Specific investment opportunities • Health and elder care services • Mobile e-commerce and services provided over internet • Services intended for the consumer market (growing at 8.6% monthly) • High tech manufacturing (semiconductors for artificial intelligence, cloud computing and industrial automation) • Robotics and process automation • Environment and “green” technologies • Education (tutoring and English language schools) • Health products (skin care, dietary supplements) • Pharmaceuticals and medical equipment • Jewelry production • Import/export trading 18
What to watch for: Withholding tax (10% or treaty rate) applies to: Dividends or equity-related bonuses Interest Royalties / licenses (and associated services) Lease / rental of immovable property Direct or indirect transfers of equity Withholding tax on cross-border service transactions Applies when PE is formed (6 months or 183 days in 12-month period) Several methods of calculation – most commonly “deemed profit” Buyer acts as withholding agent (and should register service contracts) o Law allows that non-resident can declare / pay tax on an actual basis – but seldom practiced If treaty benefits are relevant (no PE), application for benefits is required 19
What to watch for: VAT misunderstanding in cross border transactions VAT is commonly withheld in error from payments made to overseas service providers The buyer of goods and services should pay VAT Specify VAT responsibility in contracts Regulatory compliance errors Must understand Individual Income Tax rules and Permanent Establishment implications as related to foreign workers in China (including employees of overseas service providers) Reporting of certain types of offshore transactions is required (e.g. equity transfer of a foreign entity that owns a taxable entity in China) Some activities require a Chinese partner (e.g. a foreign event management company providing service in China) Transfer pricing documentation requirements (e.g. annual reporting of all 20 related party transactions by WFOEs)
Contact Us Thank You henrytan@nexiats.com.sg Myanmar Singapore China Malaysia NTS Myanmar Co Ltd. Nexia TS Public Accounting Corporation Nexia TS (Shanghai) Co., Ltd.. NTS Asia Advisory Sdn Bhd La Pyayt Wun Plaza, 410(B), 80 Robinson Road , #25-00 Room A, 20 Floor, Heng Ji Building, No. 99 Unit No 23A-06, Level 23A 4 th Floor, 37 Alanpya Pagoda Road, Singapore 068898 East Huai Hai Road, Huang Pu District, Menara Landmark, No. 12 Dagon Township, Tel: (65) 6534 5700 Shanghai 20021, China Jalan Ngee Heng Yangon, Myanmar Fax: (65) 6534 5766 Tel: (8621) 6047 8716 80000 Johor Bahru, Johor Tel: (951) 370 836, 370 837, 370 838 Email: nexiats@nexiats.com.sg Fax: (8621) 6047 8712 Tel: (60) 7 221 3285 Ext- 406, 407, 408 Website: www.nexiats.com.sg Email: china@nexiats.com.sg Fax: (60) 7 221 3289 Fax: (951) 376 945 Website: www.nexiats.com.cn Website: www.ntsasia.com.my Website: www.nts.com.mm
International Tax Updates • Taxation of the Digital Economy • Economic Substance Requirements • Transfer Pricing Presented by Edwin Leow, Head of Tax NEXIA TS PUBLIC ACCOUNTING CORPORATION
Taxation of the Digital Economy
Why Digital Service Tax? Location of the Where are the enterprise services rendered? No physical presence Digital Service Tax Where are the services Fair share of taxes consumed? Solutions 24
Digital Service Tax - EU Commission The first proposal (long-term solution, reform corporate tax rules) 25
Digital Service Tax - EU Commission Second Proposal: Interim tax 26
Digital Services Tax - OECD Proposed changes to profit allocation and nexus rules • User participation proposal – Users create the value. Targeted at certain businesses, e.g. social media platforms, search engines, online marketplaces • Marketing intangibles proposal – Market intangibles in the market jurisdiction e.g. customer data, customer relationships. Not targeted at certain businesses. • Significant economic presence proposal – Purposeful and sustained interaction with the jurisdiction via digital technology e.g. sustained revenue, user base, sustained marketing and sales promotion activities 27
Digital Service Tax - G20 • In 2018: Despite disagreements over potential consequences of digital taxation, G20 has explicitly acknowledged the possibility of a long-term, consensus-based solution on digital tax policy • In 2019:Finance ministers have come to the agreement to come up with common rules to implement common rules to close loopholes used by tech giants to minimize corporate taxes by 2020 • The 2 pillars: – Pillar 1: The right to tax companies where their goods and services are being sold/consumed, even when the company does not have a physical presence there. – Pillar 2: To apply an agreed global minimum tax rates 28
Digital Service Tax Why digital services tax – on a practical level Businesses with a substantial digital footprint but no physical presence in a jurisdiction (e.g. GAFA, Netflix, Spotify) – ‘fair’ share of taxes from revenues Exploitation of the intangible presence by MNEs Level the playing field between local companies and overseas companies (GST) 29
Digital Services Tax – A Global Perspective • France • Spain • Italy • Switzerland • South Africa • India • Other jurisdictions
France Levy Digital Services Tax (DST) Since when On 6 March 2019, the French government released a policy document outlining its DST proposal that will be taking effect in 2019 (retrospectively w.e.f. 1 January 2019) The bill introducing a digital services tax was approved by the French National Assembly recently • Interfaces and websites that connect clients and businesses On what • Advertising companies that provide targeted ads • Resellers of private data for advertisement purposes Rate 3% • Worldwide revenues from taxable services €750m (approx. S$1.1b) per Threshold/ Exemptions annum; and • Taxable revenue from taxable services obtained in France exceeding €25m (approx. S$38m) per annum liable for DST Impact/Remarks Expected to raise €500m (S$762m) per year from the tax The DST shall be abolished and replaced by an OECD solution if the latter 31 incorporates the taxation of digital activities
France 32
