Your IR8A

The Inland Revenue Authority of Singapore (IRAS) encourages all employers to join the Auto-Inclusion Scheme for Employment Income. It is a scheme where employers submit their employees’ income information to IRAS electronically.

The employment income information will be shown on the employees’ electronic tax return and automatically included in their income tax assessments.

Well if things go according to plan as above, all parties involved ie. employer, employee, IRAS and the mother Earth will be all happy.

But what happen when there has been an error or omission in the employer's submission?

For any omission/error in the Form IR8A, the penalties for any tax understated are imposed on the employer for a failure to report.

However, penalties may also be separately imposed on the employee for failure to report in his personal tax return. You can't argue with IRAS that the mistake was committed by your employer.

Remember you are the person who finally submit the return!

Gold farmers?

Who are they?
Players who repetitiously slay virtual monsters in online games in order to earn virtual "gold" and "equipment". Such winnings could be sold for real money offline.

Some of them could do so well at this that they are able to hire "employees" to run errands such as buying lunches/drinks and collecting money from buyers from all over Singapore.

Are the taxman interested in the income?
Definitely yes. Korea National Tax Service taxes these farmers up to 40% on their profits. China authority arrived in Oct 2007. Singapore's IRAS said such income is definitely taxable.

But I wonder who in Singapore with this vocation has actually declared and paid taxes on their income? If you had, please share with the details.

Why is it taxable?
Under Tax 101, we learned the "badges of trade". Of the six badges, these two would nail the farmers ie.

• frequency or number of similar transactions by an individual
• the essence of a profit seeking motive

Now I got to go check on my children playing on their computer games!!

Source - yesterday's ST pp 2

What is a business' commencement date?

I am duly notified today that IRAS has issued a directive in an attempt to define a business' commencement date.

What is the definition of the business' commencement date?
It is only when the business has established its profit-making structure and started its
first commercial activity that it can be regarded as having commenced operation.

What is profit-making structure?
No specific definition. It depends on the nature of the business. IRAS has however provided several examples in the directive.

If you were runnning a supermarket, it commences business when it opens its door and offers its goods for sale to the public. It is definitely not the date of opening ceremony.

For a manufacturing entity, it is the date the entity is in a position to start its first commercial production.

The start date for a hotel is simpler. It is the day it receives the certificate of registration.

A property developer seems to be getting a rough deal. The business commences when it buys its first piece of land or building for sale.

For a set up to provide professional service, it is deemed to have started business when it is ready to commence marketing activities. So if you are still in the midst of hiring staff and putting your office together, you have not started your business yet.

In case of doubt, you can always write in to IRAS for assistance.

KPMG - Press Release - Sep 2008 - Summary

Mr Owi Kek Hean, Head of Tax Services at KPMG in Singapore highlighted the following key trends.

Firstly, indirect tax rates on the whole have not changed, while corporate tax rates have been
pushed steadily down.

Secondly, more and more governments are introducing indirect tax systems. There are currently
135 countries with these systems in place and more in the pipeline.

Thirdly, there is a steady expansion of the transactions that these taxes are applied to, and a new focus from tax authorities on efficient collection of indirect taxes through corporate tax
departments.

Fourthly - Enforcement is on the rise.
If your business is making GST supplies of S$1 billion or more, you are entitled to access its GST
Compliance Assurance Programme. This programme involves visits by specialist revenue authority officers to large businesses to assist with issues of GST accounting, record keeping and reporting.

Interesting facts on Asia Pacific countries:-
Corporate tax rates - Highest - Japan with 40%, Lowest - Macau 12%
Indirect tax rates - Highest - Pakistan 20%, Lowest - Japan 5% (Sweden - 25%)

Windfall Tax on IPP reversed

wedding in progress

On Friday's BT, I was duly surprised by the news that Malaysia's tax department has decided to scrap the windfall tax on its Indepedent Power Producers that it announced only a few months ago. [Click here for background - http://taxwithedgar.blogspot.com/2008/07/tax-on-your-windfall.html]

Don't pop the champagne yet. The windfall tax will however be replaced by a one-off payment.

Either way, the Government will still get the IPP's monies. Renaming it to "one-off" would satisfy the rating agencies.

