Cloud computing costs are now PIC-able

On Deepavali Day, I received a very pleasant surprise.

I just read that Cloud Computing Costs are not only tax-deductible (which we know) as business expenses, they now qualify for additional deduction under Productivity & Innovation Credit.

An example cited in ST's news article - "word processing that exist online rather than on individual computers". A $100 expense would qualify for up to $400 deduction against your income (subject to meeting other terms and conditions.)

Christmas present?

Important terms and conditions to note before we jump for joy are:-
1. spent on qualifying expenditure and are entitled to PIC during the time period concerned
2. active business operations in Singapore
3. at least 3 local employees at the VERY last month of the qualifying time period

(Who are the 3 employees? INCLUDING Singaporeans & PRs but EXCLUDING sole proprietors, partners under contract for service and shareholders who are directors of company)

When do your business need to register for GST under new rules?

Under the new GST - Time of Supply Rules effective Jan 1, 2011, there is no more prospective and retrospective test that we used to do.

Under the new law, the time of supply for most transactions will be triggered by the earlier of the following two events:-
a) when payment in respect of the supply is received; and
b) when invoice in respect of the supply is issued.

Consequently the rules to determine when a business need to register for GST would have to change too.

Suppose Company performed and completed only 2 transactions in the year 2011. Each transaction is $600,000.

One transaction has been invoiced and paid. The other transaction, while completed, has NOT been invoiced nor paid as at Dec 31, 2011.

The value of supply made in 2011 under the new rules is only $600,000/-. Therefore company's liability to register has not yet arisen on Jan 1, 2012.

Taxman overruled again!!

The Court of Appeal overrules IRAS again, twice over the last two months.

What is the issue?
Are portable dormitories considered "plants" as per plaintiff being in the business of providing dormitory services or "buildings" as per IRAS?

At a total cost of $2.6 million, the plaintiff had built and operated 6 blocks of three-storey container-like as temporary workers' accommodation and administrative use within an industrial estate. Each block was made of "steel beams held by nuts and bolts while panels were inserted within this steel framework to form walls. "The floor was made of timber and each dormitory was topped with a metal roof".

Decision and Basis
IRAS has been told by the Court of Appeal to treat such portable dormitories as "plants".

The three-judge court led by CJ Chan Sek Keong overruled the earlier decisions of Income Tax Review Board and the High Court and defined such assets as "plant" on the following criteria:-

• built on prefabricated materials
• could be dismantled and moved elsewhere within 90 days' notice

The Court of Appeal concluded that the definition of plant would depend on "its exact operational role in the taxpayer's business, its characteristics and the precise factual matrix and context concerned".

Leung Yew Kwong and Tan Shao Tong from WongPartnership, lawyers for the Plaintiff, had argued that their client's business of providing dormitory service involved moving and reusing such assets in other sites in the future. [The same team from the same law firm won in the Nov 2010's case.]

IRAS' lawyers, Irving Aw and Quek Hui Ling, had relied on past rulings of similar situations. They cited a specific example where circus tents functioned as premises and would not qualify as plants.

To the plaintiff, the decision could now claim for tax relief and secure "a tax savings of at least $500,000 based on 2004 tax rates".

In my humble opinion, it is a difficult issue for IRAS as acknowledged by Judge of Appeal Andrew Phang. The law does not provide the definition of "plant" (as such words from my tax lecturer still echo in my head after years) and the three-judge court had to dwell on its precise definition in arriving at the decision.

Source - K.C. Vijayan, "Court of Appeal overrules taxman", The Straits Times, Dec 18, 2010.

Court overrules tax authority

can you pick up customers in yellow box?

What is the issue in dispute?
The company is in the business of leasing aircrafts. The company has subsidiary firms in Cayman Island. The subsidiary firms bought aircrafts with loans pegged to floating interest rates. The aircrafts are rented out to airlines on fixed rental rates.

The subsidiary firms are supposed to use the rental proceeds to service the interest obligations. Often, the firms face revenue shortfall to meet those obligations.

The Singapore parent then entered into interest rate swap arrangements with banks in Singapore to hedge against the risk of floating interest rates on behalf of its subsidiaries. During the 17-month period from October 2006, the Singapore parent company made payments to its subsidiaries overseas as part of interest rate swap arrangements. 

