Answers

Professional Level – Options Module, Paper P6 (SGP)Advanced Taxation (Singapore) December 2013 Answers

Note: ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers.Where such references are shown below, they are given for information purposes only.

1 Hori Construction Private Limited

The Board of DirectorsHori Construction Private LimitedCompany address

6 December 2013

Dear Sirs

I refer to your enquiry on various pertinent Singapore tax issues in relation to several matters for Hori Construction Private Limited(HCPL) and Hori Holdings Limited (HHL). As requested, I am pleased to advise as follows:

(i) Transfer of shares from HCPL to HHL

Income tax

The transfer by the two individual shareholders of their equity interest in HCPL to HHL would give rise to a disposal of shares.

Whether the individuals would be taxed on the gains from the disposal of the shares would depend on whether they coulddemonstrate to the Inland Revenue Authority of Singapore (IRAS) that the original equity purchases were intended for long-term strategic reasons to be considered as capital assets. As Singapore does not impose tax on capital gains, gains fromthe disposal of shares which are supportable as capital assets or intended for long-term investment (and not acquired withthe intention for resale) are ordinarily regarded as capital gains and not subject to income tax in Singapore. As the transfer ispart of the restructuring prior to listing, it is likely to qualify as a capital transaction, and so should not be taxable.

Stamp duty

A transfer of shares executed in Singapore is subject to stamp duty.

The rate of stamp duty for the transfer of shares in a Singapore company is 0·2% on the higher of the consideration or themarket value of the shares transferred. Net asset value would be used in the case where the market value is not readilyavailable.

Goods and services tax (GST)

There is no GST on the transfer of an equity interest in a Singapore company, as the transfer of equity is an exempt supply.

(ii) Purchase, ownership and disposal of the shares of HHL from the perspective of prospective shareholders

Corporate income tax

A Singapore tax resident corporate taxpayer is subject to Singapore income tax on:

– income accrued in or derived from Singapore; and– foreign sourced income received or deemed received in Singapore, unless otherwise exempted.

Foreign income in the form of branch profits, dividends and service fee income (the ‘specified foreign income’) received ordeemed received in Singapore by a Singapore tax resident corporate taxpayer will be exempted from Singapore tax subject tomeeting certain qualifying conditions.

A non-resident corporate taxpayer, subject to certain exceptions, is subject to Singapore income tax on income accrued in orderived from Singapore, and on foreign income received or deemed received in Singapore.

A company is regarded as tax resident in Singapore if the control and management of the company’s business is exercised inSingapore. Normally, control and management of a company is vested in its board of directors and the place of residence ofthe company is where its directors meet.

The prevailing corporate tax rate is 17% of chargeable income after allowing for full or partial tax exemption (whereapplicable).

The full tax exemption scheme for newly incorporated entities provides for a 100% tax exemption on the first $100,000 anda further 50% exemption on the next $200,000 of the normal chargeable income in the case of Singapore resident start-upsfor each of the first three consecutive years of assessment following incorporation, subject to certain conditions.

Companies which do not qualify for the above full tax exemption scheme can still claim partial tax exemption on their normalchargeable income of 75% of up to the first $10,000 of chargeable income and 50% of up to the next $290,000 ofchargeable income. Unlike the full tax exemption scheme, there are no conditions attached for partial tax exemption.

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Individual income tax

An individual taxpayer (both resident and non-resident) is subject to Singapore income tax on income accrued in or derivedfrom Singapore, subject to certain exceptions. Foreign sourced income received or deemed received by a Singapore taxresident individual is generally exempt from income tax in Singapore except for such income received through a partnershipin Singapore. Certain Singapore sourced investment income received or deemed received by individuals is also exempt fromtax.

Currently, a Singapore tax resident individual is subject to tax at progressive rates, ranging from 0% to 20%.

A non-Singapore tax resident individual is normally taxed on income other than Singapore employment income, at the rate of20%.

An individual is regarded as a tax resident in Singapore if in the calendar year preceding the year of assessment, they werephysically present in Singapore or exercised an employment in Singapore (other than as a director of a company) for 183 days or more, or if they ordinarily reside in Singapore.

