Comments Off on Singapore Employment Act - key changes in 2018
Singapore’s Parliament has introduced numerous key changes to the Employment Act on October 2, 2018. The country’s employee-centric workplace is leading the proposed changes, which all employers must adhere to in an attempt to avoid infringing on employment legislation.
Patrick Tay, MP, has been championing an expansion of the Act since 2011. He claims that changes and amendments proposed will provide greater worker protections in Singapore.
Others claim that the changes will help solve the problem of malpractice, which is common in small and medium enterprises.
What’s important to note is that the changes, that will take effect on 1st April 2019, while significant and will work to make Singapore’s workforce stronger, will not have a high cost for businesses. These changes are aimed at encouraging employers to have “better” employment practices.
The most significant changes that have been proposed are listed below:
Removal of S$4,500 Salary Cap for PMEs
Professionals, managers and executives, or PMEs, have had a salary cap of S$4,500 imposed against them. Under the Employment Act, any PME that exceeded these limitations did not benefit from the Act.
This means that these individuals may not be entitled to the following benefits:
- Medical fee reimbursement
- Hospitalization leaves
- Wrongful dismissal compensation
- Minimum annual leave
- Paid sick time off
But under the proposed changes, all of the benefits above would extend to PMEs of all income ranges. The cap has been removed, and the change is expected to positively impact 430,000 PMEs in Singapore.
The change ensures that all PMEs are safeguarded under the Employment Act.
PMETs, which includes technicians, is also covered under the proposed amendments. This is a significant change because this group accounts for 56% of the local workforce and is expected to account for 65% of the workforce by 2030.
It's important to note that the salary cap removal does not extend to all workers and does not include:
- Domestic workers
- Public servants
These individuals are covered by other legislation that does not include the Employment Act.
All Employees to Benefit from Statutory Leave Entitlement
Statutory leave entitlements will also see a major change under the proposed amendments. The entitlements will now be extended to all employees, and this will be done through the removal of Part IV of the Act, under the general section.
What does this mean to employees and employers?
The removal of Part IV will eliminate the restrictive wording of the legislation that includes workers that earn up to the previous salary cap imposed on PMEs, or S$4,500. Non-workmen that earned up to S$2,500 in basic monthly salary were also included in the previous legislation.
Removal of this section will extend statutory leave to all employees.
In essence, this means that statutory entitlement will be 14 days maximum after years of service.
But one key benefit from this is that employees will not be forfeiting leave.
Leave, which may have been untaken during the calendar year, will not be lost. While the change may seem minimal, and it is, it will extend legislation to all employees regardless of their basic monthly income.
Non-Workmen Salary Caps Will Be Increased
Non-workmen have been negatively impacted from salary thresholds in Part IV benefits. The former legislation put a cap of S$2,500 on basic monthly salary, but this salary cap is now being increased to S$2,600.
Previous legislation excluded statutory protections for hours of work, conditions of services and rest days for any non-workmen earning in excess of S$2,500 monthly. Overtime pay is currently only offered to non-workmen that earn up to S$2,500 in monthly salary.
Workmen that earn above the cap may be taken advantage of, working long hours with no overtime pay. But under the new cap, many of these individuals will benefit from overtime pay protection.
Singapore has strict requirements on payment for overtime work. Employers that fail to meet these requirements will suffer severe consequences, and there are also Central Provident Fund implications that will be assessed.
Raising the cap will benefit an additional 100,000 workers, extending statutory protections to them.
Changes to Medical Leave
Medical leave changes are also being proposed, offering further protections for employees that may be suffering from medical conditions which result in the employee taking leave. The proposed amendments include:
- Any medical practitioner can now certify paid sick leave for employees.
- All hospitals and medical institutions are considered approved hospitals.
- All hospitals and medical institutions will be accepted for paid hospitalization.
When the legislation mentions “all hospitals and medical institutions,” this will include community and public hospitals.
Under previous legislation, which is currently in effect, medical practitioners that were appointed by employers were the only ones that could certify paid sick leave for the individual. Hospitalization leave would only be qualified at national centers or if admitted into an acute hospital.
Employers that appoint medical practitioners could, in theory, influence the practitioner's certification, resulting in employees working when they’re truly sick.
The laws, as they stand today, would limit the ability for employees to seek out further diagnosis.
Community and public hospital admittance will allow for paid hospitalization for many employees that may have not previously been admitted into a national center or acute hospital. The ability to choose any hospital or medical institution allows for faster care and treatment of employees.
Direct admittance into a community hospital will now allow for entitlement of hospitalization leave.
Employees warded at community hospitals will have leave extended to them only if an acute hospital referred the individual.
The changes proposed will further protect employees that have worked for an employer for at least 3 months. Employers of employees that met the three month of employment will be liable to pay for medical examination fees through reimbursement.
Employment Court Tribunal to Offer Dispute Resolutions
Current iterations of the Employment Act are such that different disputes are head by different bodies. For example, if an employee feels as if they have been wrongfully dismissed, they will have their claim examined by the Ministry of Manpower.
These claims would occur when an employee claims that they were dismissed without cause or excuse.
But if a salary dispute occurs, the employee’s claim would then be adjudicated by the Tripartite Alliance for Dispute Management. Finally, if the dispute goes unresolved, the dispute will be heard by the Employment Court Tribunal.
Under the key changes proposed, the Employment Court Tribunal will be able to hear cases that include wrongful dismissal.
Salary-related disputes will still be referred to the Tribunal as in previous legislation. Employees and employers will benefit from the Tribunal being able to resolve employment disputes. There will no longer be two routes that the dispute will need to go through.
Changes will also include the expansion of the employee dismissal definition to also include involuntary resignation.
The current definition is such that dismissal is when an employer:
- Terminates an employee’s contract
- Termination is done with or without notice
- Misconduct or other circumstances exist
When an employer suggests that the employee resigns from their position, the employee, if they follow the advice and resign, is not protected under the current definition of employee dismissal.
Now, if the employer suggests that the employee resigns, the employee may be able to claim wrongful dismissal. The employee will need to prove their side of the story, and it is required that the employee show that the resignation was not voluntary but as a result of the employer’s:
Companies will need to change and adapt their current way of conduct as a result of these changes. Strategies of proposing employee termination will need to be thoroughly reviewed.
Salary disputes will also benefit from the proposed amendments. Employers will now need to have written consent from their employees if they want to make deductions from the employee’s salary.
The consent will be for certain services that may result in the employee’s salary being reduced.
Employees will also be able to withdraw their consent if the withdrawal request is made, in writing, before the deduction has been made. This allows employees to have further control and protections over any of their potential deductions from the employee’s salary.
Retrenchment of employees has also had some changes that have been covered briefly by others. The changes require employers to provide information on the retrenchment of an employee if the Commissioner of Labour requires it.
Current law is such that only employers that have 10+ employees notify the Ministry of Manpower when or if 5 or more of these employees have be retrenched in a six-month period.
Employers that are meaning to stay within the confines of the law will need to review their policies and contracts with employees. The goal is to have a full understanding of all changes, and to provide any much-needed policies changes to stay within the confines of the proposed amendments.
The Employment Act changes are a way to protect employees, shifting some of the power to the employees that help companies run and grow. The changes provide basic terms and working conditions that are meant to help all employees although some exemptions do exist.
Comments Off on Delaware, Wyoming or Singapore Compared as Offshore Financial Centres
Offshore financial centres offer key advantages for owners, including ease of doing business, tax benefits and even simple corporate compliance. Delaware, Wyoming and Singapore are three key areas of offshore incorporation.
Setting Up a Company
Setting up a company is the first step to creating an offshore financial centre. The process is often simple, and each local has its own benefits.
Delaware is where many businesses in the United States choose to incorporate, and the reason for this isn’t just low incorporation or tax benefits. The state has one of the best business courts with a very strong corporate law structure, and this is advantageous to corporations.
Forming a business in the state is easy, and there are numerous online services that will walk you through the process.
When you incorporate, you’ll need to:
- Choose a business entity type:
- Limited Liability Company
- Limited Partnership
- General Partnership
- Statutory Trusts
- Obtain a registered agent. The agent must have a physical presence in Delaware, and a business that is physically located in the state can act as their own registered agent if they wish.