IRAS's position

• IRAS has taken the position that these interest payments overseas are subject to withholding tax under provisions dealing with loans borne by the parent firm.
• The Comptroller argued that such broad interpretation of the relevant section for such payments to be taxable has been accepted by tax advisers, practitioners and businesses in the past.

P/S - The name of legal counsel representing IRAS was not mentioned by K.C. Vijayan, the ST law correspondent.

The Singapore parent's position

• The tax authority has taken a too broad an interpretation of the law.
• Such braod interpretation may actually discourage foreign investors from doing business in Singapore.

P/S - Leung Yew Kwong / Tan Shao Tong from WongPartnership represented the plaintiff.

High Court - Justice Andrew Ang
The Court ruled in favour of the Singapore parent on the following grounds:-

• interest rate swap payments are not subject to withholding tax under s12(6)(a) of Income Tax Act
• the payments were not in relation to any loan borne by the firm here
• IRAS has taken a too broad an interpretation of the law
• past acceptances by tax advisers, practitioners etc should not be cited to justify an interpretation of the law

The ruling would mean that the Comptroller of Income would have to make substantial refund and pay costs to the Singapore company. The costs to IRAS could go higher when business entities which were involved in similar situations and had paid the taxes may now seek a review with IRAS given the ruling.

Reference - K.C Vijayan, "Court overrules taxman, orders refund for firm", Straits Times, Nov 6, 2010.

What can I do with trade loss, unabsorbed capital allowance and donations?

I have summarised the article by Mr Clement Tan Kai Guan entitled "Order of Claiming Qualifying Deductions - Maximising Tax Benefits" published in Singapore Accountant, June 2010.

Question - When a taxpayer incurs a trade loss for the current year and has current year unabsorbed Capital Allowances (CA) and approved donations, what options does he have with regard to the utilisation of these qualifying deductions?

Answer

1. Prior to YA2003, you can ONLY carry forward the current year unabsorbed CA, losses and donations for setoff against his future years' taxable profits.

2. With effect from YA2003, group relief option was introduced.
Loss making Singapore incorporated companies are allowed to transfer their current year qualifying deductions to other profitable member companies of the same group.

3. From YA2006, the carry-back clause was introduced.
Any person carrying on a trade, business, profession or vocation may carry back his current year unabsorbed CA and losses, subject to a maximum of $100,000, for setoff against his Assessable Income (AI) for the immediate preceding year of assessment.
Note - Donations cannot be carried back under the loss carry-back option.
(Edgar - In the case of carry-back, there is the possibility of tax refund by IRAS on tax paid on previous year's profit.)

4. In February 2009, the carry-back option was enhanced.
The amount allowed to be carried back is increased to to $200,000 and extending the period of
carry-back from the current 1-year period to a 3-year period.
The enhanced carry-back relief system is only applicable to unabsorbed CA and unabsorbed losses relating to the YA2009 and YA2010.

Rule - Which to apply first?
Group relief first, then carry-back and carry-forward.
CA first, then trade loss.

- Transferred out CA to group companies
- Then transferred out trade loss to group companies
- Lastly transferred out Approved Donations to group companies" height
- Assume Company A first, the Company B
- Any leftovers from Group Relief, then Carry-back.
- Any leftovers from Carry-back, then Carry forward.

Clement made a simple but interesting observation.
He asked us to ensure that the trade loss be used to offset profit before exemption in excess of $300,000 first, if possible. This is due to the partial exemption.

Example - For YA2009 (ie. 18% tax rate), we have Company A with $200,000 profit and Company B with $380,000 profit. Both companies have $80,000 trade loss carried forward. Compare tax payable before and after applying the trade loss of $80,000 for the two companies.

• Company A to pay $10,350 after deducting trade loss or pays $17,550 without deducting trade loss. The trade loss of $80,000 would save $7,200 for Company A.
• Company B to pay $26,550 after deducting trade loss or pays $40,950 without deducting trade loss. The trade loss of $80,000 would save $14,400 for Company B.
  

Moral of story - use the deductions for entity with profit in excess of $300,000 in the current year of assessment or keep for use in future years instead.

