Tax Update Seminar 16 August 2019 Investment Opportunities in - - PowerPoint PPT Presentation

Tax Update Seminar

16 August 2019

NEXIA TS PUBLIC ACCOUNTING CORPORATION

Investment Opportunities in South East Asia

Henry Tan Group CEO & Chief Innovation Officer Nexia TS

Investment Climate

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In Singapore

 Relatively low corporate taxes  A liberal economic system  More than 99 percent of all trade through Singapore is duty-free.  Combined with the ease in establishing businesses

Why Singapore continues to be the hub for investments into South East Asia?

GDP growth in 2019 is expected to be around 1.5 percent to 3.5 percent

• according to the Ministry for Trade and Industry

Ease of Doing Business

2nd in Ease of Doing Business Ranking

* According to World Bank Annual Report 2018 – Ease of Doing Business Ranking

M&A in Singapore

Tech & Real Estate Rev Up

M&A activities by homegrown firms hit a historic four-year high as it climbed 19.1%

to S$46.19b (US$33.8b) in the first half of 2018 – data from Thomson Reuters. Capitaland US buying spree

worth S$1.14b (US$835m) The Grab-Uber merger buying 27.5% stake

Tech Real Estate

Fintech in Singapore

Leading Global Fintech Hub in Asia

Regional Powerhouse for Tech

MAS commitment of S$225 million for Fintech developments

Fintech investments more than doubled to hit US$365 million ($492.3 million) in 2018 amid global surge

• Straits Times, 28 Feb 2019

Top five Fintech markets by funds raised in the Asia-Pacific 2018

• analysis by Accenture

Synergies, not Silos

WHAT CAN LOCAL COMPANIES DO TO STAY AHEAD? The Future of Innovation in Singapore: Cross-Sector Collaboration

The Key to Innovation is Cross-sector Partnership

Investment Opportunities

• Biotech, REITs, Infrastructure

Developments in ASEAN countries e.g. Myanmar, Laos and Cambodia

• Private Wealth

Singapore named “most mature and respected” wealth management centre, representing 80% AMA.

AUM up 19% to S$3.3 trillion in 2017

SE Asia expected annual growth rate at ~5.2%

from 2018 to 2022, to become the 4th largest single market in the work by 2030 – putting it behind only the US, China and the European Union.

• Fintech

Tax & Private Clients in SE Asia

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South East Asia Tax Comparison

SINGAPORE MALAYSIA THAILAND VIETNAM TAX REGIME Quasi-territorial

• system. Only income

accrued in or derived from Singapore and foreign income remitted / deemed remitted to Singapore is subject to tax. Territorial system. Only income derived from Malaysia is

• taxed. Foreign

income is exempt (other than those businesses carrying

• ut banking,

insurance, air transport or shipping). Income is taxed on worldwide basis. Income is taxed on worldwide basis. CORPORATE TAX RATES 17% 24% 20% 20% INDIVIDUAL TAX RATES (HIGHEST MARGINAL RATE) 22% 28% 35% 35% FOREIGN EXCHANGE CONTROL Funds may flow freely in and out of Singapore except for certain restrictions on lending of SGD to non-resident financial institutions. Generally, repatriation

• f funds is freely

permitted. Bank of Thailand must approve remittance of funds exceeding certain ceiling sets by commercial banks. Foreign currency may be remitted overseas. However, registration and / or tax requirements may need to be met.

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[Date]

South East Asia – Ease of Setting Up Business

Singapore Malaysia Thailand Vietnam

• Minimum 1 ordinarily resident individual director;
• 1 ordinarily resident corporate secretary;
• At least one shareholder. No minimum capital requirement.
• Can be incorporated immediately.
• Minimum 1 ordinarily resident individual director and one promoter
• At least 2 shareholders with minimum paid-up share capital of MYR 2;
• Takes no more than 30 days to incorporate.
• Minimum 1 individual director;
• At least 3 natural persons shareholders, where 25% of registered share

capital needs to be paid up;

• Can be incorporated immediately.
• Minimum 1 individual director (may be foreigner but subject to

conditions);

• At least 1 shareholder;
• Need to open capital account with local bank;
• Need to obtain approval for a foreign investment certificate;
• At least one month to incorporate.

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South East Asia – Tax Incentives

Singapore Malaysia Thailand Vietnam

• Various incentives in the form of pioneer and development and

expansion companies, headquarter activities, financial services, asset securitization, fund management, international maritime activities, global trading and R&D.

• Comes in the form of tax exemptions / concessionary tax rates and

enhanced deductions.

• Various incentives available for industries such as manufacturing, hotels,

healthcare services, IT services, biotech, Islamic finance, venture capital, tourism, energy conservation and environmental protection.

• Comes in the form of tax holidays, investment allowances, accelerated

capital allowances, enhanced deductions.

• Generally, 3-8 years of tax holidays may be available for certain business

activities;

• An International Business Centre regime was introduced in 2018, where

a concessionary tax rate ranging from 3% to 8% may apply, subject to conditions..

• Concessionary tax rates ranging from 10% to 17% may apply for

taxpayers engaged in encouraged investment projects or in socio- economically disadvantaged locations.

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Singapore focus – Wealth Planning Structures (1/2)

Direct holding Trust Trust + HoldCo Fund Tax consequences for each type of investment

Stocks Dividends exempt Gains from disposal of stocks exempt if considered as capital gains Dividends exempt provided conditions in section 13(8) of the ITA are met (if income remitted into SG) Dividends exempt (even if remitted into SG) under exempted list of Locally Administered Trust (“LAT”) and Foreign Trust (“FT”) tax incentive Gains from disposal of stocks which fall into exempted list under LAT and FT tax incentive exempt Dividends exempt provided conditions in section 13(8) of the ITA are met (if income remitted into SG) Dividends exempt (even if remitted into SG) under exempted list of LAT and FT tax incentive Gains from disposal of stocks which fall into exempted list under LAT and FT tax incentive exempt Dividends generally exempt under the various Fund Tax incentives. Certainty regarding non- taxation of trading gains from assets which fall under safe harbor rules. Bonds Interest income exempt (whether remitted into SG or not) Interest income exempt if not remitted into SG Interest income exempt under LAT and FT tax incentive (even if remitted into SG) Interest income exempt if not remitted into SG Interest income exempt under LAT and FT tax incentive (even if remitted into SG) Interest income exempt if not remitted into SG Interest income exempt under LAT tax incentive (even if remitted into SG) Interest income exempt under various Fund Tax Incentives (even if remitted into SG)

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Singapore focus – Wealth Planning Structures (2/2)

Direct holding Trust Trust + HoldCo Fund

Main features of the structure Cost Low Medium Medium Medium High4 Succession flexibility Low High High High Medium5/ High6 Reporting requirements Low to High1 Medium Medium Medium High Segregation of risks No No No Yes Yes Problems of substance N/A Medium2 Medium2 Medium2 Low/ High3 WHT at source DTT at reduced rates DTT at standard or reduced rates2 DTT at standard or reduced rates2 DTT at standard or reduced rates2 Depends on the perception of the Fund by the source country3

1 Depending on number of individual assets and associated reporting requirements 2 Interposition of a trust is not a straightforward issue for the purpose of DTT application. It needs to be confirmed with the source country if the beneficiary can be considered as

a “person” and “beneficial owner” of the respective income in order to benefit from DTT

3 It needs to be confirmed how the fund is perceived by the source country (transparent or opaque for tax purposes). If transparent, the DTT between the source country and the

beneficiary would apply, if opaque, a COR for the Fund might be required.

