Professional Advice To Kellar Trading Limited: Taxation System In Singapore

Permanent Establishment

Discuss about the Professional Advice To Kellar Trading Limited: Taxation System In Singapore.

Singapore is the one country which gives several reasons to the investors for establishing their operations there. Setting up and operating a business is bit easy in Singapore and on the top of that, another central factor is the tax regime of the country. The nation is well known for its personal and corporate tax rates, measures of tax relief, absence of capital gain tax, extensive double tax treaties and one-tier tax systems. All such make it very easy for the investors to operate and establish their business in Singapore (IRAS. 2018). This report provides a detail information about taxation system of the country in respect of establishing a branch, representative office or a subsidiary. The objective of the report is to advice Kellar Trading Limited about the different tax and GST implications of setting up a business in Singapore. Kellar is a company incorporated in India which deals in selling garment products and is looking for a professional advice regarding the taxation system of Singapore. This report explains in detail the different implications and then provides an advice on the subject followed by a conclusion that deals with the final outcome of the data analysed and studied.

In general terms, a business operating in a fixed place which generates an income or value added tax liability in a specific dominion is known as permanent establishment. The concept is used by all the three model conventions, named as UN Model, OECD Model and USA Model. They use PE as a main instrument for establishing tax regimes for the foreign country’s business operations (Steenkamp, 2014).

According to the book written by Jones and Rhoades Catanach, PE is defined as it varies from treaty to treaty but requires a fixed place or location of a business, a construction site or an agent of the taxpayer who is in contract with the location situated in foreign country in order to subject the business to taxation in foreign jurisdiction. In simple words, PE is a fixed place required for starting and running a business (Jones and Rhoades Catanach, 2004)

According to the Singapore Income Tax Act (SITA), permanent establishment is defined under its section 2(1) as a fixed place where a business is carried out partly or wholly which includes the following:

1. A branch
2. Place of management
3. An office
4. A warehouse
5. A factory
6. A farm or plantation
7. A workshop
8. A mine or other place for extracting natural resources
9. A work site or construction, project related to installation and assembling (Deloitte. 2016).

The section also explain the conditions for a person who deemed to have a PE in Singapore if that individual:

1. Is engaged in supervisory activities related to the construction of a building or work site and carried out installation or assembly projects; or
2. Has another person acting on behalf of that individual in Singapore who:
   • Habitually exercise the authority for concluding contracts
   • Maintains the inventory for the purpose delivering the same on behalf of individual
   • Habitually secure order for the person or for the enterprise owned by that person (Carrying on Business in Singapore. 2018).

Tax implications : Branch

The concept of Permanent Establishment has become important for tax purpose as it avoids the possibility of double taxation charged on foreign companies on their profits.

Another important fact is that the presence of PE in Singapore will give an indication that the trader is conducting its business in Singapore (Poh, 2008). In addition to this, it is very necessary for the country of source to have permanent establishment in order to impose tax implications on the business profits. In a nutshell, PE clarifies the confusion of paying double tax as the companies having business in other countries and has a permanent establishment there, then their income and assets will be taxable in that country only (EY, 2015).

A company registered in a foreign country like India, wishes to establish a business or want to start its business in Singapore must have to get itself registered under Companies Act as a branch of the foreign registered company in Singapore. The branch office established in Singapore is a dependent entity and its decisions are taken by the parent entity. For example, Indian company Kellar Trading Limited opening its branch in Singapore for expanding its business (Taxation of Branches in Singapore. 2017).

As far as taxation is concerned, the branch is considered to be non-tax resident in Singapore and does not receive any sort of tax exemptions or advantage as compare to other companies. This is because the control and management is been exercised from the foreign country like India. Such foreign companies are not required to pay double taxes under Double Taxation Agreements. In addition to that, the company must register itself as a branch with the ACRA for starting a business in Singapore. According to the act:

• The branch office must have two authorised agents that are ordinarily resident in Singapore
• A list of head office directors which is to be notified to ACRA.
• The branch must have a registered office in Singapore (ACRA. 2018).

The branch office will be taxed as per the standards corporate tax rate of Singapore that is 17% and will not receive any benefits or exemptions. Also it will be the liability and responsibility of the parent company to meet all the liabilities of branch office.

It is not any legal entity because it is not considered as a company in traditional terms but it is just a temporary administrative formation. In Singapore, representative office does not have any legal status and is treated as a formal arrangement. The main reason behind establishing it is to expand and increase the business networks. In order to register an office an application form is to be filled and the approval is required to be taken from International Enterprise (IE) Singapore. Every time the parent company needs to re-apply for the purpose of renewal and the limit for the same is only 3 years in Singapore (Rikvin. 2018).

Representative office

As it is not considered as a legal entity, no taxes and no compliance is there. There is no requirement for any sort of tax treatment, benefits and annual filing. However, to setup the office, parent company must appoint a chief representative who will coordinate with the head office. The representative office is only used for conducting market research and is a temporary establishment. It does not generate any revenue and is not liable for any taxes (Singapore Visa. 2018).

