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Inland Revenue Authority of Singapore publishes advance rulings on specific tax cases

On 1 June 2022, the IRAS published a summary of several advance rulings on tax positions based on specific facts and circumstances. While the advance rulings are specific to the cases presented and binding to the applicant, the rationale and the tax positions of the Inland Revenue Authority of Singapore (“IRAS”) serve as guidance for taxpayers under similar circumstances.

Gains arising from the transfer of certain assets are not taxable
(Advance Ruling Summary No.9/2022)

The advance ruling pertains to the taxability of gains arising from the transfer of leasehold land, office buildings, motor vehicles, furniture, fixtures and office equipment (hereinafter collectively referred to as the “Assets”). Under the advance ruling, the IRAS took the position that the transfer of the Assets should constitute a capital transaction. As such, any gain arising from the transfer of such Assets should not be taxable.

CASE STUDY A

The above tax position is binding in respect of the scenario described below:

A Singapore-incorporated company was originally carrying on trade in Singapore and was subsequently repurposed as an investment holding company. The company had acquired the leasehold land and office building more than a decade ago when it was still a trading company. After the company had become an investment holding company, the assets were sublet to derive passive rental income.
Pursuant to the proposed group restructuring exercise, the company will be transferring the assets to a newly-incorporated company ("NewCo") and will derive a gain from the said transfer. Following the transfer, the company will be liquidated.

Based on the above facts, the IRAS took the position that the transfer of the Assets should constitute a capital transaction based on the following considerations:

the intention of the company at the point of acquiring the assets;
the holding period of the assets;
the frequency of similar transactions entered into by the company; and
the circumstances of the realization of the assets.

The above considerations are similar to the factors under the badges of trade analysis which are usually employed to test whether or not a trading activity is given. It is not surprising for the IRAS to apply the above considerations in the applicant’s case. Apart from the above fac-tors which were explicitly acknowledged by the IRAS as having been taken into consideration upon taking their decision, the IRAS will also consider the absence of (i) any supplementary work performed on the assets in question to enhance their value and (ii) short-term financing to fund the acquisition of these assets, as indicia of a lack of an intention to trade.

Gains arising from the transfer of business as a going concern are not taxable (Advance Ruling Summary No.8/2022)

The summary of this advance ruling are as follows:

The gains arising from the transfer of a Singapore business (i.e., Singapore incorporated Company A) as a going concern to a newly incorporated company (“New Co”) will not be taxable as the transaction will be regarded as capital in nature.
Company A and New Co will be eligible for Section 24 election which has the effect that the transfer of assets (as mentioned below) is disregarded for income tax purposes, and no balancing allowance or charge will arise from such a transfer.

CASE STUDY B

The above tax position is binding in respect of the scenario described below:

Companies X, Y and Z own shares in Company B which, in turn, owns shares in Company A. Pursuant to a proposed group restructuring exercise, Company A will transfer its entire business as a going concern to NewCo, which will involve the assignment or novation of Company A's existing employment and business contracts; the transfer of Company A's (i) plant, machinery, motor vehicles, computer and office equipment (PPE); (ii) inventories; and (iii) goodwill.
Company A had claimed Section 19A capital allowances on some of the qualifying plant and machinery (the qualifying assets) that will be transferred to NewCo.
The qualifying assets are used by Company A (and will continue to be used by NewCo) in the production of income chargeable to tax. The qualifying assets have not been leased by Company A to NewCo prior to the transfer.
Company A's inventories will be transferred to NewCo at net book value (based on its management accounts).
At the point of transfer, Companies X and Y will own more than 50 percent of the ordinary shares and voting rights in Company A (through Company B) and NewCo respectively. After the transfer, the shareholders' voting rights in NewCo will remain unchanged. Following the transfer, Company A will be liquidated.

The IRAS came to the conclusion that the transfer of Company A's business to NewCo will be regarded as a capital transaction taking into account the following:

the nature of Company A's business and assets;
the length of ownership of the business;
the frequency of similar transactions entered into by Company A;
the circumstances of the realization; and
the intention to liquidate Company A after the transfer has been completed.