Lessons from Raffles Town Club's appeal

nearing completion?

In yesterday's Today, it was reported that Raffles Town Club (RTC) has lost its arguments in the Court of Appeal on the following:-

• failed to obtain tax deductions for the costs involved in leasing its land and in constructing the clubhouse on the ground that $108 million cost of acquiring the land from the State and the $91.4 million incurred in building the clubhouse were capital in nature and therefore
  not eligible for tax deduction;
  
• secondly, it failed to have its membership fees taxed over 30 years, the life span of the club (this is an interesting attempt in defining the timing of revenue recognition and consequently, timing of taxability);
  
• thirdly, it failed to secure relief for YA2001 from the tax department for the $53.28 million in damages it had to pay members after it lost the 2005 class action suit filed by several thousand members who claimed the club had falsely led them to believe they were part of an exclusive establishment and;
• lastly, it failed to secure tax deductibility for the $2.34 million that RTC paid for geomancy fees.
  

Consequently, RTC is liable to pay tax for the Years of Assessment 1998-2003 on the full amount of $526.14 million it collected from its 19,000-odd members who had paid $28,000 each to join.

I have quoted verbatim the learning points from Justice Phang's concluding remarks:-

• "Where ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax."
  

• "Accounting and tax have different objectives in mind. Financial accounting is intended to provide information regarding firm performance to the market place while taxable income is prescribed by the government to meet budgetary needs ... Regardless of how persuasive accounting evidence is, the prerogative still lies with the court to decide whether a particular item should be regarded as income that has accrued for the purposes of liability to tax."

• He pointed out that while accounting treatment focuses on the balance sheet, "taxation requirements are centred on the profit and loss accounts, so that the distinctions between revenue and capital, which are vital for tax purposes, may be lost in the accounting treatment".
  

• Concluding, he said: "I am also of the view that the present case turns on how well-established tax principles and tax law would apply rather than on the correct treatment of the items brought to tax."
  

Gan Oh Boon and Tax Exemption Scheme

A businessman, Gan Oh Boon, warmly embraced the idea from Chng Chor Tong, his auditor, of spreading the profits from his steel forming and rolling business over 6 new companies set up in 2004.

Law - The law exempts new companies from paying tax on the first $100,000 of chargeable income and partially exempted for the next $200,000.

Modus operandi
Company A signs management agreement with each of the 6 shell companies. The profit from Company A is evenly distributed to 6 companies by fictitious expenses (valued $1,6mio) with no work or services performed by the 6 shell companies for Company A.

The fictitious expenses were "correctly named" and comprised of commission fees, technical consultancy fees, marketing consultancy fees, engineering consultancy fees and management fees.

The said fees were for the work and services purportedly performed by the 6 shell companies. Even though these fees were reported as income by the respective shell company, the overall tax burden has been reduced substantially for the Years of Assessment (YA) 2005 to 2007.

What went wrong for Mr Gan in applying the law?
The tax exemption scheme under section 43(6A) of the Income Tax Act, which took effect from YA 2005, was introduced to support entrepreneurship and encourage growth of local enterprises.

But in my humble interpretation, the 6 shell companies are basically shells with no independent employees and resources carrying out its own economic activities.

You can't just create companies to distribute the profits around!!!

What are the punishments?

• For the company, a fine of $24,000 and a penalty of $988,933.58.
• For Mr Gan Oh Boon personally, 2 weeks of imprisonment and a total fine of $8,000.
• In default of payment of the fine, the default sentence would be 6 weeks of imprisonment.
• He was also ordered to pay a total penalty of $988,933.58. In default of payment of penalty, the total default sentence would be 34 months of imprisonment.

Enhanced Loss Carry Back - Priority issue

Rule - A company that has assessable income for a particular YA may be eligible to offset the income with losses carried forward from a prior YA as well as losses carried back from a subsequent YA.

Consider this scenario. There could be loss carried forward from YA2006 available to offset the
assessable income of $80,000 in YA 2007 in addition to the loss carried back from YA2009.

Question - What should the priority of offset be? Should it be carry forward first, then carry back, or vice versa?

Answer - Based on section 37E(1) and (17) of the Income Tax Act, the losses brought forward would be deducted first.