Spain Levy Digital Services Tax (DST) Since when 23 Oct 2018 – the Spanish government released a preliminary draft bill 23 Jan 2019 – after a public consultation, the Spanish government published a revised version, which becomes the final bill On what Gross income derived from certain digital services for which user participation is essential for creating value e.g. • Targeted online advertising • Online intermediation services • Sale of user data Rate 3% • Worldwide revenues of €750m (approx. S$1.1b) per annum; and Threshold/ • Taxable revenue obtained in Spain exceeding €3m (approx. S$4.6m) Exemptions per annum would be subject to DST Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020 33
Italy Levy Digital Services Tax (DST) Since when 1 Jan 2019 – introduced in the Italian Budget Law 2019. The Ministry of Finance was expected to issue an implementing decree by 30 April 2019. The decree is not passed. The DST will be effective from the 60 th day after publication of the decree in the Official Gazette • Advertising routed on a digital interface to its users On what • Providing a multilateral digital interface • Transmitting data through the use of a digital interface Rate 3% • Worldwide revenue for the relevant taxable year exceed €750m Threshold/ Exemptions (approx. S$1.1b); and • Taxable revenues within the Italian territory during the relevant year exceeding €5.5m (approx. S$8.4m), liable to DST • Digital services rendered between parties belonging to the same group exempt 34 Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020
Switzerland Levy No DST. Value Added Tax levied on certain e-services/digital products Since when 2010 On what Supply of specified digital products/services to Swiss resident individuals or unregistered service recipient Rate 7.7% Threshold/ CHF100,000 (approx. S$138,000) on global income Exemptions Impact/Remarks At present, Switzerland is not planning to introduce interim measures such as the digital tax proposed in the EU. Such interim measures based solely on turnover in market areas can lead to double taxation and over-taxation and make it difficult to achieve a global consensus for a definitive solution. 35
South Africa Levy Value Added Tax Since when 2014 On what Electronic services supplied by non-resident supplies to residents Rate 15% Threshold/ Sales revenue up to ZAR 50,000 (approx. S$4,800) Exemptions Impact/Remarks It was recently revealed that SARS collected ZAR 585m (approx. S$56m) in 2016/2017 from tax on digital services 36
India Particulars Equalisation GST (Payable by GST (Reverse Charge SEP Levy Service Provider) Mechanism) Service/ Activity Online Online course Online course Downloading advertising of consisting of pre- consisting of pre- films on fashion brand recorded videos and recorded videos and Netflix by through Google downloadable PDFs downloadable PDFs Indian customers Fees / Gross INR 1,000,000 INR 1,000,000 INR 1,000,000 INR Consideration 1,000,000 Less: INR 400,000 INR 400,000 INR 400,000 INR 400,000 Expenses Income INR 600,000 INR 600,000 INR 600,000 INR 600,000 EL @ 6% INR 60,000 GST @ 18% INR 180,000 INR 180,000 (RCM) – recipient pays Income tax @ INR 240,000 40% 37
Other Jurisdictions Malaysia W.E.F. 1 Jan 2020, service tax of 6% on any digital service that is provided by a foreign service provider (FSP) to a consumer in Malaysia. FSPs who meet the mandatory registration threshold (likely to be RM500,000 per annum of digital services provided to Malaysian customers) are required to register for service tax with the Royal Malaysian Customs Department. Thailand The Thai government is reviewing to change their existing VAT legislation. Interested in levying 5% VAT of all e-commerce goods and services transactions. China The Chinese tax authority is working on reforming its VAT system and they continue to investigate how to tax the digital economy. United Kingdom Plan to introduce Digital Services Tax from April 2020 38
Digital Services Tax Singapore • GST : effective 1 Jan 2020 – reverse charge (B2B) – Overseas Vendor Registration (B2C) • Will Singapore implement proposals by OECD/G20? 39
Digital Services Tax Types of digital services tax Digital Services Tax Indirect Taxes Equalisation Direct Taxes (e.g. GST reverse Levy charge) 40
Conclusion Are you prepared? 41
Economic Substance Requirements (“ESR”)
ESR: What is this all about? Introduction The ESR legislation was introduced in response to concerns expressed by the EU 1 Code of Conduct Group about the lack of clear legal substance requirements for entities conducting business in and through certain offshore jurisdictions. Serves to address situations where entities artificially shift profits into these 2 offshore jurisdictions which do not actually reflect the true economic activities conducted and economic presence . ESR legislation for each offshore jurisdiction may vary. However, the approach in 3 tackling / addressing such situations are broadly similar . 43
ESR: Common Offshore Jurisdictions The British Overseas Territories THE BRITISH VIRGIN ISLANDS THE CAYMAN ISLANDS BERMUDA ESR legislation for these jurisdictions became operative with effect from 31 December 2018 or 1 January 2019 (as the case may be). In other words, ESR legislation is applicable for accounting periods commencing on or after 1 January 2019! 44
ESR: Who is in-scope? The British Overseas Territories Broadly, any company or limited partnerships established or incorporated within the legal remit of these jurisdictions should pay attention. Such companies or limited partnerships should satisfy the requisite economic substance tests for any “relevant activities” carried out in these jurisdictions. Relevant activities are broadly as follows:- FUND BANKING INSURANCE FINANCING LEASING MANAGEMENT HEAD QUARTERS 45
ESR: What are the economic substance tests? The British Overseas Territories Being managed and directed in that jurisdiction. Carrying out of core income generating Broadly, they are as follows:- activities with respect to the relevant activity. Pure equity holding entities are usually Maintains ECONOMIC subject to adequate SUBSTANCE TESTS REDUCED presence. substance requirements. DISTRIBUTION INTELLECTUAL Adequate full-time SHIPPING Intellectual property AND SERVICES PROPERTY employees with activities are usually CENTRE suitable subject to ENHANCED qualifications. Adequate operating expenditure substance requirements. incurred with respect to the 46 relevant activity.