Dividend distributions

Under the one-tier corporate tax system, the tax paid by a resident company is a final tax and the distributable profits of thecompany can be paid to shareholders as tax exempt (one-tier) dividends. Therefore, any dividends paid by HHL will be exemptfrom tax in the hands of shareholders, regardless of their tax residence status or legal form (corporate or individual). However,foreign shareholders should be advised to consult their own tax advisers to take into account the tax laws of their respectivecountries of residence and the existence of any double taxation agreement which their country of residence may have withSingapore.

Gains on the disposal of shares

Singapore currently does not impose tax on capital gains. So, as stated in (i) above, in general, gains or profits derived fromthe disposal of shares acquired for long-term investment purposes will be considered as capital gains and not subject toSingapore tax.

On the other hand, where such gains or profits arise from activities which the Inland Revenue Authority of Singapore (IRAS)regards as the carrying on of a trade or business of dealing in shares in Singapore, gains or profits will ordinarily be taxed asincome.

Based on the IRAS e-Tax Guide on ‘Income Tax: Certainty of Non-taxation of Companies’ Gains on Disposal of EquityInvestments’ dated 30 May 2012, the gains derived from the disposal of ordinary shares in an investee company during theperiod 1 June 2012 to 31 May 2017 (both dates inclusive) are not taxable if, immediately prior to the date of the sharedisposal, the divesting company had held at least 20% of the ordinary shares in the investee company for a continuous periodof at least 24 months. This rule does not apply to a divesting company whose gains or profits from the disposal of shares areincluded as part of its income based on the provisions of s.26 of the Income Tax Act, Chapter 134 of Singapore; or a disposalof shares in an unlisted investee company which is in the business of trading or holding Singapore immovable properties(other than the business of property development).

Stamp duty

There is no stamp duty payable on the subscription, allotment or holding of shares.

As stated in (i) above, stamp duty is payable on a transfer of shares at the rate of 0·2% of the consideration paid or the marketvalue of shares registered in Singapore, whichever is higher.

The purchaser is liable for the stamp duty, unless there is an agreement to the contrary.

No stamp duty is payable if no instrument of transfer is executed (such as in the case of scripless shares, the transfer of whichdoes not require instruments of transfer to be executed) or if the instrument of transfer is executed outside Singapore. However,stamp duty may be payable if the instrument of transfer which is executed outside Singapore is subsequently received inSingapore.

Goods and services tax (GST)

The sale of shares by an investor belonging in Singapore to another person belonging in Singapore is an exempt supply, andso not subject to GST.

Where shares are sold by a GST-registered investor in the course of a business to a person belonging outside Singapore, andthat person is outside Singapore when the sale is executed, the sale should generally, subject to satisfaction of certainconditions, be considered a taxable supply subject to GST at the zero rate. Any input GST incurred by a GST-registered investorin the making of this supply in the course of or furtherance of a business carried on by them is, therefore, recoverable fromthe Comptroller of GST.

Services such as brokerage, handling and clearing services rendered by a GST-registered person to an investor belonging inSingapore in connection with the investor’s purchase, sale or holding of shares will be subject to GST at the current rate of7%. Similar services rendered to an investor belonging outside Singapore is generally subject to GST at the zero rate, providedthat the investor is outside Singapore when the services are performed and the services provided do not benefit any Singaporepersons.

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(iii) Related GST issues relevant to HCPL and HHL

The related GST issues focus on four main areas:

– the input tax eligibility of HCPL which contracts with the external professional service providers;– the GST registration eligibility of the new Singapore holding company, HHL;– the GST treatment of the provision of management services by HHL to HCPL; and– the input tax eligibility of HHL.

HCPL is the initial contracting party with the external professional service providers. As such, it will be entitled to claim anyGST incurred as its input tax, provided it has established at the point of engaging the service providers (amongst otherconditions), that such expenses would be recovered (which forms a taxable supply of recovery of expenses) from HHL, onceit is subsequently incorporated.

If HHL were a pure investment holding company, it would be considered as not carrying on a business, i.e. there is no conductof taxable activities systematically and regularly; so, consequently, would not qualify for GST registration. However, it isintended that HHL, apart from holding shares, will provide management services to its subsidiaries for which it will chargemanagement fees on a regular basis. This will constitute business activity by HHL as well as a taxable supply for GSTpurposes. HHL can, therefore, register for GST, either on a compulsory or voluntary basis.