Another "one-off payment" next year? We will wait and see.

UOLD case and S33A of Stamp Duties Act

Ion in the making

Who are the parties involved?
UOL Development (Novena) Pte Ltd vs Commissioner of Stamp Duties

What are the facts of the case?
In 2005, 53 owners at Minbu Road sold their respective properties on an enbloc basis to UOL Development after a tender. UOL Development's lawyers subsequently sent separate letters of acceptance to each owner. UOL Development was effectively trying to treat this as 53 separate purchases instead of as an en bloc purchase.

The intended outcome was to reduce the stamp duties payable by UOL Development as the rate of stamp duties is progressively structured.

To illustrate
I assume each property is $1 million and the en bloc price is $53 millions.
The stamp duties payable for $53 mio en bloc price would be $1,584,600.
The stamp duties payable for $1 mio x 53 transactions would be $1,303,800.
A saving of about $280,000!!!

Decision of the Court
The Court ruled against UOL Development for reason that the original intention and contract was for a Sale & Purchase on an en bloc basis.

The Court also said that there was NO "sound commercial basis" for 53 separate contracts and the arrangement was "so contrived that it was clearly intended to reduce or avoid tax liabilities".

Reference - Lim Gek Khim, "Tax Planning - When does it become tax avoidance?", Singapore Accountant, Sep/Oct 2008.

Tax Planning or Tax Avoidance?

F1 in Singapore soon but Look at the mess!

As we consult with our clients on structuring a business and its activities, we often have to check ourselves as to whether we are helping the client to manage its tax exposure efficiently as compared to facilitating the client in avoiding tax.

What is it that so difficult, you may ask. Just go and find out the definition of tax planning and tax avoidance and; just follow the letters of the law.

Dr Richard Hu, the then Minister of Finance back in 1999, attempted to give some meat to the meaning of tax avoidance in the second reading of the bill to adopt Section 33A of the Stamp Duties Act. He said,

• tax avoidance schemes are purely tax driven, with little or no commercial value or rationale.
• tax planning are activities/ schemes structured to be tax efficient in accordance with the relevant tax laws.

But am I any wiser after the reading that? I don't think so.

As we push the boundary of tax planning, are we edging closer to tax avoidance?

In my next posting, I will cite a real case for discussion.

Source - Lim Gek Khim, "Tax Planning - When does it become tax avoidance", Singapore Accountant, Sep/Oct 2008.

What is your personal effective tax rate?

For those who have submitted your income tax return in April, have you received your notice of assessment yet? Can share with us your tax payable :)

In Feb 2008, Mr Sum Yee Loong of Deloitte & Touche presented the following statistics.

If you are an employee married with two children and earns a gross annual remuneration of $100,000, your effective tax is only 3.98%. The other countries cited:-
- Hong Kong 5.15%
-USA 5.35%
- Malaysia 19.26%
- China 20.84%
- India 31.88%

However, if you are an employee married with two children and earns a gross annual remuneration of $200,000, your effective tax would more than doubled to 9.13%. The other countries cited:-
- Hong Kong 11.08%
-USA 14.46%
- Malaysia 23.54%
- China 26.91%
- India 32.94%

Conclusion
While the change in effective tax rate is very high for Singapore for the two income brackets studied, Singapore still offer the lowest effective tax rates for your personal income.

What is your effective tax rate?

R&D Tax Allowance (RDTA)

New allowance is deductible from Chargeable Income effective YA2009 - YA2013.

It is capped at 50% of the first $300,000 of Chargeable Income.

RDTA Computation

Chageable income
Less - RDTA set off
----------------------------
X
Less - Partial Exemption
----------------------------
Net Chargeable Income (A)
====================

RDTA = 50% of A
Max - $150,000

Basic guidelines of how RDTA works
1. Compute RDTA for Year 1
2. Year 1 RDTA is available for setoff against net Chargeable Income for Year 2, 3 and 4
3. Any unutilised RDTA would be "lost" after 3 years
4. The setoff amount is the lower of RDTA OR incremental R&D expenditure by company for the year.

What is "incremental" R&D expenditure?

