donot produce any income are not deductible;

b. Any outgoings or expenses incurred in respect of investments whichproduce income are only deductible against the income derived fromsuch investments. The balance of any outgoings and expenses whichcannot be set off in that year shall be disregarded; and

c. Capital allowances are only deductible against the income derived frominvestments which produce income. The balance of any allowances whichcannot be set off in that year shall be disregarded.

What is a Company in the Business of Making Investments?

Refer to e-Tax Guide on IRAS’ website at iras.gov.sgQuick links > e-Tax Guides > Search > Ascertainment of Income from Business ofmaking Investment

63

Summary of Tax Treatment for Company in the Business of Making Investments

Items Business of making investments S10(1)(a) subject to S10E

Taxability/ deductibility of gains/ losses of sale of investment

Not taxable/ not deductible provided that the facts of the case shows that the gains are indeed capital in nature

Deductibility of expenses Only expenses incurred on income-producing investments allowed

Trade losses Cannot offset against other sources of income/ future income

Capital allowances - Can claim CA on qualifying plant or machinery- Unutilised CA cannot offset against other sources/ future income

Tax Exemption For

Foreign-Sourced Income

65

Granted to all persons resident in Singapore on the following sources of foreign income received in Singapore on or after 1 Jun 2003:

Tax Exemption for Specified Foreign-sourced Income

• Foreign-sourced income has been subject to tax in foreign jurisdiction;

• Headline tax rate of foreign jurisdiction is at least 15%; and

• Beneficial for tax exemption.

Qualifying conditions

• Foreign-sourced dividends

• Foreign branch profits

• Foreign-sourced service income

(Rendered in the course of person’s trade through a fixed place of operation in foreign jurisdiction)

66

• To complete:

e-Form C

Row 15 of Assessment 1 (Exempt Income / Loss for Current Year of Assessment )

Additional Information - Part D (Exemption on Foreign Dividends, Branch Profits and Service Income Received in Singapore)

e-Form C-S

Row 3 of Part B of (Non-Taxable Income)

• No need to submit supporting documents unless called upon to do so

How to Claim Tax Exemption for Specified Foreign-

sourced Income?

Refer to e-Tax Guide on IRAS’ website iras.gov.sgHome > Quick links > e-Tax Guides > Search > Tax Exemption for Foreign-SourcedIncome


Foreign Tax Credit (FTC)

68

Double taxation issue

When companies derive income from a foreign jurisdiction, their income may be subjected to tax in both the foreign jurisdiction and Singapore (i.e. taxed once in the foreign jurisdiction and then in Singapore)

Example:

Singapore

(2nd Tax)Malaysia

(1st Tax)

Rental income remitted into Singapore

Country of Source i.e. where the rental income arises

Country of Residencei.e. where the income is received

Company A’s property

Company A

69

• A DTA is entered into between two jurisdictions seeking to relieve double taxation

• It clarifies & assigns the taxing rights to each jurisdiction

To claim DTR, the following conditions have to be satisfied:

The company must be tax resident in Singapore;

Tax has been paid / payable on the income in the foreign jurisdiction in accordance with the provisions in the DTA, and

The income is subject to tax in Singapore

What is an Avoidance of Double Taxation Agreement (DTA)?

1. Refer to IRAS’ website at iras.gov.sg> e-Tax Guide “Avoidance of Double Taxation Agreements (DTAs)

2. For the full list of the DTAs Singapore concluded with other jurisdictions:IRAS’ website at iras.gov.sg> Home > Quick links > International Tax

70

• For Singapore tax residents, double taxation is relieved by:

Double taxation relief (DTR)

Available to foreign-sourced income remitted from jurisdictions which Singapore has concluded an Avoidance of Double Taxation Agreement (DTA) with

Unilateral tax relief (UTR)

Available to foreign-sourced income remitted from jurisdictions which Singapore has not concluded a DTA with