In most cases, registering for GST is compulsory when:

– the taxable turnover for the past four quarters is more than $1 million (unless there is certainty that business turnoverin the next 12 months will not exceed $1 million); or

– the company is currently making sales and the taxable turnover in the next 12 months is reasonably expected to bemore than $1 million.

GST registration on a compulsory basis must be applied for within 30 days of the date on which the liability to register arises.

If the business turnover does not fall under the above circumstances, there is no requirement to register for GST, but the optionto register for GST on a voluntary basis is still available.

The agreement for the provision of management services and the timing of the agreement will be crucial elements to the GSTregistration of HHL. Alternatively, a directors’ resolution on the provision of management services could be considered asevidence to demonstrate this firm intention.

The provision of management services by HHL to HCPL should be characterised as a standard-rated (currently 7%) supplyof services. Once registered for GST, HHL should charge GST on the management fees.

HHL will be entitled to set off input tax credits for the GST incurred on its running expenses or business purchases againstthe output tax on the management fees, as long as all necessary conditions for claiming input tax are satisfied.

All input tax claims are subject to the input tax attribution rules. In other words, there must be a direct nexus between thebusiness purchase (where GST is incurred) and the taxable activity (which requires such a business purchase). Generally,input tax incurred in the making of exempt supplies is not claimable, unless the GST-registered business passes either of thefollowing tests, in which case all the GST incurred on its business purchases is claimable even though it makes exemptsupplies, in addition to making taxable supplies.

The business makes only exempt activities listed in Regulation 33 (incidental exempt supplies) and is not categorised as anon-qualifying business (as listed in Regulation 34).

The value of all exempt supplies is less than or equal to the de minimus amount, i.e.:

– an average of $40,000 per month; and– 5% of the total value of all taxable and exempt supplies made in that period.

As an initial public offering (IPO) is categorised as an exempt supply, the GST incurred by HHL on such business purchaseswill only be claimable in full, provided HHL satisfies either of the above tests.

If this is the case, HHL may also consider making pre-registration input tax claims within the six-month period before the dateof its GST registration and before the IPO listing.

We hope the above advice is helpful to you.

Should there be any questions or further advice you require, please contact me.

Yours sincerely

Tax Adviser

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2 Sapphire Pte Ltd (SPL)

(a) Capital allowance claim on existing and new equipment

Where a person carrying on a trade, profession or business incurs capital expenditure on the provision of machinery or plantfor the purposes of that trade, profession or business, they will be given, on due claim, a capital allowance under s.19 or19A of the Singapore Income Tax Act (‘SITA’).

As Sapphire Pte Ltd (SPL) will be leasing the existing packaging machine and the new manufacturing equipment to Company M at no consideration to enable Company M to manufacture the product, these two assets should both qualify as‘machinery’ or ‘plant’ to the extent that they are not part of SPL’s trading stock and they are used for manufacturing productsfor SPL for sale.

Based on the proposed business model, in addition to the equipment provided to Company M at no consideration, SPL willalso procure and provide raw materials (at no consideration) to Company M to manufacture the product. In consideration ofthe manufacturing services provided by Company M, Company M will charge SPL certain commissions. Company M appearsto be a toll manufacturer for SPL and so, presumably, SPL will maintain title to the goods at any time during the manufacturingprocess.

In view of the above, it could be argued that the two assets placed by SPL with Company M for use in the manufacturingprocess of the product were in use by SPL for the purpose of its trade or business and therefore a capital allowance claimshould be allowable on the following basis:

– SPL has incurred capital expenditure to acquire the two assets;– the two assets are used for the purpose of SPL’s trade, i.e. to manufacture goods for SPL; and– SPL would be likely to incur maintenance, repairs and depreciation expenses on the two assets, which it owns.

For certainty, an agreement for the proposed arrangement should be concluded between SPL and Company M to documentthe intention of SPL in engaging Company M, the basis of the commission charge and the responsibilities of Company M.

Tutorial note: Under the new integrated investment allowance scheme, a company can apply to the Economic DevelopmentBoard for an additional allowance (on top of capital allowances) to be granted on fixed capital expenditure incurred on orafter 17 February 2012 for production equipment placed overseas on approved projects.

