Singapore Budget 2020: Tax Update

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Introduction

As Singapore tackles COVID-19, Deputy Prime Minister and Finance Minister Mr Heng Swee Keat delivered the Budget Statement in Parliament on 18 February 2020.

The tax changes this year, though not ground-breaking, reflect Singapore’s values amid economic uncertainty and global structural shifts. While Singapore faces some headwinds, tax measures have been introduced to stabilise the economy and support enterprises. On the international front, Singapore is well-positioned to make the most of geopolitical changes. In this regard, extensions, enhancements and refinements of certain existing tax incentive schemes are driven at maintaining Singapore’s competitiveness as a global financial hub. Overall, there are no fundamental changes to Singapore’s tax system, as the Government is of the view that the existing tax system as already fairly competitive and business friendly.

In this article, we highlight some noteworthy tax developments for businesses and global investors.

At a glance

In summary, businesses and global investors should note that:

1. Companies will enjoy temporary tax measures to stabilise and support the economy

  1. Automatic 25% corporate income tax rebate, capped at S$15,000, for YA 2020.
  2. Enhanced carry-back relief scheme for YA 2020.
  3. Accelerated relief for Plant & Machinery, Renovation & Refurbishment for YA 2021.

2. There are no changes to GST for now, but businesses could potentially anticipate a GST impact on their cross-border activities

  1. GST hike from 7% to 9% will not take effect in 2021, but will still be needed by 2025.
  2. Key changes commencing this year: GST on imported services and GST on digital payment tokens.

3. The M&A scheme will be extended to 31 December 2025, but on a limited basis

  1. Lapse of stamp duty relief for instruments executed on or after 1 April 2020.
  2. Lapse of waiver applicable to foreign holding companies of Singapore subsidiaries for acquisitions made on or after 1 April 2020.

4. Tax incentive schemes will be extended, enhanced or refined to maintain competitiveness and to promote the venture capital industry

  1. Extension of ‘safe harbour’ exemption for disposal of ordinary shares till 31 December 2027.

  2. Tax incentives for venture capital funds and fund management companies extended and enhanced.

  3. Extensions, enhancements, refinements of tax incentives for various industries, including insurance and maritime industries and certain financial markets.

25% Corporate Income Tax Rebate

The 25% automatic rebate will be capped at S$15,000 per company for the Year of Assessment (YA) 2020. As such, it will mostly benefit small and medium enterprises (SMEs) and companies experiencing minor cash flow issues.

Enhanced Carry-back Relief Scheme for YA 2020

To help small businesses cope with cash-flow problems especially in cyclical downturns, the carry-back relief scheme was introduced in the Budget 2005 to allow persons carrying on a business to carry back current year unabsorbed capital allowances and trade losses (qualifying deductions) to the immediately preceding YA, to be deducted against assessable income of the immediate preceding YA. This relief is capped at S$100,000.

This scheme will be temporarily enhanced, where qualifying deductions for YA 2020 may be carried back up to 3 immediate preceding YAs, capped at S$100,000. Further details will follow soon.

Accelerated Relief for Plant & Machinery, Renovation & Refurbishment

Businesses are also provided with various other options to manage their cash flow.

Businesses which incur capital expenditure on the acquisition of plant & machinery (P&M) in the basis period for YA 2021 may opt to accelerate the write-off of the cost of acquiring such P&M equipment over a period of 2 years. In addition, to simplify capital allowance claims for companies, the prescribed working life of the P&M will be streamlined.

Separately, businesses which incur qualifying renovation & refurbishment (R&R) expenses during the basis period for YA 2021 may also opt to claim a tax deduction on R&R expenditure in one YA, capped at S$300,000 for every relevant period of 3 consecutive YAs.

No New Changes to GST, but GST on Imported Services and Digital Payment Tokens Commenced in 2020

In the Budget 2018, the Government announced its intention to raise Goods and Services Tax (GST) by 2% from 7% to 9%, sometime from 2021 to 2025. The purpose of the increase is to meet the nation’s recurrent spending needs, particularly for healthcare, security and preschools. In deciding the timing of implementation of the GST increase, care would be exercised by the Government to carefully assess the prevailing economic conditions and the nation’s needs at that point.

This year, after reviewing the nation’s revenue and expenditure projections, the Government has decided that the GST increase will not take place in 2021. This reflects its present intention to support the economy. That being said, the Government will still raise GST as intended, by 2025.