ESR: What if I fail to comply? The British Overseas Territories In-scope entities that conduct relevant activities but fail to comply with the economic substance tests may expect:- Exchange of information 4 mechanisms may be put in place for automatic exchange of information 3 to the respective foreign tax authorities for the entities that may 2 be found in breach of the substance requirements . 1 Strike off of entities, freezing of bank accounts. Imprisonment DISTRIBUTION HOLDING INTELLECTUAL SHIPPING AND SERVICES ENTITY PTY Progressive fines (for example in the Cayman Islands, the CENTRE first financial penalty of CI$10,000 would apply, with a subsequent CI$100,000 fine if the failure is repeated in the subsequent financial year.
ESR: Takeaways! (1/2) The British Overseas Territories Significant impact may ensue on a broad range of entities and parties, including but not limited to:- • A Singapore listed group with a Cayman Islands listing vehicle or multi-tiered intermediate BVI/Cayman Islands investment holding companies. Although reduced substance requirements may apply to investment holding companies, they will still need to have adequate number of qualified employees and premises located in the BVI/Cayman Islands for holding and managing the equity investments. Also consider this, given that each holding company within the group is required to have adequate substance, the costs of maintaining these BVI/Cayman Islands holding companies to be incurred by the listed group may invariably increase. • The same issues as mentioned above applies to a private business group or a family business / trust which uses multiple BVI/Cayman Islands companies for holding their equity investment or real estate property.
ESR: Takeaways! (2/2) The British Overseas Territories Significant impact may ensue on a broad range of entities and parties, including but not limited to:- • A business group which utilises a BVI/Cayman Islands company to hold an IP and where the majority of profits derived from such IP is booked in such BVI/Cayman Islands company. Does the BVI/Cayman Islands company have adequate substance / performed the requisite development, enhancement, maintenance, protection and exploitation functions that commensurate with the profits booked? • A Singapore parent company with a BVI/Cayman Islands subsidiary, where the BVI/Cayman Islands subsidiary is managed and operated from Singapore. If the BVI/Cayman Islands subsidiary is subject to, but fails to meet, the new ESR, the information of non-compliance of the BVI/Cayman Islands may be exchanged with the IRAS. This potentially may lead to current as well as past tax and non-tax (e.g. non-compliance with business registration requirement in Singapore) exposure of the BVI/Cayman Islands subsidiary in Singapore.
ESR: Potential Solutions! Take advantage of Singapore’s extended tax 1 exemption schemes (e.g. fund tax exemptions / foreign trust exemptions) and the new Intellectual Property Development Incentive 2 Consider inward re-domiciliation 3 Discontinue the offshore entities and consider using a Singapore company to hold the equity / debt investments and / or IP assets.
