In response to enquiries, this article provides a quick overview of the common tax incentives provided in the Income Tax Act and the Economic Expansion Incentives (Relief from Income Tax) Act, which are examinable in Paper P6 (SGP).
Tax incentives under the Income Tax Act
Tax incentives under the Economic Expansion Incentives (Relief from Income Tax) Act
Apart from knowing the specific tax reliefs that each incentive offers and the authorities administering each scheme, candidates are expected to know the minimum qualifying conditions and how the tax computations for these special concessionary rates differ from those of the general trading company subject to the prevailing corporate tax rate.
A brief discussion of these seven incentives, with emphasis on the special tax reliefs and the qualifying conditions, is provided below:
The Land Intensification Allowance (LIA) was introduced in Budget 2010 to focus on promoting land productivity among industrial users. It is only available to businesses in industrial sectors that have large land takes and low gross plot ratios (GPRs). Eligible businesses must apply to the Singapore Economic Development Board (EDB), which is administering the scheme and will consider applications for the period from 1 July 2010 to 30 June 2015.
Under the LIA incentive, allowance is provided for the following qualifying capital expenditure incurred on or after 23 February 2010 up to the date of completion of the construction or renovation/extension of an approved building or structure:
A qualifying building must be built on land that is zoned as Business 1 or Business 2 (excluding Business 1 White or Business 2 White zones) under the Urban Redevelopment Authority (URA) Master Plan as at the date the development application is made to the URA.
The principal activities of the user of an approved LIA building or structure must fall within one of the following qualifying activities:
Also, the building or structure must meet the GPR benchmark for the relevant specified industry sector, ranging from 0.33 to 2.45.
The person incurring the qualifying capital expenditure will be able to claim an initial allowance (IA) of 25% and an annual allowance (AA) of 5% and will be able to fully claim the qualifying capital expenditure in 15 years.
The IA is granted in the year of assessment (YA) relating to the basis period in which the capital expenditure is incurred. Typically, this happens during the construction or renovation/extension stage.
The AA will be granted provided the following conditions are met:
If the completed building or structure fails to meet the relevant GPR benchmark, the IA and/or AA will be recovered through re-assessment of preceding tax years.
If an approved LIA building ceases permanently to be used or ceases permanently to be used for approved qualifying activities at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, no more AAs will be granted to the taxpayer from the YA relating to the basis period during which the permanent disuse occurs and the LIA incentive shall be terminated with effect from that YA.
If the predominant use of the approved LIA building changes from a qualifying activity to a different qualifying activity at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, the EDB must be notified and, where approval is granted for the change in use, the taxpayer shall be allowed to continue the claim of LIA under the new qualifying activity.
When the approved LIA building is sold/transferred at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, or after the qualifying capital expenditure has been fully claimed, any balance of the qualifying capital expenditure still remaining will be disregarded and there will not be any balancing adjustment on the seller of the building.
Where there is insufficient income in any YA to absorb the IA or AA, the unutilised LIA can, subject to the taxpayer meeting certain prevailing conditions, be:
Generally, for a foreign company planning to locate its regional headquarters company in Singapore, the most relevant tax incentives in Singapore would be the Regional Headquarters Award (RHA) and the International Headquarters Award (IHA), both administered by the EDB.
Companies with RHA status pay a lower corporate tax rate of 15% for three years plus a potential further two years on incremental qualifying income, if the prescribed conditions are satisfied. If the applicant company satisfies all the minimum requirements by the third year of the incentive period, it will enjoy the 15% concessionary tax rate on qualifying income for an additional two years.
The applicant company must satisfy all of the following minimum requirements by the milestone indicated and maintain these until the end of the incentive period:
Substantially better tax incentives in the form of lower tax rates of either 10% or 5% are possible with the IHA but, to achieve this award, applicants are expected to substantially exceed the criteria listed for the RHA.
