For global entrepreneurs looking to register a company, Singapore is a breath of fresh air. Most countries take a very bureaucratic approach towards business – they burden entrepreneurs with a maze of red tape, onerous regulations, sloppy infrastructure, high taxes and corrupt public servants who demand favors in exchange for not exerting their “nuisance value”. Singapore stands in a stark contrast – it has enjoyed long-term political stability, has world-class infrastructure and offers very business-friendly policies to entrepreneurs. These include open access to its markets, low taxation, long-term policy making and efficient, and corruption-free governance. Singapore’s economy is rated as the world’s best economy by several sources, including London-based think tank, the Legatum Institute.
The article provides an overview of Singapore’s tax system and a quick summary of the corporate and personal tax rates currently applicable for different types of income in Singapore.
An integral part of Singapore’s attractionfor entrepreneurs and investors isits shrewd taxation policies that have successfully aligned theinterests of market-basedenterprises withthe country’s political economy. This article describes Singapore’s approach to taxation of companies based in the country.
This articleprovides an overview of the Singapore taxes that a company may be subjected to and the rules for their applicability.
TAX ON BUSINESS INCOME
For Singaporetax purposes, a company is defined as a business entity incorporated or registered under the Singapore Company Act, a foreign company registered in Singapore as branch of a foreign company,or a foreign company incorporated or registered outside Singapore.
A company is taxed at a flat rate of 17% on its chargeable income regardless of whether it is a local or foreign company.
Singapore followsa territorial tax system and according to Singapore tax law,a company is liable to pay tax only on (A) income accrued in or derived from Singapore or (B) income received in Singapore from outside Singapore that results from:
Gains or profits from any trade or business;
Investments by the company (such as income received asdividends, interest and rents);
Royalties, premiums and any other profits of similar nature; and
Other gains of an income nature.
However,the above income is subject to several exemptionsand tax reliefsthat reduce a Singapore company’s taxable income:
A range ofgeneral tax incentivesand sector-specific tax incentives areavailable to qualifiedcompanies that can reduce or eliminate its corporate tax.
Qualified foreign-sourced income is exempt from taxation in Singapore.
An extensive network of Singapore’s double-tax avoidance treatieswith other countries ensures that if you have already paid tax in a treaty foreign country on income that is remitted to Singapore, then such income is not taxed a second time in Singapore.
Singapore government makesavailable severalother grants and incentivesto further reduce the corporate tax burden.
Therefore,while the headline tax rate on taxable income is a flat 17%, due to various tax exemptions and incentives describedabove, the effective rate for most companies is significantlylower than 17%.
Notethat in case of a foreign company operating in Singapore, some of the above tax reliefs may not be available if the Singapore entity is established as a branch office(since a branch office is considered to benot locally incorporated)instead of asubsidiary company (a locally incorporated company). This is one of the reasons why most foreign companies set upa subsidiary company in Singaporeand not a branch office.
TAX ON CAPITAL GAINS
Capital gains are profits from the sale of a capital asset owned by the company, such as a real estate property, shares of a company’s stock, an IP asset, a piece of art, etc. A capital gain occurs when a capital asset is sold or exchanged at a price higher than its basis (it’s purchase price plus commissions and the cost of improvements net of depreciation).
In Singapore, capital gains are tax free i.e. there is no tax on capital gains.Therefore, if an entrepreneur starts a company in Singapore which is subsequently acquired by another company or has an IPO, the entrepreneur will pay no tax on the gainsthat she receives from the sale of her equity.
Since business income is taxable in Singapore while capital gains are not, whether a transaction is treated as business income or capital gains is important. If atransaction is similar to the normal course of business, it may be considered business income and not capital gains. When in doubt, consult a qualified tax professional.
Singapore’s zero tax on capital gains policy is a very important incentive for investors, entrepreneurs and talented professionals. It can dramatically increase an individual’s“take home” amount from investments or from building a new business.This policy has helped Singaporecreate an environment of innovation and helped attract talented individuals tothe country.
TAX ON DIVIDEND DISTRIBUTIONS TO SHAREHOLDERS
A dividend is a payment made by a company to its shareholders, usually as a distribution of post-tax profits. When a company makes a profit, it can either reinvest it in the business or distribute it to shareholders or decide on somecombination of these two options.
