Recent Developments in Taxation of Businesses, Including on Incentives for Trusts
This article updates on the work of the Tax & Trust Committee and highlights selected legislative changes made this year to the income tax regime in Singapore. The author is a member of the Committee, and presents some details into the application of Singapore income tax law.
Tax and Trust Committee in 2024
In continuing its focus on developing more interest in, and growing the specialisation of, tax and trust lawyers in Singapore, the Committee has maintained and improved on its previous activities.
In relation to education and training of lawyers, the Committee conducted a webinar titled Navigating Tax Laws in a Globalised World: A Singapore Tax Perspective, held on 7 August 2024. The webinar covered an introduction to various tax issues that lawyers need to be aware of in view of recent tax developments both in Singapore and internationally, through sessions on cross-border tax considerations, Singapore tax updates, tax controversies and current tax issues in private wealth.
In a new initiative, the Committee formed an informal group for Singapore tax lawyers to share tax developments and considerations on a periodic basis. The group met twice this year. At the first meeting on 28 February 2024, the group’s discussion focused on the new section 10L of the Income Tax Act on taxation of gains from sale of foreign assets. This new tax provision was also discussed in an article published in the Law Gazette December 2023 issue. At the second meeting on 22 July 2024, discussion focused on the Multinational Enterprise (Minimum Tax) Bill (MMT Bill). The MMT Bill is also highlighted below in this article, among other tax changes.
In terms of external activities, the Committee is looking to collaborate with the Tax Academy of Singapore to develop and run programmes suitable for our members, stakeholders and pertinent entities within the tax and trust community.
Committee members keep a close eye on developments in tax and trust matters, such as annual Budget Statements in Parliament, and changes brought about by amending tax and trust legislation. The annual Income Tax (Amendment) Act incorporates the tax changes announced in the annual Budget Statement, and also covers non-Budget changes resulting from periodic reviews of tax practice and policy.
Tax Changes in 2024
The Income Tax (Amendment) Bill 2024 was introduced in Parliament on 9 September 2024, together with the Multinational Enterprise (Minimum Tax) Bill 2024 (MMT Bill). Both Bills were debated in Parliament over two days on 14 and 15 October 2024, and passed on 15 October 2024. Presidential assent was given to the Income Tax (Amendment) Act 2024, as well as the Multinational Enterprise (Minimum Tax) Act 2024 on 8 November 2024.
During the Parliamentary proceedings, the Second Minister for Finance, Ms Indranee Rajah, obtained the Speaker’s consent on 14 October 2024 to have both Bills debated together in Parliament, explaining that they are closely related because they levy taxes on the income of businesses. The MMT Bill is also to be construed as one with the Income Tax Act, sharing certain common provisions with the Income Tax Act (Act) such as the powers of the Comptroller and service of summons. In terms of policy, the provisions of the Bills are intended to, among other things, ensure that our tax system remains relevant and fair to businesses and individuals and align Singapore’s tax regime with international tax developments arising from the Base Erosion and Profit Shifting (BEPS) 2.0 initiative.
Introduction of Refundable Tax Credit
A key tax change under the Income Tax (Amendment) Bill 2024 is a 2024 Budget tax change on the introduction of the Refundable Investment Credit (RIC) under a new section 93B of the Act. This change is contained in a very long provision with 51 subsections. As explained by the Minister, this is an expenditure-based grant delivered through the tax system. Companies awarded the RIC will receive tax credits to support their local expenditure in areas such as capital investments, R&D, manpower, and freight and logistics, when they make new investments in high-value and substantive economic activities. These include the development or expansion of manufacturing facilities, setting up of headquarters and services, pursuit of R&D and innovation activities, commodity trading and decarbonization, all these being aligned with the four pillars of the Singapore economy 2030 vision, namely trade, enterprise, manufacturing and services, and supporting the green transition. How it works is that the tax credits will be offset against corporate income tax payable in the first instance. If the RIC quantum exceeds the amount of taxes paid by the company, the unutilised credits will be refunded to the company within four years from the time the company makes the claim application in respect of the qualifying expenditure incurred. Companies in the early stages of growth would find this particularly useful as they have yet to turn profitable.
Renovation and Refurbishment Scheme
Another key tax change from the 2024 Budget is on the Renovation and Refurbishment (R&R) scheme, which amends section 14N of the Act. As explained by the Minister, under our normal tax rules, R&R expenses are not tax-deductible because they are capital in nature. The R&R scheme specifically allows a deduction for such expenses, up to a cap of $300,000 every 3 years. The R&R scheme is being enhanced in three ways. First, from Year of Assessment (YA) 2025, the scope of qualifying expenditure is extended to include designer and professional fees, as it is now common for such fees to be incurred for renovation works. Second, the three-year period for determining the expenditure cap for businesses will be standardised, so that it will not commence from when each business makes its first claim. The relevant three-year period is fixed with the first three-year period running from YA 2025 to YA2027. Third, all businesses have a permanent option to claim R&R deductions in one YA, instead of over 3 YAs, providing more flexibility for them to manage their cashflow needs.