Review and discuss with us! Myanmar Singapore China Malaysia NTS Myanmar Co Ltd Nexia TS Public Accounting Corporation Nexia TS (Shanghai) Co., Ltd. NTS Asia Advisory Sdn Bhd La Pyayt Wun Plaza, 410(B), 80 Robinson Road , #25-00 Room A, 20 Floor, Heng Ji Building, No. 99 Unit No 23A-06, Level 23A 4 th Floor, 37 Alanpya Pagoda Road, Singapore 068898 East Huai Hai Road, Huang Pu District, Menara Landmark, No. 12 Dagon Township, Tel: (65) 6534 5700 Shanghai 20021, China Jalan Ngee Heng Yangon, Myanmar Fax: (65) 6534 5766 Tel: (8621) 6047 8716 80000 Johor Bahru, Johor Tel: (951) 370 836, 370 837, 370 838 Email: nexiats@nexiats.com.sg Fax: (8621) 6047 8712 Tel: (60) 7 221 3285 Ext- 406, 407, 408 Website: www.nexiats.com.sg Email: china@nexiats.com.sg Fax: (60) 7 221 3289 Fax: (951) 376 945 Website: www.nexiats.com.cn Website: www.ntsasia.com.my Website: www.nts.com.mm
Transfer Pricing Updates
India Regulations: The transfer pricing laws are in force since 2001 under section 92 of the Indian Income Tax Act, 1961 and corresponding rules. Disclosure: Indian tax payers are required to disclose their related party transaction details in a separate form No. 3CEB to be filed along with their income tax return. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis. Exempt if international transaction value is less than INR 10 million (S$195,000). Most Appropriate Method and preference for comparable: the Five methods as defined by the OECD as well as a “sixth method – “Other method as may be prescribed by the board”. However, there is no hierarchy for application of methods but predominantly the Transactional Net Margin Method is used. Preference is given to local comparables only. BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Apr-2016 CbCR compliances would be applicable for groups with a revenue threshold of INR 55 billion (S$1 bil) w.e.f 1-Apr-2016 Master File implemented as per OECD templates – with a threshold of INR 5 billion (S$97 mil) of the group revenue and INR 500 million (S$9.7 mil) of the international transactional value Unique Inter-quartile Range: Use of multiple year data as opposed to single year data has been introduced. Taxpayers can use inter-quartile range of 35th to 65th percentile in cases where the comparable dataset contains more than six data points. Safe Harbour Provisions have been rationalised and APAs have picked up pace. 54
Hong Kong Regulations: The transfer pricing laws were prescribed & implemented in the Inland Revenue Ordinance in 2018. Disclosure: Hong Kong tax payers are required to disclose their related party transaction details in their annual income tax return. Documentation: Transfer pricing documentation may be prepared in English or Chinese language. Master File and Local File to be prepared for each year with exemption in certain cases. Most Appropriate Method: Hong Kong gives priority to the traditional methodologies and then the transactional methodologies. If both cannot be applied, then Other Method may be used. Royalty: Section 15F is newly added to the Bill to impose tax on Hong Kong taxpayers if they are involved in value creation activities such as (DEMPE) functions in Hong Kong that contributed to an intellectual property held by any overseas related party. BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2018 CbCR compliances would be applicable for groups with a revenue threshold of HKD 6.8 billion (S$1.2b) w.e.f 1-Jan-2018 Master File & Local File implemented per OECD templates Interest on Loans - Companies should review if interest is indeed chargeable, and if so, the company should also ensure that the interest rates and the relevant terms of related party loans comply with the arm’s length principle. Attribution of profits to a permanent establishment - The new transfer pricing regime effectively adopts the authorized OECD Approach by treating the PE as a separate and distinct entity in determining attributable income or loss 55
Vietnam Regulations: The local transfer pricing laws are contained in Decree 20 (of 2017) Disclosure: Vietnamese tax payers are required to comply with mandatory disclosures of related party transactions and transfer pricing information in Form No. 01. This includes voluntary transfer pricing adjustment (viz, operating results of taxpayers with three forms for different sectors), to maintain and submit (CbyC), besides enhanced annual disclosures. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in cases i.e. if total revenue is less than VND 50 billion (S$3 million) and the related-party transaction value is less than VND 30 billion (S$1.8 million); amongst others. Most Appropriate Method and preference for comparable: the five methods as defined by the OECD and preference is given to internal comparables only. BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-May-2017 CbCR compliances would be applicable for groups with a revenue threshold of VND 18 trillion (S$1 billion) w.e.f 1-May-2017 Master File & Local File implemented per OECD templates A new law for taxation of e-commerce transactions, remote digital sales (Effective 1 July 2020): if there are e-commerce activities provided by non-resident suppliers, if there is no permanent establishment, the suppliers must register, declare, and pay tax in Vietnam. While the system is not yet certain a withholding tax could be levied. Expected changes to Decree 20 on Interest deduction rules: Currently Decree 20 limits deductions for related party total loan interest to 20% of total net profit generated from business activities plus loan interest and amortization costs arising in that period. Amendments are expected to be issued in 2019. it is expected that the interest deduction limits would only apply to taxpayers that are foreign-invested companies in Vietnam. 56
