Deductibility of Withholding Tax on Interest Payments Borne by Companies on behalf of Non-Residents

The Inland Revenue Authority of Singapore (IRAS) has updated its webpage on the Tax Treatment of Business Expenses to reflect the change in the tax treatment of withholding tax (WHT) on the interest payments borne by companies on behalf of non-residents, taking effect from Year of Assessment 2020.

In general, a company (“payer”) will be required to withhold tax on interest paid to a non-resident. In certain instances, the withholding tax on the interest may be borne by the payer on behalf of a non-resident.

Contractual Obligation to bear the WHT

Where the payer is contractually obligated to bear the tax for the non-resident, the withholding tax borne will be treated as part of the interest paid. The interest expense (inclusive of the withholding tax borne on behalf of the non-resident) is deductible if the loan is taken up to finance income-producing assets.

No Contractual Obligation to bear the WHT

IRAS has advised that if there is no contractual obligation for the payer to bear the tax on behalf of the non-resident, the withholding tax borne by the payer will not be treated as part of the interest paid. The tax deductibility of the withholding tax borne on behalf of the non-resident will then depend on the purpose of the loan.

If the loan is taken up for revenue purposes (e.g. to finance the purchase of trading stock), the withholding tax expense will be deductible in the hands of the payer as it is a revenue expense. On the other hand, if the loan is taken up to finance capital assets, the payer will not be able to claim a tax deduction on the withholding tax expense because it is a capital expenditure of the payer.

Withholding tax expense is also not a prescribed borrowing cost that is specifically deductible under the Income Tax Act.

For further information, please refer to IRAS’ website.

Source: Inland Revenue Authority of Singapore.

Deductibility of Life or Personal Accident Insurance Premiums

Generally, premiums on insurance policies taken out by an employer on employees are tax deductible if the beneficiaries of those insurance policies are the employees, or if the employer has the contractual obligation to pass the payout to the employees or their next-of-kin. This is on the basis that the premiums paid are a staff benefit.

Where the beneficiary of an insurance policy is the employer and there is
no contractual obligation to pass the insurance payout to the employees or their next-of-kin, the employer will be seen to have taken out the insurance policy to acquire a capital asset and premiums paid on those insurance policies shall not be tax deductible. There are certain exceptions to this rule, for example, where the insurance policy is a keyman insurance to cover loss of profit due to the demise or incapacity of a key employee of the business.

Revised Tax Position
The IRAS recently updated its website to change the tax treatment of premiums paid on group term life and personal accident insurance policies.

With effect from YA 2019, premiums paid on group term life or personal accident insurance policies are tax deductible to the employer even if the employer is the named beneficiary to the policy and there is no contractual obligation to pass the payout to the employees or their next-of-kin.

The IRAS made this revision after having received feedback from businesses that group term life and personal accident policies are usually purchased as staff benefits and employers are named as beneficiaries only for administrative convenience. Given that there is no contractual obligation to pass the payout to the employees or their next-of-kin, any payout received by the employer from the above-mentioned group insurance policies will be taxable in full to the employer. However, the employer will be allowed a tax deduction on the insurance payout to the extent it is disbursed to the employee. Such payouts received by the employee will be taxable to him or her unless specifically exempted under the Income Tax Act. In the same update by the IRAS, premiums paid on group insurance which provides for a cash surrender or investment/ saving value was included in the list of examples of insurance premiums that are capital in nature and not deductible.

Computing the Taxable Value of Accommodation Benefits Provided

Where an employer provides accommodation to its employees in respect of employment exercised in Singapore, the accommodation provided is a benefit and is taxable in the hands of the employees. The current formula, last revised and effective since YA
2015, to compute accommodation benefits (excluding hotels) is as follows:

  • The Annual Value (AV) of the property less total annual rent paid by the employee. Where AV is not available, the value will be the market rent paid by the employer (including those for furniture and fittings) less the rent paid by the employee;
  • plus 40% of the AV if the property is partially furnished or 50% of the AV if the property is fully furnished.

The AV is the estimated gross annual rent of the property if it were to be rented out, excluding furniture, furnishings and maintenance fees. Currently, employers are allowed to use the actual market rent paid for the accommodation to compute the value of the accommodation benefits if it is administratively more convenient to do so and in cases
where the AV is unavailable.

The Income Tax (Amendment) Act 2018 passed by Parliament on 2 October 2018 revises the default basis in computing the taxable value of accommodation to the actual rent paid by the employer instead of AV. Only in situations where the actual rent paid is not available (for example if the employer owns the property) or the IRAS is not satisfied that the actual rent paid is reflective of the market rent, the AV or other reasonable value as deemed by IRAS will apply. The change is effective from YA 2020.

Singapore Budget 2019 Newsletter

In Budget 2019, Singapore unveiled an expansionary budget with new measures being introduced and existing measures enhanced, to continue the relentless support in the transformation of our economy, building a caring and inclusive society, linking our city to the world, ensuring a sustainable environment and preparing for the future.

Read Crowe Singapore’s Budget 2019 Newsletter here.

NOR Scheme: Tax Exemption of Employers’ Contributions to Non-Mandatory Overseas Pension Fund or Social Security Scheme

The Not-Ordinarily-Resident (NOR) Scheme was introduced to make it attractive for individuals with global or regional business experience to live and work in Singapore.

The scheme grants favourable tax treatment to qualifying individuals for a period of five years of assessment, provided they meet the following criteria:

  1. They must not have been a Singapore tax resident in the three years of assessment  before the year he/she qualifies for the NOR scheme; and
  2. They must be a tax resident for the year of assessment in which they wish to qualify for the scheme.

If an individual is accorded the NOR status, he or she may enjoy the benefit of apportionment of his/her employment income and tax exemption on contributions made by the employer to an overseas pension fund for five consecutive years, subject to qualifying conditions.

Under the apportionment of Singapore employment income concession, the portion of the Singapore employment income that corresponds to the number of days the individual spent outside Singapore for business reasons, as a resident Singapore employee, is exempt from tax.

To enjoy the benefit of time apportionment of their employment income, an NOR taxpayer must:

  1. spend a minimum of 90 days outside of Singapore for business reasons; and
  2. must have a minimum Singapore employment income of $160,000.

The other concession under the NOR Scheme provides for tax exemption on employers’ contributions to a non-mandatory Overseas Pension Fund or Social Security Scheme.

In order to qualify for the tax exemption under this concession, the following conditions must be met:

  1. The NOR taxpayer is not a Singapore Citizen or Permanent Resident; and
  2. The NOR taxpayer’s employment income must be at least $160,000; and
  3. The employer must not claim a deduction made to the NOR taxpayer’s overseas pension or provident funds and social security schemes up to the NOR cap.

On 19 October 2018, the Inland Revenue Authority of Singapore (IRAS) provided further clarification that condition 3 is considered met where:

  1. the contribution is borne by a foreign company and is not charged or recharged to  the Singapore employer, as no deduction on the contribution is taken by the Singapore employer; or
  2. the employer is a tax-exempt body or representative office that is not required to file a tax return, as no deduction on the contribution is taken by the employer.

The above was revised from the previous clarification by IRAS that condition 3 is not satisfied if the contribution is not charged or recharged to any Singapore entity.

For further information, please refer to IRAS’ website.

Source: Inland Revenue Authority of Singapore