Taxation and IT Entrepreneurship
The most important thing while setting up any entrepreneurship business is understanding its taxation plan. IT entrepreneurship is not an exemption to this. Singapore has a notably affordable tax system which imposes corporate taxation at a flat rate of 17% with some advantages such as tax incentives and tax exemptions which are granted to startups. Singapore also only taxes on profit and not interest and dividends. This concept is known as the single-tier tax system,
Corporate tax planning helps in the reduction of effective tax rate. It is a suitable alternative for companies which need additional revenue through a reduction of how much tax they are to pay. Its advantages include the creation of additional profits as well as an increased ability to compete with other companies.
IT-related companies of Singapore manage their taxation structures in very specific ways. Assuming that a multinational IT company establishes a branch in Singapore and that this branch of the company holds most of its assets, performs most of its business functions, and bears most of its risks, if these assets are later transferred to a principal company at a market price, then the company’s primary entrepreneurs will retain their status as shareholders. These shareholders will earn revenue through the dividends, which remain untaxed in Singapore, to which they are entitled. Furthermore, the company will still be able to contact the clients and continue interacting with the business directly. Furthermore. the customers will still be part of the larger company, which means that they will be dealing with the principal company directly. Utilization of this structure of corporate tax planning can lead to increased income by IT companies in Singapore.
A tax-effective supply chain structure is used by many IT companies. It relies on the internationally accepted standards which causes profits to be attributed to group entities based on assets used, functions performed, and risks assumed. As such, if key assets, functions, and risks are centralized in a low–tax environment, then profits related to the value chain would also follow, thereby reducing the overall effective tax rate of the business. Such a centralization strategy has many commercial benefits such as synergy, efficiency, better risk management, and the associated tax benefits. Although tax saving is one of the reasons for centralization, IT entrepreneurs who choose to do so often also improve their pre-tax earnings as this approach allows them to lower costs through synergy and improved efficiency. Risks can be better managed through a central location by those who specialized in such function. For these reasons, a tax–effective supply chain structure has been popular and will remain so for the foreseeable future in Singapore as well as globally.
Technical Tax Considerations
Expansion of a Singapore IT company abroad may play a role in how it is to be taxed. Depending on the country to which the company intends to expand, it might be considered a resident of that country if its management and control lie in the country to which it has expanded.
Singapore taxes the income earned from contracts with customers when the income is repatriated to Singapore. A certain amount would have to be repatriated to meet the operational costs of the Singaporean company; this amount minus any tax-deductible expenses, would be taxable in Singapore. Nonetheless, Singapore has one of the world’s lowest taxation rates on both personal and corporate systems even though this type of income is subject to taxation.
However, corporate tax planning has certain disadvantages. One of the major disadvantages of corporate tax planning is its complexity. Many do not understand the methods of proper corporate tax planning. The other is that taxes charged may be owed on revenue before one may receive payments. Despite this fact, the use of the accrual basis might be favorable for companies which trade with fewer receivables and more payables.
There is a risk that the principal company may become taxable in the countries in which the customers are located if it is found to have a taxable presence in those countries. Should such happen to be the case the case, profits that are attributable to the company as a whole are taxable in those countries. The tax risks of the principal company would have to be managed using the large network of Singaporean tax treaties in order to secure the tax benefits of the centralized supply chain structure.
Corporate tax planning is useful for minimizing expenses related to taxation. However, it might be difficult for some to understand how to go about corporate tax planning when starting a company. Therefore, utilizing the services of a professional consultant who knows much about corporate tax planning will help anyone understand more about corporate tax planning in Singapore and thus simplify the process. We at Paul Hype Page & Co offer professional tax planning services as well as solutions related to corporate tax planning which will serve to significantly reduce your company’s overall tax bill.