Malaysia Regulations: The local transfer pricing laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia Transfer Pricing Rules 2012. A new Chapter X has been introduced explaining the applicability of the CUP method for commodity transactions. Disclosure: All Malaysian companies having related party transactions are required to disclose their domestic and cross-border related party transactions under Part N of the income tax return (Form C). This includes Part R4 of Form C that explicitly requires taxpayers to state whether documentation has been prepared or no. Additionally, taxpayers are also required to file Form MNE (cross-border transactions) or Form JCK (domestic transactions), as may be applicable. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in certain cases i.e. if annual gross income in the preceding taxable year no more than MYR 25 million (S$8 mil) and total related party transactions below MYR 15 million (S$5 mil); amongst others. Most Appropriate Method: Transactional profit methods are encouraged only in cases when traditional transactional methods cannot be reliably applied. Furthermore, the guidelines specifically disregard global formulary apportionment (considering such arrangements as arbitrary). Preference is given to local comparables. Intra-group loans: the CUP method is considered most reliable. Local indices such as the Kuala Lumpur Inter Bank Offered Rate (KLIBOR) may be readily used to benchmark intra-group loans Intra-group services: a service recipient may apply an external Comparable Uncontrolled Price (CUP) method together with a benefit test. Whereas a service provider may apply CUP method or the Cost Plus Method (CPM). BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2017 CbCR compliances would be applicable for groups with a revenue threshold of MYR 3 billion (S$1 billion) w.e.f 15-Jul-2017 Master File & Local File implemented per OECD templates 57
Indonesia Regulations: Transfer pricing laws are contained in Article 18 (of 1983) and formal transfer pricing guidelines were introduced in 2010. Disclosure: Indonesian tax payers are required to disclose their related party transaction details in their corporate income tax return and additionally (in PMK-213) it is also required to file details on Master File and Local File applicability. Documentation: Transfer pricing documentation (i.e. Local and Master File) to be prepared on a contemporaneous basis & exempt in cases i.e. if annual gross turnover in the preceding taxable year no more than 50 billion Rupiah (S$5 million); amongst others. Most Appropriate Method and preference for comparable: While the five methods as defined by the OECD without any hierarchy. Comparable uncontrolled price (CUP) is considered to be the preferred method by the tax authorities. Pan-Asian comparables also accepted, if adequate domestic comparables are not available. Royalty: the arm’s length nature of royalty paid is generally a challenge, by deeming licensee to be contract manufacturers Intra-group services: Taxpayers need to apply the ‘Benefit Test’ to substantiate that intra-group services actually received and the quantum of service charge is commensurate with the benefits derived BEPS Update: In 2017 the latest update for master file and CbCr was introduced as per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2016 CbCr compliances would be applicable for groups with a revenue threshold of IDR 11 trillion (S$1 billion) w.e.f 1-Jan-2016 Master File & Local File implemented as per OECD templates APA is at a nascent stage and no APA has been concluded till date in Indonesia 58
Singapore Evolution of Transfer Pricing 59
Singapore Recent updates • TPD mandatory starting YA 2019 • CbCR effective for FY beginning on or after 1 Jan 2017 • Transfer Pricing Guidelines Special Topic – Commodity Marketing and Trading Activities • Dormant companies – Form C: YA 2019 – RPT in financial statements 60
Concluding Remarks & Way Forward • TP in APAC is taking active shape now; it can be anticipated that more countries would introduce detailed TP regimes • APAC would be next hot bed for transfer pricing disputes • Increase importance of documentation post the OECD BEPS Action Plan 13 • Automatic Exchange of Information across borders within different countries under MCAA • Stringent penalties - compliance with documentation requirements is crucial • Revisit and align business processes and value chain in the light of new documentation regime
Refreshments
Private and Confidential Tax Treatment Arising from Adoption of FRS 116 or SFRS (I) 16 - Leases By Mr. Koy Su Hiang Associate Director, Tax 16 August 2019 NEXIA TS PUBLIC ACCOUNTING CORPORATION
Tax Treatment Arising from Adoption of FRS 116 / SFRS(I) 16 – Leases • FRS 116 / SFRS(I) 16 applies with effect from annual reporting periods on or after 1 Jan 2019. Replaces FRS 17. • IRAS issued e-Tax Guide on 8 Oct 2018 for guidance on tax treatment for entities adopting FRS 116 or SFRS(I) 16.
Our Roadmap Meaning of terms Classification of leases under FRS 17 Classification of leases for tax purposes Tax treatment of leases under FRS 17 Classification of leases under FRS 116 Tax treatment of leases under FRS 116 Singapore withholding tax implications Interest adjustment - Application of Total Assets Method Example to illustrate the tax treatment for leases
Tax Treatment Arising from Adoption of FRS 116 / SFRS(I) 16 – Leases Meaning of terms Finance lease (“FL”) For the purpose of Sec 10D of Income Tax Act (“ITA”), it means a lease of any machinery or plant with the effect of transferring substantially the obsolescence, risks or rewards incidental to ownership to the lessee. Operating lease (“OL”) For the purpose of Sec 10D, it means the leasing of any machinery or plant, other than finance leasing. Sec 10D Regulations Refer to the Income Tax (Income from Finance Leases) Regulations.
Tax Treatment Arising from Adoption of FRS 116 / SFRS(I) 16 – Leases Meaning of terms Sec 10D Regulations. A finance lease (“FL”) shall be treated as a sale agreement if – a. The lessee has an option to purchase the machinery or plant during the term of the lease including any extension or renewal thereof or upon its expiry; b. The machinery or plant which is leased is a limited use asset; c. The machinery or plant in a sale and lease-back transaction has been previously used by the lessee or any other person;
Tax Treatment Arising from Adoption of FRS 116 / SFRS(I) 16 – Leases Meaning of terms Sec 10D Regulations (cont’d) d. The lessor and lessee are related to each other and – (i) The lessee or any other person related to the lessee lends to the lessor any of the funds necessary to acquire the leased asset or guarantees any of the debt of the lessor incurred in connection with the lease; (ii) The terms of the lease are determined otherwise than on the basis that there is no such relationship between the lessor and the lessee; or (iii) The total value of the rentals or hire received or receivable for the terms of those finance leases entered into by the lessor with lessees, who are related to the lessor, at any time during the basis period for any year of assessment exceeds half of the total value of the rentals or hire received or receivable for the term of all finance leases entered into by the lessor in that basis period; or e. The lease is a leveraged lease unless the Comptroller determines that it is otherwise.