4 Enhanced Tier incentive requires a minimum fund size of SGD $50m and at least SGD $200,000 local business spending 5 If set up as a company or a limited partnership 6 If set up as a trust

Opportunities in China

Introduction: A few notable trends

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Since January 2019:

• Continued FDI growth at a rate of ~ 6% per month (high of USD $135

billion reached in December 2018)

• GDP growth has slowed to about 6.1% (thought to be sufficient to keep

economy above water)

• WFOE liquidations on the increase (particularly where manufacturing

goods for export & related trading companies)

• Increasing WFOE registrations (manufacturing and services intended

exclusively for the China market)

The latest on China’s reforms

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Opening up opportunity for investment in State-Owned Enterprises (SOEs)

• Working to make SOEs more competitive in foreign markets
• Working to continuously lower the huge corporate debt that peaked in

2015

• Positive changes in FDI into Chinese SOEs have been overshadowed by the

Belt & Road initiative

Relaxed restrictions on foreign investment in industries such as:

• Insurance
• Banking
• Asset management
• Auto industry
• Health care

Specific investment

• pportunities

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• Health and elder care services
• Mobile e-commerce and services provided over internet
• Services intended for the consumer market (growing at 8.6% monthly)
• High tech manufacturing (semiconductors for artificial intelligence, cloud

computing and industrial automation)

• Robotics and process automation
• Environment and “green” technologies
• Education (tutoring and English language schools)
• Health products (skin care, dietary supplements)
• Pharmaceuticals and medical equipment
• Jewelry production
• Import/export trading

What to watch for:

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Withholding tax (10% or treaty rate) applies to:

• Dividends or equity-related bonuses
• Interest
• Royalties / licenses (and associated services)
• Lease / rental of immovable property
• Direct or indirect transfers of equity

Withholding tax on cross-border service transactions

• Applies when PE is formed (6 months or 183 days in 12-month period)
• Several methods of calculation – most commonly “deemed profit”
• Buyer acts as withholding agent (and should register service contracts)
• Law allows that non-resident can declare / pay tax on an actual basis –

but seldom practiced

• If treaty benefits are relevant (no PE), application for benefits is required

What to watch for:

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VAT misunderstanding in cross border transactions

• VAT is commonly withheld in error from payments made to overseas service

providers

• The buyer of goods and services should pay VAT
• Specify VAT responsibility in contracts

Regulatory compliance errors

• Must understand Individual Income Tax rules and Permanent Establishment

implications as related to foreign workers in China (including employees of

• verseas service providers)
• Reporting of certain types of offshore transactions is required (e.g. equity

transfer of a foreign entity that owns a taxable entity in China)

• Some activities require a Chinese partner (e.g. a foreign event management

company providing service in China)

• Transfer pricing documentation requirements (e.g. annual reporting of all

related party transactions by WFOEs)

Singapore

Nexia TS Public Accounting Corporation 80 Robinson Road , #25-00 Singapore 068898 Tel: (65) 6534 5700 Fax: (65) 6534 5766 Email: nexiats@nexiats.com.sg Website: www.nexiats.com.sg

China

Nexia TS (Shanghai) Co., Ltd.. Room A, 20 Floor, Heng Ji Building, No. 99 East Huai Hai Road, Huang Pu District, Shanghai 20021, China Tel: (8621) 6047 8716 Fax: (8621) 6047 8712 Email: china@nexiats.com.sg Website: www.nexiats.com.cn

Malaysia

NTS Asia Advisory Sdn Bhd Unit No 23A-06, Level 23A Menara Landmark, No. 12 Jalan Ngee Heng 80000 Johor Bahru, Johor Tel: (60) 7 221 3285 Fax: (60) 7 221 3289 Website: www.ntsasia.com.my

Myanmar

NTS Myanmar Co Ltd. La Pyayt Wun Plaza, 410(B), 4th Floor, 37 Alanpya Pagoda Road, Dagon Township, Yangon, Myanmar Tel: (951) 370 836, 370 837, 370 838 Ext- 406, 407, 408 Fax: (951) 376 945 Website: www.nts.com.mm

Thank You

Contact Us

henrytan@nexiats.com.sg

NEXIA TS PUBLIC ACCOUNTING CORPORATION

International Tax Updates

• Taxation of the Digital Economy
• Economic Substance Requirements
• Transfer Pricing

Presented by

Edwin Leow, Head of Tax

Taxation of the Digital Economy

Why Digital Service Tax?

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Digital Service Tax Where are the services rendered? Where are the services consumed? Location of the enterprise No physical presence Fair share of taxes Solutions

Digital Service Tax

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• EU Commission

The first proposal (long-term solution, reform corporate tax rules)

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Digital Service Tax

• EU Commission

Second Proposal: Interim tax

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Digital Services Tax

• OECD

Proposed changes to profit allocation and nexus rules

• User participation proposal

– Users create the value. Targeted at certain businesses, e.g. social media platforms, search engines, online marketplaces

• Marketing intangibles proposal

– Market intangibles in the market jurisdiction e.g. customer data, customer relationships. Not targeted at certain businesses.