Transfer pricing in taxation

In management accounting, transfer pricing is a topic which addresses the issues with regard to determining a price for the transfer of goods and services between two divisions in a decentralised set-up.

In taxation, transfer pricing relates to the following areas:-

• When entity A sells goods on credit to entity B and the receivable remains outstanding beyond the normal credit term - Entity A may be deemed to have provided interest-free funding to entity B.

• Entity A and entity B are related. Entity B uses entity A's accounts department as its accounting resource. How much should entity A charge entity B? IRAS is prepared to accept a 5% mark-up on the basis that this has been a practice commonly adopted by related party service providers in Singapore as remuneration for providing routine support services. Other mark ups are acceptable. subject to arm's length principle.

• In the third situation, entity A and entity B are utilising a service provided in a cost pooling arrangement. Issue here is the way the costs are allocated between the entities.

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.

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.

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.

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".

Property tax too will be increased for bigger HDB flats

What happened?
The Inland Revenue Authority of Singapore (IRAS) will be revising the Annual Values (AVs) of most properties, including HDB flats.

The AVs of all properties are subject to annual reviews by IRAS to ensure that they reflect prevailing market rentable values for property tax computation. This year, most AVs will be revised upwards.

What are the property tax rates?
The property tax rate is currently set at 10% of the AV of the property. For owner-occupied residential properties, the owners enjoy a concessionary tax rate of 4%.

What is the impact to you?
From Jan 1, 2008, if you are a property owner in the more centralised and popular areas like Bishan, Bukit Merah and Marine Parade, you would have higher AV increases, compared to other areas.

The average AV increase in percentage terms for the flat types are: 20% for 1-room and 2-room flats, 25% for 3-room flats, 18% for 4-room flats, 20% for 5-room flats and 18% for executive flats.

However, the increase in AVs does not translate to a proportionate increase in property tax actually payable, due to the property tax rebates that have been granted by the Government.

As part of GST Offset Package announced in Budget 2007, an additional property tax rebate of up to $100 per year in 2008 and 2009 to be handed out. Thus 90% of all HDB flat owners will not pay more property tax in 2008 even after the AVs of their flats will be increased in 2008.

In summary,

• All 1-room and 2-room flats will pay zero property tax room flats.


• 3-room flats - 60% (compared to 13% in 2007) will pay zero property tax and 40% will be paying less tax than in 2007.


• For 4-room, 5-room and executive flats, about 15% will pay more property tax but the increase in property tax is less than $40 (or about $3 per month).

Tax evasion under Section 96 and 96A

For most of us, we should not bother to know the crime and punishment one could get for evading tax. We only need to know the law will come down hard on you.

But given the recent hoo and haah of going tax violators in the now glamourous occupation of being a hawker, it would be appropriate for our students and members of accounting profession to remind our clients of the consequences of tax evasion.

What is tax evasion?

Income tax evasion requires both a wilful intent to evade tax as well as one of five forms of physical conduct, namely:-

1. omitting from a tax return, income that should be included
   
2. making a false statement or entry in a tax return
   
3. giving a false answer, whether verbally or in writing, to any question or request for information from the IRAS
   
4. preparing or maintaining false books of account or other records, or authorising the same, or falsifying any books of account or other records
   
5. making use of any art, fraud or contrivance or authorising the use of any art, fraud or contrivance.

Punishment

Since December 2003, apart from the offence of tax evasion in Section 96 of the Income Tax Act, an offence of serious fraudulent tax evasion has been enacted under Section 96A.

The newer offence carries a heavier penalty, a higher fine and an extended jail time, for essentially some of the same acts that used to constitute ordinary tax evasion.

A person convicted of tax evasion under Section 96 faces a penalty of three times the tax evaded, a fine of up to $10,000 and a term of imprisonment of up to three years or both fine and jail.

The last two types of physical conduct listed above have been taken out from Section 96 and reinstated as new offences.

Under Section 96, there is a minimum jail sentence of six months upon a conviction for three or more offences, including assisting another to evade tax.

Under Section 96A, a person found guilty and convicted of two or more offences, also faces at least six months in jail.

Final Remark - I have done a simple format above for you to do email broadcasts to your hawker clients if necessary.