Tax Incentives For Setting Up A Private Limited Company In Singapore

Tax Environment in Singapore

Private business are spending a large number of amount on managing their existence along with the allocation of income through permanent establishment. Frequently, numerous business departments are engaged in dealing with the probable exposure or employing some of the opportunities to structure the organization more effectively. As evident in the current station for a private limited company that is based in Australia can consider establishing the business in Singapore. The principle taxes that are levied on the companies that conduct their business in Singapore are the income, taxes, goods and service tax, stamp duties and property taxes. The report would be taking into consideration the benefits of establishing the business in Singapore with numerous tax incentive provided for the business setting up the business in Singapore.

The report is based on the private limited company that has 40 shareholders carrying out the business activities in cosmetics and skin care. With the management objective of expanding the business in the Asian market and setting up the subsidiary in Singapore with production unit china, the report would seek to understand the tax environment of Singapore with tax incentive scheme for making investment in Singapore.  

The aim of the cosmetics and skin care is to expand into the Singapore market. Singapore provides strong climate for investment, political stability, free business economy, readily available financial and professional support service and attractive tax incentive for subsidiaries. The competition commission of Singapore is tasked prohibits the unfair or the abusive pricing practices and aims to maintain the competition in the market.

Additionally Singapore may be considered as the desirable jurisdiction for the making investment primary because of the attractive corporative tax rates and tax incentive. Furthermore, the absence of capital gains tax and broad network of treaty setting the business of cosmetics and skin care is relatively easy in Singapore.

The tax system of Singapore is based on the quasi-territorial basis which means that companies that look forward to conduct their business in Singapore would be taxed based on the accrued basis for the incomes derived from Singapore sources. An important factor to denote that Singapore does not create any differential between the business that are carried on in Singapore by the residents or by the non-residents. Exemptions are also applicable for the foreign sources income. All the Singapore sourced income that is earned by the non-residents are held taxable however the tax treaty exemption between Singapore and Australia helps in easing off the burden of taxes.

Income Tax System

The tax burden in Singapore is regarded as moderate in comparison to other countries and can foreign entities business profits can be reduced with the help of numerous incentives. The income tax act of Singapore is regarded as the governing statute relating to the corporate profits which is administered by the Inland Revenue authority of Singapore. Moving fast forward to the Singapore quick tax facts for companies a corporate tax rate of 17% is applicable along with this a partial exemption is provided to the companies for the first SGD 300,000 of the assessable income.

 Singapore levies a very moderate branch tax rate of 17% with the partial exemption is provided to the companies for the first SGD 300,000 of the taxable business profits.  One of the advantage for the business is that there is no capital gains tax in Singapore. Singapore provides the business with the loss relief as well. The tax system of Singapore is such that a loss relief is provided and a business can carry forward the loss for an indefinite years. The Singapore tax environment provides the double taxation relief as business can avoid taxing of profits both at the source nations and at the overseas nation.

Business expenditure are generally considered as allowable deductions in computing the taxable income, given the associated activities are directed towards the derivation of income. In order to promote the development of the enterprise expenditure that are incurred entirely for the production of income might be considered deductible in determining the assessable income. The 17% corporate rate is applicable for the subsidiary companies that are incorporated in Singapore and to the foreign nations companies that set up the business operations in Singapore. Setting the business in Singapore is regarded as beneficial as Singapore performs the one-tire corporate tax rate system where the corporate taxes are paid on the profits of the company.

The private companies that set up the business in Singapore are provided exemption on tax for the first 100,000 SGD on the normal assessable income with 50% exemption on the subsequent 200,000 of the assessable income. The exemption is applicable to the new business that looks forward to set up the business in Singapore and the exemptions are provided for the first three years of the business operations.

As evident from the above stated tabular representation 17% corporate tax rates would be applicable to the company since it is a subsidiaries to Australia that are incorporated in Singapore. The cosmetics and skin care business of the private company would also be able to a partial exemption of 75% on the first SGD 10,000 based on the normal taxable income and cosmetics business would also be entitled to 50% exemption on the following SGD 290,000. Furthermore the cosmetics business would be granted a partial tax exemption for the first SGD 300,000 of the normal assessable income. For example if the cosmetics and skin care business reports an annual turnover of SGD 2 million with net assessable income of 500,000 SGG then the applicable tax for the private business would be SGS 85,000.