The global trader programme (GTP) is an incentive scheme that aims to boost Singapore’s position as the preferred regional base for the trading operations of global traders. Administered by the International Enterprise Singapore, it is a merger of the previous approved oil traders and approved international traders schemes on 11 June 2001. The GTP allows companies that are part of the programme to benefit from a 10% or 5% concessionary tax rate on their qualifying trade income for a five-year renewable period.
Furthermore, the Singapore Government announced that high-growth medium-sized international trading companies that are keen to choose Singapore as their regional base for trading activities can be considered for the concessionary tax rate for an initial, non-renewable three-year period. During this period, the companies can establish and develop their regional or global trading network, with Singapore as their base. Once the companies are able to demonstrate sustainable growth projections that are in line with the requirements of the GTP, they can apply to join for the five-year renewable GTP scheme after the initial three-year period.
To qualify for the GTP incentive, it must satisfy the following conditions:
In addition, the applicant company will be required to meet certain benchmark criteria in relation to:
If the company does not meet these benchmark criteria, on application it will be required to show that it can commit to these benchmarks for its projected incentive period.
The following products and commodities are currently allowed under the GTP:
This list is periodically reviewed and updated by the authorities.
Administered by the EDB, both the pioneer industries and pioneer service companies essentially enjoy the same tax benefits whereby the income derived from the pioneer trade will be wholly exempt from tax during the tax relief period.
The difference is that the pioneer industries cater to the manufacturing sector, whereas the pioneer service companies cater to the service sector.
The duration of the tax relief period will depend on the nature and extent of the investments involved and will be granted for a period of five to 15 years from the production day (in the case of a pioneer product) or the commencement day (in the case of a pioneer service). The production day signifies the start of the tax relief period when marketable quantities of the product are produced, and this date can be amended to commence either earlier or later on application to the Minister.
An industry may be declared as a pioneer industry or a product declared as a pioneer product if:
For services, a company may be approved as a 'pioneer service company' if it intends to engage in any of the following qualifying activities:
The pioneer enterprise or pioneer service company is not allowed to carry on a separate trade or business during the relief period unless special permission is granted by the Minister. Where special permission has been granted, the following rules would have to be observed:
The development and expansion incentive (DEI) was introduced in the Year of Assessment 1997 to replace the post-pioneer incentive, which was found to be too restrictive.
Also administered by the EDB, a qualifying company, including a company that has not previously been granted pioneer incentive, may be taxed at a reduced rate of not less than 5% on 'expansion income' during the tax relief period. Expansion income is defined as income from qualifying activities that exceeds its base profit determined by the average annual income for the three years immediately preceding the tax relief period. In the computation of the expansion income, capital allowance shall be taken into account, notwithstanding that no claim was made.
The initial tax relief period may be granted for a period not exceeding 10 years, and this may be extended for up to five years at a time, subject to a maximum total period of 20 years.
To qualify, a company must be engaged in the manufacturing or increased manufacturing of any product from any industry that would be of economic benefit to Singapore or the same qualifying activities as pioneer service companies, reproduced below:
Administered by the EDB, the investment allowance is an incentive that can be enjoyed by a company that intends to carry on an approved project and incur fixed capital expenditure for that project.
The approved projects under the Act include the following activities:
Fixed capital expenditure means capital expenditure to be incurred on an approved project by a company on the following items that are used for carrying out the project:
In order to be eligible for investment allowances, the fixed capital expenditure must be incurred within the qualifying period of not more than five years.
The investment allowance is granted based on a specified percentage, not exceeding 100% of the fixed capital expenditure. It is granted in addition to the normal capital allowance and deducted from chargeable income. The amount of chargeable income so abated is exempt from tax. Any unutilised investment allowances can be carried forward indefinitely to be utilised against subsequent years’ chargeable income without the need to satisfy any conditions, including the shareholding test or the business continuity test.
However, the asset in respect of which an investment allowance has been given cannot be sold, leased or disposed off within the qualifying period, or within two years after the end of the qualifying period, without the prior approval of the Minister. If not, the investment allowances previously granted will be recovered.
Written by a member of the Paper P6 examining team