The tax codes of most countries (including the US) impose a tax on any dividends that are paid out to the shareholders. These countries consider such dividend payments as transfer of income from the companyto the shareholders; therefore, they impose a tax on the dividends that the shareholders have to pay. In this manner,a company’s earnings get taxed twice – first as corporate income tax which is paid by the company and a second timeasdividend tax which is paid by the shareholder. The net result is that the “take home” income of the shareholder is dramatically reduced. Most entrepreneurs find this double-taxation of profits unfair and unjustified.
In Singapore, dividend distributions by a Singapore company are tax free. This means that neither the company nor the shareholders will have to pay any tax on the dividend payments made to shareholders. This is another criticaladvantage of Singapore’s corporate tax policy and it can greatlyincrease the “take home” payment that an investor or entrepreneur receives from her Singapore company.
Singapore’s tax treaties that reduce or eliminate taxes on foreign income
To ensure that Singapore companies are not taxed twice (once inthe homecountry and second time in thecountry of their overseas operations) Singapore has signed Avoidance of Double Taxation agreement with over 80 nations; this list includes most of the majoreconomies in America, Europe and Asia. The purpose of aDTA is to boost internationaltrade by making it less burdensomefor a businessto expand operations in several countries since it does not haveto worry about paying income tax repeatedly in itsdomicile country and in the countries of itsoverseas operations.
Thus,if a company domiciled in Singapore has already paid tax for its overseas operations in aparticular country, then Singapore tax authoritieswill acknowledge that tax payment and the amount will be credited against any tax that is to be paid to Singapore forthe foreignincome remitted to Singapore.
Singapore is also a signatory to Convention on Mutual Administrative Assistance in Tax Matters, developed jointly by OECD and Council of Europe. It has also signed Foreign Account Tax Compliance Act (FATCA) enacted by the US to target non-compliance with US tax laws by US citizens using foreign accounts. Further, Singapore is bound by international trade obligations due to membership of international conventions such asWTO, Commonwealth, ASEAN and APEC. Singapore will also be a founding member of the TPP if and when it is enacted.
TAX FILING FORMS
The process for filing corporate (or personal) tax returns is quite straightforward. Singapore companies need to file their corporate tax return on an annual basis with IRAS.Companies need to file two corporate income tax forms: estimated chargeable income (ECI Form) and Corporate Income Tax Return known asForm C. A simplified version of Form C called Form C-S is available to smaller companies that meet certain conditions.
ECI form mustbe filled within three months from when the company’s financial year ends unless the company fulfills certainconditions and is therefore exempt from filing ECI.
Form C mustbe filled by November 30 of the year following the year of tax period.If a company has no revenue or income during a given financial period (a dormant company) and does not expect to receive income or commence business within the next two years, it can apply to IRAS to be released from its obligation to file its income tax return (Form C-S/ C).
TAX CALCULATION ADJUSTMENTS
The taxable income of your Singapore company will be different from its net income. This is because your company may be allowed deductions that can reduce the taxable income below its net income. Conversely, you may have to add back certain types of expenses which may not be allowed by Singapore tax rules.
Common Deductions
Non-Taxable Income: Singapore Income Tax Act provides full tax exemption for several types of income. These income types can be deducted fully from the net income of a company. Some of the income types that fall in this category are:
Capital Gains: Capital gains are not taxed in Singapore and can be fully deducted from net income.
Foreign exchange gains on capital transactions.
Foreign-sourced income (dividends, branch profits or service income) that meets the tax exemption qualifications.
Income from specific industries that the government wants to promote in Singapore (such as shipping, aviation, banking, fund management, etc.) is exempt from taxes or taxed at reduced rates if the qualifying criterion are met.
Other types of non-taxable income.
Investment Income: Investment income that results from non-trade activities of a company is not included in its taxable income. This type of income is taxed separately. Some examples of investment income are listed below. Please note that surplus expenses from one type cannot be used to offset gains of another type, therefore each type of investment income has to be netted individually.
Interest income,
Dividend income,
Rental income.