Tax Rates and Incentives

Singapore provides unilateral tax credits for the foreign tax paid by the overseas companies deriving foreign income. The credit is restricted to the tax that is payable in Singapore even though foreign tax liability is higher. If the cosmetics and the skin care business owns a minimum of 25 per cent of the share capital then the foreign tax credit would take into the consideration the underlying amount of corporate that would be paid by the business on the profits generated. The foreign tax credit system would allow the cosmetics and skin Care Company to pool the foreign tax that is paid in Australia and the same can be offset against the Singapore tax that would be payable on the same pool of foreign source income.

Setting up the Cosmetics and Skin Care Company in Singapore could be considered as the viable options since Singapore has wide range of tax treaty network. The treaties of Singapore are usually formulated with the lines of the OECD models treaty. The treaty of Singapore uses the credit method in order to avoid the double taxation agreement. The government also makes the use of the tax treaties in order to ensure that the incentives granted for the overseas investors should not be taxed away from home nation governments.

As evident from the above stated tabular representation for example if the Cosmetics and Skin Care Company reports the taxable income of SGD 5,00,000 of taxable income the taxable amount after rebate under the double taxation agreement would be fall SGD 35,700 with an effective tax rate of 11.60%. The double taxation agreement states that if the enterprise of the resident country performs the business in Singapore, the business profits that would be derived by the private company would be able to gain tax rebate and the rights of taxation would be subjected to one jurisdictions only with the other jurisdictions would forgo the right of taxing the income.  

The Singapore transfer pricing systems covers the applications of the arm’s length principle, requirements of documentation and advance pricing agreements. The related party transactions should be carried out under the arm’s length rule. Related party transactions also comprises of the enterprise that are taxed separately at the entity level and generally includes the permanent establishment of the enterprise. For a private company that is carrying on the business of cosmetics and skin care is required to make sure that the intercompany transactions are carried out based on the arm’s length principles.

Double Taxation Relief

The transfer pricing agreements also requires preparation of the documents to avoid any probable tax adjustment by the Inland Revenue Authority of Singapore. The tax jurisdictional of Singapore requires preparation of transfer pricing documentation that would form the part of the record-keeping requirements for taxation purpose and companies are prepare such documents no later than the tax filing date.

A tabular representation of the transfer pricing agreement provides that the subsidiary company are granted the threshold limit of SGD 15 Million per financial year whereas the threshold limit for all the other categories of the related party transactions stands SGD 1 million.

It is assumed that that the company is deriving revenue $1 for the first year and looking to expand the increase the revenues to $1.2 million and $1.5 million in the following two years with an applicable corporate tax rate of @17% for each of the three year in Singapore.  

Considering the investment for the Chinese counterparts the business expects to generate revenue $1 million for the first year of operations while in the second year while in the subsequent years the revenues would is forecasted to increase at $1.3 million and 1.5 million respectively at a corporate tax rate of 25%.

It is assumed that the assessable income stands $100 with shareholder’s marginal tax rate of 45% and imputation credit of 30 per share. The net dividend that shareholders would be receiving the net dividend of 55.   

For a private company that is looking forward to set up the production unit in China would be engaged in the related party transactions of three different types of transfer pricing documentations. Namely the company would be required to file the yearly income tax disclosure, contemporaneous transfer pricing documentations and other relevant transfer pricing documents on the request of the tax authorities. The private business would be required to meet the criteria of transfer pricing documentations which is stated below;

1. The yearly sum of related party transactions and sales transactions is lower than 200 million (CNY).
2. The related party transactions should be covered under the advance pricing agreement.
3. The overseas shareholders of the employees is below 50%.

The related party transactions under the transfer pricing agreement would for the private company would also include the amount currency and the contractual terms of the related party transactions.

Concerning the financing of the business operations for the cosmetics and the skin care business, the government of Singapore has successfully transformed the small island into the regional centre of finance. The business would be raising funds by issuing equity shares. However the company would also look forward to obtain the funds through banks as the Singapore government provides tax deductions for new companies setting up its operations in Singapore.