Having said the above, the tax implications on individual assets divested would still need to be considered. In the present scenario:

PPE: As the PPE are fixed capital assets employed by Company A in its trade, gains from the transfer to NewCo will be regarded as non-taxable capital receipts, unless capital allowance has been claimed in respect of an item of PPE, in which case a balancing allowance or balancing charge will need to be accounted for;
Inventories: Profits on the transfer of inventories as part of a transfer of business that is a capital transaction are still taxable in the hands of the vendors. The inventories are transferred for valuable consideration to NewCo which will carry on trade or business in Singapore, and the cost of acquiring the invento-ries will be deducted by NewCo as an expense. As such, the value of the inventories transferred for tax purposes will be the consideration paid by NewCo to Company A for the transfer. As the consideration will be the net book value stated in Company A's management accounts as at the date of transfer, there should not be any gains to Company A; and
Business contracts and goodwill: As the transfer of Company A's business to NewCo will be regarded as a capital transaction, any gains derived from the transfer of business contracts and goodwill will also be capital in nature and will not be taxable.

On a related note, the IRAS considered whether Company A and NewCo will be eligible to make a Section 24 election in respect of the transfer of the qualifying assets. The IRAS allowed the Section 24 election in the present case for the following reasons:

the "control" condition set out in Section 24(1) of the ITA will be satisfied since Companies X and Y will own more than 50 % of the ordinary shares in Company A (through Company B) and NewCo respectively. The meaning of "control" is not defined in the ITA. However, in a situation where two compa-nies (i.e. Companies X and Y) collectively own more than 50 percent of the ordinary shares in the transferor (i.e. Company A) and the transferee (i.e. New-Co), the IRAS considers the "control" requirement to be met;
the qualifying assets are used by Company A (and will continue to be used by NewCo) in the production of income chargeable to tax, and they were not leased by Company A to NewCo prior to the transfer, for the purposes of section 24(4) of the ITA; and
the transfer of the qualifying assets to NewCo is not a transaction that falls within the ambit of the Singapore anti-avoidance provision since the transfer took place against the backdrop of a group restructuring exercise.

Taxability of sales support and technical services by Singapore non-resident company (Advance Ruling Summary No.10/2022)

The summary of this advance ruling reads as follows:

Company A, a Singapore non-resident, is not liable to Singapore income tax in respect of income arising from sales support and technical services provided to its customers in Singapore under a sub-contracting arrangement with a local affiliate (Company B), nor from the engagement of a third-party Singapore warehouse provider (3P SG Co) to store and deliver its products to the customers; and
A non-final Withholding Tax (WHT) is applicable to the gross technical services fees payable by the customers to Company A at the prevailing corporate tax rate of 17 percent.

CASE STUDY C

The above tax position is binding in respect of scenario described below:

Under the sub-contracting arrangement, the sales support services to be provided by Company B to Company A will include assisting with identifying potential customers, maintaining relationships, introducing new products and administrative tasks relating to order placements. Company B is required to operate within certain agreed guidelines and parameters for price setting purposes.
Company B will provide technical services to the customers. Such services will be provided solely by Company B's employees without the supervision of Company A.
Company B will neither: (i) habitually exercise an authority to conclude contracts on Company A's behalf in Singapore; nor (ii) maintain in Singapore a stock of Company A's products from which Company B regularly fulfils orders on Company A's behalf. Instead, Company A will separately engage 3P SG Co to store and deliver its products to the customers;
Company A will contract and invoice the customers directly for the sale of its products and technical services, and the title of the products will pass directly from Company A to the customers;
the customers will pay Company A (and not Company B) fees (excluding royalty payments) for the technical services rendered;
Company A will pay Company B arm's length service fees for the provision of the services; and
apart from the arrangements with Company B and 3P SG Co, Company A will not engage in any other business activities in Singapore.

As to whether Company A will have a tax liability in Singapore in connection with the activities carried on in Singapore, the IRAS took the view that Company A will not have a tax liability given that:

the storage of its products in 3P SG Co's warehouse, in and of itself, will not give rise to a tax liability as it will not be carrying on a business in Singapore; and
Company A will not have employees based in Singapore to perform the services since it has engaged Company B to provide such services to the customers.

As to whether the technical services fees paid to Company A will be subject to Singapore WHT when paid by the customers, the IRAS took the view that the customers will be liable to withhold tax (at the prevailing Corporate Tax rate of 17 percent) on the gross technical services fees made to Company A as these are deemed to be Singapore sourced income under the ITA. As such, the customers must then withhold tax on a non-final basis in respect of such payments.

Where Company A wishes to claim the expenses it had incurred to derive the technical services fees, the relevant certified accounts and tax computations should be provided to IRAS for examination, and IRAS will then refund to Company A any tax withheld in excess of the tax on the net income.

On a separate note, the affiliated company will be subject to Singapore tax on the arm’s length service fee received from the non-resident company. The customer of the non-resident company will need to withhold 17 percent on the gross payment for the technical service fees and remit to the IRAS.

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