Classification of Leases Under FRS 17 Classification of lease Classification of lease for accounting purpose for tax purpose (under Sec 10D) OL OL FL FL not treated as sale FL treated as sale (under Sec 10D Regulations)
Classification of leases for tax purposes Does lease arrangement meet the No definition of a FL under Section 10D(3) of ITA? Yes Is any of the conditions under No paragraphs (a) to (e) of Regulation 4(1) of the Sec 10D Regulations met? Yes Lease arrangement is a FL Lease arrangement is a FL Lease arrangement is an OL. treated as a sale agreement. treated not as a sale Section 10D Regulations are agreement. not applicable.
Tax Treatment of Leases Under FRS 17 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purpose OL Lease income Lease payments taxable. deductible. Capital allowance CA not allowed on (CA) available on leased asset. leased asset.
Tax Treatment of Leases Under FRS 17 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purposes FL not treated as Taxed on full amount Full amount of lease sale agreement of lease income (i.e. payments (i.e. sum of (under Sec 10D sum of the interest the interest and Regulations) and principal principal repayment) repayment). deductible. CA available on CA not allowed on leased asset but only leased asset. against finance leasing income.
Tax Treatment of Leases Under FRS 17 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purposes FL treated as Taxed on interest Interest expense sale agreement income. deductible. (under Sec 10D Principal repayment Principal repayment not Regulations) not taxable. deductible. CA not allowed on CA available on leased leased asset. asset.
Classification of Leases Under FRS 116 Classification Classification Classification of lease of lease of lease for lessor for lessee for tax purposes OL Single accounting OL model - Right-of-Use FL FL not treated as sale (“ROU”) asset (under Sec 10 - Lease liability & Regulations) Interest expense FL treated as sale (under Sec 10D Regulations)
Tax Treatment of Leases Under FRS 116 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purposes OL Lease income Lease payments taxable. deductible. Add back interest expense and depreciation on ROU asset. Capital allowance CA not allowed on (CA) available on leased asset. leased asset.
Tax Treatment of Leases Under FRS 116 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purposes FL not treated as Taxed on full amount Full amount of lease sale agreement of lease income (i.e. payments (i.e. sum of (under Sec 10D sum of the interest the interest and Regulations) and principal principal repayment) is repayment). deductible. Add back interest expense and depreciation on ROU asset. CA available on CA not allowed on leased asset but only leased asset. against finance leasing income.
Tax Treatment of Leases Under FRS 116 Classification of Tax treatment for Tax treatment for lease for tax lessor lessee purposes FL treated as a Taxed on interest Interest expense sale agreement income. deductible. (under Sec 10D Principal repayment Principal repayment Regulations) not taxable. not deductible. CA not allowed on CA available on leased leased asset. asset.
Singapore withholding tax implications Where lessor is a non-resident Classification of lease Withholding tax implications for tax purposes OL Withhold tax on the lease payment (under Sec 12(7)(d) of ITA – “payment for FL not treated as sale the use of any moveable property”) agreement (under Sec 10D Regulations) FL treated as sale Withhold tax on the interest portion of the agreement lease payment (under Sec 12(6) of ITA) (under Sec 10D Regulations)
Interest adjustment – Application of the Total Assets Method Total asset method (“TAM”) – Formula for computing disallowable interest expense Interest expense to be disallowed = Cost of non-income producing assets as at B/S date x Common interest expense Cost of total assets* as at B/S date * “Total assets” refers to all the assets financed by common loans. Where there are assets financed by specific interest bearing loans, deduct the costs of these assets from the total assets.
Interest adjustment – Application of the Total Assets Method Application of TAM by lessee (where interest adjustment is applicable) OL & FL not treated as sale agreement – • Lessee eligible to claim contractual lease payments. • Interest expense to be added back FL treated as sale agreement – Lessee eligible to claim interest expense and CA on the leased asset instead of deduction on contractual lease payments Application of TAM – • Interest expense not subject to interest adjustment • Total asset base should exclude ROU assets
Example to illustrate the Application of the Tax Treatment for Leases Your client (“A”) has provided you with the following information: A enters into a 5-year lease for a piece of equipment. The annual lease payments are S$60,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Co. A’s incremental borrowing rate at the commencement date is 6% per annum. Co. A measures the lease liability at the present value of the 5 payments of S$60,000 discounted at the interest rate of 6% per annum, which is S$252,742. Lease Interest Principal Ending payment ($) expense (6%) Repaid ($) balance ($) Start of year 1 252,742 End of year 1 60,000 15,165 44,835 207,907 End of year 2 60,000 12,474 47,526 160,381 End of year 3 60,000 9,623 50,377 110,004 End of year 4 60,000 6,600 53,400 56,604 End of year 5 60,000 3,396 56,604 0 81 Total 300,000 47,258 252,742
Example to illustrate the Application of the Tax Treatment for Leases (Cont’d) Initial recognition and measurement of the lease by A (lessee): Accounting entry Dr Cr Start of year 1 Dr ROU asset $252,742 Cr Lease liability $252,742 End of year 1 Dr Interest expense $15,165 Cr Lease liability $44,835 Cr Cash (1 st lease payment) $60,000 Dr Depreciation (S$252,742/5) $50,548 Cr Accumulated depreciation $50,548
Example to illustrate the Application of the Tax Treatment for Leases (Cont’d) Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes Assume that the useful life of the above equipment is 15 years. The lease does not transfer substantially the obsolescence, risks or rewards incidental to ownership of the equipment to the lessee. The lease arrangement is regarded as an OL as it does not meet the definition of a FL under Section 10D(3) of the SITA.