Example
R&D expenditure for YA2009
Less - R&D expenditure for YA2008
--------------------------------------
Incremental R&D expenditure
==========================

S14D R&D

R&D expenditure now qualify for 150% deduction with effect from YA2009 - YA2013.

The R&D may not be related to the existing business / trade.

Mr Sum Yee Loong (assuming I heard him correctly) thus advised that if you want to start a new business with some R&D activities, you should it as a division in the existing business first.

You may push the division out as a separate business later.

Cross border billings

stealing in progress?

Have you been doing cross border billings? Of course, you have not. I hope...

For those who are not familiar with it, here is the explanation. Imagine you have a company in China and also a company in Hong Kong. For businesses secured and completed in China, the billing ie. the invoice is issued from the Hong Kong company.

Why?

Apparently many SMEs, with the above set up, are taking advantage of the 9% discrepancy between the corporate tax rates of two countries (Hong Kong 16.5% and China 25%).

They have been booking their mainland's revenue in the lower tax region in Hong Kong.

So can we do the same between Singapore and regional countries? You better not as apparently Chinese and Hong Kong authorities are said to be working together to clamp down on such arrangement.

Tax on your Windfall...

Last month, the Malaysian government decided to implement the provision under the Windfall Profit Levy Act 1998 ie. impose a 30 per cent levy on returns on assets above the 9 per cent threshold of the Independent Power Producers' (IPPs) audited accounts.

Apparently, the law would effectively mean a higher corporate tax rate on profits made by companies.

While at this moment, the impact is limited to IPPs. But should the government's fiscal conditions worsen, will this "martial law" be suddenly applied on other sectors that too are doing well.

Such laws confuse investors. They blur visibility in investing in a country. While the law has been around since 1998 (apparently), it was not implemented.

Sec 10(2)(c) Place of Residence provided by the Employer

This is an undoubtedly a taxable benefit. The only doubt here is how to compute the quantum of taxable benefit.

Benefit is applicable to employees. Not applicable to directors who are employees too.

What is the Rule?
The taxable value of the accommodation is the lower of:-

• 10% of the gains or profits from employment LESS any rent paid by the employee; OR;
• the annual value of the premises.

Illustration

Annual value - $38,000

Rent paid by employee - $700 x 12 months = $8,400

Remuneration from employment - $150,000

Which of the following presentation is correct?

Option A

Lower of:-

• (10% x $150,000) = $15,000 or
• $38,000

The lower amount being $15,000 ==> taxable benefit would be $15,000 less $8,400 = $6,600.

Option B

Lower of:-

• (10% x $150,000) less $8,400 = $6,600 OR;
• $38,000

Thus the taxable benefit would be $6,600.

Which do you think is the correct presentation though both give you the same answer?

GST on Donation

In BT dated June 4, 2008, Wong Sze Teen and Yeo Kai Eng also discusses the implication of GST on donations.

What is the Rule?
Generally, no GST on CASH donations if the amount involved is small and no tangible benefits granted to Donor.

But when Donors are entitled to some form of benefits ie. chance of a lucky draw to win a trip to Timbuktu, technically speaking such donations attract GST.

IRAS Concessionary Exemption is granted to certain benefits if:-
- the benefit is given as part of acknowledging the donation made and;
- the benefit has no resale value.

Thus certain acts by the Recipients, which are technically speaking, benefits to the Donors, are exempted. Eg. Donors could be invited to and honoured at a Gala Dinner held in conjuction to the Charity.

What if your GST-registered business gave a donation in kind?
Donor has to account for output GST on deemed supply except if:-
- less than $200 and;
- is not part of a series of gifts.

The GST trap of Sponsorship, Grant and Donation

such beautiful mature bamboo

In BT today, Wong Sze Teen and Yeo Kai Eng, GST experts from Ernst & Young, wrote an article on the implication of GST on sponsorship, government grants and donation.

I will cover issues on sponsorship and grants first.

Situation
Company X gives $1,000,000 to Company Y as sponsorship for a certain event that Company B is organising. Assuming both are GST-registered.

What is the Rule?
IRAS said sponsorship will not attract GST if company X:-
- did it voluntarily without any obligation and;
- did not receive any tangible benefits in return.

Failing which, company Y would have to issue a GST-tax invoice to company X.