- Certificate of incorporation. Entity forms that must be filed with the state.
Incorporation can cost as little as $90, but you’ll find that there are yearly corporate compliance measures that also must be taken. This will be listed in the next section.
Wyoming has one of the lowest income tax rates and lowest corporate tax rates in the United States. A lot of businesses choose to incorporate in the state, and there are numerous advantages over incorporating in Delaware.
The process of incorporation is very similar to Delaware, you’ll need to:
- Choose a business type:
- Limited Liability Company
- Profit Corporation
- Obtain a registered agent. A registered agent is required in the state.
- Certificate of incorporation. All entity forms must be filed with the state.
Setting up a business in Wyoming can be done for as little as $125.
Now, which state is better for incorporation? Each state has its own benefits. The key difference between the states is that Wyoming doesn’t have:
- Corporate income tax
- State personal income tax
- Franchise tax
One-person corporations are allowed, and annual and filing fees are low. Wyoming also allows businesses to adopt a corporation formed in another state.
Whether choosing Delaware or Wyoming, the initial setup process is simple and easy.
Singapore’s business legislation is friendly, offering anyone that wants to create a business in the country to have an easy, quick method of incorporation. Foreigners can freely incorporate in the country as long as they are over 18 years of age.
Foreign companies can also incorporate in the country.
Often considered the “Delaware of Asia,” Singapore does require a few additional steps to incorporate in the country. You'll need to have the name of the business approved before incorporation, and then the following requirements must be met:
- One or more resident directors need to be added. Non-resident directors can also be added. Both need to be 18+ years of age, free of malpractice charges and must not be bankrupt.
- Shareholders must be assigned, and this can be between 1 and 50.
- A minimum of S$1 in paid-up capital must be present to incorporate.
- A registered address must be provided that is a local, physical address within Singapore.
Foreigners registering their business in Singapore must use the services of a professional firm to register the business. Anyone that plans to move to Singapore will be required to obtain their Entrepreneur Pass or Employment Pass.
Registering is otherwise easy, requiring:
- Name reservation
- Registration of the company
If the incorporation has been approved, you’ll receive an official email notification from the ACRA.
One or more business licenses may need to be obtained to remain in local compliance.
Yearly Corporate Compliance
Corporate compliance is a must-understand, and this is where an accountant can make sure that your business remains in compliance at all times. The corporate compliance for each area is as follows:
Delaware’s corporate compliance is straight-forward. The state requires that you maintain a registered agent, so you must maintain a registered agent’s service throughout the lifetime of your business.
You'll need to also maintain any licenses or certifications based on your business type.
But the state doesn’t require that you file an annual report. You will be required to pay an annual tax of $300 before June 1 of each year.
The only two statutory requirements are:
- Pay franchise taxes
- Maintain a registered agent
You'll also need to:
- Hold meetings
- Keep meeting minutes
- Create resolutions to authorize corporate actions
These requirements may not be present when choosing another entity type aside from a corporation.
Wyoming’s corporate compliance is also simple and easy. A registered agent must be kept throughout the lifetime of the corporation’s existence.
Licenses and certifications will need to be obtained on a local level, so this will vary depending on the business’ location.
Corporations will be required to:
- Keep permanent records of minutes for meetings of the board of directors and shareholders.
- Record all actions taken outside of a meeting.
- Record all actions by a committee in place of the board of directors.
Wyoming requires an annual report to be filed on behalf of the business. Major business taxes don’t exist in the state, but there is an annual license tax which many consider a franchise tax.
Wyoming may be one of the country’s most tax-friendly states thanks to its lack of personal and corporate income tax. The “license tax” is minimal:
- $50, or
- $0.0002 per dollar of assets
The method chosen is dependent on which value is higher.
Singapore’s friendly business practices do require that a company secretary be assigned within six months of incorporation. A registered address must also be maintained. Licenses must be maintained from year-to-year.
Singapore’s annual filings include:
- Annual financial statements
- Filing of chargeable income
- Financial statement audit (depending on annual income and assets or employee count)
- Annual general meeting
- Annual tax return filed with the IRAs
- Annual return with the ACRA
Singapore’s professional firms will be able to help keep a corporation in compliance annually.
Tax Benefits of Delaware, Wyoming and Singapore
Every jurisdiction has their own tax benefits:
- Delaware. Delaware doesn’t require corporate tax unless the income is derived from Delaware. In this case, the tax rate is 8.7%. Businesses can incorporate their businesses in the state, but if business is not transacted in the state, the only tax paid is the franchise tax.
- Wyoming. Wyoming does not have corporate income tax. Sales tax will need to be collected in the state, but it remains at just 4%.
- Singapore. Singapore does have a friendly tax structure, and exemptions and incentives also exist. Companies pay less than 9% taxes on the first S$300,000 in annual profits. A flat rate of 17% is assessed for profits over this amount.
Double taxation agreements exist between Singapore and the United States, and these laws apply to corporations. This will help corporations save money, and a key requirement is that 50% of the corporation’s stock be held by citizens of the respective country.
That is, a company with 50% or more stockholders being citizens of the United States would pay income tax in the United States.
Availability of Trained Workforce
If a business is planning to incorporate and run their operations in either state or Singapore, there is ample availability of a trained workforce.
Delaware’s population, as of July 1, 2017 stood at 961,939 residents. The state has a very high dropout rate for high schoolers at 11.2%. And between 2012 and 2016, the number of people age 25 or older that had a Bachelor’s degree or higher was just 30.5%.
Wyoming may be a large state in terms of land area, but the state has the lowest population in the United States. The small population leads to less availability of a trained workforce, and only 26% of the population has a Bachelor’s degree or higher.
High-school dropout rates are 8% in the state.
Singapore has a robust education system which ranked the highest in math, reading and science in 2016, according to Pisa rankings. The country has the top global education ranking, and the education system is geared towards high achievement.
Singapore’s population dwarfs Delaware and Wyoming, with 5.79 million people in 2018.
Singapore, in terms of numbers and education, is often the better choice for businesses that want to hire a trained workforce. That is not to say that Wyoming and Delaware do not have a great workforce, but in terms of education, both states lag behind Singapore. The smaller size of these states also results in fewer people in the workforce.
Choosing the right jurisdiction to incorporate a business is essential to your company’s success. All three of these locations are considered tax havens, and while each has its own benefits, it’s often best to discuss your business’ needs with a professional. Singapore, which has great double taxation policies with the United States, also has a robust, well-educated workforce.
- Choose a business entity type:
Comments Off on Business jurisdiction comparison-Singapore and Bulgaria
Bulgaria and Singapore are two of the most well-known and popular offshore financial centres in the world. Both offer tax advantages, ease of business registration, a skilled labour force and straightforward corporate compliance regulations.
Bulgaria as an Offshore Financial Centre
Bulgaria is an attractive offshore financial centre due to its location advantages, tax-friendliness and high availability of an affordable trained workforce. Foreign entities can also do business in Bulgaria relatively easily, although there are liability concerns when doing so.
Setting Up a Business in Bulgaria
Bulgaria offers many advantages to prospective business owners, such as a simplified registration process and low capital requirement. The required minimum capital for launching a private limited liability company – the most common entity type in Bulgaria – is just €1. The registration process generally takes no more than three weeks.
First,partners will be required to meet before a public notary to adopt the company’s constitution, define the company's status and establish the entity’s hierarchy.The founder must sign a notarized agreement, and a certified copy of the company’s declaration of incorporation will be issued. A fee will apply, but these formalities should be completed in a single day.
Next, the company’s founder or an authorized person must open up a company bank account in a commercial bank. Any paid capital will be blocked until the Commercial Register approves the business formation. When opening the bank account, a receipt will be given that must be presented to the Commercial Register. A fee will be required to open a business bank account, which will vary according to the chosen bank.