A separate legal entity which has its own name other than the parent company and is allowed to conduct all the activities is regarded as a subsidiary company in Singapore. Also the liabilities of the subsidiary are limited to the extent of its share capital and therefore, no responsibility is bear by the parent company. It can conduct any type of business activities like trading, buying a property, incurring debts, concluding contracts and many more.

The shares issued by subsidiary belong 100% to the parent company and it can only have maximum 50 members. The Singapore subsidiary must have at least one director who is the citizen of the country and has no criminal records. A registered office should be there and a secretary is required who is a resident. Certain documents are required to be submitted with the Singapore Trade Register for the purpose of registration (Establish a Subsidiary in Singapore. 2018).

A subsidiary company is a tax resident is Singapore and is subject to tax regulations of the country. It is also taxed to a corporate rate of 17% and is entitled to local tax incentives and rebates. However, in case of holding companies which establish subsidiaries in Singapore with an intention of owning shares on which they will not be liable to pay withholding taxes. Benefits available to them under Singapore taxation systems are as follows:

• 0% – first 100,000 SGD
• 5% – next 200,000 SGD

Exemptions are also there, as from first 10,000 SGD earned, 75% of the income is exempt and from the rest only 50% is taxed when the total income is less than 300,000 SGD (Singapore Visa. 2018).

Goods and Service tax (GST) is a broad based consumption tax which is imposed on the import of goods and on all the supplies of goods and services in Singapore. In other countries it is also known as Value added tax or VAT. As defined by IRAS, GST exemption are only for sale and lease of residential property and on import and supply of precious metals (IRAS. 2018).

Subsidiary

All the business are required to register with GST of their annual income is more than S$ million. In Singapore the GST rate is 7% which is to be paid by the consumers. Also, the foreign companies are liable for GST on sales and are required to account for sales (IRAS. 2018).

From the above analysis, it will be advisable to Kellar Limited to set up its business in Singapore as a Subsidiary company. Reason being, it will be allowed to conduct all type of business activities and also has taxation benefits. Moreover, Kellar wants to expand its business and generate more revenue so setting up a subsidiary will be beneficial for the company as it will operate for long run and have some local benefits

Conclusion 

Below is the summary of all the three options available with the Kellar Limited for deciding about the establishment of business is Singapore.

From the above report, it can be concluded that Singapore has attractive regimes in respect of taxes and also it will be beneficial for Kellar Trading Limited to operate in that country. It is also observed that different types of business have different tax regulations and are beneficial in different ways.

References 

ACRA. (2018). Registering a Foreign Company: Summary. [Online] Available at: https://www.acra.gov.sg/components/wireframes/howToGuidesSummary.aspx?pageid=1048 [Accessed 10 July 2018].

Carrying on Business in Singapore. (2018). Available at: https://www.kcpartnership.com/resources/publication/Carrying%20on%20Business%20in%20Singapore.pdf [Accessed 10 July 2018].

Deloitte. (2016). Taxation and Investment in Singapore. [Online]. Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-singaporeguide-2016.pdf [Accessed 10 July 2018].

Establish a Subsidiary in Singapore. (2018). Available at: https://www.opencompanysingapore.com/establish-a-subsidiary-in-singapore [Accessed 10 July 2018].

(2015). Permanent establishments – recent trends and developments.[Online]. Available at: https://www.ey.com/Publication/vwLUAssets/ey-permanent-establishments/%24FILE/ey-permanent-establishments.pdf[Accessed 10 July 2018].

IRAS. (2018). Goods and Services Tax (GST): What It Is and How It Works. [Online]. Available at: https://www.iras.gov.sg/IRASHome/GST/GST-registered-businesses/Learning-the-basics/Goods-and-Services-Tax–GST—What-It-Is-and-How-It-Works/ [Accessed 10 July 2018].

IRAS. (2018). The Singapore Tax System. [Online]. Available at: https://www.iras.gov.sg/IRASHome/About-Us/Taxes-in-Singapore/The-Singapore-Tax-System/ [Accessed 10 July 2018].

Jones, S.M. and Rhoades-Catanach, S.C. (2004). Advanced Strategies in Taxation. USA: McGraw-Hill/Irwin.

Poh, S.S.B. (2008). Taxation in Singapore. Singapore: McGraw-Hill Education (Asia).

Rikvin. (2018). Singapore Representative Office Registration. [Online]. Available at: https://www.rikvin.com/incorporation/singapore-representative-office-registration/ [Accessed 10 July 2018].

Singapore Visa. (2018). Singapore Subsidiary vs Branch vs Representative Office. [Online]. Available at: https://www.singapore-visa.net/singapore-subsidiary-vs-branch-vs-representative-office [Accessed 10 July 2018].

Steenkamp, L. A. (2014). The permanent establishment concept in double tax agreements between developed and developing countries: Canada/South Africa as a case in point. The International Business & Economics Research Journal (Online), 13(3), 539.

Taxation of Branches in Singapore. (2017). Available at: https://www.opencompanysingapore.com/taxation-of-branches-in-singapore [Accessed 10 July 2018].

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