For what amount should the invoice be issued on?
Answer - It depends on the market value of the benefits company Y would have to give to company X.

If market value of benefits < $1,000,000 eg. $800,000, company Y would have to issue an invoice for $800,000 inclusive of GST. Thus company Y would have to account for output GST of $52,236.45 to IRAS. Company X could then account for input GST of the same amount.

Any difficulty?
Firstly, when is a benefit given is considered a benefit given?
Secondly, company Y would have to determine the market value the benefits granted.

Government Grants
Generally and simply said - Attracts no GST to both the Giver and Recipient.

GST-inclusive price

I have been paying attention to the numerous huge advertisements by the many industry players in the red hot lasik market in Singapore. Prices of lasik is definitely on a downtrend and possibility of hitting sub-$1,000 per eye for standard lasik is very real. (someone told me the limit has been breached already)

In today's national paper, I notice a lasik provider has now included the GST-inclusive price of $2,341.16 into the advert albeit in a smaller font size.

In the heat of competition, perhaps many have forgotten the small detail of the need to place GST-inclusive prices.

What is the Law?

According to reg 77(1) of GST regulations, "where a taxable person publicly displays or advertises the price of any supply of goods and services he makes, or intends to make, it has to be the "GST-inclusive" price.

Any exception to this law must be approved by IRAS.

Edgar says...

While such taxable persons may not be sufficiently in tune with all details, I wonder whether the advertising agents or media owners should play a role in removing such "printing errors or omissions".

Cake or biscuit = GBP3.5m error

Situation

Under UK tax rules, most traditional bakery products such as bread, cakes, flapjacks and Jaffa Cakes are free of Value Added Tax (VAT).

But the tax is payable on some other items eg. cereal bars, shortbread and partly-coated or wholly-coated biscuits.

The confusion arose when the Authority is not sure when a CAKE is not a bread or when a BREAD is actually a cake etc etc etc....

Customers of Marks & Spencer in UK, who had been paying VAT for the last 20 years for a product called "teacakes" realised recently that VAT should not have been applied on the product. How come? The authorities have accepted the product was actually a cake, which does not command VAT!!! A mistake realised after 20 years.

Conclusion

This incident serves to explain why the Government has chosen not to heed calls from some quarters to apply a lower GST rate on necessities.

Ms Ong Bee Lian, the Bookkeeper

Ms Ong Bee Lian, the precedent partner of Ongserve Management, a firm providing bookkeeping and secretarial service, had wilfully with intent to evade tax, consistently understated the profits of the Firm for the Years of Assessment 1998 to 2000 and 2002. The total amount understated was $156,000.

Her Modus Operandi, not much but here it is.
Evidence dug up by IRAS shows that Ms Ong has wilfully and intentionally falsified and claimed fictitious management fee expenses in the accounts of the Firm for the Years of Assessment 1998 to 2000 and 2002. Aiya...

So what has happened to her?
She will be accorded government's food and lodging for 2 weeks ie. imprisonment plus order to pay a penalty of 3 times the amount of tax undercharged.

How to finance Development Expenditure?

What is Development Expenditure (DE)?

According to Ministry of Finance, DE refers to expenses that represents a longer term investment and result in the formation of a capitalisable asset of the Government.

How is DE financed currently?

Based on FY2007 Budget, $7.1 billion of total DE of $13.1 billion (ie. 54%) is financed out of current revenues, mainly taxes.

How should DE be financed according to Mr Basant Kapur?

Mr Kapur said most DE should be financed by borrowing. Exception - DE on military hardware which should be financed out of taxes.

What are the basis of Mr Basant Kapur's position?

DE, as in any investments, would generate a return over time. The return should be measured by the incremental GDP contributed by the DEs. The interest servicing and loan capital repayment should be paid out of taxes on the incremental GDP.

Using current tax revenues to pay for future returns may have negative repercussions. Mr Kapur argued that the 2% GST increase may thus not be necessary if the DE were to be financed through borrowing, from internal sources or otherwise. The GST increase has resulted in higher than expected tax revenue which may curb consumption and fuel inflation.

In summary, we should not impose cost to the present when we are investing today for future benefits based on economists' "efficiency argument".