(b) Withholding tax on the monthly outsourced fee payment to Company M

Income tax in Singapore is charged on a territorial basis, i.e. only on income which accrues in or is derived from Singaporeor received/deemed received in Singapore if the income is derived from outside Singapore.

Section 12(7) of the SITA provides that ‘there shall be deemed to be derived from Singapore:

(a) royalty or other payments in one lump sum or otherwise for the use of or the right to use any movable property;

(b) any payment for the use of or the right to use scientific, technical, industrial or commercial knowledge or information orfor the rendering of assistance or service in connection with the application or use of such knowledge or information;

(c) any payment for the management or assistance in the management of any trade, business or profession; or

(d) rent or other payments under any agreement or arrangement for the use of any movable property,

which are borne, directly or indirectly, by a person resident in Singapore or a permanent establishment (‘PE’) in Singapore(except in respect of any business carried on outside Singapore through a PE outside Singapore) or which are deductibleagainst any income accruing in or derived from Singapore.’

Section 12(7A)(a) of the SITA provides that ‘subsection (7) shall not apply to any payment for the rendering of assistance orservice in connection with the application or use of scientific, technical, industrial or commercial knowledge or information,where such rendering of assistance or service is performed outside Singapore for or on behalf of a person resident in Singaporeor a permanent establishment in Singapore by a non-resident person who:

(i) in the event the non-resident person is not an individual, is not incorporated, formed or registered in Singapore; and(ii) in any event:

(A) does not by himself or in association with others, carry on a business in Singapore and does not have a permanentestablishment in Singapore; or

(B) carries on a business in Singapore (by himself or in association with others) or has a permanent establishment inSingapore, but the rendering of assistance or service is not performed through that business carried on in Singaporeor that permanent establishment’.

In the case of SPL, the Singapore withholding tax requirement should not be applicable [pursuant to s.12(7A)(a)] since, whilethe monthly outsourcing fee payment to Company M may potentially fall under s.12(7)(b) or (c) of the SITA, Company M’sservices are likely to be rendered entirely outside Singapore.

(c) Singapore income tax regarding Company M’s employees sent for training at SPL in Singapore

Option 1 – Company M pays the costs first and includes them in the outsourcing fee charged to SPL.Option 2 – Company M pays the costs first and re-charges the actual amount to SPL.

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Deductibility of expenses

For Singapore income tax purposes, an expense would generally be allowed a tax deduction if it fulfils the conditions in s.14of the SITA, i.e. wholly and exclusively incurred in the production of assessable income and it is not specifically disallowedfor tax deduction under s.15 of the SITA. Section 15(1)(c) of the SITA specifically disallows any capital withdrawn or any sumemployed or intended to be employed as capital. In other words, only expenses of a revenue nature (and provided that theyare not specifically disallowed for tax deduction under s.15 of the SITA) wholly and exclusively incurred in the production ofassessable income qualify for a tax deduction.

In addition, for an expense to be allowable, there must also be a nexus between the incurring of the expense and theproduction of income, i.e. the expense must be incidental and relevant to the production of assessable income. In examiningwhether the incidental and relevant test is met, it is necessary to look at the nature of the operation/activities of the trade orbusiness and the relevance of the expenses to that trade or business.

Hence, if the object is the conduct of business on a profitable basis, then an expenditure, which is not capital in nature, maybe considered as incurred in gaining or producing income even if the said expenditure does not actually generate income butis incurred on the grounds of commercial expediency in attempting to earn income or increase the efficiency of the trade orbusiness.

For the purposes of this advice, it is assumed that the training of Company M’s employees will take place when CompanyM’s rented factory in Johor Bahru Malaysia is completed, as this should be the appropriate time for Company M to recruitfactory employees.

Under Option 1, Company M will include the costs in the outsourcing fee charged to SPL. Also, it can be assumed that theywill be included in Company M’s production test expenses for the costs incurred during April to June 2014. Generally, pre-production expenses may not be considered wholly and exclusively incurred to generate income for SPL as no productionhas commenced. However, in this case the production test expenses (including the costs) should, more likely than not, qualifyfor tax deduction for SPL on the basis that they are necessarily incurred in the course of SPL’s trade and on the grounds ofcommercial expediency in attempting to earn trade income.

