isca breakfast talk: highlight of income tax and transfer pricing … · page 15 frs 109 tax...

ISCA Breakfast Talk: Highlight of income tax and transfer pricing changes in 2017

Chai Wai Fook

Partner, Tax Services

Ernst & Young Solutions LLP

10 January 2018

Topics

► FRS 115 tax treatment

► FRS 109 tax treatment

► Legislative changes on transfer pricing

10 January 2018 ISCA Breakfast Talk

Abbreviations

ECL Expected credit loss

FI Financial instrument

FRS 115 Financial Reporting Standard 115 “Revenue from Contracts

with Customers”

FRS 39 Financial Reporting Standard 39 “Financial Instruments:

Recognition and Measurement”

FRS 109 Financial Reporting Standard 109 “Financial Instruments”

FVTPL/ FVPL Fair value through profit and loss

FVTOCI/ FVOCI Fair value through other comprehensive income

IRAS Inland Revenue Authority of Singapore

ITA Income Tax Act (Chapter 134)

ORE Opening retained earnings

YA Year of Assessment


FRS 115 tax treatment Default tax treatment

Default tax treatment*

► Accept accounting revenue under FRS 115 for tax purposes unless

exceptions apply

Specific tax treatment established through case law or provided under the tax law

► Follow existing tax treatment (e.g., developers)

Significant deviation between accounting treatment and tax (including contracts with significant financing components)

Tax

adjustments

to be made

to your

accounting

revenue

Yes Yes

What are the exceptions?

*Source: FRS 115 consultation paper issued by the IRAS in October 2015


FRS 115 tax treatment Transitional adjustments

► New section 34I legislated in the ITA on 26 October 2017

► Applies to financial accounts of the first basis period for a YA in which

FRS 115 is first adopted (initial YA)

► No option to opt-out

► Sets out the tax treatment of transitional gain or loss recognised upon

adoption of FRS 115 by a person (including partnership) in the

initial YA

► To tax or allow transitional gain/loss in the initial YA based on the tax

rates applicable to the entity for the initial YA

If no early adoption of FRS 115, YA 2019 will be the initial YA

(for entities with 31 December financial year end)


FRS 115 tax treatment Formula for single tax treatment

Section 34I(3)(a)

► If income amount C of the person/partner for initial YA is subject to a

single tax treatment*

► * It is (i) subject to tax at one rate of tax; or (ii) exempt from tax

► Amount C comprises income governed by FRS 115

► Transitional gain or loss to be taxed at the same rate as the income

amount C or allowed against the income amount C


Section 34I of the ITA Formula for different tax treatment

Section 34I(3)(b)

► If income amount C of the person/partner for initial YA is subject to

different tax treatments

►


Takeaways

► Are you affected by FRS 115 with transitional adjustments to

your ORE?

► Do you fall within the exceptions to the FRS 115 tax treatment,

e.g., significant financing components?

► Do you have the necessary details to support the tax

adjustments for tax provisions and tax computations to be

submitted to the IRAS?

Do not assume no income tax impact or

adopt the “wait-and-see” stand


FRS 109 tax treatment


FRS 109 tax treatment Overview

► New Section 34AA legislated in the ITA on 26 October 2017

► IRAS issued an e-Guide providing guidance on 22 November 2017

► Tax treatment aligned with accounting treatment unless exceptions

apply (consistent with FRS 39 tax treatment)

► No option to opt-out, i.e., taxpayers under pre-FRS 39 tax treatment

will automatically come under FRS 109 tax treatment

► If entity does not need to comply with FRS 109, pre-FRS 39 tax

treatment or FRS 39 tax treatment continues to be applicable

10 January 2018

If no early adoption of FRS 109, YA 2019 will be the initial YA

(for entities with 31 December financial year end)

ISCA Breakfast Talk

FRS 109 tax treatment Default tax treatment

Section 34AA(1)

► Any profit, loss or expense in respect of any financial instrument of a qualifying person to be taxed or allowed is the amount, which is recognised in accordance with FRS 109 (subject to exceptions)

Exceptions

1) Sections 34G(3), (4) and (5) (for companies redomiciled in Singapore)

