Consultation on Capital Allowances for Assets Used by Persons Other than the Taxpayer in a manufacturing outsourcing arrangement

Dear Valued Clients and Readers

Following the Income Tax Board of Review’s decision in the case of ATG vs. CIT [2011] SGITBR, the Inland Revenue Authority of Singapore (“IRAS“) will apply the proposed guidelines below to determine whether capital allowances (“CA“) can be allowed if the plant and machinery (“P&M“) is used by a subcontractor in a manufacturing outsourcing arrangement between the taxpayer and the subcontractor.

Based on our understanding, the proposed guidelines provide that where a taxpayer outsources part of his manufacturing process to another person and provides his assets for use by the person (for instance, a subcontractor) in an outsourcing arrangement, CA can be allowed to the taxpayer in respect of the qualifying P&M if the three conditions below are satisfied.

(i)         The taxpayer incurs the capital expenditure on the plant and machinery (P&M); and

(ii)        The P&M is used for the purpose of the taxpayer’s trade, i.e. to manufacture goods for the taxpayer; and

(iii)       The taxpayer maintains the P&M and bears the cost of maintenance, repairs and depreciation.

In respect of condition (i), IRAS states that  CA can only be given to a company that incurred the expenditure for the relevant P&M. For the purpose of claiming the CA, the P&M should be reflected as the taxpayer’s assets in his balance sheet.

WHM Consulting – In our view, this condition is considered reasonable.  In any case, under the prevailing Financial Reporting Standards in Singapore, an outright purchase of an asset by the company or an asset that is subject to a finance lease arrangement where the company in question is the lessee, will be required to be capitalized in the company’s balance sheet. 

In respect of condition (ii), IRAS states that in cases where the P&M is used by a third party in a manufacturing outsourcing arrangement, CA will be given if it can be shown that the P&M is used for the purpose of the taxpayer’s trade (regardless of whether the arrangement is a toll or buy-sell arrangement). The taxpayer should be able to justify the commercial reasons of the outsourcing arrangement and how the taxpayer benefits from the arrangement. For example, in a typical buy-sell subcontracting arrangement, title of the goods passes to the taxpayer for resale after its subcontractor has processed the goods, using the taxpayer’s P&M. The arrangement resulted in cost savings for the taxpayer as the subcontractor would have charged a higher price for the goods if he had to acquire the same P&M. This would clearly show the business purpose of the arrangement.  However,  IRAS also states that there may be instances where the P&M is used largely for the purpose of the subcontractor’s trade instead of the taxpayer’s, for which CA may arguably be denied. For example, if the subcontractor has the right to exploit the P&M for his own business while manufacturing goods for the taxpayer. IRAS is prepared to treat this condition as being satisfied if the taxpayer can show that the arrangement results in reasonable incremental benefits for the taxpayer’s trade e.g. greater cost reductions, compared to the case where the subcontractor is not allowed to exploit the assets for his trade.  In such instances, CA can be allowed to the taxpayer if the other two conditions are met.

WHM Consulting – While IRAS demands a cost-and-benefit explanation by taxpayer before CA can be granted, it is our view that in practice, it is unclear as to what kind of documentary evidence IRAS will accept.  In providing cost and benefit analysis, in particular in the situation where the P&M is largely used by the subcontractor’s trade instead of taxpayer’s, the taxpayer may need to tap on certain business information of the subcontractor.  Unless both taxpayer and the subcontractor are related parties, it is our view that the subcontractor may be reluctant to share certain business information with taxpayer to enable the latter to provide a satisfactory explanation of the cost-and-benefit analysis to IRAS.   

As regards condition (iii),  IRAS expects the asset owner to be ultimately responsible for the maintenance of the P&M as any prudent asset owner would maintain oversight of the use of his assets.  As the owner is responsible for the maintenance of the P&M, IRAS does not expect the subcontractor to charge depreciation costs to the taxpayer either via fees or through embedding the depreciation charge in the fees or price of the goods sold to the asset owner.

WHM Consulting – In our view, this condition is consistent with condition (i).  If taxpayer is the entity capitalizing the asset in its balance sheet, then accounting depreciation should be accounted for by taxpayer and subcontractor should not charge a fee taking into account the depreciation cost of the assets using in the arrangement. 

IRAS is currently soliciting feedback from Accredited Tax Advisors and Professionals of Singapore Institute of Accredited Tax Professionals (“SIATP“) and it is hoped that the proposed guidelines will be fine-tuned to provide clearer application of the rules to taxpayers and tax advisors.

As always, we are pleased to assist you or your company in resolving any potential tax issues.  Please contact us at if you would like to discuss any of your/ your company’s concern on tax issues.

Best regards
Jack HM Wong
Founder and Lead Business & Tax Advisor
WHM Consulting Pte Ltd

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