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Singapore's tax structure favours enterprise and business, with one of the lowest corporate tax rates in the world. A host of tax schemes and incentives are in place to help companies grow their businesses.
Here's a quick outline of some of the key tax elements. For more details, go to the Inland Revenue Authority of Singapore website.
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Corporate Tax
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- The tax rate of 18% is with effect from the year of assessment 2008. It applies to both Singapore-incorporated subsidiaries as well as branches of foreign companies. It applies equally to resident and non-resident companies.
- Withholding taxes at the corporate income tax rate also apply to certain other payments to non-residents, such as technical assistance fees and management fees.
- A one-tier corporate taxation system took effect on 1 Jan, 2003. It replaced the imputation system of taxing dividends, where taxes paid by a company can be imputed or passed on to shareholders.
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Basis of taxation
Singapore taxes on a territorial basis. Only income derived in Singapore, or income derived overseas but received in Singapore, is subject to tax. Group relief provisions were introduced in the 2003 assessment year. Inter-company transactions must be concluded at an arms' length basis.
From 1 June 2003, foreign sourced dividends, branch profits and service income received in Singapore is tax exempt, provided:
i. the income was remitted from countries with a headline tax rate of at least 15%.
ii. the income was subject to some form of tax in the foreign country. (This condition is deemed to be met if the income was not subject to tax due to a tax incentive being awarded in the foreign country for the conduct of substantial business activities.
The tax year runs from 1 January to 31 December. Tax is imposed on a preceding year basis, that is, profits for the 2002 financial year are taxed in the 2003 year of assessment.
Tax deductions and depreciation
Operating expenses are generally deductible except for a small number that are statutorily disallowed. As Singapore does not tax capital gains, accounting depreciation (regarded as a capital expense) is not allowed. Instead, capital allowances are allowed on the following assets:
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Foreign tax credit
Foreign tax credit is limited to the lower of foreign taxes paid and the Singapore tax payable on that item of income. Foreign tax credit is computed on a country-by-country and source-by-source basis. Excess foreign tax credits are forfeited.
Singapore has comprehensive tax treaties in force with 51 countries. For income from non-treaty countries, unilateral tax credits are available for all services and royalties income.
Tax administration
Companies have to furnish an estimate of the taxable income within three months of the end of the financial year. The income tax return must be filed by 31 July of the year of assessment.
Corporate tax legislation
The governing statutes are the Income Tax Act and the Economic Expansion Incentives (Relief from Income Tax) Act. The statutes (and any subsequent amendment legislation) can be purchased here.
For full information on Corporate Tax, please click here.
Goods and Services Tax
A Goods and Services Tax (GST) of 7% is imposed on the supply of goods and services in Singapore and on the importation of goods into Singapore. But even with this Singapore has one of the lowest rates of consumption tax in the world.
The taxable value of imported goods is calculated based on the CIF value (cost, insurance and freight) of the goods plus commission, other incidental charges and all customs duties payable.
Relief from GST on imports may be granted under certain conditions. Exports and international services are zero-rated. Only a taxable person can reclaim the GST paid as input tax.
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- Currently, the top marginal personal income tax rate is 22%. It will be reduced to 21% in year of assessment 2006 and then to 20% in year of assessment 2007. All other rates will be reduced correspondingly.
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Basis of taxation
Singapore taxes on a territorial basis of taxation. Only income derived in Singapore, or income derived overseas but received in Singapore, are subject to tax. However, foreign income received in Singapore by non-residents is not subject to tax.
The tax year is known as a year of assessment and runs from 1 January to 31 December. Tax is imposed on a preceding year basis, that is, income earned in calendar year 2004 is taxed in the year of assessment 2005.
Residence in Singapore
An individual is a tax resident in Singapore if he resides in Singapore, or is:
- Physically present in Singapore for 183 days or more; or
- Employed in Singapore for 183 days or more.
Singaporeans whose overseas employment is for a period of at least six months in any calendar year can choose to be treated as a non-resident for the year of assessment following the year of overseas employment.
Differences between a resident and non-resident individual:
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Not Ordinarily Resident (NOR) Scheme
The Not Ordinarily Resident (NOR) Scheme is available from year of assessment 2003 to people who travel frequently. A person who qualifies for the NOR scheme will pay income tax only on the portion of his employment income in Singapore. The taxable amount will be based on the number of days he spends in Singapore a calendar year.