Business Expenses: Expenses incurred in the generation of revenue for the business are fully deductible. These include:
Wages
Rent
R&D expenses
Capital Allowance: In Singapore, Capital allowances are given in place of depreciation and other capital expenditures. Capital allowances are provided for the wear and tear of fixed assets used in the business. Singapore allows a write-off period of one-year, three-years or working life of the asset. In case of a one-year write off, capital allowance equal to 100% of the cost of the fixed assets can be deducted in the very first year.
Un-utilized Prior Losses: A company can deduct un-utilized losses from prior years to offset taxable income in a year. Un-utilized losses can be carried forward indefinitely, subject to certain conditions e.g. that there should be no significant change in shareholding or the principal activity of the business.
Donations: Donations to qualified organizations are tax deductible. In fact, donations to certain types of organizations qualify for double tax deduction i.e. an amount equal to twice the amount of donation can be deducted to arrive at the taxable income.
Tax Reliefs and Rebates: In addition to the above, specific tax reliefs and rebates may be applicable to your company’s unique situation. For example, a new company can avail reduced tax rates during the first three years of its existence. Similarly, the government may provide a specific tax rebates (e.g. a 50% tax rebate is in place for YA 2016 and 2017 subject to a cap of S$20,000 per YA).Productivity and Innovation Credit scheme is another example of such relief.
Please visit the IRAS website for more information about other types of deductions that may provide tax relief.
Common Add-Backs
The following types of expenditures are not tax deductible in Singapore. Therefore, you may have to make add-backs or make other adjustments to include them in your taxable income.
Non-Deductible business expenses: Certain types of business expenses are not deductible or are subject to specific limits. Some example include:
Bad debts
Contributions to the CPF above the statutory rate
Depreciation (instead of depreciation, capital allowances are provided)
Fines
Expenses incurred prior to commencement of business
Medical expenses exceeding 1% of total remuneration
Prepaid expenses
Income tax payments
Capital Expenditures: Singapore uses the concept of Capital Allowance, which is similar to the concept of depreciation used in other countries. But capital expenditures are not tax deductible in themselves. Please note that if a write-off period of one year is available for capital allowance that is essentially equivalent to full deductibility of the capital expenditure in the very year the expenditure is made.
Accounting standards and record keeping requirements
ACCOUNTING STANDARDS
All companies in Singapore have to prepare their year-end financial statements in accordance withSingapore Financial Reporting Standards (SFRS). SFRS norms are in alignmentwith International Financial Reporting Standards.
As per the SFRS standards, companies prepare their financial statements based on accrual-based accounting wherein they take into accountnot only the past transactions involving the payment and receipt of cash but also obligations (or rights) that require payment (or receipt) of cash in the future.
From year 2011, smaller companies have the option to switch to Singapore Financial Reporting Standards for Smaller Entities(SFRS for Small Entities) that isa simplified version of the fullSFRS. A companyqualifies as a Small Entity for tax purposes if it meets at least two of the three following criteria:
Total annual revenue of not more than S$10 million
Total gross assets of not more than S$10 million
Total number ofemployees of not more than 50
RECORD KEEPING REQUIREMENTS
Singapore companies are required to keeping the following records for a period of at least 5 years for each financial year:
Source documents that substantiate all transactionsof your business such as invoices, receipts, vouchers, credit and debit notes, import/export documents, etc.
Accounting records such as various ledgers, cash registers, financial statements, etc.
Bank statements.
Any other records related to transactions connected with the business.
There is no need to submit these recordsunless requested by IRAS. Note that in the absence of proper records, relevant expenses may be disallowed, revenue numbers may be understated, and worst, there may besevere penalties for filing incorrect tax return and/or lack of supporting documentation. Therefore, it is a good practice to implement an accounting system for your company or outsource the accounting function from the very first day of operation of your business.
Singapore’s tax policies creates a favorable environment for businesses to take root and flourish. It charges very attractive tax rates for businesses and has streamlined policies that maximize the take home amounts for entrepreneurial activities. However, Singapore is not a tax haven and the country is bound by international treaties to flag any suspicious activity.
The corporate tax return for a Singapore company must be filed each year. The process for doing so is straightforward. Financial statements must be prepared in accordance with Singapore’s accounting standards and it’s important to keep accurate and complete supporting records.
