Among the defining factors of Singapore’s open and promising environment for entrepreneurs is its corporate tax system. The city-state has a well-known reputation for having one of the world’s most attractive tax rate for enterprises.
The corporate tax rate of a country is a strong key point of consideration for entrepreneurs who are deciding where to register their companies. Singapore stands out not only for its easy business formation process but also and more importantly, for its tax rate which is significantly lower than other developed nations. The Republic’s solid framework for income taxes has also become instrumental in establishing it as a global business hub.
A Glimpse of Corporate Tax in Southeast Asia
|Country||Capital||Corporate Tax Rate|
|Brunei||Bandar Seri Begawan||22% or 55%|
|Cambodia||Phnom Penh||20% on profits or 1% on turnover (whichever is higher)|
|Myanmar||Nay Pyi Daw||25%|
Over the years, the single-tier tax system of Singapore has lowered, making its economic landscape even more favorable for entrepreneurs, corporate bodies and investors.
The Inland Revenue Authority of Singapore (IRAS) is the governing body that takes care of administering, assessing, and collecting of taxes.
Singapore currently has a headline corporate tax rate of 17%, which means that it is the highest rate of tax that can be paid in a certain jurisdiction. In the case of small and medium-sized enterprises (SMEs) and startups, the tax paid is lower than this headline rate after taking out the exemptions, rebates, deductions, and allowances offered by the government.
Every year, business owners in Singapore are required to declare the amount of income their businesses derived for an accounting period of 12 months. This should include all the financial activities that occurred during that timeframe.
For income tax filing, business owners can choose the start and end the dates of their accounting period based on what complements their business operations the most. A majority of Singaporean ventures choose to have the end of their financial year on December 31 and have it begin on January 1.
A Friendly Tax System for Startups
One of the most common roadblocks for entrepreneurs is the lack of adequate funding. In Singapore, the government and its partner agencies make sure to provide a path around this hindrance by building an environment that is conducive for enterprise development.
Initiatives have been rolled out by the government to make sure startups are provided with good access to funding. These government assistance initiatives include cash grants, debt financing schemes, tax incentive schemes, business incubator schemes, and equity financing schemes. Below is a quick overview of initiative SMEs and startups can use:
a) Cash Grants
Cash grants are provided by various government agencies to enterprises across industries under various terms, conditions, and qualifying criteria.
b) Debt Financing
A funding option for those who want to raise capital without having to share their profits. In this scheme, borrowers are legally binded and expected to make loan repayments to lenders whether the business is doing well or not.
c) Tax Incentive Schemes
This set of incentives is formulated by the government to encourage more enterprising individuals to create more businesses and contribute to job creation that can boost Singapore economy. Some of the most noteworthy incentives that startups can utilize is the tax exemption, offered for businesses which meet the criteria or a full exemption of up to S$200,000 for a company’s first 3 consecutive years of assessment.
There is also the investment allowance, which allows businesses to claim an allowance for capital and industry-specific tax incentives which can be used by companies according to their industry.
d) Business Incubator Scheme (BIS)
This arrangement is perfect for fledgling entrepreneurs who are not only looking for financial support but overall know-how for their startup. From its name, the business incubator scheme provides a physical location for new businesses as well as cost-friendly shared services, financial assistance, and even mentoring which can be very helpful for ventures in their infancy stage.
e) Equity Financing
A financing option wherein investors provide capital to startups in exchange for a shared ownership of the company. This scheme is ideal for new businesses that are still at their early stages.
Tax Exemption Scheme for New Startups
In 2005, the government of Singapore introduced tax exemption scheme for newly-registered startups in the city-state to encourage more individuals to take the entrepreneurial path. Through this scheme, startups that satisfy the qualifications can enjoy up to S$200,000 tax exemption on its first three consecutive years of assessment (YAs). To break it down, the eligible startup will get a full tax exemption on its first S$100,000 chargeable income and further get a 50% tax exemption on the next up to S$200,000 normal chargeable income.
Startups must satisfy the following requirements in order to qualify for the tax exemption scheme:
- The startup must be duly incorporated in Singapore;
- The startup must be a corporate tax resident in Singapore for the corresponding YA;
- The startup should have no more than twenty shareholders during the YA.
In order to claim the tax exemption, startup owners simply need to fill out the necessary sections of the Estimated Chargeable Income form as well as the income tax return.
Unfortunately, companies whose principal activities fall under property development either for sales or investment and investment holding.
Partial Tax Exemption for Companies Registered in Singapore
Every company registered in Singapore, save for startups that have already availed of the tax exemption scheme, can claim partial tax exemption of up to S$152,500. Companies that are qualified can get up to 75% on the first S$10,000 normal chargeable income and 50% on the following S$290,000 normal chargeable income.