While no new GST changes have been announced this Budget, we highlight two crucial changes commencing this year.

GST on Imported Services

GST on imported services, also announced in the Budget 2018, came into effect on 1 January 2020.

Prior to the introduction of such changes, only locally procured services were subject to GST, while services procured from overseas were not. Therefore, in order to achieve a level playing field in the GST treatment for services whether procured locally or overseas, the reverse charge mechanism was implemented, which requires GST-registered businesses in Singapore to account for GST on the import of overseas services as if they were the supplier. The reverse charge applies only to businesses that make exempt supplies, and will therefore primarily affect a few businesses, namely banks, insurers, property developers and recently, suppliers of digital payment tokens.

The Overseas Vendor Regime was also implemented, requiring overseas vendors to register for and charge GST on the overseas supplies of digital services to Singapore consumers. Examples of digital services include downloadable digital content (e.g. mobile applications and e-books) and subscription based media (e.g. Netflix and Spotify).

Meanwhile, there will be no new changes in the GST treatment for the online purchases of goods from overseas.

At present, GST is imposed on the import of goods into Singapore, unless specifically exempted or relieved. In the Budget 2019, measures were introduced to reduce GST relief for the import of goods into Singapore by travellers, thereby reducing incentives for people to purchase goods overseas instead of locally on the basis that overseas goods will be relieved from GST. However, parity in the GST treatment of all goods consumed in Singapore has yet to be achieved. In particular, overseas goods imported into Singapore by post or air with a cost, insurance or freight value below S$400 are exempt from GST. This lacuna has yet to be addressed by the Government.

In our view, the current position on the GST treatment of imported goods may evolve in step with global trends. Since 2015, the Organisation for Economic Cooperation and Development (OECD) has been working to develop a global consensus to taxing the digital economy, culminating in a Programme of Work released in May 2019. As this is a moving target, we are keeping abreast of these developments.

GST on Digital Payment Tokens

With effect from 1 January 2020, supplies of digital payment tokens will no longer be subject to GST.

Prior to then, the supply of virtual currencies was treated by the Inland Revenue Authority of Singapore (IRAS) as a taxable supply of services for GST purposes. Thus, a person who supplies virtual currencies in the furtherance of a business would be liable to register for and charge GST if the relevant S$1 million threshold is triggered. Conversely, if such GST-registered person were to make payment for goods and services using virtual currencies, this would be treated as a barter trade situation, i.e. he would have to account for GST on the supply of virtual currencies, while the supplier would charge GST on the supply of goods and services if applicable.

On 19 November 2019, IRAS issued an e-Tax Guide on the GST Treatment of Digital Payment Tokens. Having reviewed other jurisdictions’ tax treatment of cryptocurrencies transactions, IRAS recognised that the taxing of cryptocurrencies that function as a medium of exchange (i.e. digital payment tokens) results in two taxing points – once on the purchase of the cryptocurrency, and again on its use as payments for other goods and services subject to GST. Therefore, to better reflect the characteristics of such tokens as a “currency” for GST purposes, supplies of such tokens would no longer be subject to GST from 1 January 2020. Instead, they will be treated as exempt supplies.

This change is welcome, given that it follows the GST treatment of supplies of foreign currencies under foreign exchange transactions, which have always been treated as exempt supplies. In essence, IRAS will treat cryptocurrencies like currencies for GST purposes.

Singapore is now more aligned with international practices on the GST treatment of cryptocurrencies. For example, Australia, the UK and the EU generally adopt the position that certain cryptocurrencies will be treated as exempt supplies for GST purposes.

M&A Scheme Extended, But on Limited Basis

The Mergers & Acquisitions (M&A) scheme was introduced in 2010 to support the restructuring and growth of companies through M&A. Under this scheme, a Singapore company making a qualifying acquisition of the shares of a target company may enjoy certain tax benefits.

In order to qualify for the M&A scheme, the ultimate holding company of an acquiring company must be incorporated and tax resident in Singapore. In 2012, a waiver of this condition was introduced for certain eligible companies, including foreign multinational corporations (MNCs) carrying out headquarter activities in Singapore under the Headquarters Tax Incentive Programme.
The M&A scheme will be extended to cover qualifying acquisitions made on or before 31 December 2025.