Transfer Pricing Agreements

The banking sector of Singapore provides broad array of services that ranges from traditional lending to the corporate and investment banking services. For a private company that looks forward to set up the cosmetics and skin care business, Singapore could be viewed as the desirable jurisdictions for the making investment and setting up the business operations as Singapore provides attractive corporate and personal tax rates with reliefs and incentives. With wide range of tax treaty network and non-existence of capital gains tax it is relatively easy for the company to set up the subsidiary in Singapore.

The government of Singapore welcomes the overseas investments since it contributes to the economic growth of Singapore. Additionally, the benefit of setting up the business operations in Singapore is that the government provides attractive tax incentives. There is hardly any business complexity in Singapore as there no such requirement of local participations in the equity or administrations of the foreign owned enterprise and no restrictions of entering in any specific industries.      

The commercial reality of Singapore states that it is a rising economy and holds the reputation for integrity, quality, reliability and productivity. Singapore is known for its professional business environment along with the ability to attract sizeable amount of overseas investment. Singapore is strategically surrounded by the emerging Asean economies. It boasts economic benefits that lends support to wide range of fund management.

The commercial reality of cosmetics and skin care brands possess a bright future in the country. Setting the business in Singapore is advantageous because it is a hub to make the supply of products in the neighbouring countries. With immense amount of growth in the Singapore there is wide array of opportunity for the business to attain good amount sales.   

Considering the economy of China for the Cosmetics and Skin Care business despite the highs and lows it appears that the consumer’s pursuit of beauty remains unchanged. The Chinese economy has been experiencing highs and lows in the recent years while the cosmetics industry has managed to preserve the compound average yearly growth at a rate of 8% in 2016-2017. With the changes in the demographic taste, higher income has resulted in increased consumer spending. The consumer has better understanding of the cosmetics consumption and with multiple channel of sales the momentum is anticipated to gather.

Concerning the complexity of the issue the beauty and the personal care market in Singapore recorded a moderate present value growth in spite of the increasing global economic uncertainty and declining consume confidence. The taste of consumer towards the skin care and cosmetics products have turned out to be more sophisticated.

Conclusion

There is a weaker consumer spending in retail and this would force the current business to offer customers with more price discounts in order to stimulate sales and certainly adds to the complexity issue of the business.

Singapore is held as the emerging nation and one of the favourite destinations among the Asian nations for international cosmetics players as there is a high spending customers of cosmetic products. The relevant culture and social norms suggest that there is an increasing beauty concerns in both the men and women which is further fuelling growth in the cosmetics industry of Singapore.

The business has performed a market survey to study the cultural and social norms relating to beauty products in Singapore. There is growing market of men’s grooming with increasing trend in skincare products among the women. The consumer behaviour suggest that there is demographic preference and brand of customers toward to the cosmetics and skin care products.   

Even though Singapore is considered as the secure heaven for investment with stable economy and lower amount of risk, Singapore accompanies a higher investment cost. Combined with the factors of limited land, concentrated labour and higher import resources this results in significant rise in business costs. For the private business of cosmetics and skincare opportunity for supernormal profit in Singapore is mitigated by the higher set up costs with lower return.

There is no better business environment anywhere across the world that presently Australian offers. Australia has a resilient and fast growing economy with stable political environment and excellent infrastructure for growth. As the business is looking to explore the markets of Asia, Australian is geographically close and rapidly growing cultural links with the Asia pacific regions. Given the company undertakes the decision of staying in Australia, the business would gain benefit from the two trade facilities between Asia-pacific regions and Australia. The primarily open economy of Australia would provide the company and its shareholders with strong two way merchandise trade in the Asian export market.  

Considering the benefits of investing in Singapore from the perspective of both the company as well as shareholders it can be stated that the company would be able to obtain the corporate income tax relief rebate. This would allow the business with 30% rebate on the corporate profits with yearly cap of SGD $30,000. The shareholders of the company would also obtain the benefit of gaining an exemption on paying interest on loans given the company decides to additional amount of loan from banks.