• Significant economic presence proposal

– Purposeful and sustained interaction with the jurisdiction via digital technology e.g. sustained revenue, user base, sustained marketing and sales promotion activities

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Digital Service Tax

• G20
• In 2018: Despite disagreements over potential consequences of digital

taxation, G20 has explicitly acknowledged the possibility of a long-term, consensus-based solution on digital tax policy

• In 2019:Finance ministers have come to the agreement to come up with

common rules to implement common rules to close loopholes used by tech giants to minimize corporate taxes by 2020

• The 2 pillars:

– Pillar 1: The right to tax companies where their goods and services are being sold/consumed, even when the company does not have a physical presence there. – Pillar 2: To apply an agreed global minimum tax rates

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Digital Service Tax

Why digital services tax – on a practical level Businesses with a substantial digital footprint but no physical presence in a jurisdiction (e.g. GAFA, Netflix, Spotify) – ‘fair’ share of taxes from revenues Exploitation of the intangible presence by MNEs Level the playing field between local companies and

• verseas companies (GST)

Digital Services Tax – A Global Perspective

• France
• Spain
• Italy
• Switzerland
• South Africa
• India
• Other jurisdictions

France

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Levy Digital Services Tax (DST) Since when On 6 March 2019, the French government released a policy document

• utlining its DST proposal that will be taking effect in 2019

(retrospectively w.e.f. 1 January 2019) The bill introducing a digital services tax was approved by the French National Assembly recently On what

• Interfaces and websites that connect clients and businesses
• Advertising companies that provide targeted ads
• Resellers of private data for advertisement purposes

Rate 3% Threshold/ Exemptions

• Worldwide revenues from taxable services €750m (approx. S$1.1b) per

annum; and

• Taxable revenue from taxable services obtained in France exceeding

€25m (approx. S$38m) per annum liable for DST Impact/Remarks Expected to raise €500m (S$762m) per year from the tax The DST shall be abolished and replaced by an OECD solution if the latter incorporates the taxation of digital activities

France

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Spain

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Levy Digital Services Tax (DST) Since when 23 Oct 2018 – the Spanish government released a preliminary draft bill 23 Jan 2019 – after a public consultation, the Spanish government published a revised version, which becomes the final bill On what Gross income derived from certain digital services for which user participation is essential for creating value e.g.

• Targeted online advertising
• Online intermediation services
• Sale of user data

Rate 3% Threshold/ Exemptions

• Worldwide revenues of €750m (approx. S$1.1b) per annum; and
• Taxable revenue obtained in Spain exceeding €3m (approx. S$4.6m)

per annum would be subject to DST Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020

Italy

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Levy Digital Services Tax (DST) Since when 1 Jan 2019 – introduced in the Italian Budget Law 2019. The Ministry of Finance was expected to issue an implementing decree by 30 April 2019. The decree is not passed. The DST will be effective from the 60th day after publication of the decree in the Official Gazette On what

• Advertising routed on a digital interface to its users
• Providing a multilateral digital interface
• Transmitting data through the use of a digital interface

Rate 3% Threshold/ Exemptions

• Worldwide revenue for the relevant taxable year exceed €750m

(approx. S$1.1b); and

• Taxable revenues within the Italian territory during the relevant year

exceeding €5.5m (approx. S$8.4m), liable to DST

• Digital services rendered between parties belonging to the same group

exempt Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020

Switzerland

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Levy No DST. Value Added Tax levied on certain e-services/digital products Since when 2010 On what Supply of specified digital products/services to Swiss resident individuals

• r unregistered service recipient

Rate 7.7% Threshold/ Exemptions CHF100,000 (approx. S$138,000) on global income Impact/Remarks At present, Switzerland is not planning to introduce interim measures such as the digital tax proposed in the EU. Such interim measures based solely on turnover in market areas can lead to double taxation and over-taxation and make it difficult to achieve a global consensus for a definitive solution.

South Africa

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Levy Value Added Tax Since when 2014 On what Electronic services supplied by non-resident supplies to residents Rate 15% Threshold/ Exemptions Sales revenue up to ZAR 50,000 (approx. S$4,800) Impact/Remarks It was recently revealed that SARS collected ZAR 585m (approx. S$56m) in 2016/2017 from tax on digital services

India

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Particulars Equalisation Levy GST (Payable by Service Provider) GST (Reverse Charge Mechanism) SEP Service/ Activity Online advertising of fashion brand through Google Online course consisting of pre- recorded videos and downloadable PDFs Online course consisting of pre- recorded videos and downloadable PDFs Downloading films on Netflix by Indian customers Fees / Gross Consideration INR 1,000,000 INR 1,000,000 INR 1,000,000 INR 1,000,000 Less: Expenses INR 400,000 INR 400,000 INR 400,000 INR 400,000 Income INR 600,000 INR 600,000 INR 600,000 INR 600,000 EL @ 6% INR 60,000 GST @ 18% INR 180,000 INR 180,000 (RCM) – recipient pays Income tax @ 40% INR 240,000

Other Jurisdictions

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Malaysia W.E.F. 1 Jan 2020, service tax of 6% on any digital service that is provided by a foreign service provider (FSP) to a consumer in Malaysia. FSPs who meet the mandatory registration threshold (likely to be RM500,000 per annum of digital services provided to Malaysian customers) are required to register for service tax with the Royal Malaysian Customs Department. Thailand The Thai government is reviewing to change their existing VAT legislation. Interested in levying 5% VAT of all e-commerce goods and services transactions. China The Chinese tax authority is working on reforming its VAT system and they continue to investigate how to tax the digital economy. United Kingdom Plan to introduce Digital Services Tax from April 2020

Digital Services Tax

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Singapore

• GST : effective 1 Jan 2020

– reverse charge (B2B) – Overseas Vendor Registration (B2C)

• Will Singapore implement proposals by OECD/G20?

Digital Services Tax

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Types of digital services tax

Digital Services Tax

Direct Taxes Equalisation Levy Indirect Taxes (e.g. GST reverse charge)

Conclusion

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Are you prepared?

Economic Substance Requirements (“ESR”)

ESR: What is this all about?

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1 2 3

The ESR legislation was introduced in response to concerns expressed by the EU Code of Conduct Group about the lack of clear legal substance requirements for entities conducting business in and through certain offshore jurisdictions. Serves to address situations where entities artificially shift profits into these

• ffshore jurisdictions which do not actually reflect the true economic activities

conducted and economic presence. ESR legislation for each offshore jurisdiction may vary. However, the approach in tackling / addressing such situations are broadly similar.

Introduction

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ESR: Common Offshore Jurisdictions

The British Overseas Territories

THE BRITISH VIRGIN ISLANDS THE CAYMAN ISLANDS BERMUDA

ESR legislation for these jurisdictions became operative with effect from 31 December 2018 or 1 January 2019 (as the case may be). In other words, ESR legislation is applicable for accounting periods commencing on or after 1 January 2019!

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ESR: Who is in-scope?

The British Overseas Territories

Broadly, any company or limited partnerships established or incorporated within the legal remit

• f these jurisdictions should pay attention.

Such companies or limited partnerships should satisfy the requisite economic substance tests for any “relevant activities” carried out in these jurisdictions. Relevant activities are broadly as follows:-

LEASING HEAD QUARTERS FINANCING FUND MANAGEMENT INSURANCE BANKING

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ESR: What are the economic substance tests?

