Strategically located in Asia, Singapore is an attractive location for global businesses to access the markets of China, India, Vietnam, Thailand and Indonesia.
Overview of taxation for companies in Singapore
Arguably, the most important attraction for Singapore-based companies remains the city-state’s quasi-territorial tax system, which means that tax is imposed on all income accrued in or derived from Singapore, as well as on all foreign-sourced income remitted to the country, with certain qualifying exemptions (dividends, branch profits, service income).
There is neither any capital gains tax in Singapore nor is there any withholding tax on dividends. There is also no one-tier corporate tax system, capital duty, capital acquisitions tax, inheritance or estate tax, or even net worth/wealth tax in the city-state.
Importantly, advance rulings on taxation are possible too.
Moreover, there are no significant restrictions on foreign exchange transactions and capital movements in Singapore, which means that funds may flow freely into and from Singapore. While the government imposes certain restrictions on the lending of Singapore Dollars (SGD) to non-resident financial institutions, these restrictions do not apply to the lending of SGD to individuals and non-financial institutions, including corporate treasury centres.
We discuss the Singapore corporate taxation scene in detail below.
Corporate Tax Rates
The corporate income tax rate in Singapore is 17 percent, which is calculated on the basis of the company’s chargeable income i.e. taxable revenues less allowable expenses and other allowances. Though the rate itself is one of the lowest in the world, the effective tax payable works out to be even lower if a company takes advantage of all the government incentives, subsidies and schemes.
For instance, through the government’s enhanced Productivity and Innovation Credit (PIC) Scheme, should companies plan their PIC strategies well, they stand to save million in taxes. This is possible as they can estimate their taxable income and make provisions for investments in qualifying activities at the time of annual budgeting.
Corporate Tax Residency
To determine the corporate tax residency of a company in Singapore, the Inland Revenue Authority Of Singapore (IRAS) looks at where the said company is controlled and managed. “Control and management” is the making of decisions on strategic matters, such as those on company policy and strategy. Typically, the location of the company’s Board of Directors meetings, during which strategic decisions are made, is a key factor in determining where the control and management is exercised. This is also important for IRAS before it decides on giving a Singapore-based company exemption on its foreign-sourced service income.
Related Article: Guide to Singapore Corporate Tax Residency
Fiscal Year Determination
Every company in Singapore is free to determine its financial year end (FYE), which does not necessarily have to be December 31. It is advisable though to keep the company’s FYE within 365 days in order to fully enjoy the zero tax exemption for new start-up companies.
Annual Filing Requirements
Every company in Singapore is required to file its annual returns (AR) to the Accounting and Corporate Regulatory Authority (ACRA) – the national regulator of business entities and public accountants in Singapore – within one month of its Annual General Meeting (AGM) date. As consolidated returns are not permitted, each company is required to file its returns separately.
Similarly, every company must file its tax returns by November 30 of the assessment year for income earned in the preceding accounting year. e-Filing will be made compulsory in a phased approach from YA 2018.
Importantly, companies in Singapore are allowed to carry forward the unabsorbed trade (rental) losses and capital allowances to subsequent years to offset against the income of those years until the trade losses are fully utilised (subject to conditions).
Please note: Corporate tax filing season is here!
Singapore’s corporate tax filing season 2017 is here. The due date for submitting corporate income tax returns (Form C-S/ C) for Year of Assessment (YA) 2017 is:
- e-filing: December 15, 2017
- Paper filing: November 30, 2017
GIRO is the preferred method of payment as it allows tax payment by instalments. Singapore-registered companies can enjoy up to 10 interest-free monthly instalments when they file their Estimated Chargeable Income electronically within three months from their financial year end.
Companies must pay their tax within one month from the date of the Notice of Assessment (NOA). When payment is not received by the due date, a 5% penalty can be imposed on the overdue tax. A 1% additional penalty per month may be imposed if the tax is still not paid 60 days after the 5% penalty is imposed. The 1% penalty is imposed for each month that the tax remains unpaid, up to a maximum of 12 months.
IRAS informs that currently, about 81 percent of the corporate taxpayers file their tax returns on time. Companies have 11 months (for companies with financial years ending in December) to 22 months (for companies with financial years ending in January) to prepare and file their returns.
Form C-S/ Form C
Every company in Singapore is required to file returns even if it is making losses. Companies that do not meet the Form C-S qualifying conditions will need to file Form C together with their financial statements, tax computations and supporting schedules.
From YA 2017, companies will qualify to file Form C-S if they meet all of the following conditions:
- incorporated in Singapore;
- an annual revenue of $5 million or below
- only derives income taxable at the prevailing corporate tax rate of 17%; and
- is not claiming any of the following in the YA:
- carry-back of Current Year Capital Allowances/Losses
- group relief
- investment allowance
- foreign tax credit and tax deducted at source
From Year of Assessment (YA) 2012, to simplify the filing procedure for small companies, IRAS introduced Form C-S – an Income Tax Return form shortened to three pages for qualifying small companies to report their income to IRAS. It comprises a declaration statement of the company’s eligibility; information on tax adjustments; and information from the financial accounts. Do note that qualifying small companies are also not required to submit financial statements and tax computation because essential tax information and financial information would have to be declared in the Form C-S. However, companies should prepare these financial statements and tax computation and submit them to IRAS upon request.