Under Option 2, Company M will re-charge the actual amount of the costs incurred to SPL. Again, the costs should, morelikely than not, qualify for tax deduction for SPL as they should be considered as necessarily incurred in the course of SPL’strade and on the grounds of commercial expediency in attempting to earn trade income.

Withholding tax implications

Option 1 – As stated in part (b) above, Singapore withholding tax should not be applicable to the monthly outsourcing feepayment to Company M, if Company M’s services are rendered entirely outside Singapore.

Under this option, the outsourcing fee attributable to the number of days Company M’s employees are in Singapore for trainingcould be subject to Singapore withholding tax on the basis that the ‘services’ will be rendered in Singapore. If no breakdownof the amount of outsourcing fee relating to the training in Singapore is provided in the invoice, there is a risk that the wholemonthly outsourcing fee (which included the costs) may be subject to Singapore withholding tax as part of the services willbe rendered in Singapore. If withholding tax is applicable, under Article 13 of the Singapore/Malaysia double taxationagreement, the reduced withholding tax rate is 5% to the extent Company M is tax resident in Malaysia and is the beneficialowner of the outsourcing fee.

Option 2 – Any cost reimbursement payment by SPL to Company M should not attract Singapore withholding tax, and thus,on balance, Option 2 should be SPL’s preferred option.

(d) Individual income tax liability of trainees

Company M’s employees will only have exposure to Singapore individual income tax if the duration of the training in Singaporeis for more than 60 days in a calendar year.

3 (a) A double taxation agreement (DTA) serves to relieve or avoid the incidence of double taxation of income earned in one countryby a resident of the other country. It provides the mechanisms for deciding which of one or more countries should have theright to tax different types of income and/or minimise such double taxation by providing for relief where the same income istaxed in more than one jurisdiction.

The key features that are included in a DTA are:

– Scope of agreementThis typically clarifies that only persons who are residents of one or both countries are covered by the DTA. This isimportant as only qualifying persons may avail themselves of the treaty benefits. It also specifies the types of taxescovered and typically includes income tax but not indirect taxes.

– Residence rules, including tie-breaker clausesDepending on the rules of each country, a person normally resident in one country may also be resident in anothercountry, thus potentially giving rise to dual residency. Where there is a DTA between the two countries, there will be tie-breaker rules to resolve this conflict such that the person will normally be deemed to be resident in only one of thetwo countries.

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– Nature and level of presence required to constitute a permanent establishmentDetailed rules will be set out in a DTA to establish the nature and level of presence or activities required before apermanent establishment is constituted in a particular country, including by the use of agents.

– Various provisions relating to the treatment of specific types of income or profitsDetailed provisions set out the respective taxing rights for the country of residence and the country of source in relationto different types of income. The outcome could be sole taxing rights being assigned to one country or, more commonly,shared taxation between the two countries of the DTA.

– Applicability of preferential rates of withholding taxThe articles on dividend, royalty and interest income typically provide for preferential rates of withholding tax to apply,subject to certain specified conditions.

– Mechanisms for the relief of double taxationWithin the framework of co-operation under a DTA, the country of residence would usually agree to either give credit toits residents for any ‘foreign’ tax suffered on income taxed in the other country, or exempt such income from tax. Thecredit or exemption granted by the country of residence is one way whereby double taxation is eliminated on foreignincome derived by its residents.

– Provision for the exchange of informationThis provision sets out the scope of information which is exchangeable by the competent authorities. Typically, this isrestricted to information which is necessary for carrying out the treaty provisions or the domestic laws of both countriesconcerning taxes covered by the DTA and relates only to persons who are residents of either or both contracting states.

– Effective date and procedures for terminationThis section specifies when the provisions of the DTA become effective. It also deals with how and when the DTA willcease to have effect.

(b) A Ltd

Business profits

First, it is necessary to determine A Ltd’s country of residence. The tie-breaker rules in the DTA between Singapore and Country P will be useful in the event of a conflict based on the respective domestic rules in Singapore and Country P.