The company would gain the benefits of reduced corporate tax on interest. From the perspective of the Shareholders investing in Singapore would enable them to obtain the benefit of capital gains tax exemptions. The shareholders would be exempted from the gains derived from the revenue nature that would originate from the disposal of the ordinary shares.   

1. Corporate Income Tax rebate scheme: In a bid to attain tax benefits it is recommended that the business should structure the profit for the first three years under the corporate income tax rebate scheme (CIT). The scheme would grant the business with 30% relief up to the yearly cap of SGD $30,000.
2. Finance and Treasury Centre (FTC) Tax Incentive:Another way of obtaining of tax benefit is the finance and treasury centre (FTC) tax incentive which would provide the current business to obtain an exemption on interest payment of loans that would be taken from banks. This would provide the company with reduced corporate tax on fees, interest and gains from qualifying services and activities.
3. Integrated Investment Allowance (IIA):As the business is planning to set-up its production unit in china to gain the cheap labour advantage the can obtain the tax benefits of Integrated Investment Allowance (IIA) which would enable the company to gain capital allowance on the basis of capital expenditure that would be incurred in setting up the production equipment outside of Singapore.  

Conclusion: 

On a conclusive note, Singapore’s overall excessive tax incentive scheme, reduced company income tax regime, double taxation agreement with Australia and lower cost of compliance makes it as one of the first choice for cosmetics and skin care business. Though china has cheaper labour but Singapore offers hassle-free and non-existence of any bureaucratic stress as the favour environment for setting up the subsidiaries.

Reference List:

Agarwal, Sumit, Nathan Marwell, and Leslie McGranahan. “Consumption responses to temporary tax incentives: Evidence from state sales tax holidays.” American Economic Journal: Economic Policy 9.4 (2017): 1-27.

Barkoczy, Stephen. “Foundations of taxation law 2016.” OUP Catalogue (2016).

Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.

Becker, Johannes, E. Reimer, and A. Rust. Klaus Vogel on Double Taxation Conventions. Kluwer Law International, 2015.

Cao, Liangyue, et al. “Understanding the economy-wide efficiency and incidence of major Australian taxes.” Canberra: Treasury working paper 2001 (2015).

Graetz, Michael J., and Alvin C. Warren. “Integration of corporate and shareholder taxes.” (2016).

Joseph, Sally-Ann. “Taxing Sovereign Wealth Funds: Looking to Singapore for Inspiration.” Fed. L. Rev. 45 (2017): 17.

Li, Quan. “Fiscal decentralization and tax incentives in the developing world.” Review of International Political Economy23.2 (2016): 232-260.

Liu, Qing, and Yi Lu. “Firm investment and exporting: Evidence from China’s value-added tax reform.” Journal of International Economics 97.2 (2015): 392-403.

Long, Brendan, Jon Campbell, and Carolyn Kelshaw. “The justice lens on taxation policy in Australia.” St Mark’s Review235 (2016): 94.

Mahar, Frederick, Jonathan Longridge, and Jing Lin He. “The economic impact of a corporate tax rate cut in Australia.” Taxation in Australia 51.3 (2016): 141.

McClure, Ross, Roman Lanis, and Brett Govendir. “Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia: An Expose.” (2017).

Poh, Simon. “R&D tax incentives in Singapore.” Nexia International (2016).

Saad, Natrah. “Tax knowledge, tax complexity and tax compliance: Taxpayers’ view.” Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.

Stewart, Miranda. “Australia’s Hybrid International Tax System: Limited Focus on Tax and Development.” Taxation and Development-A Comparative Study. Springer, Cham, 2017. 17-41.

Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. “Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice.” International Small Business Journal 34.3 (2016): 329-344.

Thampapillai, Dodo. “Foreign Employment Income and Double Tax Avoidance Agreement: Australia’s Possible Governance Failure.” (2016).

Wiedemann, Verena, and Katharina Finke. Taxing investments in the Asia-Pacific region: The importance of cross-border taxation and tax incentives. No. 15-014. ZEW Discussion Papers, 2015.

Woellner, Robin, et al. “Australian Taxation Law 2016.” OUP Catalogue (2016).

Zwick, Eric, and James Mahon. “Tax policy and heterogeneous investment behavior.” Australian Economic Review 107.1 (2017): 217-48.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order