The British Overseas Territories Broadly, they are as follows:-

SHIPPING DISTRIBUTION AND SERVICES CENTRE INTELLECTUAL PROPERTY ECONOMIC SUBSTANCE TESTS Being managed and directed in that jurisdiction. Carrying out of core income generating activities with respect to the relevant activity. Maintains adequate presence. Adequate full-time employees with suitable qualifications. Adequate operating expenditure incurred with respect to the relevant activity. Intellectual property activities are usually subject to ENHANCED substance requirements. Pure equity holding entities are usually subject to REDUCED substance requirements.

ESR: What if I fail to comply?

The British Overseas Territories In-scope entities that conduct relevant activities but fail to comply with the economic substance tests may expect:-

SHIPPING DISTRIBUTION AND SERVICES CENTRE INTELLECTUAL PTY HOLDING ENTITY

Progressive fines (for example in the Cayman Islands, the first financial penalty of CI$10,000 would apply, with a subsequent CI$100,000 fine if the failure is repeated in the subsequent financial year. Imprisonment Strike off of entities, freezing of bank accounts. Exchange of information mechanisms may be put in place for automatic exchange of information to the respective foreign tax authorities for the entities that may be found in breach of the substance requirements.

1 2 3 4

ESR: Takeaways! (1/2)

The British Overseas Territories Significant impact may ensue on a broad range of entities and parties, including but not limited to:-

• A Singapore listed group with a Cayman Islands listing vehicle or multi-tiered intermediate

BVI/Cayman Islands investment holding companies. Although reduced substance requirements may apply to investment holding companies, they will still need to have adequate number of qualified employees and premises located in the BVI/Cayman Islands for holding and managing the equity investments. Also consider this, given that each holding company within the group is required to have adequate substance, the costs of maintaining these BVI/Cayman Islands holding companies to be incurred by the listed group may invariably increase.

• The same issues as mentioned above applies to a private business group or a family business /

trust which uses multiple BVI/Cayman Islands companies for holding their equity investment

• r real estate property.

ESR: Takeaways! (2/2)

The British Overseas Territories Significant impact may ensue on a broad range of entities and parties, including but not limited to:-

• A business group which utilises a BVI/Cayman Islands company to hold an IP and where the

majority of profits derived from such IP is booked in such BVI/Cayman Islands company. Does the BVI/Cayman Islands company have adequate substance / performed the requisite development, enhancement, maintenance, protection and exploitation functions that commensurate with the profits booked?

• A Singapore parent company with a BVI/Cayman Islands subsidiary, where the BVI/Cayman

Islands subsidiary is managed and operated from Singapore. If the BVI/Cayman Islands subsidiary is subject to, but fails to meet, the new ESR, the information of non-compliance of the BVI/Cayman Islands may be exchanged with the IRAS. This potentially may lead to current as well as past tax and non-tax (e.g. non-compliance with business registration requirement in Singapore) exposure of the BVI/Cayman Islands subsidiary in Singapore.

ESR: Potential Solutions!

1 2 3

Take advantage of Singapore’s extended tax exemption schemes (e.g. fund tax exemptions / foreign trust exemptions) and the new Intellectual Property Development Incentive Consider inward re-domiciliation Discontinue the offshore entities and consider using a Singapore company to hold the equity / debt investments and / or IP assets.

Singapore

Nexia TS Public Accounting Corporation 80 Robinson Road , #25-00 Singapore 068898 Tel: (65) 6534 5700 Fax: (65) 6534 5766 Email: nexiats@nexiats.com.sg Website: www.nexiats.com.sg

China

Nexia TS (Shanghai) Co., Ltd. Room A, 20 Floor, Heng Ji Building, No. 99 East Huai Hai Road, Huang Pu District, Shanghai 20021, China Tel: (8621) 6047 8716 Fax: (8621) 6047 8712 Email: china@nexiats.com.sg Website: www.nexiats.com.cn

Malaysia

NTS Asia Advisory Sdn Bhd Unit No 23A-06, Level 23A Menara Landmark, No. 12 Jalan Ngee Heng 80000 Johor Bahru, Johor Tel: (60) 7 221 3285 Fax: (60) 7 221 3289 Website: www.ntsasia.com.my

Myanmar

NTS Myanmar Co Ltd La Pyayt Wun Plaza, 410(B), 4th Floor, 37 Alanpya Pagoda Road, Dagon Township, Yangon, Myanmar Tel: (951) 370 836, 370 837, 370 838 Ext- 406, 407, 408 Fax: (951) 376 945 Website: www.nts.com.mm

Review and discuss with us!

Transfer Pricing Updates

India

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Regulations: The transfer pricing laws are in force since 2001 under section 92 of the Indian Income Tax Act, 1961 and corresponding rules. Disclosure: Indian tax payers are required to disclose their related party transaction details in a separate form No. 3CEB to be filed along with their income tax return. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis. Exempt if international transaction value is less than INR 10 million (S$195,000). Most Appropriate Method and preference for comparable: the Five methods as defined by the OECD as well as a “sixth method – “Other method as may be prescribed by the board”. However, there is no hierarchy for application of methods but predominantly the Transactional Net Margin Method is used. Preference is given to local comparables only. BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Apr-2016 CbCR compliances would be applicable for groups with a revenue threshold of INR 55 billion (S$1 bil) w.e.f 1-Apr-2016 Master File implemented as per OECD templates – with a threshold of INR 5 billion (S$97 mil) of the group revenue and INR 500 million (S$9.7 mil) of the international transactional value Unique Inter-quartile Range: Use of multiple year data as opposed to single year data has been introduced. Taxpayers can use inter-quartile range of 35th to 65th percentile in cases where the comparable dataset contains more than six data points. Safe Harbour Provisions have been rationalised and APAs have picked up pace.

Hong Kong

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Regulations: The transfer pricing laws were prescribed & implemented in the Inland Revenue Ordinance in 2018. Disclosure: Hong Kong tax payers are required to disclose their related party transaction details in their annual income tax return. Documentation: Transfer pricing documentation may be prepared in English or Chinese language. Master File and Local File to be prepared for each year with exemption in certain cases. Most Appropriate Method: Hong Kong gives priority to the traditional methodologies and then the transactional methodologies. If both cannot be applied, then Other Method may be used. Royalty: Section 15F is newly added to the Bill to impose tax on Hong Kong taxpayers if they are involved in value creation activities such as (DEMPE) functions in Hong Kong that contributed to an intellectual property held by any overseas related party. BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2018 CbCR compliances would be applicable for groups with a revenue threshold of HKD 6.8 billion (S$1.2b) w.e.f 1-Jan-2018 Master File & Local File implemented per OECD templates Interest on Loans - Companies should review if interest is indeed chargeable, and if so, the company should also ensure that the interest rates and the relevant terms of related party loans comply with the arm’s length principle. Attribution of profits to a permanent establishment - The new transfer pricing regime effectively adopts the authorized OECD Approach by treating the PE as a separate and distinct entity in determining attributable income or loss

Vietnam

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Regulations: The local transfer pricing laws are contained in Decree 20 (of 2017) Disclosure: Vietnamese tax payers are required to comply with mandatory disclosures of related party transactions and transfer pricing information in Form No. 01. This includes voluntary transfer pricing adjustment (viz, operating results of taxpayers with three forms for different sectors), to maintain and submit (CbyC), besides enhanced annual disclosures. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in cases i.e. if total revenue is less than VND 50 billion (S$3 million) and the related-party transaction value is less than VND 30 billion (S$1.8 million); amongst

• thers.