A NOR taxpayer will also be exempt from tax on income earned before he came to Singapore. The remittance of such pre-assignment income will now be exempt from tax. A non-citizen NOR taxpayer will also be exempt from tax on his employer's contribution to his overseas pension fund. Further details of the scheme are available at the IRAS website.
Treatment of Stock Options
Stock option gains are taxed as employment income. The gains are computed on the difference between the market value of the shares at the time of exercise and the exercise price. Various schemes such as the Qualified Employee Stock Option Plan (QESOP) scheme, Entrepreneurial Employee Stock Option Plan (ESOP) Scheme and Company Stock Option Plan (CSOP) scheme are available to reduce the tax burden. These schemes are also available to other forms of employee share ownership plans. Further details of the schemes are available at the IRAS website.
Foreign tax credit
Foreign tax credit is limited to the lower of foreign taxes paid and the Singapore tax payable on that item of income. Foreign tax credit is computed on a country-by-country and source-by-source basis. Excess foreign tax credits are forfeited.
Singapore has full double taxation treaties in force with 51 countries. For income from non-treaty countries, unilateral tax credits are available for all services and royalties income.
Tax administration
Individuals are required to file their tax returns by 15 April of the year of assessment.
Individual tax legislation
The governing statute is the Income Tax Act. The statute (and any subsequent amendment legislation) can be purchased online here.
Property Tax
Property tax is calculated as a percentage of the annual value of all houses, lands, buildings and tenements. Annual value is defined as the gross annual rental value of the property. It is not dependent on the type of industry the property is used in.
The common methods of determining the annual value are:
- Using the rental value of comparable properties in similar locations
- Applying a reasonable return on the capital investment in the property (commonly used for properties with no alternative use)
- Adopting 5% of the market value for vacant land or land with insignificant buildings.
The tax rate for industrial and commercial properties is 10%, while owner-occupied residential properties are taxed at a concessionary rate of 4%. Property tax exemption for land under development may be granted in certain cases.
Property tax is assessed twice yearly, on 1 January and 1 July. The Chief Assessor determines the annual value and owners may lodge an objection if they disagree with the annual value.
Single Tax Deduction for Patenting Costs
It was announced during Budget 2003 that a single tax deduction would be available for patenting costs incurred on or after 1st June 2003.
Under Section 14A of the Income Tax Act
Policy Objective
As Singapore pushes to develop itself as an intellectual property (IP) Hub, importance has to be placed on recognizing the value of IP as strategic assets. IP protection in the form of patents forms the basis of protection and subsequent exploitation of the fruits of technological and scientific research and development. In line with the drive for an innovation driven economy, Singapore recognizes the importance of pervasive patent filing.
Benefit to Companies
Under the current tax treatment, the costs incurred in the patent process are capital in nature and hence not deductible for income tax purposes. To encourage more companies and businesses to patent their inventions and make Singapore an attractive base for IP management, a single tax deduction for patenting costs will be extended to Singapore-based companies and businesses (hereafter referred to as "persons") incurred on or after 1st June 2003.
Eligibility Criteria
To qualify for the single tax deduction, the person:
- who incurs the patenting costs must be legally registered in Singapore.
- must submit at the time of filing for the claim of the patenting costs, a written undertaking to confirm that:
- he is entitled to the economic returns from the exploitation of the patent(s);
- the patent when granted will be legally owned by him in Singapore; and
- he has not and will not apply for the Patent Application Fund Plus (administered by the Economic Development Board) on the patenting costs incurred.
Scope of Patenting Costs
The following defines the scope of patenting costs that qualify for the single tax deduction:
Official fees paid to the Registry of Patents in Singapore or elsewhere for the:
i) filing of a patent
ii) search and examination report on the application for a patent
iii) grant of a patent
Professional fees paid to a registered patent agent or equivalent for:
i) applying for or obtaining patents in Singapore or elsewhere
ii) preparing specifications or other documents for the purposes of the Patent Act or the patent law of another country
iii) giving advice (other than advice of a scientific or technical nature) about the validity or infringement of patents
Examples of the above allowable costs include those incurred in translation and prior art searches.