Who is Mr Basant Kapur?

He is a Professor of Economics and Director, Singapore Centre for Applied and Policy Economics, NUS.

Reference - Basant Kapur, "Better to borrow than raise GST", Straits Times, 29 Feb 2008.

Destroying records and selling computer...

Png Yeow Leng, 35, pleaded guilty to 6 charges under GST Act when he faked transactions to claim $42,000 in tax rebates over 9 months to March 2005.

Nothing amazing about this so far.

The interesting thing is that he has the honour of being the first person in 14 years to be convicted of not keeping proper business records.

When the IRAS officers first attempted to commence investigation into his business dealings, he closed his shop, burnt its records and sold his computer to a karung guni man.

Under section 46(1) and (2) of the GST Act, a GST trader is required to keep business and accounting records, copies of all tax invoices and receipts issued by him and tax invoices received by him and to preserve such records for a period of not less than 7 years.

From 1 Jan 2007, you have to keep your records for 5 years.

Failure to do so is an offence. Under section 46(6), the offence is punishable with a fine not exceeding $5,000 or to imprisonment for a term not exceeding 6 months or to both and, in the case of a second or subsequent conviction, to a fine not exceeding $10,000 or to imprisonment for a term not exceeding 3 years or to both.

SRS enhancements

things people watch together

Old rule - Workers only can top up their own accounts.
New rule - From Oct 1, 2008, employers can top up the SRS accounts for their employees and enjoy tax exemptions.



So if you know that an employee of yours is going to contribute to SRS, why don't the company do it on behalf of the employee?



Old rule - Currently, members are given 10 years to withdraw their SRS savings from the retirement age of 62.
New rule - It will start only when a SRS member makes his or her first withdrawal.



Other features:-

• 50% of the amount taken out of SRS account during that 10-year period is taxable.


• Top-ups will still be capped at $11,475 for Singaporeans and PRs and; $26,775 for foreigners.

Section 94A of the Income Tax (Amendment) Act

two lonely petals

A piece of legislation, passed in Feb last year, has sharply upped the ante for filing late returns. The harsh new penalty kicks in for those who fail to file tax returns for two years or longer. There could also be a fine of up to $1,000.

The new Act has been giving sleepless nights to many, especially this fellow called Joe Ang. He felt so bad that he wrote a letter to IRAS.

"Dear Honourable Tax Officer of IRAS,

I have had many sleepless nights over the last two years for the tax owing. Please see the attached cheque of $100.

Good night.

Your humble taxpayer, Joe Ang.

P/S - If I still can't sleep, I will send the rest of the monies."

I will attribute the above adapted joke to Mr Sum Yee Loong who has kindly shared it with us during his budget review presentation on 27 Feb 2008. Cheers.

Mr Tharman explains...

Singapore achieved S$6.4 billion Budget surplus in fiscal year 2007 (equivalent to 2.7% of GDP) against S$0.7 billion deficit forecasted. The variance is a humongous SGD $7.1 billion between actual and budgeted.

The Finance Ministry has been urged to improve its fiscal marksmanship. Mr Tharman attempted to explain the variance in Parliament on Feb 27, 2008.

At the time of the Budget last year, the finance ministry estimated 2006 stamp duties to be $1.5 billion and hence projected the same level for 2007 on the basis that 2006 was itself already an exceptional year for property.

After the budget was released, the data showed a significant increase in stamp duty collection for Jan-Mar FY2006 to $2 billion, not $1.5 billion figure used at the time of preparing the Budget. Eventually, the property market accounted for more than $3.5 billion in extra revenues, lifting the budget surplus for FY2007 to $6.4 billion.

Well Mr Tharman has explained SGD$2 billion of the SGD$7.1 billion variance, how about the rest of the variance?

There was also uncertainty on whether the buoyancy in luxury projects would filter through to the rest of the property market. They did not expect the surge in the volume of transactions.

Singapore is a very open economy and thus very expose to external factors, positively and negatively.

I wonder we can quote Mr Tharman when we miss our business targets and hope our bosses will still see us positively by saying, "We cannot expect too much prescience in the budget planning process."

Our bosses may respond, "Mr Tharman is running the country's finances while you are just running a department's/section's finances."