Example to illustrate the Application of the Tax Treatment for Leases ( Cont’d) Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes Tax treatment for lessor ^^ Taxed on lease income of $60,000 each year during the 5-year lease period CA is allowed to the lessor on the equipment ^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax based on the lease payment of S$60,000 each year when the amount is due and payable. Tax treatment for lessee Lease payment of $60,000 is deductible each year on an incurred basis during the 5-year lease period No CA is allowed to the lessee on the leased equipment
Example to illustrate the Application of the Tax Treatment for Leases ( Cont’d) Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place Assume that the useful life of the equipment is 5 years. The equipment is a limited use asset. The lease transfers substantially the obsolescence, risks or rewards incidental to ownership of the equipment to the lessee. The lease arrangement meets the definition of a FL under Section 10D(3) of SITA. In addition, the lease arrangement is a FL treated as a sale agreement since it meets the condition under paragraph (b) of Regulation 4(1) of the Section 10D Regulations (i.e. the machinery or plant which is leased is a limited use asset).
Example to illustrate the Application of the Tax Treatment for Leases ( Cont’d) Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place Tax treatment for lessor ^^ Taxed on interest income as computed based on the lessor’s implicit interest rate Principal repayment is not taxable No CA is allowed to the lessor on the equipment ^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax based on the interest expense of S$15,165 in year 1 as recognised by the lessee. This is because the lessee has no knowledge of the lessor’s implicit interest rate. Tax treatment for lessee Interest portion of lease payment is deductible (i.e. $15,165 is deductible in year 1, $12,474 is deductible in year 2 and so on) Principal repayment is not deductible CA is allowed to the lessee on leased equipment of $252,742, over the tax writing-down period for the equipment.
THANK YOU Speak to us! Koy Su Hiang Email: koysuhiang@nexiats.com.sg Contact Number: 6534 5700 (ext. 862) Myanmar Singapore China Malaysia NTS Myanmar Co Ltd Nexia TS Public Accounting Corporation Nexia TS (Shanghai) Co., Ltd. NTS Asia Advisory Sdn Bhd La Pyayt Wun Plaza, 410(B), 80 Robinson Road , #25-00 Room A, 20 Floor, Heng Ji Building, No. 99 Unit No 23A-06, Level 23A 4 th Floor, 37 Alanpya Pagoda Road, Singapore 068898 East Huai Hai Road, Huang Pu District, Menara Landmark, No. 12 Dagon Township, Tel: (65) 6534 5700 Shanghai 20021, China Jalan Ngee Heng Yangon, Myanmar Fax: (65) 6534 5766 Tel: (8621) 6047 8716 80000 Johor Bahru, Johor Tel: (951) 370 836, 370 837, 370 838 Email: nexiats@nexiats.com.sg Fax: (8621) 6047 8712 Tel: (60) 7 221 3285 Ext- 406, 407, 408 Website: www.nexiats.com.sg Email: china@nexiats.com.sg Fax: (60) 7 221 3289 Fax: (951) 376 945 Website: www.nexiats.com.cn Website: www.ntsasia.com.my Website: www.nts.com.mm
Private and Confidential Income Tax Treatment arising from the Adoption of FRS109 By Mr. Shaun Zheng Associate Director, Tax 16 August 2019 NEXIA TS PUBLIC ACCOUNTING CORPORATION
FRS 109 Financial Instruments Overview • FRS 109 replaces the existing FRS 39 and is applicable to entities for annual periods beginning on or after 1 January 2018 (i.e. YA 2019 or YA 2020, as the case may be). Early adoption is possible. • Unless an election is made to apply FRS 109, the FRS 109 tax treatment is not applicable to taxpayers that qualify and have chosen to comply with Singapore Financial Reporting Standards for Small Entities. • If FRS 109 is not applicable, taxpayers may continue to adopt pre-FRS39 tax treatment or FRS39 tax treatment (as the case may be). • Unlike FRS 39, taxpayers are not allowed to opt out of the FRS 109 tax treatment, which invariably means that taxpayers currently under Pre-FRS 39 tax treatment would be required to apply FRS 109 for tax purposes. • A new Section 34AA of the Singapore Income Tax Act (“SITA”) has been legislated on 26 October 2017 and sets out the tax treatment of financial instruments under FRS 109.