Most Appropriate Method and preference for comparable: the five methods as defined by the OECD and preference is given to internal comparables only. BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-May-2017 CbCR compliances would be applicable for groups with a revenue threshold of VND 18 trillion (S$1 billion) w.e.f 1-May-2017 Master File & Local File implemented per OECD templates A new law for taxation of e-commerce transactions, remote digital sales (Effective 1 July 2020): if there are e-commerce activities provided by non-resident suppliers, if there is no permanent establishment, the suppliers must register, declare, and pay tax in

• Vietnam. While the system is not yet certain a withholding tax could be levied.

Expected changes to Decree 20 on Interest deduction rules: Currently Decree 20 limits deductions for related party total loan interest to 20% of total net profit generated from business activities plus loan interest and amortization costs arising in that period. Amendments are expected to be issued in 2019. it is expected that the interest deduction limits would only apply to taxpayers that are foreign-invested companies in Vietnam.

Malaysia

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Regulations: The local transfer pricing laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia Transfer Pricing Rules 2012. A new Chapter X has been introduced explaining the applicability of the CUP method for commodity transactions. Disclosure: All Malaysian companies having related party transactions are required to disclose their domestic and cross-border related party transactions under Part N of the income tax return (Form C). This includes Part R4 of Form C that explicitly requires taxpayers to state whether documentation has been prepared or no. Additionally, taxpayers are also required to file Form MNE (cross-border transactions) or Form JCK (domestic transactions), as may be applicable. Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in certain cases i.e. if annual gross income in the preceding taxable year no more than MYR 25 million (S$8 mil) and total related party transactions below MYR 15 million (S$5 mil); amongst others. Most Appropriate Method: Transactional profit methods are encouraged only in cases when traditional transactional methods cannot be reliably applied. Furthermore, the guidelines specifically disregard global formulary apportionment (considering such arrangements as arbitrary). Preference is given to local comparables. Intra-group loans: the CUP method is considered most reliable. Local indices such as the Kuala Lumpur Inter Bank Offered Rate (KLIBOR) may be readily used to benchmark intra-group loans Intra-group services: a service recipient may apply an external Comparable Uncontrolled Price (CUP) method together with a benefit test. Whereas a service provider may apply CUP method or the Cost Plus Method (CPM). BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2017 CbCR compliances would be applicable for groups with a revenue threshold of MYR 3 billion (S$1 billion) w.e.f 15-Jul-2017 Master File & Local File implemented per OECD templates

Indonesia

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Regulations: Transfer pricing laws are contained in Article 18 (of 1983) and formal transfer pricing guidelines were introduced in 2010. Disclosure: Indonesian tax payers are required to disclose their related party transaction details in their corporate income tax return and additionally (in PMK-213) it is also required to file details on Master File and Local File applicability. Documentation: Transfer pricing documentation (i.e. Local and Master File) to be prepared on a contemporaneous basis & exempt in cases i.e. if annual gross turnover in the preceding taxable year no more than 50 billion Rupiah (S$5 million); amongst others. Most Appropriate Method and preference for comparable: While the five methods as defined by the OECD without any hierarchy. Comparable uncontrolled price (CUP) is considered to be the preferred method by the tax authorities. Pan-Asian comparables also accepted, if adequate domestic comparables are not available. Royalty: the arm’s length nature of royalty paid is generally a challenge, by deeming licensee to be contract manufacturers Intra-group services: Taxpayers need to apply the ‘Benefit Test’ to substantiate that intra-group services actually received and the quantum of service charge is commensurate with the benefits derived BEPS Update: In 2017 the latest update for master file and CbCr was introduced as per Action Plan 13 of OECD’s BEPS Project w.e.f 1-Jan-2016 CbCr compliances would be applicable for groups with a revenue threshold of IDR 11 trillion (S$1 billion) w.e.f 1-Jan-2016 Master File & Local File implemented as per OECD templates APA is at a nascent stage and no APA has been concluded till date in Indonesia

Singapore

59

Evolution of Transfer Pricing

Singapore

60

Recent updates

• TPD mandatory starting YA 2019
• CbCR effective for FY beginning on or after 1 Jan 2017
• Transfer Pricing Guidelines Special Topic – Commodity Marketing and

Trading Activities

• Dormant companies – Form C: YA 2019 – RPT in financial statements

Concluding Remarks & Way Forward

• TP in APAC is taking active shape now; it can be anticipated that more

countries would introduce detailed TP regimes

• APAC would be next hot bed for transfer pricing disputes
• Increase importance of documentation post the OECD BEPS Action Plan 13
• Automatic Exchange of Information across borders within different countries

under MCAA

• Stringent penalties - compliance with documentation requirements is crucial
• Revisit and align business processes and value chain in the light of new

documentation regime

Refreshments

NEXIA TS PUBLIC ACCOUNTING CORPORATION

Private and Confidential

Tax Treatment Arising from Adoption of FRS 116 or SFRS (I) 16 - Leases

By Mr. Koy Su Hiang Associate Director, Tax

16 August 2019

Tax Treatment Arising from Adoption

• f FRS 116 / SFRS(I) 16 – Leases
• FRS 116 / SFRS(I) 16 applies with effect from annual reporting

periods on or after 1 Jan 2019. Replaces FRS 17.

• IRAS issued e-Tax Guide on 8 Oct 2018 for guidance on tax

treatment for entities adopting FRS 116 or SFRS(I) 16.

Our Roadmap

 Meaning of terms  Classification of leases under FRS 17  Classification of leases for tax purposes  Tax treatment of leases under FRS 17  Classification of leases under FRS 116  Tax treatment of leases under FRS 116  Singapore withholding tax implications  Interest adjustment - Application of Total Assets Method  Example to illustrate the tax treatment for leases

Tax Treatment Arising from Adoption

• f FRS 116 / SFRS(I) 16 – Leases

Meaning of terms Finance lease (“FL”) For the purpose of Sec 10D of Income Tax Act (“ITA”), it means a lease

• f any machinery or plant with the effect of transferring substantially the
• bsolescence, risks or rewards incidental to ownership to the lessee.