After opening a bank account, an A4 registration form must be filled out and submitted to register the business with the Commercial Register. Each director must produce two sworn and notarized affidavits, as per Articles 141 and 142 of the Trade Act and Article 13 of the Commercial Registration Act. Other documents must also be presented, including:
- Appointment of cadres decree
- Incorporation certificate
- Bank receipt issued when opening a bank account
- Notarized associates’ signatures specimens
Several types of entities are available when launching a business in Bulgaria, including:
Limited Liability Company (OOD)
- A single shareholder
- A single director
In Bulgaria, a limited liability company, or OOD, can be incorporated with:
If the company has a single shareholder, the abbreviation for the entity becomes EOOD to denote that it is a single-member company.
The shareholder and director can be of any nationality and not necessarily a resident in Bulgaria.
Joint Stock Company (AD/EAD)
To form a joint stock company (JSC), there must be:
- A single shareholder (known as EAD), or
- Two or more shareholders (known as AD)
A larger capital investment is required with this business entity: a minimum of €25,000,or 25% of that amount paid at the time of incorporation.
Additionally, a joint stock company must have:
- An appointed certified accountant
- Appointed at least three Board of Directors members
A JSC may be advantageous for owners who plan to raise capital in Europe, as Bulgarian law does not restrict the transfer or issuance of shares with this entity type. JSCs also have the advantage of having the ability to be listed on either the Sofia Stock Exchange or another stock exchange in the European Union, including the London Stock Exchange and Euro Next.
The Bulgaria limited partnership requires:
- At least two partners with different powers and liability over the entity’s debt
A minimum of one general partner must be fully liable, while the remaining limited partners will only be liable to the extent of their contribution (which is unpaid) to the partnership.
Limited partnerships are generally formed by those who want to provide professional services, such as lawyers and accountants. This entity type may also be a practical option for those who already have a partner in Bulgaria.
Free Zone Company
Non-residents can form and register a wholly-owned foreign company in one of Bulgaria’s free economic and industrial zones. Free economic zones are intended to house export-oriented businesses, while the industrial zones are intended for companies that will provide infrastructure and facilities for manufacturing operations.
The minimum requirements for forming a free zone company will vary from one zone to another. Generally, the company must provide a minimum number of new jobs and meet certain capital requirements.
Free zone companies are best suited for manufacturing- or export-oriented businesses.
Residents and foreigners can both register as a sole proprietor in Bulgaria. Sole proprietors must register in the Bulgarian Trade Register. There are no capital requirements for this entity type, but limited liability is not conferred to the sole proprietor. In other words, the owner of the business is wholly liable.
Forming a sole proprietorship may be a practical option for self-employed foreigners living in Bulgaria and local residents.
Yearly Corporate Compliance
- Annual financial statements must be filed with the Bulgarian Trade Register before March 31st each year. This applies to all companies.
- Joint-Stock Company: Annual financial statements and balance sheet must be audited by a certified accountant, which must be filed with the Bulgarian Trade Register before March 31st each year.
- All companies are required to maintain records of the financial statements and accounts.
- All enterprises must maintain a registered office address in the country.
- Bulgaria has one of the lowest corporate tax rates in all of Europe: 10%. Sole-proprietorships and limited partnerships have a standard tax rate of 0%.
- Tax returns must be paid and filed by March 31st each year. A 12% monthly interest fee will apply to any outstanding taxes.
- ValueAdded Tax (VAT) registration will be required for businesses with a turnover of over €25,000. The VAT rate in Bulgaria is 20%. Corporate VAT returns must be filed by the 14th of every month.
- Dividends distributed between domestic and EU/EEA entities are not subjected to corporate withholding tax.
- Global business income is taxed.
- Capital gains from sales of shares through the Bulgarian Stock Exchange or EU/EAA stock exchanges are exempt from taxes.
- Royalties and interest paid to non-EU/EAA entities are subject to a 10% withholding tax,unless a double tax treaty is applicable.
- Bulgaria has double taxation agreements with 68 countries, including Japan, UAE, Canada,Malaysia, Singapore, and many others.
Ease of Doing Business
Foreign companies may open a branch office entity in Bulgaria to do business in the country. These branches are not considered separate legal entities. Therefore,the parent company will be subject to unlimited liability for losses incurred at said branch.
Branches must have a resident legal representative and must file financial statements with the Bulgarian Trade Register before March 31st each year.
Bulgaria boasts a skilled and educated workforce while maintaining one of the lowest labour costs in Europe. The country’s labour code is also favorable for businesses. The country boasts a workforce of 3.4 million people, and most have a higher education.
Singapore as an Offshore Financial Centre
Singapore remains as one of the largest offshore financial centres in the world. The country enjoys this distinction due to its business-friendly environment. The government has made it easy to form a business in the country and adhere to compliance requirements.
Setting Up a Business in Singapore
Registering a business in Singapore is a fairly simple and straightforward process – and it can all be completed online at Bizfile by the Accounting and Corporate Regulatory Authority.
The first step to setting up a business in Singapore is to apply for an EntrePass through the Ministry of Manpower (MOM). A detailed business plan must be created as well as financial projections. A $3,000 security deposit will be required. If approved, an Approval-in-Principle letter will be sent within 2-6 weeks.
All businesses in Singapore must be registered with the Accounting and Corporate Regulatory Authority (ACRA) and have a minimum $1 in paid-up capital for private limited companies.
Nominal fees apply for the business name application and to incorporate the company. Registrations are generally approved within 15 minutes if applying online.
- Company names must be approved by the ACRA
- There must be at least one shareholder
- At least one director must be a resident of Singapore
- The company must have a Company Secretary, and that person must be a Singapore resident
- The company must maintain a physical office address in Singapore
- The company's office address and hours (must be a minimum of three hours per weekday) must be registered.
- The business registration number issued by ACRA must be included in all documents used for official business communications.
Yearly Corporate Compliance
Companies registered in Singapore must adhere to several requirements in order to remain complaint:
- An auditor must be appointed within 3 months of incorporation, unless exempted from audit requirements.
- The First Company Secretary must be appointed within six months of the date of incorporation.
- Transfer share agreement must be stamped within 14 days of signing the document.
- The company must establish a Financial Year End (FYE).
- Companies must register for Goods and Services Tax (GST) if turnover exceeds $1 million.
- Companies must file an Annual Return (filed with the ACRA) and an Annual Tax Return (filed with the IRAS) each year.
- Certain business activities will require special licenses.
Companies with a turnover of S$1 million or more must register to pay GST, which is 7%.GST is similar to VAT and sales tax in other countries.
Taxes in Singapore are pretty straightforward:
- The first S$300,000 in annual profits: Less than 9%
- Annual profits after $300,000: 17%
Singapore’slow tax rates have helped make the country an attractive place to launch business.
Ease of Doing Business
Foreign entities can establish a representative office in Singapore through one of three government agencies:
- Legal:Legal Services Regulatory Authority
- Banking,insurance and finance: Monetary Authority of Singapore
- All other industries: Enterprise Singapore
Although Singapore has a relatively small workforce of just 5.7 million people, workers are educated and trained.
The work culture in Singapore prioritizes productivity, innovation and technology adoption. Singapore has 67% labour force participation, and more than half of workers hold a diploma or degree of some sort.
Both Bulgaria and Singapore are attractive options when establishing a business or expanding operations offshore. The optimal destination for a business will depend on the industry and the company's goals.
Comments Off on Agreement Between Singapore and Malaysia to Avoid Double Taxation
Singapore and Malaysia came to an agreement in 1968 to avoid double taxation. Another agreement was signed in 1973, which was placed into the text of the original treatment. The cooperation between the two countries aims to prevent two main things:
- Double taxation
- Fiscal evasion of taxes on income
The agreement between the Government of Malaysia and the Government of the Republic of Singapore applies to, in accordance to Article 1:
- Persons who reside in one of the Contracting states
- Persons who reside in both of the Contracting states
Residents of one or both of the states, in this case Singapore and Malaysia, have the taxes covered in the agreement outlined as follows:
- Income derived by a contracting state
- Malaysian income tax
- Malaysian petroleum income tax
- Singapore income tax
Any income derived from the activities above will be subject to the rules of the agreement which helps residents avoid financial losses caused by double taxation.
What's important to note is that, under Article 2 of the agreement, taxes on income that are similar or identical will also count under the agreement. There's room for interpretation of income taxes under this section of the agreement.