Domestic Top-up Tax and Multinational Enterprise Top-up Tax
As regards the MMT Bill, it implements two new top-up taxes, arising from the BEPS 2.0 initiative. These were also announced in the 2024 Budget. The two taxes are first, the domestic top-up tax (DTT); and second, the multinational enterprise top-up tax (MTT). The MTT applies the Income Inclusion Rule, which is part of the BEPS Pillar Two Global Anti-Base Erosion (GLoBE) rules. How they work is as follows. DTT and MTT apply to large multinational enterprise (MNE) groups, meaning those with annual group revenue of 750m Euros or more, in at least two of the four preceding financial years. Both DTT and MTT will apply from financial years of businesses commencing on or after 1 January 2025. DTT applies to Singapore entities of a large MNE group and is payable if the group’s effective tax rate falls below 15%. MTT applies to large MNE groups that are parented in Singapore. If the effective tax rate of the MNE group’s entities in any foreign jurisdiction is below 15%, MTT is imposed to top up the effective tax rate to 15%.
The rationale for introducing DTT and MTT was given in this way. As the EU, the United Kingdom (UK), Switzerland, Japan, Korea, Malaysia and Hong Kong, among other tax jurisdictions, have either implemented similar rules or intend to do so in 2025, the implementation of DTT and MTT ensures that Singapore is aligned such international implementation of BEPS 2.0. The Minister cautioned that if Singapore did not impose the DTT and MTT, affected MNE groups would have to pay these taxes to other tax jurisdictions that have imposed the GLoBE rules. As such, it is in Singapore’s interest to impose the DTT and MTT so that the tax can be collected here, rather than it going to other tax jurisdictions. On enforcement measures, the MTT Bill provides the Comptroller of Income Tax with powers to administer, collect and enforce the DTT and MTT. The Bill includes offences for failure to keep proper records, tax evasion and obstruction of the Comptroller. The Minister added that such powers and offences mirror those already existing under the Income Tax Act, and ensure that the Inland Revenue Authority of Singapore (IRAS) has the necessary powers to enforce compliance with the DTT and MTT.
By way of comment, in addition to keeping abreast of perennial tax changes, lawyers providing tax advice to their clients must be cognizant of the various growing enforcement powers Parliament has been conferring upon IRAS in recent years for the administration of taxes, particularly when engaging with IRAS in dealings and representations on behalf of their clients.
Certain non-Budget tax changes resulting from policy reviews include the following:
Trust incentive schemes
The tax incentive schemes for foreign trusts, foreign accounts of philanthropic purpose trusts and prescribed locally-administered trusts were extended and refined, with effect from 27 November 2024. The amendments extend the lifetimes of these schemes under sections 13F, 13L and 13N of the Act to 31 December 2027. More specifically, on exemption of income of a foreign trust, the date by which a foreign trust or an eligible holding company must be constituted or incorporated for certain of its income to be tax-exempt is extended to 31 December 2027. Where a trust or company is constituted or incorporated before this date, the amendments to section 13F prescribe a later basis period under which certain conditions need to be satisfied before the exemption is applicable.
Regarding the exemption of income of a foreign account of a philanthropic purpose trust, the date by which a philanthropic purpose trust or an eligible holding company must be constituted or incorporated for certain of its income to be tax-exempt is extended to 31 December 2027. Like the amendments for a foreign trust, for where a philanthropic purpose trust or an eligible holding company is constituted or incorporated before this date, the amendments to section 13L prescribe a later basis period under which certain conditions need to be satisfied before the exemption is applicable.
As regards the exemption of “relevant income” of a prescribed locally-administered trust, the date by which a prescribed locally-administered trust or holding company established for the purpose of the trust must be constituted or incorporated for certain of its income to be tax-exempt is extended to 31 December 2027. Where a prescribed locally-administered trust or holding company is constituted or incorporated before this date, the amendments to section 13N prescribe a later basis period under which certain conditions need to be satisfied before the exemption applies. The amendments to section 13N apply the exemption to dividends received by a prescribed locally-administered trusts from a prescribed holding company not resident in Singapore, which is paid out of income that is not “relevant income” of the holding company.
Sovereign funds scheme
This scheme, under section 13V of the Act, which is aimed at attracting and retaining sovereign wealth funds in Singapore, underwent a couple of key changes, namely, extension of the tax incentive scheme to 31 December 2029 and enhancement of the scope of the scheme to support funds owned by multiple foreign governments. Interestingly, the amendments on this second key change have retrospective effect as they are deemed to have come into operation on 7 February 2024, even before Budget Day which was on 16 February 2024. The section heading in the Act has also been expanded and now reads: Exemption of certain income of prescribed sovereign fund entity, approved foreign government-owned entity, and prescribed or approved international organisation. The amendments expand the definitions of “foreign government-owned entity” and “sovereign fund entity” to entities that are owned or incorporated by the government or public authority of more than one foreign country. Additionally, the tax treatment under section 13V of income of a prescribed sovereign fund entity from funds managed in Singapore by an approved foreign government-owned entity, has been extended to its income from funds managed in Singapore by an approved international organisation. The tax treatment has also been extended to income of a prescribed organisation from similar Singapore-managed funds. Moreover, the amendments to section 13V extend the tax treatment of income under the section of income of an approved foreign government-owned entity from its Singapore-managed funds, or from carrying out management and investment advisory services to a prescribed sovereign fund entity, to such income of an approved international organization.