2) Anything that is capital in nature [Section 34AA(2)]

3) Prescribed exceptions in Section 34AA(3)


FRS 109 tax treatment Some of the new tax changes

► ECL of a FI (on

revenue account)

must be credit-

impaired to be tax

deductible

Tax implications

► Tax adjustment

required for ECL on

non-credit impaired FI

(on revenue account)

► Deferred tax impact

(on revenue account)

► Unrealised gain or loss of an

equity instrument on revenue

account measured at FVOCI

recognised in OCI not taxable or

deductible until derecognition

Tax implications

► Deferred tax impact on

unrealised gain or loss

► On derecognition, tax adjustment

required to bring the cumulative

gain or loss to tax or allow (as no

transfer of such gain or loss in

OCI to P&L for accounting

purposes)


FRS 109 tax treatment Transitional tax treatment from pre-FRS 39 tax treatment

► From pre-FRS 39 tax treatment to FRS 109 tax treatment, tax

adjustments to be made for financial assets on revenue account

Transitional tax adjustments

► Need to compute on an FI-by-FI basis to tax or allow the difference

computed using the formula below

A – B + C

Where

A is the remeasured amount of the FI on date of initial application (FRS 109)

B is the cost of the instrument

C is any impairment loss allowed previously and not yet written back

► For debt instrument (asset), to allow any impairment loss recognised

in ORE in respect of credit-impaired FI


FRS 109 tax treatment Transitional tax treatment from pre-FRS 39 tax treatment

► From pre-FRS 39 tax treatment to FRS 109 tax treatment, tax


Transitional tax adjustments (cont’d)

► For debt instrument, to tax or allow the difference computed using

the formula below (on an FI-by-FI basis)

X – Y

Where

X is sum of interest income previously recognised in the P&L under FRS 39

Y is the sum of interest income previously taxed


FRS 109 tax treatment Transitional tax treatment

► From FRS 39 tax treatment to FRS 109 tax treatment, tax


Transitional tax adjustments

► Need to determine the unrealised gain or loss in the ORE at date of

initial application (FRS 109) to be taxed or allowed as deduction

► Need to identify any reversal of impairment loss in the ORE at date

of initial application (FRS 109) to be taxed

► Need to identify the impairment loss in the ORE at date of initial

application (FRS 109) in respect of credit-impaired FI, if applicable


Takeaways

► Are you affected by FRS 109, especially on initial adoption?

► Are you currently under pre-FRS 39 tax treatment and owned FI on

revenue account?

► Are you currently under FRS 39 tax treatment and owned FI on

revenue account?

► Do you have the necessary details or documentation to support the

submission of itemised financial assets on capital or revenue

account?

10 January 2018

Do not assume no income tax impact or

adopt the “wait-and-see” stand

ISCA Breakfast Talk

Legislative changes on transfer pricing


Transfer pricing amendments

► Amendments to section 34D of ITA legislated on 26 October 2017

► Clarifies the meaning of “arm’s length conditions”

► Clarifies the type of actions that the IRAS may take to counteract the

tax advantage, which could be:

i. Increase the amount of income

ii. Reduce the amount of deduction or allowance

iii. Reduce the amount of loss

Specifically, for (i), the amount of income that is increased is treated as

accruing in or derived from Singapore or received in Singapore from

outside Singapore, as the case may be.


Section 34E – New section

► Introduces a surcharge on transfer pricing (TP) adjustments for non-

compliance with the arm’s length principle

► Equal to 5% of the amount of

(i) Increase in income

(ii) Reduction of deduction or allowance

(iii) Reduction of loss

will be recoverable by the Comptroller for non-compliance with the

arm’s length principle

► Surcharge will apply with effect from YA 2019


Section 34F – New section

► Introduces the requirement for mandatory TP documentation (TPD)

with effect from YA 2019

► Applies to (i) a company, (ii) a firm or (iii) trust if either of the

following conditions is met:

► Gross revenue from its trade or business for the basis period

concerned exceeds S$10 million or

► TPD is required to be prepared for a transaction by the

company, firm or trustee in the previous basis period

► Prepare TPD (i.e., no later than the time for making the tax return)

and retain for at least five years

► Furnish a copy of the TPD to the IRAS within 30 days of notice

on request


Section 34F – New section ► Penalties for non-compliance

► A person who fails to comply with the following shall be guilty of an

offence and shall be liable on conviction to a fine not

exceeding S$10,000

► The Comptroller may compound any offence relating to the above

► Similar penalties apply to a person who knowingly provides false

or misleading documentation to the Comptroller


Takeaways

► Be aware of the deemed remittance rule

► 5% surcharge is applicable even if the company is enjoying tax

incentive (0% tax rate) or in non-taxable position

10 January 2018

Do you already have in place

a set of current TPD?

ISCA Breakfast Talk

ISCA Breakfast Talk: Goods and Services Tax (GST) updates

Yeo Kai Eng

Partner, Indirect Tax Services

Ernst & Young Solutions LLP

10 January 2018

Topics

► Customer accounting for Prescribed Goods

► Other GST updates


Customer accounting for Prescribed Goods



► Effective 1 January 2019

► Customer accounting will be implemented for local sale of

prescribed goods by a GST-registered supplier to a

GST-registered customer for his business purpose if the

GST-exclusive value of the sale exceeds S$10,000 in a

single invoice

► IRAS has issued an e-Tax Guide – GST : Customer

Accounting on Prescribed Goods on 15 September 2017



► Prescribed goods:

► Mobile phones

► Memory cards

► Off-the-shelf software



► Excepted supply – supply of prescribed goods that is

specifically excluded from customer accounting:

► Supply of goods under Gross Margin Scheme

► Supply of goods made under the Approved Third Party Logistics

Company Scheme or Approved Refiner and Consolidator Scheme

to an approved or specified person

► A deemed taxable supply of goods arising from the transfer or

disposal of goods for no consideration




► Mobile phones – those that:

(i) Can transmit and receive spoken messages over a cellular

network (whether or not it has any other function)

(ii) Has a screen size of 17.5 cm or less, measured diagonally from the

top corner to a bottom corner, excluding the bezel

► Exclude

► Tablet, walkie-talkie, satellite phone, smart watch, cordless phone

► Mobile phones that are bundled with mobile subscriptions and call

services plans (excluding pre-paid plans) supplied by a

GST-registered approved mobile telecommunication service provider

► Mobile phone accessories sold separately




► Memory cards

► A memory card is a prescribed good for customer accounting purpose

if it is an electronic flash memory data storage device used for storing

digital information. E.g., CompactFlash, SD card, memory stick

► Exclude

► Thumb drive

► Portable external hard disk



► Prescribed goods

► Off-the-shelf software - is one that is not customised for a

particular customer and where:

(a) The software is stored in a compact disc (CD) or similar storage

medium which is provided as part of the supply

(b) The software may be accessed by the use of a product key or

license key that is provided in a physical box packaging as part of

the supply

► Exclude

► Software that is pre-loaded on any hardware or computer, as part of

the supply of the hardware or computer

► Software downloaded from internet which is accessed by a

product/license key not supplied in a boxed package


What is customer accounting?

► GST-registered customer will be:

► Responsible for accounting for the

sales and the output tax payable on

behalf of the GST-registered supplier

► Able to claim the input tax on the

purchase of the prescribed goods,

subject to the conditions governing

input tax claims



► The GST-registered supplier should only:

► Collect the GST-exclusive price of the prescribed goods and issue

a valid tax invoice with the following additional details to the GST-

registered customer:

► Customer’s GST registration number

► A statement: “Sale made under customer accounting. Customer

to account for GST of S$X.” or “Customer accounting: Customer

to pay GST of $X to IRAS.” – where $X refers to the amount of

output tax payable on the supply of prescribed goods for which the

GST-registered customer will account on the GST-registered

supplier’s behalf

► Report the GST-exclusive value of the prescribed goods sold as

standard-rated supplies in the GST return



► E.g., supplier makes a supply of prescribed goods for $20,000

(excluding GST) to a GST-registered customer for his

business purpose

► Supplier’s GST return

► Standard rated supplies : $20,000

► Output tax : $0

► Customer’s GST return

► Standard rated supplies : $20,000

► Output tax : $1,400

► Taxable purchase : $20,000

► Input tax : $1,400


Preparing for customer accounting of prescribed goods

► For GST-registered supplier, this will include

the ability to manage the following areas to

facilitate customer accounting:

