Nobody likes taxes. Over 190,000 companies paid tax in Singapore in 2016, for gross tax receipts of S$1.36 billion. As a social enterprise or SME owner, dealing with taxes often causes headaches, especially when you need every cent to pay the bills or grow your business.
Fortunately, the Singapore tax regime is one of the most friendly in the world to small businesses and social enterprises, seeking to encourage hard work, promote entrepreneurship and attract foreign investments by imposing a very competitive flat 17% rate on chargeable income of companies. This tax can be further reduced if your business qualifies for any of the tax reduction or exemption schemes discussed below. In this article, we will provide you with a brief guide to corporate tax liabilities in Singapore.
Do you need to pay taxes?
Under the Income Tax Act, all companies must pay tax on Singapore-derived revenues or foreign revenues remitted to or used for business in Singapore. However, a Singapore tax-resident business can claim tax exemptions/reductions on its foreign-sourced revenue in certain cases:
- Singapore has signed agreements for Avoidance of Double Taxation (“DTA”) with many countries including China and Japan. Revenue sourced from such countries is tax-exempt or tax-reduced in Singapore.
- Other foreign-sourced revenues are exempt from tax provided that
- (i) it has already been subject to tax in its country of origin,
- (ii) the highest corporate tax rate in that country is at least 15% at the time when that revenue was received in Singapore and
- (iii) the Comptroller of Income Tax is satisfied that the exemption would be beneficial to the business.
Startup Tax Exemptions
Furthermore, Singapore grants various tax exemptions to new startup companies to encourage entrepreneurship. For its first three years of assessment (“YA”), a qualifying company can enjoy
- full tax exemption on its first S$100,000 of normal chargeable income and
- further 50% exemption on its next S$200,000 of normal chargeable income.
Please note that the tax exemptions will be cut to 75% exemption on the first S$100,000 of normal chargeable income and 50% exemption on next S$200,000 with effect from YA 2020.
Your company will qualify for startup tax exemptions if all three conditions below are satisfied:
- The company is incorporated and tax resident in Singapore;
- The company’s main business activity is not investment holding or property development; and
- The company’s total share capital is beneficially held directly by no more than 20 shareholders, where either
- all shareholders are individuals; or
- at least one shareholder holding at least 10% of the issued ordinary shares of the company is an individual.
Registered Charity Tax Exemption
In some cases, a social enterprise may be established purely for charitable purposes. (Good examples would be the Singapore Red Cross Society and the National Kidney Foundation.) These social enterprises typically derive their income from donations and public fund-raising, though some may choose to raise funds through commercial activity as well. Whatever the source of funds, such social enterprises are ultimately not aimed at making profits, but channel their income into their respective social causes.
In such cases, the social enterprise could apply to be registered as a charity with the Ministry of Culture, Community and Youth. All income of a registered charity is exempt from tax. There is also a scheme that exempts income of approved not-for-profit organisations, and foreign charitable trusts.
Calculate your Chargeable Income
Chargeable income is calculated as your business’ taxable revenues less deductible expenses.
Taxable revenues refer to ordinary revenues and does not include nonrecurring items such as capital gains (for example, gains on sale of fixed assets). A good way to understand if revenue is taxable is to consider whether the revenue is likely to recur or a one-off matter. For example, while rental income from a property is taxable, money obtained from selling the property is not (unless the company’s business happens to involve buying and selling properties etc).
Deductible expenses are generally expenses “wholly and exclusively incurred … in the production of income”. These do not include personal expenses or any other expenses not directly incurred to generate income (for example, expenses incurred in purchasing machinery are not tax-deductible). It may be useful to consult the non-conclusive list of deductible expenses provided on IRAS’ website when filing your business’ tax returns for the year.
Do I qualify for any tax allowances?
Tax allowances may be further deducted from chargeable income before tax is assessed, thus reducing a business’ tax liabilities.
Under the Income Tax Act, businesses may claim capital allowances for any capital expenditures incurred in the provision of “machinery or plant” for the purposes of their business. Any fixed asset would qualify for such capital allowances if it is
- not part of the business’s trading stock;
- used for the carrying on the business; and
- not merely the business premises.
Capital allowances are awarded to cover the cost of writing off an asset, which means that the amount claimable each year depends on the amount written off each year. This in turn depends on the type of equipment purchased. Generally speaking, assets can be written off as follows:
- Computers, prescribed automation equipment and assets costing $5000 or less (and with an annual aggregate cost of $30,000 or less) can be written off in one (1) year.
- All other assets eligible for capital allowances can be written off in three (3) years or over the prescribed working life of the asset.
To compute your tax liabilities, simply fill up the forms in the Basic Corporate Tax Calculator provided by IRAS, including any tax exemptions and deductions you might be eligible for.
We hope that this guide has provided you with a better understanding on your corporate tax liabilities as a social enterprise/small business in Singapore. Please note that no part of this guide is meant as legal, tax or financial advice, and that it may be prudent to consult your own independent advisors for any matters on tax optimization.
Have a question on taxes?
If you have any questions about taxes, you may request a quote from Liu Hern Kuan or book a Quick Consult with other lawyers with similar expertise for a transparent, flat fee of S$49 and expect a call back within 1-2 days to get your questions answered.
This article is written by Liu Hern Kuan from Tan Peng Chin LLC and Chen Sicong from Asian Law Students’ Association.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.