Agreement Definitions to Consider for Double Taxation
A complete set of definitions are laid out, but the most important points are:
- “Malaysia,” means all of the territory of the Federation of Malaysia. Malaysia may also mean any area in which Malaysia has sovereign rights.
- “Singapore,” means the territory of the Republic of Singapore.
The definitions of the “contracting state” refers to Malaysia or Singapore in this context. A “person” can be any person, or company, that is treated as a person for tax purposes.
Any “person” under the agreement, who is a resident of either contracting state, is an individual whom resides in one of the two contracting states for tax purposes. “Person” may also fall under the respective contracting state’s tax laws imposed by a statutory body, local authority or political subdivision.
When a person is a resident of both contracting states, the status of the person must be determined as is explained in Article 4. This determination follows these main points:
- The State in which the person has a permanent home. In the event that the individual has a permanent home in both states, the state in which the person’s personal and economic relations are closer will be determined to be the individual’s state for taxation purposes.
- When a permanent home is unavailable and the individual's interests cannot be determined, residency of a state will be determined by habitual abode. Habitual abode is the state in which the person spends most of their time.
- A habitual abode in both states will require the residency to be based on the state in which the person is a national.
- In the event that the person is a resident of both states or neither state, the question of residency will fall under the guidance of the contracting states.
If all of the above points are considered, the person’s state will then be the place where management is located.
Income Governed Under the Agreement for Taxation Purposes
Once the definitions are considered, it’s time to understand what is considered income under the agreement. Income is categorized into multiple categories to allow for proper legal definitions to be met.
We'll be attempting to succinctly define what income will be considered income.
Immovable Property Income
Income that is gained in one of the states from immovable property may be taxed. The definition of “immovable property” falls under the contracting state, and this income may include income from:
- Agriculture activities
- Forestry activities
- Direct use of the property
- Letting of the property
Income from an immovable property from an enterprise or independent services provider will also fall under immovable property income.
Business Profit Income
Business profits that are derived in the state through a permanent residence will be taxed under the corresponding state’s laws. When a permanent establishment exists in both states, the profits of each will be taxed by each state as if the business was distinct and separate from the establishment.
- Business A is established in Malaysia
- Business B is established in Singapore
Profits from each business, as if it were a separate entity, will be treated as if the business, even if it were under one company, was separate. Therefore, each location, Business A and B, would pay taxes in the state where the income was derived.
Double taxation does not exist in this case.
Deductions of expenses are allowed for general and executive expenses, which are available as if the enterprise were independent in the respective state.
States will determine the proper taxation of profits if competent authorities cannot determine profit attribution properly. Authorities will then take it upon themselves, in application of any law that exists, to make an estimation of the profits from each state.
Taxation of the business will be determined using the same methods as outlined in the agreement year-by-year unless there is reason to determine taxation otherwise.
Transport income is also taxed, and this can be income derived from:
- Air transport
- Road transport
- Boat transport
Profits from ships or aircraft, operating internationally, are only taxable in the enterprise’s contracting state. The definition of profits, in this instance, may include income that’s derived from:
- Rental container use
- Rental of aircraft
- Rental of boats
When profits are derived through a joint business or pool, the state in which the enterprises residency exists will tax the enterprise accordingly. Ground vehicle profits, when earned through international traffic, will be taxable only in the contracting state.
Dividend income may be taxable if paid by one company to the resident of the other contracting state. Taxes on dividends may also be imposed when the contracting state is different from the owner of the dividend’s respecting state. The tax, in this case, will be:
- 10% of ground dividend amounts
- 5% of gross dividends if the owner holds less than a 25% stake in the enterprise
Taxation of profits will not be affected due to dividend income. If neither state imposes taxes on dividends, then dividends will be exempt under the first-mentioned state. When one or both states impose taxes, they will fall under the above amounts.
Taxation on interest will be required if the interest occurs in a contracting state and is paid to a resident of another contracting state. If the owner of the interest is a resident of the other state, taxation cannot exceed 10% of the gross interest paid.
Interest paid on an approved loan may be exempt from Malaysian tax.
The government of a contracting state will be exempt from taxation in the event that the interest is from the Government of the other state.
Royalties may be taxed up to 8% of the gross amount when the owner of the royalties is a resident of the other state. Taxes for royalties in the state that they are derived will also need to be paid.
Royalties in another state, which are earned through a permanent establishment in the state, will be considered as derived from the contracting state.
Technical fee taxes cannot exceed 5% of gross technical fees. Fees, derived by a resident of one contracting state, earned in the opposing state, cannot exceed 5%. Technical fees are fees that are provided in consideration for consultancy, technical duties or managerial work.
When the fees arise from the permanent establishment, wherein the fees are derived from the connection to the establishment, taxation may revert to taxation on independent personal services or business services.
Independent Personal Services Income
Independent personal service income, from a person that conducts a professional service, will be taxed in the state where a fixed base exists. In the event that a base has been established in both states, tax is imposed in each respective state on income attributable to the state.
Professional services can include many professions, including accountants, dentists, doctors and other professional workers.
Dependent Personal Services Income
Income that’s derived from wages or salary shall be taxed only in the contracting state unless the remuneration is from the other state. Exceptions to the rule do exist, and these include:
- Work paid for by an employer that is not a resident of the other state.
- Renumeration is not earned by a permanent establishment or resident of an employer that is in the other state.
Income from residency in another contracting state may be taxed by the other state.
Fees paid to a director of a company that resides in one contracting state yet is a resident of the opposing state due to the conditions of being a member of the company’s board of directors. In this case, the other contracting state may tax the director fees.
Taxation, as per Malaysian and Singapore laws, is setup to avoid double taxation. The agreement makes an effort to remove the risk of double taxation.
Double taxation laws and agreement between Malaysia and Singapore are best considered by a certified accountant.
Comments Off on Agreement Between Singapore and India for Avoidance of Double Taxation
The Government of Singapore and the Republic of India, the Contracting States, signed an agreement on 20 April 1981, and the purpose was to avoid double taxation and also avoid fiscal evasion. Amendments have been made to the original agreement, with the full scope able to be found here.
The original agreement, also known as Annex D, is as follows:
Understanding the Scope of the Agreement -Contracting States
Contracting States, in this case Singapore and India, have come to an agreement which applies to any persons that are residents of one or both States. That is, the person must be a resident of Singapore and/or India to fall within the scope of the agreement
The agreement clearly defines which taxes will be covered in each State.
India’s Taxes Which Apply to the Agreement
India’s taxes, which are defined in Article 2, titled “Taxes Covered,” will include:
- Income-tax and any surcharge on income-tax under Income-tax Act, 1961
- Surtax imposed under the Companies (Profits) Surtax Act, 1964
When looking over the agreement, “Indian tax” refers to the definitions above. Taxes that fall outside of this scope will not be subject to the agreement in its original state.
Singapore's Taxes Which Apply to the Agreement
Singapore’s definition of what is covered is far more general, called, in this case “the income tax.” When overviewing the rest of this document, “Singapore tax” will be considered “the income tax.”
The agreement will apply to similar or identical taxes for both States.
Contracting States will also be required, as per the agreement, to notify the other State when taxation laws are significantly changed. Relevant enactment copies must also be given to the Contracting State so that all competent authorities can understand the new laws.
Understanding Fiscal Domicile
Fiscal domicile is a resident of a Contracting State. Residency is formed in accordance with each State’s tax laws. For the purpose of avoiding double taxation, the definition of a resident must provide a clear residence if the individual is a resident of both India and Singapore.
The agreement outlines how to determine residency in this case, and a person may be considered a resident if:
- A permanent home is available to him. When a permanent home exists in both States, authorities will determine which state the person’s economic and personal relations are closer.
- In the event that relations cannot be determined, or if a permanent residence does not exist, then a person is considered a resident in the state in which they have a habitual abode. What this means is the majority of time a person spends in a State. For example, if a person spent 7 months in Singapore and 5 months in India, habitual abode would declare that the person is a resident of Singapore for the purpose of the agreement.
- If no habitual abode exists or it exists in both States, the authorities of both States will work to determine the question of residency together.