Related Article: Guide to Filing Corporate Taxes – Form C-S and Form C
Common filing mistakes to avoid while making PIC claims
- understatement of income e.g. omission of particular receipts or invoices issued or transactions settled in cash; importantly, accounts of business transactions must be kept for five years from the relevant YA
- duplicate claims for cash payout and 400% enhanced deduction/ allowance on the same dollar of expenditure under the Productivity and Innovation Credit (PIC) Scheme;
- claiming 500% instead of 400% enhanced deduction/ allowance on the qualifying expenditure under the PIC Scheme;
- businesses can claim PIC only on the market value of qualifying PIC expenditure; in the past, IRAS has noted that some businesses have claimed PIC on inflated values, particularly in the area of training costs, mobile application and website development
Filing correct PIC claims is important, as offenders convicted of PIC fraud will have to pay a penalty of up to four times the amount of cash payout fraudulently obtained, and a fine of up to $50,000 and/or face imprisonment of up to five years. This includes any person who willfully assists another person to obtain a cash payout or PIC bonus which he/she is not entitled to.
Calculating taxable income in Singapore
Understanding of taxable income is very important as well to avoid making filing mistakes. For Singapore tax purposes, taxable income refers to:
- gains or profits from any trade or business;
- income from investment such as dividends, interest and rental;
- royalties, premiums and any other profits from property; and
- other gains that are revenue in nature.
Generally, deductible business expenses are those ‘wholly and exclusively incurred in the production of income’. In other words, they must satisfy all these conditions:
- expenses are solely incurred in the production of income
- expenses are not a contingent liability, i.e. it does not depend on an event that may or may not occur in the future
- expenses are revenue, and not capital, in nature
- expenses are not prohibited from deduction under the Income Tax Act
Meanwhile, non-deductible business expenses include personal expenses such as travel or entertainment not related to the running of the business, and capital expenses such as expenses incurred to incorporate a company and purchase of fixed assets.
Also, note that with regard to the renovation and refurbishment costs, these can be claimed only over three successive years, with the total capped at $300,000 for every three-year period.
Industry-specific tips on calculating corporate tax residency
Investment Holding Companies
Deductible expenses are expenses that are attributed to the investment income. These may be incurred directly, indirectly, or in accordance with statutory and regulatory provisions. Indirect expenses are capped at 5% of the total investment income.
The allowable development costs include land cost, stamp duty, property tax, construction cost, architect fee, differential premium, development charge and financing cost. Marketing and promotional expenses are deductible in the year in which they are incurred.
Moreover, income derived from construction contracts are to be recognised using the percentage of completion method. This means that the revenue and costs associated with a particular YA is determined by the stage of completion at the end of that YA only.
Calculating taxable income at concessionary and prevailing corporate tax rates
A company may receive different streams of income taxable at different tax rates, i.e. the prevailing corporate tax rate and concessionary tax rates. Common mistakes to avoid here include:
- incorrect classification of non-qualifying income under the concessionary tax rate category
- incorrect identification of direct and common expenses
- adoption of inappropriate bases in the allocation of common expenses and capital allowances
Foreign Sourced Income and Avoidance of Double Taxation
For Singapore tax resident companies, who also do their business overseas, it’s quite common nowadays to have their foreign sourced income remitted to Singapore. Since the city-state follows a progressive tax framework based on territorial policy, this foreign sourced income is also taxed.
Though, as detailed in Sections 13 (7A) to 13 (11) of the Income Tax Act (ITA) of Singapore, companies can benefit from the foreign sourced income exemption scheme (FSIE), which is applicable to foreign-sourced dividend, foreign branch profits, and foreign-sourced service income.
Sometimes, foreign income of a Singapore tax resident company may be subject to taxation twice – once overseas, and then a second time when the income is remitted into Singapore.
For such cases, IRAS has a foreign tax credit (FTC) scheme, which allows the company to claim a credit for the tax paid in the foreign country against the Singapore tax that is payable on the same income.
Under this, two types of credit or relief can be claimed.
- Double Tax Relief (DTR) – a credit relief provided under Singapore’s Avoidance of Double Tax Agreements (DTAs);
- Unilateral Tax Credit (UTC) – granted on all foreign-sourced income received in Singapore by Singapore tax residents from jurisdictions that do not have DTAs with Singapore
The government, in 2011, also introduced a Foreign Tax Credit (FTC) pooling system to give businesses greater flexibility in their FTC claims, reduce the taxes payable on foreign income, and to simplify tax compliance.
It must be noted that for Singapore-based companies to enjoy exemptions under the FTC or FSIE, the headline corporate tax rate in the foreign country from which the income is received must be at least 15 percent, and the income must have already been subjected to tax in that particular country.
So the common mistakes to avoid while claiming tax exemption for foreign-sourced dividends include:
- dividends must meet the “headline tax rate” condition, i.e. the dividends were received from countries less than 15% headline tax rate; and
- dividends must meet the “subject to tax” condition, e.g. the dividends were distributed from a company which is part of a group and the income of the company was found not to be subject to tax
Related Article: Guide to Tax Exemption for Foreign Sourced Income
Errors in Tax Returns
IRAS determines if the error/omission/discrepancy in the tax return was made without any intention to evade taxes. If found to be true, the taxpayer may:
- face a penalty up to 200% of the amount of tax undercharged;
- be fined up to $5,000; and/or
- be imprisoned up to three years.
If the intention was to evade taxes, the taxpayer may face a penalty up to 400% of the amount of tax undercharged; be fined up to $50,000; and/or be imprisoned up to five years.
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