Friday, August 14, 2009

Tax Treatment for Shares and Options Schemes

Source: IRAS Circular - Changes To Tax Treatment of Employee Stock Options And Other Forms Of Employee Share Ownership Plans

For Personal Income Tax

1) Stock Options
An individual who is granted Stock Options (ESOP) while exercising employment in Singapore, the full amount of ESOP gains, irrespective of where the ESOP is exercised would be regarded as gains from employment derived from Singapore and come under S 10(1)(b). Note: If individual is granted ESOP while he is outside Singapore AND Not a tax resident, he is not taxed.

Gain is derived based on (Open Market Price of the shares at the time of exercise of the ESOP and the price paid for such shares).

Example 1:- ESOP granted while an individual is exercising employment in Singapore and he exercise his option overseas and is tax resident of Singapore.

Verdict => ESOP is taxable in Spore.

Mr Mahan, a Singapore citizen is granted ESOP on 25.02.03 by his employer, XYZ Company Ltd, which is a Singapore incorporated company. During his employment with XYZ Company Ltd, Mr Mahan performs his employment duties substantially in Singapore, but is required to travel out of Singapore occasionally to render services to XYZ Company Ltd’s clients in the Asia Pacific region. Mr Mahan is seconded to work for a related overseas company from 1.1.04 onwards. During his secondment overseas, Mr Mahan exercises his ESOP on 15.11.04 and ESOP gains amount to $100,000. His salary from his overseas employment of $250,000 is not remitted to Singapore during the
year 2004. Mr Mahan also does not have any other income from Singapore during the year 2004. Assuming that Mr Mahan is a tax resident of Singapore for YA 2005 (i.e. he
does not wish to avail himself of the concession to opt to be treated as a non-resident for YA 2005) and assuming YA 2003 tax rate structure applies:

Mr Mahan’s Income Tax Computation - Year of Assessment 2005

Salary from overseas employment (not remitted) $NIL
ESOP gains (derived from Singapore) $100,000
Less: Earned income relief (assume no other personal 1,000
reliefs claimed)
Chargeable income 99,000
Tax on first $80,000 = 4,600
On the next $19,000 @15%= 2,850
Tax payable 7,450

Example 2 - ESOP granted while the individual is exercising employment overseas
i.e. prior to his posting to Singapore

Verdict => ESOP is NOT taxable in Spore be'cos the ESOP was granted while o/seas.

During his employment with EFG-US, Mr Bravo, an American citizen was granted ESOP by the US parent company on 15.7.99. Subsequently, he was seconded by EFG-US to head its related subsidiary in Singapore, EFG Singapore from 21.5.01. On 15.1.02, Mr Bravo exercised the ESOP that was previously granted during his employment with EFG-US and derived ESOP gains amounting to $250,000. Mr Bravo’s salary (excluding the ESOP gains) for the full year of 2002 amounts to $500,000. Mr Bravo has not remitted any foreign income to Singapore or derived any other income from Singapore
during the year 2002. As Mr Bravo is a tax resident of Singapore for YA 2003:

Mr Bravo’s Income Tax Computation Year of Assessment 2003
$
Salary 500,000
Less: Earned income relief (assume no other personal 1,000
reliefs claimed)
Chargeable income 499,000

Tax on first $320,000 47,000
On the next $179,000 @ 22% 39,380
Tax payable 86,380

When is the ESOP Gains taxable?

If no vesting period or moratorium, it is taxable when the options are exercised.
If moratorium or vesting period involved, it becomes taxable when the moratorium is lifted (and as such need to use market price at the date when moratorium is lifted).


2) Shares Granted (ESOW)

If granted shares while in employment in Singapore, will be assessed to tax in Singapore. This is regardless of whether he is in or outside Singapore at date of vesting. The test is whether, when the shares were granted, was individual exercising employment in Singapore.

NOTE: FOR CORPORATE TAX, if individual is not taxed, Corporate cannot claim for tax deduction the expense relating to the granting of shares.

Gains on ESOW becomes taxable when the shares are granted, UNLESS there are vesting conditions imposed, for which gains become taxable when the vesting conditions are satisfied. So the key is when does the person gets the beneficial interest, if gets it while overseas, not taxable. If gets it when in Singapore then taxable.

When is the ESOW Gains taxable?

If no vesting period or moratorium, it is taxable when the shares are granted.
If moratorium or vesting period involved, it becomes taxable when the moratorium is lifted (and as such need to use market price at the date when moratorium is lifted).

Thursday, July 9, 2009

GST on prompt payment discounts

Businesses may give a prompt payment discount to their customers who are on credit terms. For example, you may give a 10% discount to a customer if he pays within 30 days from the date of tax invoice. In such instances, GST is chargeable on the net price after the prompt payment discount (i.e. 90% of the selling price).

This treatment is applicable for all prompt payment discounts regardless of whether the customer takes up the discount offer or not.

However, the treatment is not applicable for payments by instalments.

(GST) Difference between reimbursement and disbursement

Bottomline

Disbursement = No GST, Reimbursement = levy GST.