Understanding Taxation of Income
The taxation of income is a major section of the agreement, and it encompasses all of the income which may be subject to the agreement.
Immovable property may produce an income, and this income may be taxed in the Contracting State where the property exists. Contracting States definite “immovable property” under their own law, and this may include “accessory property” which applies to the immovable property.
Accessory may include:
- Equipment used for the purpose of land management
- Livestock used to produce income
Natural resources and mineral deposits may also be included. Income can come from direct working of the land, or it may come from letting the land or other uses of immovable property which results in income.
Property in which an enterprise exists or professional services are performed will be governed by income from immovable property.
The law does not regard aircrafts or ships as immovable property.
Business profits may be subject to double taxation, but there are limits in place. The agreement is such that income or profits of a business of a Contracting State are only taxable if the income is derived in the Contracting State.
When income is derived in the opposing Contracting State through a permanent establishment, the income may be taxed in the other Contracting State for income or profits that are attributable to the permanent establishment.
That is, if the permanent establishment made up 30% of the enterprise's income, then taxation can only be applied to this amount in the opposing Contracting State.
Laws allow for the deduction of expenses, when determining income or profits, to keep the permanent establishment. These expenses may include:
- General administrative expenses
- Executive expenses
A section of the agreement, under Article 7, paragraph 2, exists which claims that when an enterprise of a Contracting State conducts business in the opposing State through a permanent establishment, taxation is such that the income and profits will be determined as if the enterprise were an independent enterprise.
That is, the income and profits, may be treated as if they were made by an independent enterprise, under the same conditions, attributable to each Contracting State. Estimates, based on a reasonable basis, may also be made in the event that attributing profits and income accurately for each State is not possible.
“Income or profits” does not income from:
- Technical service fees
- Capital gains fees
The conduct of trade or business is what would constitute “income or profits.”
Air Transport and Shipping Profits
Air transport and shipping income or profits have their own classification under the agreement. Aircraft may fly into international zones, and in this case, operations may have income from both States.
When the aircraft operates in places only within the Contracting State, taxes will not be exempt. But, if this is not the case, income from operating the aircraft in international traffic shall be exempt from taxes in other Contracting States.
Profits from joint businesses, international operating agencies and pools will also fall under this definition.
Income derived from the other Contracting State may include income from a variety of sources, including:
- Goods loaded into the aircraft
- Passenger carry
Shipping also has its own definition, and unlike air transport, taxation will occur on the other Contracting State. Income from a business that is operating in the other Contracting State may be taxed by the other Contracting State.
The taxation can only occur after 50% of the tax is reduced on the tax chargeable income.
Income may also be derived from:
- Passenger carry
Dividend and Interest Profits
Dividend and interest income or profit are also taxed differently. When dividends or interest is paid by a company, consider a resident of a Contracting state, to a resident of another Contracting State, taxation may occur in the original Contracting state.
If a resident company derives income or profits from the other State, taxes may not be imposed by the other State on dividends paid by the company to non-residents of the other State. This rule applies even if part or all of the profit arises in the other State.
Interest is considered to arise in a Contracting State when the payer is:
- The Contracting State
- A local authority
- A statutory authority
- Resident of the Contracting States
- A political subdivision
But if the person paying the interest has a permanent establishment in a Contracting State which is connected to the debt in which the interest payment occurs, and the interest is derived from the permanent establishment, interest will have arisen in the Contracting States in which the permanent establishment exists.
When interest is given due to a special relationship, wherein the recipient and payer have some form of relationships, special cases will apply. That is, if the agreement is such that the interest paid exceeds the amount of interest paid if such a relationship didn’t exist, the excess of such payments will be taxable in accordance to the laws of the Contracting States.
Royalty income is also complex, and like with dividend and interest income, royalties paid to a resident of another Contracting State, taxation may occur in the original Contracting state. Royalties are said to originate in the Contracting State when the payer is:
- The Contracting State
- A local authority
- A statutory authority
- Resident of the Contracting States
- A political subdivision
If a permanent establishment exists and the payer’s liability to pay the royalties occurred in the State in which the establishment exists, royalties will be considered as derived from the Contracting State where the permanent establishment exists.
Special relationships for royalties follow the same guidelines as with interest.
Dependent Personal Services Income
Salaries, wages and renumeration are considered derived in the Contracting State where the employment occurs. Employment exercised in the other Contracting State may be taxed in the other Contracting state.
Singapore’s laws are such that income earned in India will not be taxed in India if the following is met:
- The resident of Singapore was not in India for a period exceeding 183 days in the past year
- Wages or salaries are paid by an employer that is a resident of Singapore
- Remuneration is not derived from an employer’s permanent establishment in India
India has the same rules as Singapore in this respect.
Directors’ fees of a resident of a Contracting State, which have arisen from the directors’ role as a member of a board of directors in a company that is a resident of the other Contracting State, may have to pay taxes in the other Contracting State.
Apprentices, Students and Trainees
Students who are a resident of a Contracting State but are in the other Contracting state to expand their education, are exempt from paying taxes in the other Contracting State so long as they do not reside in the contracting State for a period exceeding six years. Exemptions are for:
- Remittance relating to the person’s training, education and maintenance
- Remuneration per annum is 7,500 Indian rupees or less, or equivalent in Singapore currency and the remuneration was for personal services to supplement the resources available to the person
An individual that is in the other Contracting State for the purpose of the following may be exempt from taxes on the items listed below if they do not exceed three years of residency in the other State since their arrival. Individuals covered by these rules may be in the other State for:
- Training (grant)
- Research (grant)
- Student (grant)
Award from the government or from one of the following may also be included:
- Religious organizations
- Charitable organizations
- Scientific organizations
- Education organizations
Exemptions for the following exist:
- Remittance for the purpose of education or training
- Remuneration of up to 7,500 Indian rupees or equivalent in Singapore in connection to the individual's study, training or research
Individuals that are considered an employee or are under contract with the other State for the sole purposes of gaining experience from a person that is not an enterprise for a period no longer than 12 months may also be exempt from:
- Remuneration of 12,500 Indian rupees or equivalent
Income that is not mentioned within the Agreement will be taxed based on the laws of the respective Contracting States.
Provisions to agreements are allowed, under the avoidance of double taxation. When income is subject to tax in each of the Contracting States, relief from double taxation may be given under:
- Credits against tax payable
- Deduction allowances
The provisions follow the Income-tax Act, 1961 as pertains to credits.
Discrimination cannot occur, meaning the other Contracting State may not impose higher taxes on nationals or citizens of a Contracting State. Reliefs, allowances or reductions, for the sole purpose of tax purposes, which are granted only to citizens are not required to be given to non-residents.
There is a mutual agreement procedure in place that allows for remedies if a resident of one of the Contracting States believes that the actions of either state are in contradiction of the Agreement. Cases must be presented within a three-year period.
Competent authorities of each of the Contracting States are allowed to exchange information if it helps to carry out the provisions in the Agreement. Information is to be treated as “secret.”
Comments Off on Registrable Controllers and Its Significance
The Companies Act of Singapore was amended in 2017 under the Companies Act 2017. When the Act was passed, it was passed in an effort to improve the transparency of a business’ ownership and control.
The Act was put in place to conform to international norms, and it also:
- Enhances debt restructuring
- Improves business operation ease
- Reduces regulatory burdens
Singapore’s lawmakers passed the Act to help make business operations more transparent, lowering the risk of misuse of corporate entities. The Financial Action Task Force recommended the changes that will help with:
- Threats to business integrity
- Money laundering
- Terrorist financing
Authorities will also have an easier time meeting international standards for tax transparency as a result.
Maintenance of a Register of Controllers
Implemented on 31 March 2017, the Act requires all companies, including foreign companies unless a special exemption is made, to maintain what is known as a “register of registrable controllers.”
The register will include “beneficial ownership information,” and upon request, the information is to be furnished to public agencies.
Controllers are defined as a person or legal entity that has “significant” control or interest in a company. Under the law, this is a person that has 25%+ of shares in the business or more than 25% voting power. Control would include an individual that has the power to:
- Influence control over the company
- Remove or appoint directors
- Holds more than 25% of voting rights
Implementation of the register is required as of 31 March 2017. A register of registrable controllers must be maintained within 30 days of the business’ incorporation.