• The reliefs are claimed on a source-by-source and country-by-country basis

Foreign Tax Credit (FTC) System

or

71

Calculating the Singapore tax payable*:

* FTC is not available in the case of a net foreign loss

Calculating the Foreign Tax Credit (FTC)

Refer to IRAS’ website at iras.gov.sg Home > Businesses > Companies > Working out Corporate Income Taxes > Claiming Reliefs > Claiming Reliefs> Foreign Tax Credit

Foreign-sourced income after expenses and partial exemption

attributable to that income

x Singapore tax rate

FTC is the lower of:1) The actual amount of foreign tax paid; or2) The amount of Singapore tax attributable to the foreign-sourced

income (net of expenses)


Foreign Tax Credit (FTC) Pooling System

73

Objective

To simplify and reduce taxation of foreign income (FI) particularly for companies that are globalising and earning a larger share of their income overseas

Tax Treatment prior to YA 2012

Amount of FTC:

• Source-by-source and country-by-country basis

• Limited to lower of foreign tax paid and Singapore tax payable on that FI


74

With effect from YA 2012

• Introduction of new FTC pooling system

- all foreign taxes paid on qualifying FI pooled together to compute FTC

- amount of FTC is lower of:

(i) pooled foreign taxes paid on qualifying FI; and

(ii) total Singapore tax payable on qualifying FI


75

Qualifying conditions

• Foreign income tax is paid on FI in foreign jurisdiction from which FI is derived;

• Headline tax rate of foreign jurisdiction from which FI is derived is at least 15% at the time FI is received in Singapore; and

• Entitled to claim FTC and there is Singapore tax payable on that FI


Refer to IRAS’ website at iras.gov.sg

Home > Businesses > Companies > Working out Corporate Income Taxes > Claiming

Reliefs > FTC Pooling System

Where the above conditions are not met, or where companies choose not to elect for FTC pooling system, the current FTC rules will apply.

76

Example of benefits of FTC pooling system


Foreign Country A (S$)

Foreign Country B (S$)

Total (S$)

Foreign income remitted

10,000 20,000 30,000

Foreign income taxes paid

500 5,000 5,500

77

Under current method of FTC computation (assuming no expenses and partial tax exemption does not apply)

Foreign

Country A

(S$)

Foreign

Country B

(S$)

Total (S$)

Foreign income tax paid 500 5,000 5,500

Singapore tax payable on the FI (based on prevailing CIT rate of 17% )

1,700 3,400 5,100

FTC available (capped at the lower of foreign tax paid and Singapore tax payable on each FI)

500 3,400 3,900

Net Singapore tax payable on the FI after offsetting FTC ($5,100 – $3,900)

- - 1,200


78

Under new FTC pooling system:


Total (S$)

Total foreign income taxes paid in Countries A and B 5,500

Total Singapore tax payable on FI from Countries A and B 5,100

FTC available (lower of total foreign taxes paid and total Singapore tax payable on FI from Countries A and B)

5,100

Net Singapore tax payable on the FI after offsetting FTC ($5,100 – $5,100)

0

Decrease in net Singapore tax payable on FI ($5,100 – $3,900) 1,200

Case Study 1

Investment Holding Company with Foreign Tax Credit and Exemption of Foreign-sourced Income

80

Case Study 1

YA 2018 (Basis period: 01/04/2016 to 31/03/2017)


Singapore dividend income (1-tier exempt) 35,000

Dividend income received from a Malaysia company 100,000

Rental income 35,000

Interest income received from Indonesia 24,000

Other income 10,000

Total income 204,000


81

Case Study 1 (cont’d)

Expenses S$

Custodian fee (for Singapore tax-exempt dividends)

2,400

Interest on term loan (acquiring property for rental)

