Taxation of Singapore-Based Cost Centres  

Blessed with a strategic geographic location, highly-talented labour, and excellent infrastructure, Singapore provides an ideal destination for multi-national corporations seeking to set up processing centres to support operations regionally or globally. These centres may be remunerated on a cost or cost-plus basis by related parties. 

Hitherto, the Inland Revenue Authority of Singapore (“IRAS”) has, as an administrative practice, allowed companies that operate such processing centres to be taxed on a simplified “cost plus mark-up basis” (“CM basis”). Compared to the “normal trading company” basis of assessment (“NTC basis”), to which such companies will be otherwise subject, the CM basis can help reduce tax compliance costs and enhance certainty on quantum of taxable income.

Going forward, IRAS has tightened rules over the type of companies that can qualify for the CM basis. In this article, we discuss the revised rules and how processing centre companies in Singapore that currently apply the CM basis are affected.

WHICH COMPANIES ARE AFFECTED?

The revision of rules is mainly applicable to “service companies”, i.e. those that render services only to related parties and not third parties.  

CHANGES IN REQUIREMENTS TO QUALIFY FOR CM BASIS

After the changes in tax rules, the CM basis would be strictly meant for service companies that:

•  only provide routine support services; and
•  adopt a 5% mark-up on costs as the arm’s length charge for such services.

“Routine support services” are further defined in the Transfer Pricing Guidelines (TPG), with a detailed list of such services being provided. The qualifying services are those that relate to accounting and auditing, accounts receivable and accounts payable, budgeting, computer support, database administration, employee benefits administration, general administration, legal services, payroll, corporate communications, staffing and recruiting, tax, as well as training and employee development.

IRAS has clarified the CM basis will not be applicable for the following companies:

•  investment holding companies that also provide routine support services;
•  companies that provide non-routine support services; and
•  service companies that use a % cost mark-up other that 5%.

Under the CM basis, the chargeable income is computed based on 5% mark-up on the total cost incurred by the service company (before offsetting any revenue grants received). Service companies applying the CM basis will not be able to claim for deductions such as double or further tax deductions, capital allowances and losses, donations, and foreign tax credits. 

NEXT STEPS

Service companies that no longer qualify for the CM basis should prepare to revert to the NTC basis, latest by YA 2020 (i.e. financial year ended/ending in 2019). Under the NTC basis, a company needs to prepare its tax computation in the usual manner, subjecting the net profits before tax to the usual tax adjustments such as the deduction of non-taxable income, adding back of disallowed expenses, and the deduction of capital allowances, losses and tax-exempt donations to arrive at the assessable income. As with all Singapore companies, service companies are expected to charge arm’s length fees; accordingly, the NTC basis is also subject to transfer pricing adjustments where the remuneration or mark-up these companies receive from related parties is deemed to be not at arm’s length. 

Service companies that continue to qualify for the CM basis should consider if it will be more advantageous to apply those tax adjustments and claims that have been excluded from the CM basis. If so, they should also consider transiting to the NTC basis. 

Finally, companies that are transiting to the NTC basis should be aware that certain transitional adjustments can be applied in the transition year of assessment. For more details on transitional adjustments, or other matters related to the changes in the CM basis, please feel free to contact your usual tax services engagement team or contact us via www.complete-corp.com/contact or the author via the email below.

lawpeiserh@complete-corp.com.sg