Expenses not qualifying for the single tax deduction
Patent renewal costs, maintenance of a lapsed patent due to negligence, the defence or enforcement of a patent, charges arising from the transfer of rights, cannot be claimed. Such costs are not integral to the patenting process and are not deductible.
Documents required for claiming the single tax deduction for patenting costs
In order for your claim of the single tax deduction for patenting costs to be considered, you are required to:
i) Complete and sign the declaration form; and
ii) For each invention, complete a copy of the "Breakdown of patenting costs for the purpose of claiming single tax deduction for patenting costs" sheet (Available below in Microsoft Word format).
For Small and Medium Sized Enterprises (SMEs) at the time of patent application, you are required to submit the completed forms to:
a) Economic Development Board (IP SBU) for verification; and
b) IRAS (after verification by EDB) when the claim is being made together with your annual income tax return.
For companies larger than SMEs at the time of patent application, as you do not qualify for the Patent Application Fund Plus, you are required to submit the completed forms to:
a) Economic Development Board (IP SBU); and
b) IRAS (no verification required by EDB) when the claim is being made together with your annual income tax return.
The declaration form (including the "Breakdown of patenting costs" sheet) is also available on the IRAS website.
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Definition of Small and Medium Sized Enterprises:
a. Fixed Assets* not exceeding S$15 million for manufacturing companies;
b. Employment size not exceeding 200 workers for non-manufacturing companies.
*Fixed Asset is defined as net book value of factory, building, machinery and equipment.
Automatic Writing-Down Allowances for Intellectual Property Rights
It was announced during Budget 2003 that the writing-down allowances under Section 19B of the Income Tax Act on capital expenditure incurred in acquiring intellectual property rights (IPRs) will be granted automatically(1), subject to the condition that the legal and economic ownership of the IPR lies with the Singapore entity. This will apply to IPRs acquired on or after 1 November 2003.
(1)This is a change from the previous policy, where only IPRs approved by the Economic Development Board (EDB) and the Infocomm Development Authority of Singapore (IDA) were granted writing-down allowances under Section 19B.
Policy Objective
The global economy today has shifted to one that values creativity and innovation. Where the market values of the top companies in the old economy were primarily attributable to physical and financial assets; today, it is largely attributable to intellectual assets such as intellectual property. As such, it is Singapore's intent to increase Singapore's attractiveness as location for the creation, management and exploitation of IP. One such step is to align the tax treatment for acquisitions of IPR to the existing capital allowance provisions for acquisitions of physical assets such as plant and machinery.
Scope of Incentive
The automatic writing-down allowances is applicable to any acquisition of IPRs made during the period from 1st November 2003 to 31st October 2008, where a transferee(2) acquires the legal and economic ownership of the IPR from a transferor. The transferee will be able to claim writing-down allowances on a straight-line basis over a 5-year period on the capital expenditure incurred in acquiring the IPR. For this purpose, "capital expenditure" does not include legal fees, registration fees, stamp duty and other costs related to the acquisition of the IPR.
(2) A "transferee" refers to a company who acquires the IPR. A "transferor" refers to a person who sells the IPR to the "transferee".
Categories of IPRs eligible for writing-down allowances
For the purpose of claiming the writing-down allowances, "intellectual property rights" means:
(a) any patent, copyright, trademark, registered design, geographical indication or layout design of integrated circuit,
(b) any trade secret or confidential information(3), or
(c) any know-how or information of commercial value.
(3) For this purpose, 'intellectual property rights' would also include any right under the law of another country or jurisdiction outside of Singapore corresponding to, or similar to, a right within paragraphs (a) and (b).
Legal and Economic Ownership Requirement
In order to qualify for the writing-down allowances, the transferee must acquire the legal and economic ownership(4) of the IPR from the transferor. For this purpose,
Legal ownership means the legal assignment of the said IPR granted to the transferee.
Economic ownership means the future economic benefits attributable to the IPR which will accrue to the transferee.
For any exceptions, please consult EDB for clarification.
