Tackling Tax Evasion Worldwide

BEPS (Base Erosion and Profit Shifting) practices cost countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.

Working together in the OECD/G20 BEPS Inclusive Framework, over 130 countries are implementing 15 Actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

Dual Residency Status

The residency rules for each country are unlikely to be identical, therefore a person normally resident in one country may also be resident in another country, thus potentially giving rise to dual residency.

Where a DTA (Double Tax Agreement) exists 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 the two countries.

Extract of Model Tax Convention Article 4:
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof.
This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
 a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
 b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
 c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
 d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. 

Tax Residency - Benefits of being a SG tax resident

According to section 2 of ITA (Income Tax Act), the residency status of a company is dependent on the location where the control and management of its business is exercised. As control and management of a company is vested with the board of directors, therefore the place where the board meets is the place where management and control is exercised. 

Question:

Is a Singapore branch of a foreign company a tax resident in Singapore?

Answer:

No.

Benefits of being a resident company:

1. It is entitled to benefits conferred under the Avoidance of Double Taxation Agreements (DTA) that Singapore has concluded with treaty countries.

2. It can enjoy tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income under section 13(8) of ITA.

3. It can enjoy tax exemption scheme for new start-up companies.

Tax Residency Status

As different tax treatment applies to resident and non-resident taxpayers, it is important to determine the residency status of a taxpayer.

Tax Residency for Individuals

The definition of "resident in Singapore" in relation to an individual in s2 of ITA implied that there are 2 mututally exclusive tests to be applied, namely Qualitative Test and Quantitative Test. Where the Qualitative test is not met, there are 2 exceptions or concessions to qualify a foreigner who is employed in Singapore to be a tax resident in Singapore.

QUALITATIVE TEST
In the year preceding the year of assessment (Basis Period), an individual is a resident in Singapore if he resides in Singapore except for such temporary absences therefrom as may be reasonable and not inconsistent with a claim by such person to be resident in Singapore.

"resides in Singapore" - means a degree of permanency in the individual's intent to make Singapore as his/her home. Generally, Singapore citizens are considered to "reside" in Singapore.

"temporary absences" - Factors to consider: * past history of residence, * present habits and way of life, * family and business ties, * house/a place of stay

QUANTITATIVE TEST
In the year preceding the year of assessment, an individual is a resident in Singapore if he is physically present or who exercises an employment (other than as a director of a company) in Singapore for 183 days or more.

"other than director" - where the directors are non-executive directors, only the physical presence test is applicable. However, where the directors are executive directors (i.e working), both the physical presence and the employment test can be applied.

Exception to the Quantitative Test:

Where a foreigner is physically present and exercising employment in Singapore and has failed to meet the quantitative test, the following exception/concessions may qualify him to be a tax resident in Singapore for the relevant years of assessment:

(1) 3-year Administrative Concession: Foreigners who are physically present or working in Singapore for 3 consecutive years can be a tax resident for all 3 years of assessment.

(2) 2- year Administrative Concession: This is applicable for foreign employees who enter Singapore from 1 Jan 2007 and has stayed or worked in Singapore for a continuous period of at least 183 days which straddle over 2 calender years. Such foreign employees can qualify to be tax residents for both relevant years of assessment. Note that the foreign employee can opt not to enjoy the concession BUT he cannot opt to be a resident for 1 year and a non-resident for the other year.


Tax Residency for Companies

According to s2 of the Income Tax Act (ITA), the residency status of a company or a body of person is where the control and management of whose business is exercised.

As the control and management of a company is vested with the board of directors, the place where the board meets is the place where management and control is exercised and not the place where the day-to-day running of the business or the place of incorporation is.


Tax treatment: Resident vs Non-resident Company

Generally, the basis of taxation for a resident company and non-resident company is the same. However, only resident companies can enjoy the following benefits:
- Entitlement to benefits conferred under the Avoidance of Double Taxation Agreements (DTA)
- Entitlement to claim of Double Tax Reliefs (DTR) and Unilateral Tax Reliefs (UTR)
- Tax exemption on foreign-sourced dividends, foreign branch profits and foreign-sourced service income under section 13(8) of the Income Tax Act.
- Tax exemption scheme for new start-up companies.