However, this will be on a limited basis:

  1. Lapse of stamp duty relief: Stamp duty relief under the M&A scheme will lapse for instruments executed on or after 1 April 2020.
  2. Lapse of waiver for MNCs: The above waiver will lapse for share acquisitions made from 1 April 2020. As such, MNCs which incorporate Singapore subsidiaries may no longer satisfy the conditions for the M&A scheme.

Further to the changes introduced, the prevailing tax benefits available under the M&A scheme include (i) an M&A allowance on the purchase consideration, capped at S$10 million for all qualifying acquisitions in the basis period for each YA; and (ii) a double tax deduction (DTD) on transaction costs incurred in respect of the qualifying share acquisition, subject to an expenditure cap of S$100,000. The limits on the M&A allowance and DTD are designed to focus the main benefit of the M&A scheme on SMEs. In this regard, all other conditions of the M&A scheme will remain the same.

Safe Harbour Tax Exemption Extended and Refined

Singapore does not impose a tax on capital gains. Thus, only gains of an income nature derived by a company from the disposal of equity investments are subject to tax in Singapore. In turn, the determination of whether a gain is income or capital in nature is a fact-specific exercise based on an analysis of the badges of trade, including the length of period of ownership of shares disposed and frequency of similar transactions.

In the Budget 2012, to provide upfront certainty to companies in their corporate restructuring, a ‘safe harbour’ tax exemption was introduced, where gains derived by a company from disposals of ordinary shares in an investee company are exempt from Singapore income tax. To qualify for the exemption, the divesting company must have held at least 20% of the shares in the investee company for a continuous period of at least 24 months immediately prior to the date of share disposal.

Currently, the exemption does not apply to disposals of unlisted shares in an investee company that is in the business of trading or holding Singapore immovable properties. Given that land in Singapore is scarce, the policies governing real property in Singapore differ from that of movable assets. The Government seeks to discourage businesses from speculating in Singapore real property, so as to ensure a stable and sustainable property market.

The safe harbour exemption will be extended to cover disposals of shares on or before 31 December 2027.

Further, from 1 June 2022, the above exception will be extended to apply to immovable properties outside Singapore, as well as an investee company in the business of developing immovable properties. This will ensure consistency in the tax treatment for property-related businesses. Further details will be released soon.

All other conditions and exclusions of the exemption will remain the same.

Extended and Enhanced Tax Incentive Scheme for VC Funds and VCFMs

Under section 13H of the ITA, venture capital (VC) funds may be granted a tax exemption on specified income derived from approved investments. Singapore VC fund management companies (VCFMs) may also enjoy a concessionary tax rate of 5% on the fee income derived from managing the VC fund (the Fund Management Incentive or FMI).

The 13H Scheme and the FMI are administered by Enterprise Singapore. The incentives were introduced to encourage the inflow of local and foreign VCs into Singapore, and to incentivize investors to fund locally-based start-ups and SMEs. Therefore in general, 13H is granted to VC funds which invest in locally-based enterprises.

In order to promote the fund management industry in Singapore, the 13H Scheme and the FMI will be extended till 31 December 2025.

From 1 April 2020, the following enhancements will also be introduced:

  1. Expansion of list of exempted investments and income to include Specified Income from Designated Investments;
  2. Extension of section 13H tax incentive to VC funds constituted as foreign-incorporated companies or Singapore Variable Capital Companies (VCCs);
  3. Extension of tenure of tax exemption for approved VC fund to a total of up to 15 years;
  4. Enhancement of section 13H fund incentive to enable approved VC funds to claim remission for GST incurred on their expenses at a fixed recovery rate to be determined for the industry; and
  5. Removal of limitation on the total incentive tenure for VC FMCs under the Fund Management Incentive, to be replaced with a maximum tenure of 5 years subject to renewal.

In general, Singapore-sourced Specified Income from Designated Investments will be exempt from tax under the 13H Scheme, which covers a wide scope of income and investments. Notably, the enhanced scope of exemption under 13H will now be aligned with the main fund incentives in Singapore, Sections 13CA (Offshore Fund Tax Incentive), 13R (Onshore Fund Tax Incentive) and 13X (Enhanced Tier Fund Tax Incentive).