Second, it is necessary to determine whether the activities carried out by A Ltd in the other/non-resident jurisdiction do or donot constitute a permanent establishment (PE). Examples of the circumstances in which a PE will exist include the existenceof a building site or construction project; supervisory activities connected with such a building site or construction project; thefurnishing of services; and the presence of an agent who has, and habitually exercises, a general authority to negotiate andconclude contracts on behalf of the enterprise

If A Ltd is not resident in Singapore, then the business profits it earns in Singapore are tax exempt in Singapore so long as A Ltd does not have a PE in Singapore.

On the other hand, where profits are attributable to a PE in Singapore, then A Ltd will be subject to Singapore tax on suchprofits, as if it is an independent enterprise dealing at arm’s length.

If A Ltd is resident in Singapore, it is taxable on the profits it earns from business in both Singapore and Country P, assumingit has not also created a PE outside Singapore, including Country P.

On the other hand, any profits earned in Country P by A Ltd as a resident in Singapore will also be taxable in Country P(country of source) where these are attributable to a PE in Country P. Where such foreign income which has already sufferedtax overseas in Country P is subject to tax again when remitted to Singapore (assuming it does not qualify for exemption),Singapore (as the country of residence) will give credit for the foreign tax suffered.

Royalties

Royalties are typically not business profits unless they are related to a PE.

Country R (as the country of source) may either exempt or levy withholding tax on the royalties. Depending on the DTAbetween Singapore and Country R, tax may be withheld at a lower than normal rate, known as the treaty rate.

As the country of residence, Singapore will tax the royalty income when it is remitted to Singapore. But credit will be givenfor any foreign tax levied in Country R.

General

Although most treaties based on the OECD model contain similar provisions, it is important to check the actual provisions ordefinitions in the specific treaties, particularly regarding royalties.

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4 James Kim

(a) Area representation criteria

To qualify for area representative status, James must have satisfied all four of the criteria below:

– he must be employed by a non-resident employer;– he is based in Singapore for geographical convenience;– he is required to travel outside Singapore in the course of his duties; and– his remuneration is paid by his non-resident employer and not charged directly or indirectly to the accounts of a

permanent establishment in Singapore.

(b) Tax computation of James Kim for the year of assessment 2013

$ $Salary ($30,000 x 12) 360,000Non-contractual bonus (two months) 0Contractual bonus (three months) 90,000Transport and entertainment allowance 25,800

––––––––475,800

Less: Amount applicable to 250 days employment exercised outside Singapore(250/366 x 475,800) 325,000

––––––––Singapore remuneration 150,800Contributions to overseas social security scheme 16,200Monthly subscriptions to Raffles Town Club 1,800 18,000

––––––– ––––––––168,800

Accommodation (lower of 10% of $168,800 or annual rental of $96,000) 16,880––––––––185,680

Less: Personal reliefsEarned income (6,000)Supplementary retirement scheme (25,000)Course fees (maximum) (5,500) (36,500)

––––––– ––––––––Chargeable income 149,180

––––––––––––––––

Tax on first $120,000 7,950Tax on remaining $29,180 at 15% 4,377

––––––––Tax payable 12,327

––––––––––––––––

Date of departure from Singapore Date of arrival in Singapore Countries visited3 January 2012 28 February 2012 India 5513 March 2012 28 April 2012 Hong Kong 452 June 2012 27 June 2012 China 245 July 2012 25 August 2012 Korea 501 September 2012 31 October 2012 Japan 594 December 2012 22 December 2012 Thailand 17

––––Total days outside Singapore 250

––––––––

(c) The IRAS treats a proportion of the days spent on vacation outside Singapore by an area representative as time spent inSingapore. Therefore, of the 19 days James spent on vacation in Thailand. six days will be considered as time spent inSingapore, arrived at as follows: 19 x (366 – 250)/(366 – 19) = 6 days

This will increase the amount of James’s Singapore chargeable income by $8,580 (110% x 6/366 x $475,800).

(d) James would have contributed $100,000 to his supplementary retirement scheme (SRS) over the four-year period from 2012to 2015. Therefore, if James’s marginal tax bracket in each of these four years remains at 15%, he would have saved a totalof $15,000 ($100,000 x 15%) in tax.