Operating lease (“OL”) For the purpose of Sec 10D, it means the leasing of any machinery or plant, other than finance leasing. Sec 10D Regulations Refer to the Income Tax (Income from Finance Leases) Regulations.

Tax Treatment Arising from Adoption

• f FRS 116 / SFRS(I) 16 – Leases

Meaning of terms Sec 10D Regulations. A finance lease (“FL”) shall be treated as a sale agreement if –

• a. The lessee has an option to purchase the machinery or plant during the

term of the lease including any extension or renewal thereof or upon its expiry;

• b. The machinery or plant which is leased is a limited use asset;
• c. The machinery or plant in a sale and lease-back transaction has been

previously used by the lessee or any other person;

Tax Treatment Arising from Adoption

• f FRS 116 / SFRS(I) 16 – Leases

Meaning of terms Sec 10D Regulations (cont’d) d. The lessor and lessee are related to each other and – (i) The lessee or any other person related to the lessee lends to the lessor any of the funds necessary to acquire the leased asset or guarantees any of the debt

• f the lessor incurred in connection with the lease;

(ii) The terms of the lease are determined otherwise than on the basis that there is no such relationship between the lessor and the lessee; or (iii) The total value of the rentals or hire received or receivable for the terms of those finance leases entered into by the lessor with lessees, who are related to the lessor, at any time during the basis period for any year of assessment exceeds half of the total value of the rentals or hire received or receivable for the term of all finance leases entered into by the lessor in that basis period; or e. The lease is a leveraged lease unless the Comptroller determines that it is otherwise.

Classification of Leases Under FRS 17

Classification of lease for accounting purpose Classification of lease for tax purpose (under Sec 10D) OL OL FL FL not treated as sale FL treated as sale (under Sec 10D Regulations)

Classification of leases for tax purposes

Does lease arrangement meet the definition of a FL under Section 10D(3) of ITA? Is any of the conditions under paragraphs (a) to (e) of Regulation 4(1) of the Sec 10D Regulations met? Lease arrangement is a FL treated as a sale agreement. Lease arrangement is a FL treated not as a sale agreement. Lease arrangement is an OL. Section 10D Regulations are not applicable. No No Yes Yes

Tax Treatment of Leases Under FRS 17

Classification of lease for tax purpose Tax treatment for lessor Tax treatment for lessee OL Lease income taxable. Lease payments deductible. Capital allowance (CA) available on leased asset. CA not allowed on leased asset.

Tax Treatment of Leases Under FRS 17

Classification of lease for tax purposes Tax treatment for lessor Tax treatment for lessee FL not treated as sale agreement (under Sec 10D Regulations) Taxed on full amount

• f lease income (i.e.

sum of the interest and principal repayment). Full amount of lease payments (i.e. sum of the interest and principal repayment) deductible. CA available on leased asset but only against finance leasing income. CA not allowed on leased asset.

Tax Treatment of Leases Under FRS 17

Classification of lease for tax purposes Tax treatment for lessor Tax treatment for lessee FL treated as sale agreement (under Sec 10D Regulations) Taxed on interest income. Principal repayment not taxable. Interest expense deductible. Principal repayment not deductible. CA not allowed on leased asset. CA available on leased asset.

Classification of Leases Under FRS 116

Classification

• f lease

for lessor Classification

• f lease

for lessee Classification

• f lease

for tax purposes OL Single accounting model

• Right-of-Use

(“ROU”) asset

• Lease liability &

Interest expense OL FL FL not treated as sale (under Sec 10 Regulations) FL treated as sale (under Sec 10D Regulations)

Tax Treatment of Leases Under FRS 116

Classification of lease for tax purposes Tax treatment for lessor Tax treatment for lessee OL Lease income taxable. Lease payments deductible. Add back interest expense and depreciation on ROU asset. Capital allowance (CA) available on leased asset. CA not allowed on leased asset.

Tax Treatment of Leases Under FRS 116

Classification of lease for tax purposes Tax treatment for lessor Tax treatment for lessee FL not treated as sale agreement (under Sec 10D Regulations) Taxed on full amount

• f lease income (i.e.

sum of the interest and principal repayment). Full amount of lease payments (i.e. sum of the interest and principal repayment) is deductible. Add back interest expense and depreciation on ROU asset. CA available on leased asset but only against finance leasing income. CA not allowed on leased asset.

Tax Treatment of Leases Under FRS 116

Classification of lease for tax purposes Tax treatment for lessor Tax treatment for lessee FL treated as a sale agreement (under Sec 10D Regulations) Taxed on interest income. Principal repayment not taxable. Interest expense deductible. Principal repayment not deductible. CA not allowed on leased asset. CA available on leased asset.

Singapore withholding tax implications Where lessor is a non-resident

Classification of lease for tax purposes Withholding tax implications OL Withhold tax on the lease payment (under Sec 12(7)(d) of ITA – “payment for the use of any moveable property”) FL not treated as sale agreement (under Sec 10D Regulations) FL treated as sale agreement (under Sec 10D Regulations) Withhold tax on the interest portion of the lease payment (under Sec 12(6) of ITA)

Interest adjustment – Application of the Total Assets Method

Total asset method (“TAM”) – Formula for computing disallowable interest expense Interest expense to be disallowed =

Cost of non-income producing assets as at B/S date x Common interest expense Cost of total assets* as at B/S date

* “Total assets” refers to all the assets financed by common loans. Where there are assets financed by specific interest bearing loans, deduct the costs of these assets from the total assets.

Interest adjustment – Application of the Total Assets Method

Application of TAM by lessee (where interest adjustment is applicable) OL & FL not treated as sale agreement –

• Lessee eligible to claim contractual lease payments.
• Interest expense to be added back

FL treated as sale agreement – Lessee eligible to claim interest expense and CA on the leased asset instead of deduction on contractual lease payments Application of TAM –

• Interest expense not subject to interest adjustment
• Total asset base should exclude ROU assets

Example to illustrate the Application

• f the Tax Treatment for Leases

81

Your client (“A”) has provided you with the following information:

• A enters into a 5-year lease for a piece of equipment.
• The annual lease payments are S$60,000 payable at the end of each year.
• The interest rate implicit in the lease cannot be readily determined.
• Co. A’s incremental borrowing rate at the commencement date is 6% per annum.
• Co. A measures the lease liability at the present value of the 5 payments of S$60,000 discounted

at the interest rate of 6% per annum, which is S$252,742.