45,000

Property tax (property rented out) 1,600

Repair and maintenance (property rented out) 7,000

Auditor’s remuneration 3,000

Bank charges 500

Secretarial and tax services 2,000

Director’s fee 60,000

Depreciation 5,000

Direct expenses

Statutory/Regulatory expenses

Non-deductible expense


Indirectexpense

82


Common expenses S$

Auditor’s remuneration 3,000

Bank charges 500

Secretarial and tax services 2,000

Director’s fee (capped at 5% of total income) 10,200

Total common expenses 15,700

5% Restriction on Indirect Expenses S$

Director’s fee 60,000

Capped at 5% of $204,000 (total income) 10,200

Indirect expenses allowed (Lower of A or B) 10,200


B

A

83

Tax Computation S$ S$ S$

Singapore tax-exempt dividend 35,000

Malaysia dividend (foreign-sourced) 100,000

135,000

Less: Direct expenses – custodian fee 2,400


(135,000/204,000 x 15,700) 10,389

(12,789)

Net dividend income (subject to tax) NIL

Malaysia dividend income is exempt under Section 13(8).

Qualifying conditions met:1) Dividend income has been subjected to tax in Malaysia; 2) Headline tax rate in Malaysia is more than 15%; and3) Beneficial for tax exemption


84

*Net rental loss is disregarded.


Tax Computation

S$ S$ S$


Less: Direct expenses

Interest on term loan 45,000

Property tax 1,600

Repairs and maintenance 7,000

53,600


(35,000/204,000 x 15,700) 2,694

(56,294)

Net rental income NIL*

85


^ The interest income has been subjected to withholding tax of 10% in Indonesia.

S$ S$ S$

Indonesia Interest income (foreign-sourced) ^ 24,000

Less: Direct expenses NIL


(24,000/204,000 x 15,700) 1,847

(1,847)

22,153

Other income 10,000

Less: Direct expenses NIL


(10,000/204,000 x 15,700) 770

(770)

9,230

Chargeable income before tax exempt income 31,383

Tax Computation

86


S$ S$

Chargeable income before tax exempt income 31,383

Less: Exempt income

First $10,000 @ 75% (7,500)

Next $21,383 @ 50% (10,692) (18,192)

Chargeable income after tax exempt income 13,191

Tax payable @ 17% 2,242.47

Less: DTR* (1,582.94)

Tax payable after DTR 659.53

* DTR is the lower of:a. S$ 2,400 (The actual amount foreign tax paid to Indonesia); or

b. S$1,582.94 (The amount of Singapore tax attributable to the foreign-sourced income (net of expenses) S$2,242.47 x [S$22,153 / S$31,383]

Tax Computation

87


S$

Tax payable after DTR 659.53

Less: Corporate income tax rebate ($659.53 x 40%) (263.81)

Net Tax payable 395.72

Tax Computation

Case Study 2

Investment Holding Company Providing Routine Support Services to Related Companies

89

Case Study 2


Income S$

Service fee 3,150,000

Dividend income (1-tier exempt) 600,000


Investment Holding Company Providing Routine

Support Services to Related Companies

Expenses S$

Direct cost relating to provision of services (identified by Investment Holding Company)

3,000,000

Statutory and regulatory expenses 200,000

Other indirect expenses 500,000

90

Service income Dividend Interest Total

Income (Ratio A) 3,150,000 600,000 200,000 3,950,000

Direct cost relating to provision of services

(3,000,000) (3,000,000)*

Statutory & regulatory (Allocated based on ratio A)

(159,494) (30,380) (10,126) (200,000)*

Other expenses (Allocated based on ratio A)

(398,734) (75,949) (25,316) (500,000)*

Total expenses 3,558,228

Service fee @ 105% of total expenses

3,736,139

* Subject to review under sections 14 and 15 of the ITA



How to Determine the Service Fee?