Reimbursement

The following diagram illustrates a typical reimbursement scenario:

Reimbursement


Supplier issues a tax invoice to company A.
Company A is legally responsible to pay supplier for the goods and services.
Company A re-bills company B for the goods and services
GST must be charged as it is viewed as a separate supply for GST purposes. This is commonly known as a reimbursement.

Disbursement

The following diagram illustrates a typical disbursement scenario:





Supplier issues a tax invoice to company B.
Company B is legally responsible to pay supplier for the goods and services.
Company A is merely paying on behalf of company B.
When Company A recovers this sum of money from company B, it can be treated as a disbursement, assuming all the conditions for disbursement are met.

Conditions for disbursements
Situation: You make payment on behalf of another party where supplier bills the other party.

The other party is responsible for paying the supplier;
The other party knows that the goods or services would be provided by that supplier;
The other party authorised you to make the payment on his behalf;
The other party is the recipient of the goods or services;
The payment is separately itemised when you invoice the other party;
You recover only the exact amount paid to the supplier; and
The goods or services paid for are clearly additional to the supplies you make to the other party.
If all the above conditions are met, this transaction is treated as a disbursement and no GST is chargeable. For disbursements, you cannot claim the input tax incurred for the original supply.


Some common disbursement examples:
A freight forwarding company makes payment for import duty and GST to Singapore Customs on behalf of their clients who are the owners of the imported goods. When the company re-bills the client for this payment, there is no GST chargeable.
A motor trader pays the insurance premium on the customer's behalf. When the motor trader re-bills the customer for the premium, there is no GST chargeable.

Wednesday, July 8, 2009

(GST) TRANSFER FOR A CONSIDERATION OF “QUALIFYING DEDUCTIONS” ALLOWED UNDER THE INCOME TAX GROUP RELIEF SYSTEM

Background

For income tax purposes, with effect from the year of assessment (“YA”) 2003, a company (“transferor company”) belonging to a group may transfer any “qualifying deductions” to another company (“claimant company”) of the same group. “Qualifying deductions” under section 37C(14) of the Income Tax Act (“ITA”) refers to the current year unabsorbed capital allowances, current year unabsorbed trade losses and current year unabsorbed donations that may be transferred to be deducted against the assessable income of the claimant company under the income tax group relief system (“group relief system”).

Bottomline
The transaction should not attract GST, but if a registered trader paid input GST for the transferred deductions, it cannot offset the input GST suffered against output GST. Hence, it should not attract GST in the first place.

This is classified as a non-supply or excluded transaction.


Taxable Supply in the Course or Furtherance of Business


Section 8(1) of the Goods and Services Tax Act (“GST Act”) provides that GST shall be charged on any supply of goods or services made in Singapore where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

Although the transfer of “qualifying deductions” is not a supply of goods, the transfer for consideration is a taxable supply of services under section 10(2)(b) of the GST Act. Section 10(2)(b) of the GST Act provides that anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

Furthermore, the transfer of “qualifying deductions” for consideration constitutes a supply in the furtherance of business under section 10(2)(b) of the GST Act. The “qualifying deductions” are assets of the transferor company and have a value as the “qualifying deductions” may be carried forward and used to be deducted against future profits of the company for income tax purposes. With the implementation of the group relief system, the “qualifying deductions” would still be of value when they are transferred out to another company in the same group for a consideration, to be used by the claimant company as a deduction against its own taxable profits. Thus, the transfer of “qualifying deductions” is no different from the transfer of any other business asset for a consideration. However, if the “qualifying deductions” are transferred without consideration, there will not be any supply for GST purposes because such transfers are not deemed to be a taxable supply under section 10(2)(b) of the GST Act.

In a situation where a company supplies services to another company and the latter transfers its “qualifying deductions” to the former in return for the services supplied, the amount of “qualifying deductions” transferred would be treated, for GST purposes, as non-monetary consideration for the services supplied and this non-monetary consideration would have to be valued for GST to be imposed on the consideration.

Deeming the Transfer of “Qualifying Deductions” to be neither a Supply of Goods nor a Supply of Services

Notwithstanding the above paragraphs and in order not to negate the original intended benefits of the group relief system, which is to encourage risk taking and enterprise, the Government has approved the deeming of the transfer of “qualifying deductions” under the group relief system to be neither a supply of goods nor a supply of services by way of ministerial order pursuant to section 10(3)(c) of the GST Act. The GST (Excluded Transactions) (Amendment) Order 2003 to provide for the above has been gazetted on 29 May 2003 and will apply on transfers of “qualifying deductions” made from the effective date of the group relief system. However, the deeming of the transfer of “qualifying deductions” to be neither a supply of goods nor a supply of services will not apply to situations mentioned in the preceding paragraph.

Input Tax Claim in respect of Transfer of “Qualifying Deductions”

Where the claimant company is a registered trader and incurs input tax for the purposes of acquiring the “qualifying deductions”, it will not be able to claim the input tax incurred against GST payable because the “qualifying deductions” are not used to make taxable supplies subsequently.