Lease payment ($) Interest expense (6%) Principal Repaid ($) Ending balance ($) Start of year 1 252,742 End of year 1 60,000 15,165 44,835 207,907 End of year 2 60,000 12,474 47,526 160,381 End of year 3 60,000 9,623 50,377 110,004 End of year 4 60,000 6,600 53,400 56,604 End of year 5 60,000 3,396 56,604 Total 300,000 47,258 252,742

Example to illustrate the Application

• f the Tax Treatment for Leases

(Cont’d)

Initial recognition and measurement of the lease by A (lessee): Accounting entry Dr Cr Start of year 1 Dr ROU asset Cr Lease liability $252,742 $252,742 End of year 1 Dr Interest expense Cr Lease liability Cr Cash (1st lease payment) $15,165 $44,835 $60,000 Dr Depreciation (S$252,742/5) Cr Accumulated depreciation $50,548 $50,548

Example to illustrate the Application

• f the Tax Treatment for Leases

(Cont’d) Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes

• Assume that the useful life of the above equipment is 15 years.
• The lease does not transfer substantially the obsolescence, risks or rewards incidental to
• wnership of the equipment to the lessee.
• The lease arrangement is regarded as an OL as it does not meet the definition of a FL

under Section 10D(3) of the SITA.

Example to illustrate the Application

• f the Tax Treatment for Leases

(Cont’d) Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes Tax treatment for lessor ^^

• Taxed on lease income of $60,000 each year during the 5-year lease period
• CA is allowed to the lessor on the equipment

^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax based on the lease payment of S$60,000 each year when the amount is due and payable.

Tax treatment for lessee

• Lease payment of $60,000 is deductible each year on an incurred basis during the 5-year

lease period

• No CA is allowed to the lessee on the leased equipment

Example to illustrate the Application

• f the Tax Treatment for Leases

(Cont’d) Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place

• Assume that the useful life of the equipment is 5 years.
• The equipment is a limited use asset.
• The lease transfers substantially the obsolescence, risks or rewards incidental to
• wnership of the equipment to the lessee.
• The lease arrangement meets the definition of a FL under Section 10D(3) of SITA.
• In addition, the lease arrangement is a FL treated as a sale agreement since it meets the

condition under paragraph (b) of Regulation 4(1) of the Section 10D Regulations (i.e. the machinery or plant which is leased is a limited use asset).

Example to illustrate the Application

• f the Tax Treatment for Leases

(Cont’d) Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place Tax treatment for lessor ^^

• Taxed on interest income as computed based on the lessor’s implicit interest rate
• Principal repayment is not taxable
• No CA is allowed to the lessor on the equipment

^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax based

• n the interest expense of S$15,165 in year 1 as recognised by the lessee. This is because

the lessee has no knowledge of the lessor’s implicit interest rate. Tax treatment for lessee

• Interest portion of lease payment is deductible (i.e. $15,165 is deductible in year 1,

$12,474 is deductible in year 2 and so on)

• Principal repayment is not deductible
• CA is allowed to the lessee on leased equipment of $252,742, over the tax writing-down

period for the equipment.

Singapore

Nexia TS Public Accounting Corporation 80 Robinson Road , #25-00 Singapore 068898 Tel: (65) 6534 5700 Fax: (65) 6534 5766 Email: nexiats@nexiats.com.sg Website: www.nexiats.com.sg

China

Nexia TS (Shanghai) Co., Ltd. Room A, 20 Floor, Heng Ji Building, No. 99 East Huai Hai Road, Huang Pu District, Shanghai 20021, China Tel: (8621) 6047 8716 Fax: (8621) 6047 8712 Email: china@nexiats.com.sg Website: www.nexiats.com.cn

Malaysia

NTS Asia Advisory Sdn Bhd Unit No 23A-06, Level 23A Menara Landmark, No. 12 Jalan Ngee Heng 80000 Johor Bahru, Johor Tel: (60) 7 221 3285 Fax: (60) 7 221 3289 Website: www.ntsasia.com.my

Myanmar

NTS Myanmar Co Ltd La Pyayt Wun Plaza, 410(B), 4th Floor, 37 Alanpya Pagoda Road, Dagon Township, Yangon, Myanmar Tel: (951) 370 836, 370 837, 370 838 Ext- 406, 407, 408 Fax: (951) 376 945 Website: www.nts.com.mm

THANK YOU

Speak to us! Koy Su Hiang Email: koysuhiang@nexiats.com.sg Contact Number: 6534 5700 (ext. 862)

NEXIA TS PUBLIC ACCOUNTING CORPORATION

Private and Confidential

Income Tax Treatment arising from the Adoption of FRS109

By Mr. Shaun Zheng Associate Director, Tax

16 August 2019

FRS 109 Financial Instruments

Overview

• FRS 109 replaces the existing FRS 39 and is applicable to entities for annual periods

beginning on or after 1 January 2018 (i.e. YA 2019 or YA 2020, as the case may be). Early adoption is possible.

• Unless an election is made to apply FRS 109, the FRS 109 tax treatment is not

applicable to taxpayers that qualify and have chosen to comply with Singapore Financial Reporting Standards for Small Entities.

• If FRS 109 is not applicable, taxpayers may continue to adopt pre-FRS39 tax

treatment or FRS39 tax treatment (as the case may be).

• Unlike FRS 39, taxpayers are not allowed to opt out of the FRS 109 tax treatment,

which invariably means that taxpayers currently under Pre-FRS 39 tax treatment would be required to apply FRS 109 for tax purposes.

• A new Section 34AA of the Singapore Income Tax Act (“SITA”) has been legislated on

26 October 2017 and sets out the tax treatment of financial instruments under FRS 109.

FRS 109 Financial Instruments

Key differences between FRS 39 and FRS 109

90

Available-For-Sale (“AFS”) classification has been

• removed. AFS classification no longer exists under

FRS 109. Fair Value Through Other Comprehensive Income (“FVOCI”) classification has been introduced. FVOCI did not exist previously under FRS 39. No longer necessary for impairment losses to be recognized in P&L only when there is an objective evidence of impairment due to a loss of events under FRS 109. Rather, an entity has to assess whether the credit risk

• n a financial instrument has increased significantly

since initial recognition and recognize a loss allowance for Expected Credit Losses (“ECL”), representing either a 12-month ECL or lifetime ECL (for credit impaired or non-credit impaired financial asset). FRS 39 tax treatment catered for AFS financial assets no longer relevant after entities transit to FRS 109. FRS 109 tax treatment for FVOCI financial assets is new since such financial assets previously did not exist under FRS 39. Unlike FRS 39 tax treatment, not all impairment losses recognized under FRS 109 are deductible. Only impairment losses recognized in the P&L with respect to credit-impaired financial instruments that are on revenue account rank for tax deduction. As such, it is imperative for entities to identify accurately impairment losses with respect to credit-impaired financial instruments on revenue account and justify the deduction claim.