In an effort to reduce fraud, companies are required to take what is referred to as “reasonable steps” to obtain information about controllers and identify controllers in the business. Notice will also be provided to any potential controllers through hard or electronic copy.
Individuals may reply to the notice, but it’s not the company’s liability if these parties do not respond.
A reply to a notice will need to be entered into the register of registrable controllers within two days of receiving the notice. The register is to be kept in:
- Registered filing agent’s office, or
- Registered company’s office, or
- Prescribed place
Companies can ask for assistance in identifying controllers, through a notice, from:
- Other persons of importance
If a request is received, companies must furnish the registers to public agencies, including the Accounting and Corporate Regulatory Authority of Singapore. If a company does not maintain a register of registrable controllers in accordance with the amendment, a fine of S$5,000 may be assessed to the company.
Foreign Companies and Public Registers
Foreign companies that have registered in Singapore will be required to maintain public registers of all of their members. These companies will also be required to notify the Accounting and Corporate Regulatory Authority of Singapore of the address where the register is being kept.
The register is an attempt to bring foreign companies into the same requirements of local companies in respect to a public register.
All foreign companies are required to keep such a registrar.
Singapore Companies and Register of Nominee Directors
Companies incorporated in Singapore will also be required to maintain what is known as a “register of nominee directors.” These individuals, or directors, are persons that will act in accordance to the direction of any other person within the company.
This is done so that a nominee director, who may be appointed to the board of directors of the company, by a person with a shareholding in the company, is identified.
Nominee directors must disclose this information to their companies in an effort to reduce fraud and improper influence in a company. The goal is to:
- Reduce terrorist financing
- Reduce money laundering
Nominees, often acting on the directions of their appointee, hold too much power in a company to not be identified. The register will help reduce the influence of the person that appointed the register and make it transparent who the nominee is through the register.
Even if companies have wound up, they are still required to retain their records for a period of five years, an increase from just two years before the Act passed.
Struck off companies are not required to keep their records at this time.
What all of this does is ensure that Singapore’s businesses to fall in line with international standards. The United Kingdom and Australia, for example, have similar requirements in an effort to reduce risks inside of a company.
The register of registrable controllers also helps authorities and shareholders know which parties may be influencing a company's decision. The use of shell companies to engage in fraud or complex contract division will also be easier to identify when the register of registrable controllers is available.
Companies will no longer need to use common seals, and measures have also been taken to provide a timeline for annual general meetings and filing annual returns.
Comments Off on Limited Liability Company vs Partnership: Which is the Right Choice for Your Business?
Singapore has multiple business types to choose from when incorporating, but two of the most common business types are:
- Limited liability company
- A partnership
Limited liability companies are also considered a private limited company or PLC. But, for the purpose of this article, we’ll be using “limited liability company,” or “LLC.”
Legal Identity Differences Between an LLC and a Partnership
Legal identities are very important because if a company has its own legal identity, it is separate from its shareholders and directors. An LLC is advantageous because a separate legal identity is given to these businesses.
What this means is that the entity can:
- Enter into legal relationships
- Sue or be sued
- Hold property
- Enter into contracts
All of these points will occur in the name of the company. In most cases, an LLC will have up to 50 persons that have shares. A partnership often occurs between 2 and 20 members. Partnerships are a concern because they’re not a legal entity.
What does this mean?
Partners have unlimited liability. If a business fails to pay its debts, the partners may be held liable to satisfy the debts. But, even in a partnership, the firm can sue or be sued in the firm’s name. The main difference is that liability will fall on the partners rather than the separate legal entity that is the limited liability company.
Shareholders in an LLC are only liable for the investment in the company – not for the company’s debts.
Note: A partnership is different from a limited liability partnership, or LLIP, which limits the partner’s liability to his or her investment into the business.
Continuity and Transferability of an LLC and a Partnership
Business continuity and transferability is another question of concern. Partnerships are allowed to continue and transfer as long as the partners agree that it will. Paperwork should be in place that allows for the partnership to exist even if a partner drops out of the venture or dies.
Perpetuity and succession of an LLC is irrespective of the partners, shareholders or directors of the business.
If a shareholder, partner or director die in an LLC, the continuance of the business is not an issue. Transferring of shares is also very straightforward, and the transfer will not impact the daily operations of the LLC.
Raising Capital Questions and Concerns
LLCs have the benefit of being a legal entity, and these businesses will be viewed favorably by banks when it comes to lending and raising capital. An LLC comes with credibility. Partnerships will have a harder time receiving financing for their operations.
Partnerships are often limited to the contributions of their partners.
So, if the partners have already exhausted all of their personal contributions, it will be very difficult to raise capital.
Private finances are often needed, especially in the initial stages of the partnership’s operation.
Taxation of an LLC vs a Partnership
Taxation of an LLC will be imposed on profits, and a tax rate of below 9% is imposed up to SGD 300,000. Tax rates are capped at 17% for all profits above the SGD 300,000 threshold. Partnerships will be taxed differently.
Partnerships will be taxed on the profits that are distributed among partners.
Tier-based, the income from partnerships will be taxed based on the personal income tax rate.
Responsibilities and Expenses of an LLC vs a Partnership
A partnership has a low cost of registration, and it’s an easy entity to setup. Two or more persons with an idea may start with a partnership because they’re:
- Easy to manage
- Easy to administer
- Quick to set up
- Less administrative duty intensive
Annual filing requirements are required for an LLC, and there’s also a higher registration fee. You'll find that there are also requirements for:
- Annual accounts
- Annual general meetings
- Tax returns
Partnerships may be formed without the use of an accountant or law firm, but it’s ill-advised to form an LLC without professional assistance. The initial set-up of an LLC is vital to the business’ ongoing operation.
Professionals, such as accountants, will be able to manage all of the complex responsibilities of an LLC.
An LLC may be a complex structure, especially compared to a partnership in terms of responsibility and maintenance, but they also offer flexibility and power. Limiting the liability of the shareholders is a major benefit, and this is often one that leads to a new business being formed as an LLC.
The flexibility and advantages of the LLC are often enough for owners to deal with more complex maintenance of the business.
Partnerships also have to worry about a discontent partner giving notice for the dissolution of the partnership. This is a major concern for all partners because it can cause substantial losses and concerns for all partners involved. Partnerships are often only chosen in a limited number of situations.
Oftentimes, partnerships are not recommended, although they do have their place in limited scenarios.
Comments Off on Understanding Permanent Establishment in Tax
Globalization has led to the question of trade and investment suffering from double taxation. Policy discussions are ongoing, discussing the harmful impact of aggressive tax planning and have led to discussions of double taxation agreement, the cornerstone being permanent establishment.
Double taxation has led to companies engaging in tax avoidance schemes, often complex in nature, to avoid paying taxes in a resident state and in a state where profits are received.
Double taxation agreements (DTAs), often entered into as a political tool or gesture, can also harm a country’s revenues. Agreements with the United States can cost billions in losses annually. The Netherlands may have lost as much as €770 million in 2011 alone due to agreements with developing countries.
Tech giants, such as Facebook, Google and Apple, also funneled money through international headquarters to avoid a “physical establishment” in countries that have higher tax rates.
The issue, which led to Apple and Google owing $600 million to Italy, has led to the European Union planning to revise their rules on Permanent Establishments.
What is a Permanent Establishment?
Businesses that operate outside of their resident country, or country in which they are a resident, are required, in many countries, to still pay taxes in their resident country. Even when the operations are based in another country, the resident company wants to receive taxes from the income made.
DTAs are such that source countries and resident countries have taxing rights.
Permanent establishment (PE), as pertains to DTAs, helps put in place a threshold for the taxing source. For example, let’s assume the following:
- State A is the resident country
- State B is the source company (non-resident)
A company earns revenue from State B, and State A and B have a DTA in place. Under the DTA, there may be a threshold for how much a company is taxed by State B and State A.
Thresholds for taxation will be dependent on the DTA that’s in place.