FRS 109 Financial Instruments Key differences between FRS 39 and FRS 109 Available-For-Sale (“AFS”) classification has been FRS 39 tax treatment catered for AFS financial removed. AFS classification no longer exists under assets no longer relevant after entities transit to FRS 109. FRS 109. Fair Value Through Other Comprehensive Income FRS 109 tax treatment for FVOCI financial (“FVOCI”) classification has been introduced. FVOCI assets is new since such financial assets did not exist previously under FRS 39. previously did not exist under FRS 39. No longer necessary for impairment losses to be Unlike FRS 39 tax treatment, not all impairment recognized in P&L only when there is an objective losses recognized under FRS 109 are deductible. evidence of impairment due to a loss of events under Only impairment losses recognized in the P&L FRS 109. with respect to credit-impaired financial Rather, an entity has to assess whether the credit risk instruments that are on revenue account rank for on a financial instrument has increased significantly tax deduction. since initial recognition and recognize a loss As such, it is imperative for entities to identify allowance for Expected Credit Losses (“ECL”), accurately impairment losses with respect to representing either a 12-month ECL or lifetime ECL credit-impaired financial instruments on revenue (for credit impaired or non-credit impaired financial account and justify the deduction claim . 90 asset).
FRS 109 Financial Instruments Overview of accounting treatment Subsequent Amortised Measurement FVTPL FVTOCI cost Equity instrument Debt instrument To OCI – Reclassified upon N.A. OCI - Not derecognition FV gain/(loss) To P/L; reclassified to FL - gain/loss P/L, but may be Exchange difference attributable to To P/L; Interest recognised transferred P/L credit risk may in P/L is computed based within equity go to OCI on Effective interest method Impairment (EIR) P/L - EIR Interest PL
FRS 109 Financial Instruments FVTPL Tax Treatment Subsequent Measurement FVTPL FV gain/(loss) 1) P/L; Exchange difference 2) FL - gain/loss attributable to credit risk Impairment may go to OCI Interest Tax implications 1) In P/L, tax adjustment is required if FI are under capital account. 2) No tax adjustment required on gain/loss recognized in OCI; However, upon de-recognition of that FI which is on revenue account, accumulated gain/loss (not recycled to P/L) previously recognized in OCI will be taxed or allowed as a deduction -> tax adjustment required
FRS 109 Financial Instruments FVTOCI Tax Treatment (Equity Instrument) Subsequent Measurement FVTOCI Equity Instrument FV gain/(loss) To OCI – Not reclassified to P/L, but may be transferred Exchange difference within equity Impairment To P/L Interest Tax implications 1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account. 2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses previously recognised in OCI which may or may not be transferred within equity. Tax adjustment is required.
FRS 109 Financial Instruments FVTOCI Tax Treatment (Debt Instrument) Subsequent Measurement FVTOCI Debt Instrument (DI) To OCI – reclassified to P/L upon de-recognition FV gain/(loss) To PL; Interest recognised Exchange difference in P/L is computed based Impairment on Effective Interest Method (EIR) Interest Tax implications 1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account. 2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses reclassified from OCI to P/L. 3) To tax or allow as a deduction, the foreign exchange gains / losses recognised in the P/L.
FRS 109 Financial Instruments Amortised Cost Tax Treatment Subsequent Measurement Amortised cost N.A. FV gain/(loss) Exchange difference P/L Impairment PL - EIR Interest Tax implications For DI on revenue accounts, same with the tax treatment for FVTOCI; For interest income/expenses, same tax treatment with FVTOCI. For DI on capital account, gain/loss recognized in PL will not be taxed or brought to tax.
FRS 109 Financial Instruments What you will see in your future tax computations • Under FRS 39 tax treatment, taxpayers are required to submit to the IRAS a list of financial assets on capital account for CIT’s determination (i.e. to determine whether assets are indeed on capital account). • Similarly for FRS 109 tax treatment, taxpayers are required to submit an itemized listing of all debt instruments (measured at FVTPL, FVOCI or amortized cost) and equity instruments measured at FVTPL held as financial assets on capital accounts annually, together with the tax returns. • Taxpayers should also submit an itemized listing of all equity instruments measured at FVOCI (on both revenue and capital account) together with their tax returns in the YA of the basis period when the asset is derecognized.
FRS 109 Financial Instruments Tax treatment on impairment losses, under FRS 109 ECL model (1/2) • Only impairment loss recognized in P/L in respect of credit-impaired financial instruments that are on revenue account are allowable as a deduction. • No deduction is allowed in respect of FI such as: – Credit-impaired financial instruments that are on capital account; or – Non-credit-impaired financial instruments, regardless of whether they are on revenue or capital account.
FRS 109 Financial Instruments Tax treatment on impairment losses, under FRS 109 ECL model (2/2) A financial asset is considered credit-impaired if it includes observable data about the following events:- a) Significant financial difficulty of the issuer or borrower; b) A breach of contract, such as a default or past due event; c) The lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e) The disappearance of an active market for that financial asset because of financial difficulties; or f) The purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.
FRS 109 Financial Instruments Transitional accounting treatments On Date of Initial Application (DIA) of FRS 109:- Opening retained Carrying amount before & Unrealized earning or other on DIA gain/(loss) components of equity Ending impairment allowance (FRS39) & Impairment Opening retained Opening loss allowance gain/(loss) earning (FRS109) at DIA
FRS 109 Financial Instruments Transitional Tax Adjustments • No tax adjustment is required for transitional accounting adjustment recognised in other components of equity at DIA • Tax adjustment may be required for transitional accounting adjustments recognized in opening retained earning – Where tax adjustment is required, show the details of how each tax adjustment is arrived at in the tax computation; and – keep sufficient documents to support the tax adjustments and to submit to the CIT upon request
Recommend
More recommend