FRS 109 Financial Instruments

Overview of accounting treatment

Subsequent Measurement FVTPL FVTOCI Amortised cost Equity instrument Debt instrument FV gain/(loss) To P/L; FL - gain/loss attributable to credit risk may go to OCI OCI - Not reclassified to P/L, but may be transferred within equity To OCI – Reclassified upon derecognition N.A. Exchange difference To P/L; Interest recognised in P/L is computed based

• n Effective interest method

(EIR) P/L Impairment Interest PL P/L - EIR

FRS 109 Financial Instruments

FVTPL Tax Treatment

1) In P/L, tax adjustment is required if FI are under capital account. 2) No tax adjustment required on gain/loss recognized in OCI; However, upon de-recognition of that FI which is on revenue account, accumulated gain/loss (not recycled to P/L) previously recognized in OCI will be taxed or allowed as a deduction -> tax adjustment required Subsequent Measurement FVTPL FV gain/(loss) 1) P/L; 2) FL - gain/loss attributable to credit risk may go to OCI Exchange difference Impairment Interest Tax implications

FRS 109 Financial Instruments

FVTOCI Tax Treatment (Equity Instrument)

1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account. 2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses previously recognised in OCI which may or may not be transferred within equity. Tax adjustment is required. Subsequent Measurement FVTOCI Equity Instrument FV gain/(loss) To OCI – Not reclassified to P/L, but may be transferred within equity Exchange difference Impairment Interest To P/L Tax implications

FRS 109 Financial Instruments

FVTOCI Tax Treatment (Debt Instrument)

1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account. 2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses reclassified from OCI to P/L. 3) To tax or allow as a deduction, the foreign exchange gains / losses recognised in the P/L. Subsequent Measurement FVTOCI Debt Instrument (DI) FV gain/(loss) To OCI – reclassified to P/L upon de-recognition To PL; Interest recognised in P/L is computed based

• n Effective Interest

Method (EIR) Exchange difference Impairment Interest Tax implications

FRS 109 Financial Instruments

Amortised Cost Tax Treatment

For DI on revenue accounts, same with the tax treatment for FVTOCI; For interest income/expenses, same tax treatment with FVTOCI. For DI on capital account, gain/loss recognized in PL will not be taxed or brought to tax.

Subsequent Measurement Amortised cost FV gain/(loss) N.A. Exchange difference P/L Impairment Interest PL - EIR Tax implications

FRS 109 Financial Instruments

What you will see in your future tax computations

• Under FRS 39 tax treatment, taxpayers are required to submit to the IRAS a

list of financial assets on capital account for CIT’s determination (i.e. to determine whether assets are indeed on capital account).

• Similarly for FRS 109 tax treatment, taxpayers are required to submit an

itemized listing of all debt instruments (measured at FVTPL, FVOCI or amortized cost) and equity instruments measured at FVTPL held as financial assets on capital accounts annually, together with the tax returns.

• Taxpayers should also submit an itemized listing of all equity instruments

measured at FVOCI (on both revenue and capital account) together with their tax returns in the YA of the basis period when the asset is derecognized.

FRS 109 Financial Instruments

Tax treatment on impairment losses, under FRS 109 ECL model (1/2)

• Only impairment loss recognized in P/L in respect of credit-impaired

financial instruments that are on revenue account are allowable as a deduction.

• No deduction is allowed in respect of FI such as:

– Credit-impaired financial instruments that are on capital account; or – Non-credit-impaired financial instruments, regardless of whether they are on revenue or capital account.

FRS 109 Financial Instruments

Tax treatment on impairment losses, under FRS 109 ECL model (2/2)

A financial asset is considered credit-impaired if it includes observable data about the following events:- a) Significant financial difficulty of the issuer or borrower; b) A breach of contract, such as a default or past due event; c) The lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e) The disappearance of an active market for that financial asset because of financial difficulties; or f) The purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

FRS 109 Financial Instruments

Transitional accounting treatments On Date of Initial Application (DIA) of FRS 109:-

Carrying amount before &

• n DIA

Unrealized gain/(loss) Opening retained earning or other components of equity Ending impairment allowance (FRS39) & Opening loss allowance (FRS109) at DIA Impairment gain/(loss) Opening retained earning

FRS 109 Financial Instruments

Transitional Tax Adjustments

• No tax adjustment is required for transitional accounting

adjustment recognised in other components of equity at DIA

• Tax adjustment may be required for transitional accounting

adjustments recognized in opening retained earning – Where tax adjustment is required, show the details of how each tax adjustment is arrived at in the tax computation; and – keep sufficient documents to support the tax adjustments and to submit to the CIT upon request

FRS 109 Financial Instruments

Transitional Tax Adjustments – from FRS 39 to FRS 109

Transitional accounting treatments Revenue account Equity instrument Tax / deduction allowed for unrealised gain/loss Debt instrument Tax / deduction allowed for unrealized gain/loss Tax allowed for Reversal of impairment* Tax deductible for impairment** Capital account No tax adjustment * Reversal amount of impairment loss is taxable to the extent that the amount had been previously allowed as a deduction under FRS 39 tax treatment; and Impairment is tax deductible to the extent that the amount is in respect of a credit-impaired financial instrument ** impairment loss in ORE in respect of credit-impaired FI

Singapore

Nexia TS Public Accounting Corporation 80 Robinson Road , #25-00 Singapore 068898 Tel: (65) 6534 5700 Fax: (65) 6534 5766 Email: nexiats@nexiats.com.sg Website: www.nexiats.com.sg

China

Nexia TS (Shanghai) Co., Ltd. Room A, 20 Floor, Heng Ji Building, No. 99 East Huai Hai Road, Huang Pu District, Shanghai 20021, China Tel: (8621) 6047 8716 Fax: (8621) 6047 8712 Email: china@nexiats.com.sg Website: www.nexiats.com.cn

Malaysia

NTS Asia Advisory Sdn Bhd Unit No 23A-06, Level 23A Menara Landmark, No. 12 Jalan Ngee Heng 80000 Johor Bahru, Johor Tel: (60) 7 221 3285 Fax: (60) 7 221 3289 Website: www.ntsasia.com.my

Myanmar

NTS Myanmar Co Ltd La Pyayt Wun Plaza, 410(B), 4th Floor, 37 Alanpya Pagoda Road, Dagon Township, Yangon, Myanmar Tel: (951) 370 836, 370 837, 370 838 Ext- 406, 407, 408 Fax: (951) 376 945 Website: www.nts.com.mm

Q&A