In the year 2015, James will withdraw $110,000 (inclusive of the $10,000 gains from making investments). As a foreigner,this withdrawal is considered a premature withdrawal as he would not have fulfilled the condition that he must havemaintained the SRS account for at least ten years from the date of his first contribution and have been a non-Singaporean fora continuous period of ten years before the date of withdrawal. As such, he would be subject to a 5% penalty on the fullamount of the withdrawal of $5,500 (5% of $110,000).

In addition, 100% of his total withdrawal will be brought into tax in the year of withdrawal, resulting in an additional taxliability of $16,500 ($110,000 multiplied by an unchanged tax bracket of 15%).

The total additional tax and penalty of $22,000 ($5,500 plus $16,500) will therefore exceed the tax savings of $15,000over the period of four years.

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5 Victory Parade Pte Ltd

(a) Global trader programme

The global trader programme (GTP) is an incentive scheme which aims to boost Singapore’s position as the preferred regionalbase for the trading operations of global traders. The GTP allows companies which are part of the programme to benefit froma 10% or 5% concessionary tax rate on their qualifying trade income for a five-year renewable period.

Furthermore, the Singapore Government has announced that high-growth medium-sized international trading companieswhich are keen to choose Singapore as their regional base for trading activities can be considered for the concessionary taxrate for an initial, non-renewable three-year period. During this period the companies can establish and develop their regionalor global trading network, with Singapore as their base. Once the companies are able to demonstrate sustainable growthprojections which are in line with the requirements of the GTP, they can apply to join the five-year renewable GTP schemeafter the initial three-year period.

Qualifying criteria

A company can apply to be a part of the GTP if:

– It is a well established international company, (large or medium-sized) and carries out international trading,procurement, distribution and transportation of qualifying commodities and products.

– It intends to use Singapore as its regional base for its principal offshore trading activities, business activities and supportfunctions, including:

– general and administrative management control;– business and investment planning and coordination;– financial control and treasury functions;– market development and planning;– logistics management, including warehousing and freight services.

– It is a bona fide company with a global network and good track record.

– It can ensure that it will:

– principally conduct substantial offshore trading activities;– incur a significant amount of local business spending in Singapore;– employ a substantial number of experienced trading professionals in Singapore;– make significant use of Singapore’s banking and financial services and its ancillary services (e.g. trade and logistics

services, trade institutes and trade arbitration services, etc);– impart manpower training and aid in the development of trading expertise in Singapore.

In addition, the applicant company will be required to meet certain benchmark criteria in relation to:

– minimum annual turnover;– minimum annual local business spending; and– minimum employment of trading professionals (involved in either procurement/sourcing, sales and marketing, or risk

management); these may include senior management and can be either locals or expatriates.

If the company does not meet these benchmark criteria, on application it will be required to show that it can commit to thesebenchmarks for its projected incentive period.

Qualifying products and commodities

The following products and commodities are currently allowed under the GTP:

– energy commodities and products;– agricultural commodities and bulk edible products;– building and industrial materials;– consumer products;– industrial products;– machinery components;– minerals;– electronic and electrical products; and– carbon credits.

This list is periodically reviewed and updated by the authorities.

(b) Goods and services tax (GST) on reimbursements v disbursements

Whether Victory Parade Pte Ltd (VPPL) needs to charge Winning Ways Pte Ltd (WWPL) GST on the re-billed amount willdepend on whether the recovery of expenses is treated as a reimbursement or a disbursement.

Disbursements are not subject to GST as they are regarded as an out-of-scope supply. Otherwise, the recovery of expenseswill be treated as a reimbursement which is considered to be a separate supply made by VPPL to WWPL and VPPL wouldhave to charge GST on the re-billed amount.

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For the recovery of expenses to qualify as a disbursement and so not be subject to GST, all the conditions below must besatisfied:

– the other party (WPPL) is responsible for paying the supplier of the goods and services (ACCA) as evidenced by thesupplier’s invoice;

– the other party knows that the goods and services would be provided by that supplier;– the other party authorised the GST trader (VPPL) to make the payment on their behalf;– the other party is the recipient of the goods or services;– the payment is separately itemised when the GST trader invoices the other party;– the GST trader recovers only the exact amount paid to the supplier; and– the goods and services paid for are clearly additional to the supplies which the GST trader makes to the other party.