What a PE does is a few things:
- Limits taxing at the source State
- Sets minimum limits on the nature of the activity
Let's assume that a PE is formed, when in accordance to the DTA, if a company has been operating in State B for a period of 6 – 12 months.
A company, signing a new contract, may have to operate in the non-resident state for a period of eight months. This means that the DTA would consider the operations to be a permanent establishment, meeting the threshold in the agreement.
The non-resident country will want an allotment of taxes as a result.
But the company doesn’t want to pay these taxes. Complex avoidance strategies may be put in place, and now, the company has formed three different entities. All of the three entities will work on the project for no more than three months at a time in an effort to avoid further taxation.
The state where the operations took place may not realize that the contract has been split in such a way that it’s designed to reduce or avoid the PE definition.
Under the example above, and it happens frequently, the company will pay less taxes while still operating in a non-resident state.
When a DTA is formed, it’s important that the definition of a permanent establishment is clear and concise. Both states must understand and consider the implications that the PE definition will have on the agreement.
Source States are often the beneficiary of a wider agreement, wherein a wider range of situations for a permanent establishment exist. The Source States may not benefit from a narrower permanent establishment definition because it will often reduce the State’s right to tax the company.
There are reasons why a state may agree to narrower agreements aside from a lack of understanding.
For example, perhaps the state is willing to concede with less taxation rights on the basis that Foreign Direct Investment will increase, covering the potential loss in revenue.
Conventions and Permanent Establishments
There are model conventions in DTAs resulting in an agreement, despite differences in wording, offering similar provisions. OECD, UN and United States proposals on conventions have led to this similar wording being adopted in DTAs.
States have a right to follow these recommendations fully, or the state can choose to make changes as needed.
Initial Definitions of a Personal Establishment
Under the models, and they are different, the personal establishment is determined under the “place of business test.” The requirements often fall under:
- Existence of a place of business
- The place of business must have a degree of permanence, but that permanence doesn’t need an attachment to the soil
- Operations are through a fixed place of business
Following these criteria, you’ll also find sections that include examples of what a PE may consist of and the minimum period of time that is required for a permanent establishment to be triggered.
It's important to mention that “operations are through a fixed place of business” means that the company employs workers in the State. These workers may not be independent of the company.
Exclusions in activities will also be listed in a third section, and this means activities that may provide little or no income.
UN, OECD and US models, while having significant similarities, vary greatly primarily due to the minimum time that constitutes a PE. For example, under the OECD model, it would require a company to operate in a state for 12 months to be considered a PE.
UN models establish a PE after just a six-month period.
Resident and non-resident states will be greatly impacted, depending on the model adopted, because it may mean a significant drop in tax revenue. OECD models are also lacking information on what happens if a company operates in a non-resident country past the PE definition.
UN models, in this case, are more thorough and may provide a better framework for a DTA to follow.
Each model also has its own definition of “auxiliary” activities. The benefit of each model must be considered so that the DTA is as thorough as possible. There are also differences between the UN and OECD models as pertains to:
- Consultancy business provisions for the duration test
- Specific anti-abuse clauses
- Preparatory or auxiliary activities
The result is that DTAs become a complex agreement wherein multiple editions may be signed that cover different policies appropriately. Contracting States may decide that it’s best to adopt several DTAs to provide better overall provisions and tax benefits.
Duration tests are often the most important part of a PE, and contracting states may decide to update their agreements or use different agreements with different contracting states.
Extractive Industry Impacts and Permanent Establishment
Defining a permanent establishment is key to enforcing a DTA, but it may be difficult to define a PE because there are different triggers. As we’ve learned, there are different means in which a PE can be established based on the adopted model convention.
Questions exist in business industries where fragmented work may count towards PE establishment.
Multiple parties may operate in extractive industries, and these parties may be commonly owned. Fragmented activities may exist in one common project, but there’s the question of whether or not these fragmented activities should be lumped together.
When lumped together, this may create a PE, which may or may not be beneficial.
Contract splits, which are often utilized as a means of avoidance, also occur in extractive industry operations. Should these activities be grouped together, too?
There's also the consideration of investor-State contracts.
Joint operating agreements may exist within these contracts which will trigger different PEs, and subcontractors may also trigger a PE despite only being called in for short-term work. It's a complex web of legalities that can lead to more questions than answers for businesses.
Tax administrators will need to monitor work closely in order to correctly develop a timeline of work and ensure that the definition of a PE is properly established.
Companies have also been known to call in several companies to split the work among. These companies may be subsidiaries, and the companies may shift profits around in such a way that they avoid PE and are able to maximize profits.
Avoiding taxes at source benefits companies, but it also lowers revenue in the source countries where operations took place.
Extractive services are such that different stages are likely to trigger permanent establishment. States often require companies in this field to establish a presence in the region.
Subcontractor Issues and Concerns
Subcontractors are a vital part of the workforce, and it’s not uncommon, despite the industry, for subcontractors to be called into a project. These professionals will often only work for a short-term period, and the skills that they offer are highly specialized.
Electricians, for example, may be subcontracted to work on a defense building.
These individuals operate on their own terms, so they may or may not trigger a PE. Companies, in an effort to avoid triggering a PE, will subcontract in such a way or structure operations to avoid threshold establishment.
Subcontracting companies, which may be closely related, may also be called in for profit shifting, or to shift profits from a company that has met the PE threshold to a company that does not meet the threshold.
Since the two companies are closely related, and they may even have the same owners, this provides a direct benefit in terms of revenue.
Resident states will often negotiate longer PE thresholds, and this will generate higher tax revenue for the resident state. Larger entities with higher operations may request longer PE thresholds because the state that they’re coming to an agreement with is smaller in size and less beneficial of a partner.
The Republic of China, known for its large economy, has an 18-month threshold with their agreement with the Government of Ukraine. Ukraine loses out on revenue as a result of the poorly agreed upon DTA.
Loopholes exist that allow companies to shift profits, and this is what Google and Apple did when they setup their bases in Ireland. The companies knew that Ireland had lower taxes than Italy, for example, so it made economic sense to shift profits.
The penalties paid were small in comparison to the profit made, and it is likely, although not certain, that the two tech giants knew the potential fines or penalties would be far lower than the savings potential.
It's a risk-reward basis for these companies, and the BEPS project, from the OECD, aims at helping governments find solutions to the growing profit shifting problem.
Base erosion profit sharing is a major issue facing many of these models, and it’s an issue that will continue to exist, although the area does have room for improvement. OECD’s Multilateral Convention is a promising solution that will allow the adoption of specific clauses by States that will prevent the avoidance of PE.
Anti-fragmentation rules are especially important and are the focus of many solutions because of the widespread use of fragmentation to avoid thresholds.
Comments Off on Deduction of Interest Expenses s14(1)(a)
BML v Comptroller of Income Tax  SGHC 118 revolves around the interpretation of s 14(1)(a) of the Act on the deduction of interest expenses upon money borrowed for capital employed in acquiring income.
Case Facts to Consider
BML, the appellant, owns and operates a mall. The appellant's transaction in October 2004 came into question when the company assigned its rental income rights to a special purpose vehicle. The goal of creating the special purpose vehicle is to provide security for a loan.
A facility agreement was made with the appellant borrowing $520 million, or the market value of the mall.
The appellant utilized $170 million to refinance previous borrowings, and the remaining balance of $350 million was "lent" to shareholders. The money lent to shareholders was provided as interest-bearing loans.
BML essentially converted their equity-based vehicle into a debt-based vehicle by issuing fixed rate subordinated bonds through a capital reduction exercise.
The appellant then went on to claim deductions for the shareholder bond interest expenses. Deductions were claimed for the years between 2005 and 2009.
The Comptroller of Income Tax disallowed the deductions incurred through Shareholder Bond interest expenses. The Comptroller's decision was upheld, with the appellant appealing the decision to the High Court.
The Board's Stance and the Basis of the Appellant
The Board's decision, in summary, suggests that there was no link between rental income, which is how the appellant makes money from the shopping mall, and the interest that was paid to Shareholder Bonds.
The Board suggests that the interest was not used to provide the mall with further income. Instead, the interest was derived from the intent to provide shareholders with a return for their interest in the company.
