Budget 2010

Commonwealth tax relief is removed wef YA 2010.

A new s.12(7A) in the ITA makes it clear that management and technical services performed outside Singapore are excluded from the scope of withholding tax; conditions apply.

A new s.49(2) in the GST Act requires taxpayers to state the precise grounds of objection when applying for a review or revision of a decision made by the Comptroller of GST.

Wef 1.1.2011 the concessionary 10% tax accorded to qualifying futures members of the SGX and of SICOM will cease. New incentives applicants which engage in qualifying transactions will have to apply for the Financial Sector Incentive (FSI).

Income tax, stamp duty and GST concessions for listed REITs which expired on 17.2.2010 will be renewed from 18.2.2010 to 31.3.2015. The Foreign-Sourced Income Exemption (FSIE) for listed REITs will expire 31.3.2015; qualifying foreign-sourced income should be remitted into Singapore on or before 31.3.2015.

The Approved Start-up Fund Manager Scheme expired 17.2.2010 and will not be renewed.

Wef 1.4.2010 tax concessions (10% tax) for offshore insurance companies will be subject to a sunset clause of 5 years till 31.3.2015; the incentive will be awarded for 10 years; and new headcount requirements will be imposed.

Wef 1.7.2010 GST zero-rating for the marine industry will be expanded to include pleasure, recreational ships and private yachts (not licensed for use in Singapore waters); all goods supplied for use on board qualifying ships; and the transport of goods or passengers by ships. Conditions apply in all cases. IRAS will release details by June 2010.

The GST remission for listed Registered Business Trusts in the sectors of infrastructure, ship leasing and aircraft leasing, which expired 17.2.2010, is renewed from 18.2.2010 to 31.3.2015.

The Investment Allowance scheme for aircraft rotables is renewed from 1.4.2010 to 31.3.2015. The “non-swapping” condition will be removed.

The withholding tax rate on non-resident public entertainers will be reduced from 15% to 1o% from 22.2.2010 to 31.3.2015.

For individuals, changes to personal reliefs - a new Spouse Relief ,to replace wife relief, this can be claimed by either spouse; increasing the qualifying amounts (parent relief, handicapped parent relief); improving the qualifying terms (qualifying child relief, CPF cash top-up relief); and removing the qualifying income threshold (handicapped spouse relief, handicapped child relief). Personal reliefs are available to tax residents only. For more details, email our client services executives.

From January 2011 the 1994 property tax rebates will be replaced by a progressive property schedule for owner-occupied residential properties : 0% for first S$6,000 of Annual Value (AV), 4% for next S$59,000 of AV and 6% for balance of AV in excess of S$65,000. Non owner occupied residential and other properties will continue to be subject to a 10% property tax.

Wef YA 2011 the course fees relief will increase from S$3,500 to S$5,500.

Tax deduction of 250% will be extended to donations made 1.1.2010 to 31.12.2010. Unutilised donations can be carried forward for up to 5 years, or set off under Group Relief; but cannot be carried back for tax relief. All existing rules to qualify for the enhanced tax deduction will apply.

A new section 34D was enacted in the ITA to define “transactions not at arm's length”. Related party is defined in s.13(16) as “in relation to a person, means any other person who, directly or indirectly, controls that person, or is controlled, directly or indirectly, by that person, or where he and that other person, directly or indirectly, are under the control of a common person.” Where a person carries on business through a permanent establishment, s.34D shall apply as if the person and the permanent establishment are two separate and distinct persons.

Transactions are not at arm's length “where 2 persons are related parties and conditions are made or imposed between the 2 persons in their commercial or financial relations which differ from those which would be made if they were not related parties.” In such circumstances, then any profits which would, but for those conditions, have accrued to one of the persons, and, by reason of those conditions, have not so accrued, may be included in the profits of that person and taxed in accordance with the ITA. Putting transfer pricing into the tax legislation is a significant step by the Singapore tax authorities.

TRANSFER PRICING : Transfer Pricing Guidelines issued in Feb 2006 were followed by Transfer Pricing Consultations July 2008 where IRAS proposed to send questionnaires to selected taxpayers who appear to have significant related party transactions. Taxpayers with significant related party transactions are asked to ensure they have a system in place to maintain adequate and timely transfer pricing documentation to demonstrate compliance with the arms-length principle. The Comptroller also issued a supplementary administrative guideline on Advance Pricing Arrangements (Oct 2008) and finally a tax circular on Transfer Pricing Guidelines for Related Party Loans and Services (Oct 2008 and Feb 2009).