Who and When will taxpayers be taxed?

WHO are the taxpayers?

s10(1) of Income Tax Act (ITA):"Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore..."


s2 of Income Tax Act (ITA):
"person" =
+ individuals
+ a company
+ a body of persons
+ a Hindu joint family

WHEN will the taxpayers be taxed?

(a) Preceding Year Basis
Year of Assessment (YA): YA refers to the tax year in which income tax is calculated and charged. Each YA begins on 1 Jan and ends on 31 Dec.

Basis Period (BP): BP refers to the period that the income is earned for a particular YA.
In Singapore, we are on the preceding year basis, therefore the BP for a particular YA is always the previous year of that YA.

(a) Individuals : BP is the preceding calendar year.
(b) Business: BP is the preceding financial accounting year.

Question:

John owns a sole-proprietoship business providing consultancy services. The SP business adopted 31 March to be its year-end. For the year ended 31 March 2016, the SP business recorded an adjusted taxable profit of $60,000.
In addition, the SP business purchased an office unit 3 years ago which is currently rented out since 1 September 2015. The net rental income per month is $2,000.

John also rented out his private condominium since 1 March 2016. The net rental income per month is $1,900.

Calculate the tax payable by John for the year of assessment 2017.

What is Taxable in Singapore?

So what is taxable in Singapore?
(a) Territorial System of Taxation
Income under s10(1)(a) - (g) of Income Tax Act (ITA) is chargeable to tax if it is:
Accrued in Singapore OR
Derived from Singapore OR
Received in Singapore from outside Singapore

(b) Income of Revenue Nature
Only income of a revenue nature is taxable. Singapore does not impose tax on Capital gains.

Guidelines from common law:
1. Receipts of a recurrent nature are more likely to be treated as revenue receipts.

2. Compensation received for the destruction of the recipient's profit-making apparatus are receipts of a capital nature.
- Barr, Crombie & Co vs CIR.

3. Money received in lieu of trading receipts is of revenue character.
- Kelshall Parsons & Co vs CIR.

4. Money received for restriction on income earning activities of a person is capital in nature.
- Higgs vs Oiliver
- Glenboig Union Fireclay Co Ltd vs IRC.

5. Receipts for the sale of the (non-current) assets of a business are prima facie capital receipts.

Question:
James, an machinery manufacturer, received $200,000 as compensation from its raw materials supplier for the cancellation of a trading contract. He was given the following advice:
1. Compensation for the cancellation of a trading contract is always a taxable receipt.
2. Compensation for the cancellation of a trading contract is always a non-taxable receipt.
3. The taxability of the compensation is dependent solely on whether the contract is for trade purposes.
4. Compensation for the cancellation of a trading contract is not taxable if the cancellation of the contract will cause destruction to James's manufacturing operations.

Which of the above advice is correct?

Determining Revenue vs Capital: Badges of Trade

1. Nature of subject matter

This refers to the nature of the asset/ property that is being bought and sold. Some property (e.g. commodities, manufactured items) are normally regarded as the subject of trading while others are less likely to be regarded as trading when they are not bought in quantity (e.g. antiques, art work).

 2. Length of ownership

This refers to the holding period of the asset/ property in question. The shorter the holding period, the more likely it would be regarded as held for trading.

 3. Frequency of transactions

High frequency of similar transactions is more indicative of trading than an isolated transaction.

 4. Supplementary work

This refers to additional work done on the asset/ property in question to make it more marketable or extra effort made to find or attract purchasers. If this is done, it is more likely that the subsequent disposal would be regarded as trading.

 5. Circumstances of the realisation

Some circumstances are less likely to indicate trading (e.g. company is forced to sell the property in question due to compulsory acquisition, sudden urgent need of cash or threat of foreclosure by creditors).

 6. Motive

This refers to whether there was an intention to trade at the time of the acquisition of the asset/ property in question.

 7. Mode of financing

This refers to how the purchase of the asset/property in question is being financed. Short-term financing is more indicative of trading than long-term financing. The company's financial position and ability to hold on to the property will also be taken into consideration.

 8. Other factors

Other factors include whether there were any feasibility studies conducted, the accounting treatment of the company, the availability of documentation or other evidence maintained by the company to indicate its intention.