91

Service income Dividend Interest Total

Income 3,736,139 600,000 200,000 4,536,139

Less:

Direct cost relating to provision of services

(3,000,000) (3,000,000)*

Statutory & regulatory expenses

(159,494) (30,380) (10,126) (200,000)*

Other indirect expenses (398,734) (30,000)^ (10,000)^ (438,734)*

Chargeable income before exempt amount

177,911 0(Exempt)

179,874 357,785

# Cost plus mark-up basis of assessment is not applicable as it is only for pure service companies providing certain routine support services (as per Annex C of TP Guidelines) to only related parties* assuming after review, all are deductible expenses ^ capped at 5% of the investment income



Prepared on Normal Trading Company Basis#


92

Total

Chargeable income before exempt amount (cont’d)

357,785

Less: Exempt amount

First $10,000 @ 75% 7,500

Next $290,000@ 50% 145,000

(152,500)


Tax payable @ 17% 34,898.45

Less: Corporate income tax rebate [40% x 34,898.45]

(13,959.38)

Net tax payable 20,939.07



Prepared on Normal Trading Company Basis#


Case Study 3

Trading & Investment Holding Company

94


Sales 750,000

Less: Cost of goods sold 345,000

Gross Profit 405,000

Other IncomeDividend (1-tier) 35,000



504,000

Less: ExpensesCustodian fees (for S'pore tax-exempt dividends) 2,400

Property tax (for property rented out) 1,600

Repair and maintenance (for property rented out) 7,000

Audit fee 3,000

Director fees 12,000

Depreciation 1,000

Salaries/bonus/allowances and CPF 80,000

Secretarial fees 2,000

109,000

Net Profit Before Taxation 395,000


Case Study 3

S$

95

Additional Information from the Balance Sheet:

Fixed assets additionComputer S$1,000

Description of

assetCost

S$

100%

Base CA

S$

300%

Enhanced CA

S$

Total CA

S$

Tax written

down value

S$

Computer* 1,000 1,000 3,000 4,000 Nil

Capital allowances (CA)

* Prescribed in PIC IT and Automation Equipment list.



96


S$

Net Profit before tax per accounts 395,000

Less: Separate sources of income

Singapore dividends 35,000


Rental income 40,000 99,000

296,000

Add: Disallowable expenses

Depreciation 1,000

Property tax 1,600

Repair and maintenance 7,000

Custodian fees 2,400 12,000

Adjusted profit 308,000

Less: Capital allowances for YA 2018 4,000

Adjusted profit after capital allowances 304,000

Tax Computation

97

Tax Computation (cont’d)


Add: Separate sources of incomeSingapore tax exempt (1-tier) dividend 35,000

Less: Custodian fees 2,400 tax exempt

Interest 24,000

Rental 40,000

Less: Property tax 1,600

Repair and maintenance 7,000 31,400

Chargeable income before exempt amount 359,400

Less: Exempt amount

First $10,000 @ 75% 7,500

Next $290,000@ 50% 145,000 152,500


Tax payable @ 17% 35,173.00

Less: Corporate income tax rebate [40% x 35,173] (14,069.20)

Net tax payable 21,103.80

98

Assistance and Service Channels

Home > e-Services > Businesses > CompaniesHome > e-Services> CorpPass

• Email us at myTax Mail

• For companies: 1800-356-8622

• 8.00am to 5.00pm from Mondays to Fridays• Best time to call: 8.30am – 10.30am• Best day to call: Friday

Websitewww.iras.gov.sg

Email

Helpline

Social Media Twitter.com/IRAS_SG

Facebook.com/irassg

mytax.iras.gov.sg

Please complete our Feedback Form after the seminar.

Your feedback will assist us in planning and organising our future seminars.

The information presented in the slides aims to provide a better general

understanding of taxpayers’ tax obligations and is not intended to comprehensively

address all possible tax issues that may arise. This information is correct as at 19 Oct

2018. While every effort has been made to ensure that this information is consistent

with existing law and practice, should there be any changes, IRAS reserves the right

to vary its position accordingly.

© 2018 Inland Revenue Authority of Singapore. All rights reserved.

Documents

Seminar on Taxation of Investment Holding …...7 Filing of Corporate Income Tax Returns * Waiver to file ECI: Companies with financial year ending in or after Jul 2017 will qualify