The Income Tax (Amendment) Bill 2017

A Legislative Juggernaut

The Income Tax (Amendment) Bill 2017 (hereafter referred to as “the Bill”) was read and passed in Parliament on 26 October 2017. Some of its more salient provisions are discussed below.

Enhancing and extending the corporate income tax rebate

It is worth noting that certain key Budget 2017 measures were legislated in the Bill. These include the announced enhancements and extensions to the corporate income tax rebate for the Years of Assessment 2017 and 2018. In line with helping companies cope with the current economic uncertainty, the capping of the current corporate income tax rebate of 50% is raised from S$20,000 to S$25,000 for the Year of Assessment (YA) 2017. The rebate will be extended to YA 2018 as well, albeit at a reduced rate of 20% and capped at S$10,000. On the personal tax front, the Budget announcement of a 20% income tax rebate capped at $500 for all individual tax residents was also legislated by way of this Bill.  
In an era of increasing tax scrutiny, countries need to judiciously manage their headline corporate tax rates while still demonstrating their commitment towards strengthening the global tax administration and governance structure under the auspices of the Base Erosion and Profit Shifting (BEPS) framework. In this context, the enacted rebates go a long way towards alleviating the cashflow burden of many taxpaying firms in Singapore, particularly for those in the SME sector who face a markedly challenging business and economic environment.      

Strengthening the transfer pricing provisions

The existing transfer pricing provisions enacted in the Income Tax Act enshrine the arm’s length principle that is applicable to related party transactions. The Bill introduces certain key changes to the transfer pricing legislation landscape. As a start, there are now provisions for the mandatory preparation of transfer pricing documentation for large taxpayers (i.e. businesses with turnover exceeding S$10 million) with effect from the Year of Assessment 2019 (financial year ending 2018). Penalties for not preparing and putting in place such documentation have been increased to S$10,000 from the previously modest sum of S$1,000, highlighting the tax authorities’ keen focus on transfer pricing enforcement. The tax authorities have also taken steps to clarify the provisions on enforcing the arm’s length principle, in particular the emphasis on substance over form. This includes powers to disregard a transaction where there is an inconsistency or conflict between its form and substance. To this end also, a 5% surcharge is now applicable to all transfer pricing adjustments. All in all, the legislating of these provisions is consistent with the strong and unrelenting commitment on the part of Singapore towards implementing the OECD’s various BEPS initiatives that are aimed at combating harmful tax practices globally.   

Introduction of a tax framework for inward re-domiciliation

The Companies (Amendment) Act 2017 which was passed into law on 10 March 2017 introduced, amongst other things, the legal regime for inward re-domiciliation of foreign corporate entities. The re-domiciliation regime, which came into effect on 11 October 2017, allows foreign companies to transfer their registration to Singapore. Once re-domiciled, the foreign company will become a Singapore company that is required to comply with provisions of the Companies Act like any other Singapore incorporated company. The attractiveness of the regime lies in the fact that it allows a foreign company that is intending to relocate to Singapore for any number of reasons (for example to move its headquarters closer to its client base or to take advantage of Singapore’s key strengths as a global business and financial hub with business-friendly policies, stable political climate, strong rule of law, competitive tax regime and a highly skilled workforce) to retain its corporate identity, history and branding. Importantly, the re-domiciliation will not affect the obligations, liabilities, property or rights of the foreign corporate entity.     
The Bill introduces a tax framework for companies that re-domicile into Singapore under this new regime. The framework complements the regime by outlining the tax treatment of certain expenditures incurred and/or assets acquired, in particular those that may have occurred prior to the re-domiciliation. These amongst, other things, include the specific allowances and deductions that are claimable in respect of items such as transferred-in plant and machinery, intellectual property rights and receivables that subsequently go bad or become impaired. The Bill also provides for the granting of tax credits to a re-domiciled company in respect of any exit taxes imposed by the originating jurisdiction on unrealised profits where those profits are also taxed in Singapore. It is however worth noting that the granting of the tax credits are subject to approval and certain conditions.  

Introduction of Financial Reporting Standard (FRS) 109 tax treatment

The Bill also introduces the tax treatment for FRS 109 which comes into effect for financial periods beginning on or after 1 January 2018, replacing the existing FRS 39. The FRS 109 treatment outlined in these newly enacted provisions in general aligns the tax treatment of financial instruments with the accounting treatment. Unlike in the case of FRS 39, taxpayers do not have an option to opt out of the FRS 109 tax treatment. This is to keep things simple and reduce complexity. The downside to this of course is that taxpayers will not necessarily have the option of bringing to tax such financial gains or losses on a realisation basis of taxation. The silver lining here is that it is understood that the tax authorities are allowing an additional three month instalment plan to facilitate the transition to FRS 109 which will aid taxpayers that are hit with additional taxes as a result of the changeover.   

Adjustments to statutory or exempt income arising from the adoption of FRS 115

The Bill introduces a new Section 34I in conjunction with the implementation of FRS 115 (Revenue from Contracts with Customers) which comes into effect for financial periods beginning on or after 1 January 2018. The section allows adjustments to be made to the statutory or exempt income of a taxpayer in the year that FRS 115 is first applied. Amongst other things, this allows taxpayers to address the tax consequences without having to revise the prior years’ tax computations in particular where the adjustment arising from the new standard is made to retained earnings.

Enabling Singapore to implement its obligations under the multilateral convention to implement tax treaty related measures to prevent BEPS

A key aspect of the Bill is the inclusion of a provision in Section 49 that enables the implementation of Singapore’s obligations under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the Multilateral Instrument. This will ultimately allow Singapore to make modifications to its Double Tax Agreements (DTAs) where necessary to address issues such as treaty abuse. This is again part of Singapore’s wider commitment to supporting and implementing the global BEPS initiative.    

Liberalisation of tax deductions for payments under cost sharing agreements for research and development (R&D) projects

In the Budget 2017, it was announced that taxpayers could opt to claim tax deductions for 75% of payments made under cost sharing agreements (CSA) in connection with R&D projects without the need to provide breakdowns of the expenditure claimed. This was in contrast to the previous requirement of having to provide a full breakdown of such CSA payments to demonstrate that certain categories of disallowed expenditures have been excluded.
In a move that is likely to delight taxpayers engaged in R&D activities, the Bill (in response to post-Budget feedback) does away altogether with these restrictions, in effect allowing a full deduction of such CSA payments without the need to provide a breakdown of the expenditures incurred. Further, an additional 50% deduction on qualifying costs incurred on R&D performed in Singapore, by the taxpayer or an R&D organization on the taxpayer’s behalf under a CSA, would be allowed even if the costs are reimbursed under the CSA.

Increasing the maximum amount of tax deduction and tax exemption for qualifying third-party voluntary contributions made to Medisave accounts of employees and self-employed persons

The Bill also introduces certain changes to the tax exemptions and deductions in relation to voluntary contributions to Medisave accounts of employees and self-employed persons. With effect from 1 January 2018, the maximum amount that an employer can contribute to his employee’s Medisave account (that is not treated as income of the employee) under the Additional Medisave Contribution Scheme will be raised from $1,500 to $2,730 per year. Separately, the maximum tax exemption that a self-employed person can receive on contributions to his Medisave account by an eligible company he works with will be increased from $1,500 to $2,730 per year. In tandem with these changes, there will be a corresponding increase in the tax deduction allowable to the employer for these contributions from $1,500 to $2,730 per year.
If you are impacted by, or require further clarification on, any of these tax changes, please do not hesitate to contact your usual Moore Stephens advisors.