Clients can access our detailed analysis at Appendix D.

The Green Vehicle Rebates (GVR) scheme will be extended to include imported used green vehicles wef 1.7.2010. Green vehicles imported for test-bedding will have the ARF, COE and customers duties waived for a period of 6 years, instead of 2 years.

Tax principles tested in the Courts and Income Tax Board of Review (ITBR): Some of the 2009 and 2010 tax cases are discussed here.

(a) A receipt received in connection with an asset is not always taxable according to the nature of the asset, see ZT v CIT (2009 ITBR);

(b) Where ordinary accounting principles run counter to the principles of tax laws, they must yield to the latter for purposes of computing gains and profits for tax, see ABD Pte Ltd v CIT (2010 SGHC 107);

(c) Whether an asset functions as plant for a taxpayer has to be determined by examining the functions of the asset in the taxpayer's trade, If an asset is a structure, it is not enough to satisfy the “functional test” to qualify as plant, the structure must be used as plant and not used as premises, “the premises test”, see ZF v CIT (2010 SGHC 14); and

(d) any gain or benefit obtained by a person in his “capacity as an employee” would constitute a gain or benefit from employment liable to tax (the “capacity as an employee” test will overlap the “reward for services” test), see ABB v CIT (2010 SGHC 46).

ABD Pte Ltd v CIT (2010 SGHC 107) raises significant tax issues, the Singapore High Court affirmed the decisions of the Singapore Income Tax Board of Review to the effect that (a) entrance fees (S$526 million) received between 1996 to 2000 are taxable in the year the entrance fee was levied on the member and not taxed equally over the period of club membership (30 years); (b) the land cost (S$108 million), the building costs (S$91 million) and the geomancy fees (S$2.3 million) were not tax deductible against the gross entrance fees; and (c) the Club liability to S$53 million in damages to its members, ordered by the Court of Appeal in 2003, cannot be set off against the gross entrance fees.

Clients can access our detailed analysis of the tax cases at Appendix E.

GST CHANGES : GST is a complex tax to manage because it is transactions-based. There are many GST tax circulars aimed at clarifying the incidence of GST based on the various industry sectors. Taxpayers are also able to obtain GST rulings and advance rulings so that industry practices are aligned to the GST regulations. We have obtained GST rulings on specified transactions.

Income Tax Rulings : Taxpayers may apply for tax appeals and tax rulings such as on (a) the exemption of tax on income on various grounds; (b) the exemption of withholding tax on various grounds; (c) specified tax reliefs; (d) the carry forward of unutilised tax losses and unutilised capital allowances following a substantial change in shareholdings; and (e) tax clarifications.

TAX EVASION, GST EVASION : In 2009 the Comptroller issued media releases to enable taxpayers understand the seriousness of tax and GST evasion. The media releases name the taxpayer, his company and the modus operandi of the tax evasion. A company was fined and its director sentenced to imprisonment for setting up 6 related companies with fictitious expenses of S$1.6 mil to abuse the tax exemption scheme for new companies. The taxpayers were advised by their tax agent, a certified public accountant, who was convicted for under-reporting his own income of S$2.4 mil. A company was fined and its director sentenced to 6 months imprisonment in a conviction under s.96A (serious tax evasion) of the ITA. Sole proprietors and partnerships were also convicted for tax evasion, including a family food court. GST offences were mostly for making fictitious input tax refund claims. A GST-registered trader was sentenced to 24 months imprisonment and penalties of S$1.5 mil for this offence; as were several other GST registered businesses.

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We keep clients up to date on tax issues in the Asean region and worldwide from time to time. Our MSI Global Alliance network of independent Legal & Accounting firms worldwide of 7,500 lawyers, accountants, tax consultants, and offshore tax specialists in 100 countries provide us with up to date information which may be relevant and useful to you.

Information is not advice. The information in this publication should not be acted upon without professional advice. As this is an Executive Summary, important conditions and other details are or may be omitted. We accept no liability to persons who act on this publication without consulting us or their professional advisers.

March 2010

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