Expansion of securities lending and repurchase arrangements
The scope of qualifying securities or repurchase arrangements under section 10H of the Act has been expanded to include unlisted stocks and shares of Singapore tax resident companies. The amendments to section 10H which took effect from 27 November 2024, also align the tax treatment of all distributions of income in respect of securities transferred under such arrangements, including the application of section 45G to a distribution (and compensatory payment in lieu of distribution) relating to transferred securities that are units of a REIT or an approved REIT exchange-traded fund. Additionally, the definition of “Singapore-based transferee” in section 10H(12) was amended to include a person who enters into the securities lending or repurchase arrangement through, or for a business carried on through, a permanent establishment in Singapore.
Distributions by insurers considered interest from debt security
Amendments have been made to section 10I of the Act to provide tax certainty and maintain parity between insurers and banks on Additional Tier 1 (AT1) non-share capital instruments issued by insurers on or after 1 January 2025. Pursuant to the amendments, any distribution that is liable to be made by a licensed insurer that is incorporated, formed or established in Singapore, or a designated financial holding company that has a subsidiary that is such an insurer, in respect of an AT1 capital instrument (other than shares) is considered interest from a debt security for the purposes of income tax. The change took effect on 27 November 2024.
Tax deduction for REIT managers
Clarifications were made to the tax treatment of REIT units held by REIT managers. Section 14ZI was amended to specify that when REIT managers use the REIT units they have received as part of their management fees to pay employees or directors, the amount of tax deduction obtained is the market value of the REIT units on the date the units were originally received by the REIT managers. This tax change is effective from Year of Assessment 2026.
Tax deduction under Philanthropy Tax Incentive Scheme
Amendments were also made to sections 37A and 37AA of the Act to apportion and adjust the tax deductions available to a company under the Philanthropy Tax Incentive Scheme for Family Offices (PTIS) for income taxed at different tax rates. The changes here basically come in two parts. First, tax deductions provided to a company under the PTIS will be apportioned between income taxed at different rates (if applicable) on a basis considered reasonable by the Comptroller of Income Tax. Secondly, unabsorbed deductions relating to an income will be set off against other income taxed at a different rate, after applying an adjustment factor in accordance with section 37A of the Act. These changes are to make the above tax treatment consistent with treatment of donations under sections 37(3)(b), (c), (d) or (f) of the Act. The amendments have taken effect from 27 November 2024.
Waiver of ECI requirement
To ease an administrative burden upon taxpayers, the requirement for individual sole-proprietors, and persons required to file partnership returns, to furnish the Comptroller of Income Tax with Estimated Chargeable Income has been waived for Years of Assessment 2026 to 2030. Under a new section 63(1B) of the Act, the statutory duty under section 63(1A) to furnish an estimate of an individual’s chargeable income does not apply for Years of Assessment 2026 to 2030. Similarly, under a new section 71(3B) of the Act, the statutory duty under section 71(3) to furnish to the Comptroller an estimate of the income from all sources of the partnership, and the names and identification numbers of all the partners together with the amount of the share of the income to which each partner was entitled for that year, does not apply for Years of Assessment 2026 to 2030.
Crypto-Asset Reporting Framework
In other current developments, on 27 November 2024 as well (the date of commencement of many of the provisions of the Income Tax (Amendment) Act 2024), Singapore together with 60 other tax jurisdictions committed to the implementation of the Crypto-Asset Reporting Framework (CARF), at the 17th Global Forum Plenary Meeting in Asuncion, Paraguay. This is significant as Singapore has been identified, under the CARF Commitment Process, as one of the 52 tax jurisdictions relevant to the CARF in 2024. Singapore is expected to commence exchanges under the CARF by 2027, or 2028 at the latest. The evolution of the crypto-asset sector will be closely monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum is a multilateral framework for tax transparency and information sharing, which monitors and peer reviews the implementation of international standard on exchange of information among tax jurisdictions.
Conclusion
Going forward, lawyers engaging in tax practice have to come to grips with three statutes dealing with income tax, namely the Income Tax Act 1947, the Economic Expansion Incentives (Relief from Income Tax) Act 1967, and the new Multinational Enterprise (Minimum Tax) Act 2024 as well as the interactions between them in the new tax landscape in Singapore.
The Tax & Trust Committee welcomes more members to take up the challenge, and engage in the exciting and constantly changing area of tax and trust practice, in the new year.
This article is for general information only and does not constitute legal advice. The views expressed in this article are the personal views of the author and do not represent the views of any organisation.