For the record, there had been six instances of over-projection in the Budget positions in the last 10 years.

Reference - Chen Hui Fen, Govt uses 'realistic' assumptions instead of 'optimistic' ones, Business Times, 27 Feb 2008.

Hong Kong pushes the ante in its budget

HK slashes taxes and doles out the goodies, with greater generosity than Singapore's, funded by its record budget surplus achieved in 2007.

Singapore achieved S$6.4 billion Budget surplus (equivalent to 2.7 per cent of GDP) while Hong Kong's record FY2007 HK$115.6 billion (S$20.7 billion) surplus - 7.2 per cent of GDP.

1. Both governments to give out tax rebates. 20% tax rebate, up to $2,000 for Singapore. For HK, 75% tax rebate on salaries and corporate tax, up to a ceiling of HK$25,000.
2. While Singapore holds its corporate and income tax rates steady, HK has decided to cut its headline corporate rate by 1% to 16.5% (Singapore - 18%). For income tax, HK's top tier rate is 15% compared to 20% in Singapore. That is HK's way of sharpening its competitive edge in the international arena.
3. In promoting entrepreneurship in its already highly entrepreneurial society, HK is waiving business registration fees for a year. Singapore has decided to develop its competitiveness for its future by placing its chips on specific targeted areas:-

• seeding Research and Development culture in all business entities in Singapore if possible, with tax grants and relaxation of restriction to perform R&D related to your existing business and;
• targeted incentives for specific financial and maritime industries, and tech start-ups.

4. While HK has decided to scrap its 40% tax on its wine and beer duty all together, Singapore has instead decided to moderate its liquor duties by charging duties based on its alcohol content.

5. On Green front, HK is ahead of Singapore with tax concessions for environmentally-friendly vehicles and even machinery. We were just lamenting the lack of concrete intention ie. $, by Singapore on this front.

6. For the lower income group in both economies,

HK will do the following:-

• mandatory pension payments - to inject cash of up to HK$6,000.
• extra month's payment under Comprehensive Social Security Assistance (CSSA).
• The elderly were also given additional funding of HK$60 million a year for day care, residential and infirmary places.
• Old Age Allowance recipients will also receive a one-off grant of HK$3,000, costing the government HK$1.5 billion.
• set aside HK$50 billion for health care financing in the ageing society.
• subsidy of HK$1,800 for electricity charges per household, costing the government HK$4.3 billion.

Singapore will do the following:-

• Singapore is disbursing some S$1.8 billion of 'growth dividends' to all Singaporeans still holding on to their shares.
• Another S$1 billion in benefits under a GST offset package unveiled earlier when the consumption tax rate was raised by two percentage points.

Reference
Anna Teo, A tale of the Budgets of two cities, Business Times, 29 Feb 2008.
Jane Moir, HK slashes taxes, doles out the goodies, Business Times, 28 Feb 2008.

GST for Gold trading could be different

Under normal circumstances, GST is to be accounted for at the earliest of the following events:-

• date when goods are delivered or made available to your customer;
• date when payment is received; or
• date of issuance of invoice.

But when it comes to trading of gold where the prices are dependent on fluctuations in the market for a period of 90 days.

The law allows that the invoice to be issued on the 90th day with the price determined by (assuming the seller has not received any payment),

• buyer/seller; or
• otherwise based on the open market value prevailing on that day.

This method of accounting is only peculier to sales of gold jewellery.

GST - Residential Building Project

There is no doubt that you have to charge GST for construction services done for both residential and commercial properties.

Zero-rated if it is done on properties outside Singapore.

Situation

You are the GST-registered sub-contractor appointed to do the tiling and flooring works for a project eg. total value is $20,000 (excluding GST).

Your GST-registered main contractor will supply you the tiles eg. valued at $8,000 (excluding GST).

How could you do the billing?

Solutions

Option 1 - Invoice the main contractor on the net value ie. ($20,000 less $12,000) $8,000 + $560 GST.

Option 2 - Invoice main contractor for the total value of contract ie $20,000 + $1,400 GST. Main contractor would then invoice you for the tiles supplied ie. $12,000 + $840 GST.

P/S - Adapted from article in ST Feb 6, 2008.