Singapore's Ministry of Finance has made proposals regarding potential changes to the Income Tax Act. These proposals sent shock waves across Singapore's financial scene because these changes would cause many all over Singapore to have to reconsider their plans regarding their taxation.

Income Tax Act

The Income Tax Act is Singapore’s primary legislation governing all matters related to income tax in the country. It was first introduced in 1947 as Ordinance 39. Its latest update took place in 2014. It is supported by other tax-related acts such as the Property Tax Act, the Goods and Services Act, and the Casino Tax Act. The Income Tax Act specifies how all taxpayers in Singapore are to be taxed.

Recently, Singapore’s Ministry of Finance (MOF) proposed some changes to be made to the Income Tax Act. It proposed these changes to better reflect the realities of the Singaporean economy today. It also revealed these changes to the public and subsequently invited various members of the public to comment on these proposed changes.

 

Changes to the Not Ordinarily Resident (NOR) Scheme

One of the schemes to which the MOF has proposed changes is the Not Ordinarily Resident (NOR) scheme. The NOR scheme was introduced in 2002. Under the current regulations of the NOR scheme, a taxpayer is eligible for NOR status if the taxpayer became a Singapore tax resident during a certain year of assessment (YA) after not having been one during any of the prior three YAs. Those who qualify for NOR status will receive it for a period spanning five YAs. The first YA to be used is the YA in which the taxpayer first fulfills the criteria for NOR status. Those who have NOR status, earn at least S$160,000 per year, and spend a minimum of 90 days per year abroad for business purposes are allowed to pro-rate their taxable income over the five-YA period over which they have this status.

However, the Singaporean government now plans to end the NOR scheme. By doing so, it ensures that the last period of NOR status eligibility will run from YA 2020 to YA 2024. The government believes that ending the NOR scheme will cause Singapore’s tax system to become simpler and fairer by creating a more level playing field for all of Singapore’s taxpayers. Despite this fact, the removal of this scheme also brings up another important point. Some are now questioning the impact that the removal of the NOR scheme will have on the country’s ability to attract talent from all over the world. They claim that by ending the scheme, foreigners will be less inclined to live and work in Singapore.

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Personal Income Tax Rebate of 50%

Those who are paying personal income tax in YA 2019 are eligible for a personal income tax rebate of 50%. This rebate is capped at S$200 and is for those who are paying tax on income earned in 2018. Only Singapore tax residents are eligible for this rebate. This rebate’s amount is calculated based on how much tax is payable after accounting for double taxation relief, the Parenthood Tax Rebate, and other relevant tax credits. It is not necessary for tax residents to apply for this tax rebate. This is the case because the Inland Revenue Authority of Singapore (IRAS) has stated that it will calculate the value of the rebate itself, then automatically grant it to all of Singapore’s tax residents. The rebate is part of Singapore’s Bicentennial Bonus, which is a series of bonuses, incentives, and other handouts given by the Singaporean government to commemorate the 200th anniversary of Sir Stamford Raffles’ first entry into Singapore.

Tax Incentive Schemes for Eligible Funds

Under Singapore’s current tax laws, funds which are managed by fund managers based in Singapore had been able to benefit from certain tax incentive schemes. The tax incentives for eligible funds are mentioned in Sections 13CA, 13R, and 13X of the Income Tax Act. However, the last day of eligibility for these schemes had originally been scheduled to have occurred on March 31, 2019. In light of this fact, the MOF has proposed that the date until which such tax incentive schemes will be in effect will be December 31, 2024 – an extension of almost six years. This decision was made to increase the growth rate of the country’s asset management industry, which had already been growing at a tremendous rate in recent years. In this way, the government expects to bolster economic growth by increasing the success of the asset management industry. The MOF also proposed changes to the parameters of the schemes. These changes are intended to maintain the general relevance of the schemes as well as make the completion of compliance-related tasks simpler.

 

Introduction of the Expense Ratio

Another of the proposed changes to the Income Tax Act is the introduction of the expense ratio. The expense ratio refers to a tax deduction which will be targeted at Singapore’s taxpayers who are defined as self-employed commission agents. Examples of self-employed commission agents include real estate agents, insurance salespeople, and others in similar lines of work. To be eligible for the deduction related to the expense ratio, a taxpayer must earn a gross annual commission income of S$50,000 or less. This tax deduction will either be based on what the Singaporean government refers to as a “prescribed deemed expense ratio” or the expenses which these agents incurred in the process of generating their commission income. The prescribed deemed expense ratio is 25% of an agent’s gross commission income. This scheme will come into effect starting from YA 2020. It will apply to income which has been earned in 2019.

 

Extension of the Writing Down Allowance

The current laws in Singapore state that a partnership or company may receive an allowance to be spent on intellectual property rights to be used for business purposes. This allowance is known as the Writing Down Allowance. Examples of approved intellectual property rights which many be acquired include trade secrets, copyrights, registered designs, patents, commercially-valuable information, and trademarks. Expenses incurred on any of the preceding are allowed to be written down over a five-, 10-, or 15-year period.

Originally, according to Section 19B of the Income Tax Act, the Writing Down Allowance had been available for expenditures on eligible intellectual property rights until the end of the basis period for YA 2020. However, a change proposed by the MOF would see this date postponed to the end of the basis period for YA 2025. This change would be made because the Singaporean government understands that intellectual property rights do much to drive economic growth, especially in a country such as Singapore in which much economic value is generated through knowledge. Furthermore, the extension of the Writing Down Allowance would also do much to encourage investors to invest in intellectual property rights in Singapore. It would also boost the country’s reputation as a global intellectual property hub.

 

Extension of S-REIT Income Tax Concessions

Existing tax laws in Singapore state that real estate investment trusts which are based in Singapore (S-REITs) may receive the privilege of tax transparency if their trustees have distributed a minimum of 90% of the S-REIT’s taxable income in the same year in which the trustees derived this taxable income. S-REITs also benefit from several other income tax concessions such as tax exemptions on income sourced from abroad, an income tax rate of just 10% which is imposed on their distributions which have been received by investors which are neither residents nor individuals, and tax exemptions on certain distributions which are received by individuals. Originally, these concessions were scheduled to no longer be in force after March 31, 2020. However, the Singaporean government has proposed that the final day of eligibility for these concessions should be postponed to December 31, 2025. The primary reasons for this move are to improve the status of REITs in Singapore as well as to enhance the country’s status as one of the Asia-Pacific region’s leading locations in which REITs may operate. All other criteria related to these concessions are expected to remain as they currently are.

 

Conclusion

Any government decisions related to important legislation such as the Income Tax Act can never be taken lightly. This is especially true in this case because the MOF’s proposed changes are both numerous and highly impactful. Every taxpayer, business owner, or anyone applying for Certificate of Residence or Tax Reclaim Form acceptance must be aware of these proposed changes, especially if they do end up coming into effect. Nevertheless, regardless of whatever the final decision taken may be, everyone affected should understand that the government and MOF have the best interests of the country and its economy at heart.