► Classify mobile phones, memory cards and

off-the-shelf software as prescribed goods

► Implement processes to check if a customer

is GST-registered and verify if the prescribed

goods purchased are for the customer’s

business purpose

► Track the sales of prescribed goods and

identify those sales where the GST-exclusive

price exceeds S$10,000 in a single invoice



► For GST-registered supplier, this will include

the ability to manage the following areas to

facilitate customer accounting (cont’d):

► Change the system logic (if GST reporting is

supported by accounting system) such that the

system can automatically recognise and

capture the sales of prescribed goods that are

subject to customer accounting

► Exclude the output tax from the GST return for

the affected sales transactions that are subject

to customer accounting

► Issue valid tax invoices with the additional

details required



► For GST-registered customers, this will

include the ability to manage the following

areas to facilitate customer accounting:

► Ensure that the correct treatment is adopted

on the purchase of prescribed goods from

the GST-registered supplier (e.g. if the

supplier incorrectly charged 7% GST when

the GST-exclusive price of the prescribed

goods exceeds S$10,000 in a single invoice)

► Inform the GST-registered supplier of his

GST-registration number

► Receive valid tax invoices with the

necessary additional details


Other GST updates Goods and Services Tax (Amendment) Act 2017



Customer accounting

for GST-registered Real

Estate Investment

Trusts (REIT) and their

Special Purpose

Vehicles (SPV)

► Currently, customer accounting applies to

the sale of a non-residential property by a

GST-registered supplier to a REIT or its

SPV but does not apply to any movable

assets that are supplied together with the

sale of the property

► With effect from 1 January 2018, customer

accounting will be extended to movable

assets that are supplied together with the

sale of a non-residential property by a

GST-registered supplier to a REIT or

its SPV



Land zone “Rural

Centre and Settlement”

and sale of government

land with existing

building to be

demolished

► With effect from 1 January 2018:

► The zoning under “Rural Centre and

Settlement” will be removed from the

Fourth Schedule to the GST Act as it

is no longer in use

► The GST treatment of the sale of

Government land with existing

building to be demolished will follow

the approved use of the land, instead

of the approved use of the

existing building



Late submission penalty

► To discourage the late filing of GST

returns, with effect from 1 April 2018, the

monthly penalty of S$200 for the late

submission of GST returns will commence

immediately after the filing due date,

instead of one month after the filing

due date



Additional requirement

for invoice details and

electronic record

keeping requirement

► The GST Act has been amended (effective

1 January 2018) to allow the Comptroller

of GST to request a taxable person to

include additional details (e.g., model and

serial number of the goods supplied) on

invoices issued to a non-taxable person

► Selected businesses might also be

required to maintain electronic inventory

system with details of sales

and purchases



“Opt-out” approach for

digital tax notices

► Currently, businesses are required to

provide specific consent before the IRAS

can issue digital tax notices (i.e.,

“opt-in” approach)

► The GST Act has been amended (effective

1 January 2018) to provide an “opt-out”

approach for digital tax notices. Under the

“opt-out” approach, businesses that wish

to receive hardcopies tax notices must

“opt out”. Otherwise, they will only receive

digital tax notices


Contact Details

► Mr Chai Wai Fook

Partner, Tax Services , Ernst & Young Solutions LLP

Accredited Tax Advisor (Income Tax)

Email: [email protected]

Tel: 6309 8775

► Mr Yeo Kai Eng

Partner, Indirect Tax Services, Ernst & Young Solutions LLP

ASEAN Indirect Tax Leader

Accredited Tax Advisor (Income Tax & GST)

Email: [email protected]

Tel: 6309 8208


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isca breakfast talk: highlight of income tax and transfer pricing … · page 15 frs 109 tax...

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