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.

Malaysia's new single-tier corporate tax system...

....is now in sync with Singapore's system.

Under Malaysia's old two-tier imputation system, profits earned by companies were firstly taxed at corporate rate and subsequently tax at individual level when received as dividend distributed.

Singapore's old two-tier imputation system while similar but slightly different from our neighbour's ie. profits earned by companies were firstly taxed at corporate rate. The after-tax dividend received by individuals were then "re-grossed" and subject to the individual's tax rate.

Now both Singapore and Malaysia will pay out exempt dividend ie. after corporate tax rate, to shareholders.

Yeo Hiap Seng multi million dollars tax saga continues

this is not as clear as black and light brown

Back in Apr 2007, I became aware of the ongoing ding-donging between YHS and IRAS on a "simple" definition issue that may result in YHS paying IRAS millions of dollars.

http://taxwithedgar.blogspot.com/2007/04/revaluation-surplus-and-tax-issues-with.html

What is the ding-donging about?
In 2000, IRAS wants to treat $108.2 million of the revaluation surplus of $128.8 million as a taxable gain. The tax payable by YHS would be $23.3 million.

YHS has insisted that the $108.2 million is capital in nature and thus not taxable.

What is today's news about?
Apparently, the statutory time limit for assessing profits on the Sterling project for YA 2001 expires at the end of this month. So IRAS has issued a "protective assessment" on the tax payable to avoid the situation of the "claim" becoming a legal-no-show (ie. YHS can no longer be legally obliged to answer/pay).

YHS's responses
- YHS applied for a "standover without penalty" of the tax raised by the protective assessment. IRAS granted the request.
- YHS will make a tax provision of $23.3 million and consequently issued a profit warning.

For most of the taxpayers, you pay first if you wish to object to the assessment. If you don't, you got fined. For YHS, standover without penalty was granted.

Friends, this series of "tactical" moves of creating the revaluation reserve prior to converting the land from factory use to condominium property developments, subsequently objecting to the tax assessment and dragging it over the last 6 years should be documented and reviewed in MBA/tax classes.

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).

Do you DARE to go to trial on tax evasion?

If you have been charged by IRAS for tax evasion, would you accept the accept the charges and submit yourself to whatever punishments befitting OR would you seek your justice in court? What did Mr Looi, our famour curry puff entrepreneur do under similar circumstances?

For income tax offences

Section 96 and Section 96A provide for statutory presumption which relieves the prosecution from having to prove an intention to evade tax, the very hallmark of tax evasion.

Where a false statement is found to have been made in the taxpayer's return, accounts or records, this is considered proof of an intention to evade tax.

You can try to challenge the presumption by having the burden of to disproving the presumption in trial.

For GST violations,

The advantage is also with IRAS, the plaintiff / prosecution. The defence ie. the alleged violators, would have to prove its case beyond reasonable doubt.

Concluding remark

To date, very few persons charged with tax evasion have been brave enough or not foolish enough to seek justice in court.

As for our Mr Looi, he pleaded guilty with any legal representation.

Mr Sharma, a partner of KhattarWong rallied the authority to level out the playing field ie. BOTH prosecution and defence are required to prove their case in court.