While filing for corporate tax in Singapore, it’s crucial to discern the distinction between net income and taxable income. The computation journey commences with the net profit or loss detailed in the company’s financial records. However, this initial figure is subject to critical adjustments to determine the taxable income for the specific accounting period accurately. In essence, adjustments to your company’s net profit or loss are necessary to align with tax regulations and accurately determine the chargeable income.
The following adjustments are made to the Singapore company’s net profit/loss data in order to calculate the taxable income:
Adjustments to Taxable Income
- Exclude Non-Taxable Income:
- Remove income of a non-taxable nature, such as capital gains, profits from the sale of fixed assets, gains on foreign exchange in capital transactions, exempt shipping income for qualifying shipping companies, foreign-sourced dividends, branch profits, and certain income exempted under the Singapore Income Tax Act.
- Adjust Net Investment Income:
- Evaluate investment income separately for tax purposes, considering interest, dividends, and rental income.
- Subtract all investment income from chargeable income.
- Deduct qualified expenses related to each type of investment income.
- Calculate the net investment income for each category.
- Deduct Qualified Business Expenses:
- Deduct expenses wholly and exclusively incurred in the production of trade income.
- Examples of deductible expenses include wages, office rent, service fees, and research and development expenses.
- Non-deductible expenses include fines, fixed assets write-offs, income tax, private and domestic expenses, and certain motor vehicle expenses.
- Section 14N Deduction:
- Deduct expenditure incurred on renovation and refurbishment works under Section 14N, where applicable. This deduction provides relief for qualifying expenses related to improving business premises.
- Claim Capital Allowances:
- Instead of deducting fixed asset purchase costs, claim “capital allowances” for the wear and tear of assets.
- Include unutilized capital allowances from previous accounting periods and the current period.
- Offset Unutilized Losses:
- Deduct qualified losses incurred in the carrying of a business, following the “preceding year” basis.
- Unutilized losses can be carried forward indefinitely, subject to specific conditions.
- Deduct Unutilized Donations:
- Deduct only donations made to approved institutions of a public character for income tax calculation purposes.
Understanding and correctly applying these adjustments are crucial for companies looking to compute their taxable income accurately and strategically manage their tax positions in compliance with Singapore’s tax regulations.
Example: Taxable Income Adjustments
|Net Profit Calculation
|Net Profit as per Profit and Loss Statement
|Financial statements must adhere to Singapore’s Financial Reporting Standards (FRS).
|Adjustments for Exclusions
|Subtract Foreign income not subject to tax
|Excludes foreign income not subject to taxation.
|Non-business source income
|Excludes non-business source income like interest earned and property income.
|Excludes capital gains from the taxable income calculation.
|Excludes special deductions such as qualified R&D expenses.
|Adjustments for Inclusions
|Add Disallowed expenses
|Includes disallowed expenses in the taxable income.
|Includes capital expenses in the taxable income.
|For tax purposes, deducts capital allowances instead of depreciation.
|Adjustments for Deductions
|Subtract Capital allowances (current and carried forward)
|Deducts current and carried forward capital allowances from the taxable income.
|Carried forward losses
|Deducts carried forward losses from the taxable income.
|Add Non-business source income
|Includes additional non-business source income like interest earned and property income.
|Subtract Approved donations
|Deducts approved donations from the taxable income.
|Deducts investment allowances from the taxable income.
|Includes any special deductions allowed through various government incentives.
|Includes tax exemptions, whether full or partial, applicable to the company.
|Tax Calculation and Payment
|Calculate Taxable income
|Calculates the final taxable income after all adjustments.
|Tax payable at prevailing corporate tax rate
|Applies the current corporate tax rate in Singapore (17%) to calculate tax payable.
|Subtract Tax rebates
|Deducts any applicable tax rebates.
|Subtract Tax deduction at source
|Deducts any taxes deducted at source.
|Net tax payable
|Represents the net amount of tax payable after adjustments and deductions.
Please note that this table provides a simplified example for illustrative purposes only.
In conclusion, understanding the intricacies of corporate tax filing in Singapore is paramount for businesses aiming to navigate the complexities of taxable income calculations effectively. Adjustments to a company’s net profit or loss involve carefully considering various elements, from excluding non-taxable income and disallowed expenses to incorporating capital allowances and deductions for carried-forward losses.
The nuanced approach includes deducting qualified business expenses and factoring in additional income sources. Companies can arrive at their taxable income through this comprehensive process, ensuring compliance with Singapore’s tax regulations. Leveraging available deductions, such as Section 14N for renovation expenditure and capital allowances, becomes essential for optimizing tax liabilities.
We empower clients to comply with Singapore’s tax regulations while strategically managing their tax positions for financial success.
FAQs on Tax Adjustments Guidelines
- For companies with a non-S$ functional currency, the expenditure caps for Section 14N (R&R works) and the PIC scheme are calculated using either of two methods. IRAS accepts any two methods but must be applied consistently across all relevant expenditures and Years of Assessment (YAs). The total allowed amount for qualifying R&R works is capped at S$300,000 every three consecutive years, while the combined expenditure cap for PIC is set for specific YAs (e.g., S$1,200,000 for YAs from 2016 to 2018).
- Deductible business expenses reduce taxable income, while non-deductible expenses do not meet specific criteria. Deductible expenses, like accounting fees and bank charges, must be wholly and exclusively incurred in income production, not contingent on future events, revenue in nature, and not prohibited for deduction under the Income Tax Act 1947. Conversely, non-deductible expenses, such as fines and capital expenses, include activities that don’t fulfil these conditions. Understanding these distinctions is crucial for accurate tax calculations and compliance.
- The taxable amount is determined based on the foreign income applied for the asset’s acquisition, not the asset’s net book value or market value at the time it is brought into Singapore.
- General income tax principles determine the taxability of income from the sale of carbon credits, which varies based on each case’s specific details. In the context of a company engaged in trading carbon credits, the income derived from such transactions is considered revenue and, therefore, subject to taxation. Even in cases where a company initially purchases carbon credits for internal use but subsequently sells them, the resulting income is regarded as part of the company’s business income and is consequently taxable.
- If the donations received are not voluntary gifts and are exchanged for benefits provided by the receiving organization, they qualify as business receipts. In such cases, they become taxable income for the recipient.
- Regarding expenses incurred to generate these taxable receipts, they are deductible if they meet specific criteria. The expenses must be wholly and exclusively incurred in the production of income, be of a revenue nature, and not be prohibited from deduction under the Income Tax Act 1947. This ensures that only legitimate and applicable expenses are eligible for tax deduction.
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