Based on the facts, it is likely that VPPL is merely paying ACCA on behalf of WPPL and hence it should be able to treat thetransaction as a disbursement.

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Professional Level – Options Module, Paper P6 (SGP)Advanced Taxation (Singapore) December 2013 Marking Scheme

Available Maximum1 Hori Construction Private Limited (HCPL)

(i) Transfer of shares from HCPL to HHLIncome tax considerations 3·0Stamp duty considerations 1·5GST considerations 1·0

–––––5·5 5·0

–––––

(ii) Singapore income tax positionCorporate tax implications for resident taxpayers 2·5Corporate tax implications for non-resident taxpayers 1·0Residence test for companies 1·0Full tax exemption 1·5Partial tax exemption 1·0Individual tax implications for resident taxpayers 3·0Individual tax implications for non-resident taxpayers 1·0Residence test for individuals 1·0

Purchase, ownership and disposal of the shares of HHL Tax implications for distribution of dividends 2·0Tax implications for gains on the disposal of shares – general 1·5– e-tax guide re companies 2·0Stamp duty considerations 2·0GST considerations 2·5

–––––22·0 18·0

–––––

(iii) GST issues relevant to HCPL and HHL Input tax eligibility of HCPL 1·5GST registration eligibility of HHL 3·5GST treatment of the provision of management services by HHL to HCPL 1·0Input tax eligibility of HHL. 3·5

–––––9·5 8·0

–––––

Appropriate format and presentation of the letter 1·0Structure including relevant headings 1·0Effectiveness of communication 1·0Logical flow 1·0 4·0

––––– –––––35·0

–––––

23

Available Maximum2 Sapphire Pte Ltd

(a) Capital allowance claim on existing and new equipmentConditions for claim 1·0Correct application 3·5Logical conclusion 1·0Desirability of a documented agreement 0·5 6·0

–––––

(b) Withholding tax on the outsourced fee payment to Company MBasis of taxation 1·0Likely fall under technical assistance or management fees under s.12(7) 3·0Withholding tax not applicable for technical assistance or management fees rendered outside Singapore under s.12(7A) 2·5Logical conclusion 1·5

–––––8·0 7·0

–––––

(c) Options for sending employees for trainingGeneral rules re deductibility for SPL 4·0Application to Option 1 2·0Application to Option 2 1·0Withholding tax Option 1 4·0Withholding tax Option 2 1·0

–––––12·0 11·0

–––––

(d) 60 days limitation 1·0–––––25·0

–––––

3 (a) Function 2·0Features – 1 mark each, maximum 6·0 8·0

–––––

(b) Identification of country of residence 1·5Determination of whether a PE exists in non-resident country 2·5Treatment if non-resident in Singapore and no PE 1·0Treatment if non-resident in Singapore but PE 1·5Treatment if resident in Singapore and no PE elsewhere 1·0Treatment if resident in Singapore and is a PE elsewhere 2·5Royalties not business profits unless related to PE 1·0Treatment of royalty 2·0Need to confirm actual provisions in specific treaties 1·0

–––––14·0 12·0

––––– –––––20·0

–––––

24

Available Maximum4 James King

(a) Conditions to claim for area representative status (4 x 1) 4·0

(b) Individual tax computationTotal remuneration 2·5Apportionment for time spent outside Singapore 2·5Benefits (not apportioned) 2·0Personal reliefs 1·5Tax payable 0·5 9·0

–––––

(c) IRAS treatment 1·0Additional days 1·0Additional chargeable income 1·0 3·0

–––––

(d) Total SRS saving on contributions 0·5Why a premature withdrawal 2·0Tax cost of premature withdrawal 1·0Logical conclusion 0·5 4·0

––––– –––––20·0

–––––

5 (a) Global trader programme (GTP)Key features: basic 2·0Alternative qualification for initial three-year period 2·0Qualifying criteria 6·0Benchmark criteria 2·0Qualifying commodities and products 2·0

–––––14·0 12·0

–––––

(b) Reimbursement v disbursementsDifferences between reimbursements and disbursements 2·0Conditions to qualify as a disbursement – 1 mark each, maximum 6·0Logical conclusion 1·0

–––––9·0 8·0

––––– –––––20·0

–––––

25