As per the board's stance, there was not a substitute in financing which would justify the appellant's deduction of the interest.
The entire basis of the case, from the standpoint of the appellant, was that the Comptroller misinterpreted s 14(1)(a) of the Act. Basis for the argument stems from the following:
- The Comptroller doesn't have the authority to determine if interest paid is deductible
The governing test under s 14(1)(a) came under question as well the Act's wording of:
- Any sum payable by way of interest
The question of the case is whether or not the interest paid by the appellant should be deductible. Both parties disagree over whether the Comptroller has the authority to decide on interest being payable under "capital employed in acquiring the income."
The Comptroller asserts that there must be a direct link between money borrowed and income acquired.
Andermatt Investments Pte Ltd v Comptroller of Income Tax  2 SLR(R) 866
Andermatt Investments is the leading case in the interpretation of s 14(1)(a). The case, used to interpret the Act, involves an investment company that wanted to purchase a property owned by another company.
Shareholders of Andermatt included the Wan family.
Wan Holdings, owner by the Wan family, owned the property in question. Andermatt purchased all shares of Wan Holdings.
The acquisition of the property was problematic because Andermatt purchased all shares in Wan Holdings, effectively making Andermatt vested in the property. Andermatt's purchase of Wan Holdings was then to be satisfied by drawing down on an overdraft facility.
The investment company wanted to deduct the interest payable against the property's rental income.
High Court's Decision on BML v Comptroller of Income Tax  SGHC 118
The case was dismissed by the High Court, meaning the appeal was thrown out. Dismissal was based on the following facts:
- The Comptroller has the discretion, in accordance with s 14(1)(a), to determine whether the requirements for a deduction are satisfied. The High Court, in effect, also claims that a direct link should be made between income produced and money borrowed under the s 14(1)(a) governing test.
- The mall's rental income and interest paid on shareholder bonds could not be established, meaning that there was no direct link between the two.
- The Court decided that it will not intervene unless the appellant can prove that irrelevant considerations were made in the Comptroller's decision to not allow the deduction.
The High Court's decision is that the Comptroller's determination and the decision of the Board were reasonable.
The Court concluded that the mall was already owned and under the control of the appellant and generating rental income prior to the bond issuance. The issuance of the bond was found to neither change the rental income of the mall, nor change the ownership status of the mall. The restructuring, at the admittance of the appellant, was to restructure capital holdings in the firm and not due to financing needs or the desire to generate more rental income.
Direct links for deductions allow for a fair and just way for companies to deduct interest payments. The case points to a direct link requiring more than a balance sheet. Companies, as in the case of the appellant, could make changes to their capital structure whether or not a loan was needed and related to income produced.
The loan and bonds given to shareholders wasn't required to produce income and did nothing to help enhance the appellant's assets.
Rather, there was no link established between the shareholder bonds and the income produced.
A number of factors, following the ruling, will need to be established for companies to make a deduction on interest paid. First and foremost, the link between the interest paid and income produced will need to be tangible and factual.
The Comptroller, under Section 14(1)(a) and the ruling now, without a doubt, has discretion over how much, if any, deduction should be allowed.
Loan capital replaced by equity capital isn't entirely bad, and there are circumstances wherein deductions can be made. The appellant's case is a bad example of loan capital replaced by equity capital, but if the circumstance revolved around an old loan being replaced by a new loan, deductions would be allowed.
Taxpayer intent isn't enough to prove a direct link between income produced and money borrowed.
Intention does remain relevant in the tax code, but it doesn't provide a direct link.
Comments Off on Process and Effects of Compulsory Winding Up
There are many reasons to wind up a company. Maybe your company has ceased business activities, or maybe you're looking to minimize tax liabilities. In these two cases, voluntary winding up is possible. However, there are also two other ways to wind up a company: creditor's voluntary winding up, and by an order of the court.
Members' Voluntary Winding Up
Companies winding up voluntarily can only do so if it is still able to pay its debt in full within 12 months of commencing the winding up. Company directors will be required to make a statement to this effect once the winding up process is complete.
When a company chooses the members' voluntary winding up, the shareholders will appoint a liquidator to file the necessary notifications under the Companies Act and wind up its affairs.
No originating summons is filed in court in the case of a voluntary wind up. The Accounting and Corporate Regulatory Authority handles this instead.
Creditors' Voluntary Winding Up
What happens when a company is insolvent, or unable to pay its debts? In this case, the company can only be wound up through a creditors' voluntary winding up or by an order of the court.
If the company's Directors decide that the company cannot continue operating, due to its liabilities, a meeting must be called with the creditors to appoint a liquidator. In this case, the Directors make no declaration of solvency, which is required with a members' voluntary winding up.
It's possible that a members' voluntary winding up may transition to a creditors' voluntary winding up if the appointed liquidator forms the opinion that the company cannot pay its debts in full within the required time period.
Compulsory Winding Up
There are also cases when companies may be compulsorily wound up via an order of the court. The court may be petitioned to obtain such an order.
There are many reasons why a company may be wound up compulsorily.
- The company is not able to pay its debts.
- The company, through a special resolution, has resolved that it should be wound up by the court.
- The court decides that it is just and equitable for the company to be wound up.
- The Directors acted in their own interests in regards to the company's affairs rather than in the interests of the company as a whole.
- The company is being used for an unlawful purpose.
- A creditor has a claim against a company for more than $10,000, has served a written demand requiring the payment, and the debt was not paid within three weeks.
A Real-World Example of Compulsory Winding Up
Take, for example, the case Companies Winding Up No 192 of 2016, Summons No 5094 of 2016. In this particular case, which also highlights the importance of replying to tax income, the judge ordered the defendant to be wound up.
A petition for the order was filed by the Comptroller of Income Tax on grounds that the defendant was unable to satisfy its debts. The defendant's business was in the management and investing of property.
In 2014, the Comptroller sent a letter to the defendant stating that the gains from the sales of two properties by the defendant is taxable. The Comptroller provided the defendant with reasons for the position as well as "proposed revised tax computations" for the years of assessment between 2011 and 2013.
The defendant was given a deadline of 8 January 2015 to inform the Comptroller of any objection. The defendant failed to respond by the deadline, so the Comptroller proceeded with the revision of the tax assessments.
The defendant was sent a letter stating the additional assessment as well as Notices of Additional Assessment. The notices state the amounts of $672,319.32 and $458,682.01 for 2013 and 2011 respectively were to be paid by 21 February 2015 as additional tax.
The notices also gave a two-month deadline from the date of the notices to object to the additional assessments.
No payments were made before the deadline. Between 20 April 2015 and 28 March 2016, tax officers made calls to the defendant requesting payment. Letters and emails were also sent between 21 July 2015 and 29 January 2016.
The defendant had arranged to make payments through associate companies via cheque for part of the owed payments. Together with penalties, the defendant owed more than $1 million. Most of the additional tax remained unpaid.
The Comptroller sent a demand dated 5 July 2016, which stated that the defendant owed $1,131,130.25. The demand stated that if the defendant did not make a full payment within three weeks that the Comptroller would commence winding up proceedings against the defendant.
No further payments were made. The defendant claimed to have been dealing with health issues and other business-related matters, and for these reasons, did not respond to the statutory demand.
The Comptroller filed the application to wind up the defendant on 7 September 2016.
The court ultimately ruled that the defendant was unable to pay its debt to the Comptroller, and the court may order the winding up of the defendant under the Companies Act. The judge ordered the costs to be taxed and paid to the Comptroller out of the defendant's assets.
The Effects of a Compulsory Winding Up Order
When the court winds up a company compulsorily, the winding up is deemed to have commenced at the time the Originating Summons was presented. Once the winding up has commenced, the Directors of the company have no power to carry on business operations. The assigned liquidator then takes control over the company.
Within two weeks of the winding up order, the secretary and directors of the company must deliver to the liquidator a statement of the company's affairs. This statement contains the details of the company's liabilities and assets, and it also allows the liquidator to carry out an investigation into the company's affairs.
After the winding up order is made, no action can be taken against the company without the leave of the court. Unless the court orders otherwise, any transfer of company shares or disposition of company property shall be void.