(4) Companies would have to submit the Declaration Form to confirm they have met the ownership requirements. One copy of the Declaration form is to be submitted with the Income Tax Return in order for the writing down allowance to be considered. Another copy is to be submitted to EDB. The Declaration Form is available on the IRAS and EDB websites.
Valuation Issues
Third-party independent valuation reports on the value of the IPRs acquired are required to be submitted to the Inland Revenue Authority of Singapore (IRAS) together with the Income Tax Returns (Forms C) when filing claims for the writing-down allowances for:
- All unrelated party transactions where the capital expenditure incurred in acquiring the IPR is equal to or greater than S$2 million; and
- All related party transactions where the capital expenditure incurred in acquiring the IPR is equal to or greater than S$0.5 million.
A transferor and transferee are considered to be "related parties" under the following circumstances:
(i) where one person, whether directly or indirectly, has the ability to control the other or where both of them, whether directly or indirectly, are under control of a common person; or
(ii) where one person has, directly or indirectly, at least 25% of the issued capital of the other person.
Acceptable valuation methods include, but are not limited to, the cost approach, income approach, and market approach methods . Valuations of the IPR are to be done by qualified persons (e.g. Certified Public Accountant or Chartered Financial Analyst), who have no interest in the IPR acquisition, or business dealings with the transferor or transferee whatsoever.
In a case where a valuation report is submitted, the amount that is eligible for writing-down allowance would be the actual capital expenditure incurred by the transferee or the amount as stated in the valuation report, whichever is the lower.
The Comptroller reserves the right to require a second independent valuation or to adjust the amount eligible for the writing-down allowance, if there is reason to believe that the true value of the IPR (on an arm's length basis) is materially different from that which is presented in the valuation report.
Contacts
This information can also be found at the IRAS website. For inquiries relating to filing of claims, please contact IRAS Helpline at 1800 356 8622. For any inquiries on the qualifying criteria, please contact EDB at +65 6832 6832.
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Useful references:
i. Valuation of Intellectual Property and Intangible Assets, Gordon V. Smith and Russell L. Parr, John Wiley & Sons, Inc., 3rd Edition (2000).
ii. Valuing Intangible Assets, Robert F. Reilly and Robert P. Schweihs, McGraw-Hill Trade, 3rd Edition (1998). |
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Writing Down Allowances for Approved Cost Sharing Agreement for Research and Development Activities
It was announced during Budget 2006 that the period for which the writing-down allowances for approved cost sharing agreement for research and development ("R&D") activities as provided under Section 19C of the Income Tax Act will be accelerated to 1 year. It has also been decided by the Ministry of Finance that in the event of any disposal, sale or assignment of any rights under any approved cost-sharing agreement, only the writing-down allowances previously allowed under section 19C would be recovered, and not the full proceeds received from the disposal, sale or assignment.
This is unlike the treatment under section 19C previously where the full proceeds received from the disposal, sale or assignment of the rights would be subject to tax. This change is applicable to any disposal, sale or assignment of any right under any cost-sharing agreement entered into and approved on or after 17 February 2006.
Policy Objective
Following the 2006 Budget announcement, the writing-down period under section 19C for the expenditure incurred under any cost-sharing agreement approved on or after 17 February 2006 in respect of R&D activities would be shortened from 5 years to 1 year. The intent of accelerating the writing down period is to signal Government’s support for private sector R&D, and to help foster interest in the formation of collaborative research networks.
In addition, with the objective of aligning the treatments for collaborative and in-house R&D, and also for disposal of plant and equipment, section 19C will be enhanced such that in the event of any disposal, sale or assignment of any rights under any approved cost-sharing agreement, only the writing-down allowances previously allowed under section 19C would be recovered.
Qualifying Criteria
Interested applicants shall be required to meet the following qualifying criteria:
(a) The company must have entered into a bona fide cost-sharing agreement for R&D activities that is approved by the Economic Development Board ("EDB");
(b) There must be economic spin-offs to the Singapore economy, for instance, undertake some R&D work in Singapore; and
(c) The company's proportionate share of the overall contribution to the cost-sharing arrangement should commensurate with the company's proportionate share of the overall expected benefits to be received from the R&D cost-sharing agreement.
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Related Links
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Singapore Budget 2008 at a Glance: Key tax measures relevant to companies....(more) |
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