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 jack.wong@whm-consulting.com 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
E-mail: jack.wong@whm-consulting.com

New Protocols between Singapore and Qatar and between Singapore and Mexico


Dear Valued Clients and Readers

On 2 December 2011, the Inland Revenue Authority of Singapore reported that the protocols to the standing agreements for the avoidance of double taxation (DTAs) between Singapore and Qatar, as well as Singapore and Mexico, will enter into force on 1 January 2012.  These protocols incorporate the internationally agreed Standard for the exchange of information for tax purposes upon request into the standing DTAs.

The full text of the protocol between Singapore and Qatar is availble here. The full text of the protocol between Singapore and Mexico is availble here.

As always, we are pleased to assist you or your company in resolving any potential tax issues.  Please contact us at jack.wong@whm-consulting.com 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
E-mail: jack.wong@whm-consulting.com

Supreme Court Note: AQP v Comptroller of Income Tax [2011] SGHC 229


Dear Valued Clients and Readers

In the case AQP v. Comptroller of Income Tax, the Singapore High Court held that defalcation losses incurred by an employee exercising overriding power or control in the taxpayer firm were not deductible under s 14(1) of the Income Tax Act. The High Court also clarified that a genuine mistake of law could fall within the meaning of the phrase “error or mistake” under s 93A(1).

The following is the Supreme Court Note to assist readers to understand the Court’s judgment. It is not intended to be a substitute for the reasons of the Court.

In this case, the managing director (“the Ex-MD”) of the appellant taxpayer had defalcated the appellant’s funds and caused the appellant to incur a loss of $12,272,917. The Ex-MD had made out false purchase orders to the appellant’s suppliers, and falsely claimed to have made loans to the appellant’s customers, before drawing from the appellant’s funds under the pretext of reimbursement. The appellant omitted to include a deduction for the loss incurred and only lodged a claim for relief under s 93A(1) five years later. The Comptroller of Income Tax and the Income Tax Board of Review rejected the appellant’s claim for relief.

In the judgment, the High Court recognised that the crux of the dispute with regard to the tax-deductibility of defalcation losses centred around the correct understanding of the seminal English case of Curtis (HM Inspector of Taxes) v J & G Oldfield, Limited (1925) 9 TC 319 (“the Curtis test”). Having surveyed the relevant cases of various Commonwealth jurisdictions, the High Court came to the conclusion that the correct understanding of the Curtis test was as follows: Did the defalcator possess an overriding power or control in the taxpayer firm (i.e. in a position to do exactly what he liked), and was the defalcation committed in the exercise of such power or control? If so, the losses which resulted from such defalcations were not deductible for income tax purposes.

Having formulated the test, the High Court defended its viability on the policy ground of deterring firms from not providing adequate checks on employees who had possessed overriding power or control (i.e. directors). The fact that the appellant’s business was successful when the Ex-MD had overriding power or control was held to be irrelevant. The High Court also clarified that what mattered was whether the taxpayer factually did give the defalcator unjustified overriding power or control.

In the present case, the Ex-MD was held to have possessed an overriding power or control in the appellant as there was total trust reposed in him and he did not have to tell anyone about his usage of the appellant’s funds. His defalcations were also committed in the exercise of such overriding power or control, as evident in the blatant way in which he had siphoned funds from the appellant without restraint. The loss incurred by the appellant from the Ex-MD’s defalcation therefore did not qualify for deduction under s 14(1).

Having dismissed the appellant’s appeal on the point of deductibility, the High Court then proceeded to hold in obiter that the phrase “error or mistake” under s 93A(1) was wide enough to cover a genuine mistake of law (i.e. a mistake as to what was thought to be established law) made by the taxpayer whilst computing its taxable income. However, the High Court also observed that s 93A(3) appears to have the effect of qualifying the granting of relief to a taxpayer who was operating under a mistake of law, assuming that the Comptroller had also been mistaken as to “the basis on which the liability of the [taxpayer] ought to have been computed” at the material time.

As always, we are pleased to assist you or your company in resolving any potential tax issues.  Please contact us at jack.wong@whm-consulting.com 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
E-mail: jack.wong@whm-consulting.com

Sole Proprietor was sentenced to jail for committing GST fraud


Dear Valued Clients and Readers

It was reported in IRAS’ website (see GST Fraud) that a sole proprietor was sentenced to jail and fined for S$413k for committing GST fraud.

The facts provided by IRAS were as follows:

1.    The taxpayer was a sole-proprietor of his business in 1996 whose principal activities are wholesale of parts and accessories for vehicles.  The business was registered for GST in 1998 and the taxpayer was responsible for the GST compliance for his business.

2.    IRAS’ investigation revealed that the taxpayer had declared fictitious input tax claims in the relevant GST returns from September 2000 to September 2007 by adding transhipments goods of the business into the relevant GST returns under the value of taxable purposes although the fact was that no GST was incurred by the business.  IRAS also found out that the taxpayer had burnt the physical copies of the records in order to impede IRAS’ investigations when he realized that IRAS requested records to assess the amount of tax undercharged.

3.   Taxpayer finally admitted that he obtained fraudulent refunds from the Comptroller of GST due to greed.  He pleaded guilty to 11 charges of creating false entries in the relevant GST returns to evade tax, and 3 charges for destruction of supporting documents.  18 charges of creating false entries were taken into consideration for sentencing.  He faced a penalty of S$413K which is 3 times the amount of tax undercharged.

This case provided us with three important reminders for the purpose of GST compliance:

  • There is no time limit for IRAS to initiate any recovery action for tax undercharged if fraud is committed on the part of the taxpayer.
  • Input tax can only be claimed by businesses if they have incurred GST on purchases against their taxable supplies (including domestic sales and export sales) provided that the essential conditions for making claims can be satisfied.
As always, we are pleased to assist you or your company in resolving any potential tax issues.  Please contact us at jack.wong@whm-consulting.com 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
E-mail: jack.wong@whm-consulting.com

New e-Tax Guides Published by IRAS on 6 September 2011


Dear Valued Clients and Readers

You may wish to note that the Inland Revenue Authority of Singapore had issued new e-Tax Guides on the following subject matters on 6 September 2011:

a) Foreign-Sourced Income Exemption Rule

b) Ascertainment of Income From Business of Making Investment – Section 10E

c) Group Loss Relief System

The above are in line with IRAS’ effort in educating taxpayers and increasing their understanding of the tax law so as to comply in full with their income tax reporting obligation.

As stated in IRAS’ website, IRAS adopts a risk-based approach of identifying compliance risk and prioritising and tailoring specific compliance programmes with a view to

1.  Identifying taxpayers who have made mistakes in their tax returns;

2.  Creating an audit presence in the community to deter non-compliance by other taxpayers;

3.  Educating taxpayers on their tax obligations and how to comply; and

4.  Identifying tax laws, policies and processes where the tax system can be simplified.

The above means that IRAS is expecting an even higher level of compliance with the tax obligations by taxpayers and less tolerance level in the event that taxpayers file incorrect tax returns or are negligent in dealing with their tax affairs.  Accordingly, taxpayers should be proactive in seeking advice from tax advisors if the inability to take such action could result in potential penalty to be imposed by IRAS.

As always, we are pleased to assist you or your company in resolving any potential tax issues.  Please contact us at jack.wong@whm-consulting.com 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
E-mail: jack.wong@whm-consulting.com

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