However, 13H is primarily administered by Enterprise Singapore, while 13CA, 13R and 13X are administered by the Monetary Authority of Singapore (MAS). This is because the incentives were created for different objectives – 13H was created to facilitate VC financing for SMEs, while 13CA, 13R and 13X are meant to encourage the fund management industry, as we will explain below.

13CA was introduced to attract non-Singapore investors to set up offshore funds to be managed by Singapore-based fund managers. 13R is similarly designed to attract the funds of non-Singapore investors and to facilitate the domiciliation of funds (i.e. setting up of onshore funds). In the Budget 2019, the Government removed the restriction that such funds could not be 100% owned by Singapore resident persons. The restriction was originally meant to focus the benefit of the incentives on non-resident persons. At present, a financial penalty is still imposed on non-qualifying investors of the fund (i.e. Singapore non-individuals who invest over a certain percentage of the fund).

13X aims to provide Singapore-based fund managers with greater flexibility in sourcing for mandates, and as such, does not impose restrictions or financial penalties on investments made by Singapore resident persons.

There is generally no prescribed investment policy or strategy for funds under 13CA, 13R and 13X. In practice, such funds are used to make investments mostly outside of Singapore. This is because 13CA and 13R do not impose any minimum local fund expenditure requirements, while 13X imposes a minimum local spending of only S$200,000.

On the other hand, 13H is specifically aimed at enhancing the financing options of locally-based start-ups and SMEs. Therefore, VCFMs are expected to focus primarily on VC investing, and the bulk of drawn capital from funds should be applied towards VC investments. Under the 13H Scheme, an approved fund must invest at least 80% of committed capital in specified products directly issued by an unlisted start-up company that is less than 10 years old.

Generally, the investment classifications under 13H include Singapore-based seed/early stage companies, Singapore-based companies, and overseas companies with economic spin-offs to Singapore (i.e. business agreements with Singapore, operations, R&D facilities or headquarters in Singapore, or businesses listed on the Singapore exchange).

The potential benefits of the 13H Scheme and FMI could therefore generate new structuring opportunities for businesses and global investors.

Further details of the above changes will be released soon.

Extensions, Refinements and Enhancements of Tax Incentives in Various Industries

Finally, to maintain the attractiveness of Singapore’s tax system, certain existing tax incentive schemes will be extended, refined or enhanced. In this regard, most tax incentives in Singapore have a sunset date and are subject to periodic review, geared to maintaining the relevance and competitiveness of Singapore’s tax system.

Based on minor changes introduced by the Government this Budget 2020, it reflects that at present, the Government finds that the tax system in Singapore is satisfactory, requiring only extensions and tweaks of existing tax incentives, which are generally competitive and business friendly.

The changes introduced are relevant to the following industries:

  1. Internationalisation of Companies – Extension of Double Tax Deduction for Internationalisation (DTDi) scheme till 31 December 2025.

  2. Insurance Industry – Extension of Insurance Business Development (IBD) scheme till 31 December 2025.

  3. Maritime Industry – Extension of Maritime Sector Incentive (MSI) Scheme till 31 December 2026. The MSI Scheme is also enhanced to expand the scope of income exemption.

  4. Financial Services (Derivatives) – There is currently a withholding tax exemption for interest on margin deposits. The applicable scope of covered entities and products under this withholding tax exemption have been enhanced.

  5. Financial Services (Structured Commodity Financing) – Extension of Global Trader Program till 31 December 2026.

  6. Finance and Treasury – Extension of Finance and Treasury Centre Scheme till 31 December 2026. From 19 February 2020, enhancements include extending the list of qualifying sources of funds and expanding the scope of approved activities.

  7. Intensification of Industrial Land – Extension of Land Intensification Allowance Scheme till 31 December 2025.

  8. Telecommunications Industry – Extension of writing-down allowance scheme for the acquisition of an indefeasible right to use an international submarine cable system till 31 December 2025.

  9. Research & Development (R&D) – Lapse of section 14E tax incentive providing for further tax deductions for R&D expenditure after 31 March 2020.

  10. Government or Statutory Board Grants – For capital grants approved on or after 1 January 2021, removal of tax deductions or allowances for expenditures funded by Government or statutory board grants. This reflects the Government’s intention to remove double incentivisation of recipients through grants and tax deductions or allowances.


Dentons Rodyk thanks and acknowledges Associate Jeremy Goh, Legal Executive Audrey Thng and Practice Trainee Kimberly Chong for their contributions to this article.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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