The IRAS, however, remains vigilant against companies that are registered not for commercial or entrepreneurial purposes but to abuse this partial tax exemption scheme.
Tax fraud is considered a criminal offence and as such, individuals who engage in such activities are punishable by law.
Corporate Income Tax Rebate for YAs 2016 to 2017
During the Budget 2016, Singapore Finance Minister Heng Swee Keat has announced that the Corporate Tax Income Rebate for the Years of Assessment 2016 to 2017 will be raised from the original 30% of the corporate tax payable to 50%. The increase in tax income rebate seeks to assist companies in the city-state, especially small and medium-sized enterprises (SMEs), to restructure while in the middle of Singapore’s current economic climate. The rebate will be capped at S$20,000 per YA.
|Year of Assessment (YA)||Corporate Income Tax Rebate||Cap|
|2016 and 2017||50%||$20,000|
|2013 to 2015||30%||$30,000|
Singapore Corporate Tax Residency
The location where a company is incorporated is not an indicator of its tax residency. In Singapore, the tax residence of company is dependent on the type of management of a business. If a company exercises full management and control inside of the city-state, then it is considered as a tax resident. On the other hand, if a startup has part of its processes managed in a foreign country, then it is considered as a non-resident.
Generally, the basis for taxation is the same for residents and non-residents. However, there are benefits that a resident company enjoys that a non-resident cannot avail of. Some of these are:
- Tax benefits offered by the Avoidance of Double Taxation Agreements (DTA)
The IRAS defines a Double Taxation Agreement or DTA as an “an agreement concluded between Singapore and another jurisdiction (a treaty partner) which serves to relieve double taxation of income that is earned in one jurisdiction by a resident of the other jurisdiction.” This usually happens when a company is considered as a separate legal entity from its shareholders. Under Singapore’s single-tier corporate income tax system, the resident corporate taxpayers are exempted from double taxation in more than fifty treaty partners of Singapore
- Tax exemption on Foreign Brand Profits
The government has launched this initiative to make Singapore an even more attractive business destination and encourage more individuals to incorporate a business. Through this, eligible tax residents are able to enjoy tax exemption on income it has earned outside of Singapore.
Filing Estimated Chargeable Income or ECI
The IRAS defines Estimated Chargeable Income (ECI) as the estimation of a company’s taxable income for a certain YA. The approximation must be after deducting corporate expenses that are tax-allowable.
The following are considered tax-allowable expenses:
- Profit gained from any business activities;
- Income derived from investment which can include dividends, interest or rental;
- Revenue from property, royalties, premiums;
- Any other corporate gains that can be considered as a revenue.
Every company registered in the city-state must file their ECI three months after their financial year-end (FYE). Generally, the IRAS sends a notification as a reminder to file their ECI. However, companies are still expected to file the ECI even if they have not received the ECI notification from IRAS within three months from their FYE.
Filing of Singapore Corporate Income Tax
Every entrepreneur should have a proper grasp of income tax filing. In Singapore, filing taxes starts by preparing your statement of accounts (which includes trading, balance, and profit and loss sheets) at the end of each accounting period. Keeping good records of the accounting year can make this a simpler process, since you will be obligated to have records of your sales from invoices to cash register tapes. Pro-tip: Employ the use of an accounting software which can help keep digital invoices to minimize risk of losing your copies.
The next mandatory step would be to make a 4-line statement for your income tax filing which involves taking down all the relevant numbers from your statement of accounts (revenue, gross and adjusted profit, and business expenses). This is a very important step of the filing process because your business expenses can be deducted against your income and therefore entitle you to a lower tax. If you are a starting entrepreneur, make sure that you are familiar with the allowable deductibles, some of which are employee salaries and office expenses. The deducted expenses can be applied indefinitely and should follow the preceding year.
For the actual income tax filing, the IRAS will send a notification for when you need to report your business’ income. The easiest and most accessible way of filing is through the myTax Portal. However, you also have the option of filling out a form and sending the actual copy to the IRAS office.
Singapore Corporate Tax Calculator
Richmond has launched a free and user-friendly corporate tax calculator that allows individuals and corporate entities in easily getting an estimate of their tax liabilities in Singapore for the year of assessment (YA). One only has to input the basic information that the tool requires including the chargeable income, gross tax payable, corporate tax rebate and more. The tool may also be used to benchmarking the corporate tax rate of Singapore to an entrepreneurs’ home country.
Engaging a Professional Service Provider
Most of the taxpayers in Singapore file their tax on time. The timely filing of tax returns with the Inland Revenue Authority of Singapore (IRAS) is essential for taxpayers. Corporate taxpayers are required to keep their books of accounts accurate and ensure that all the invoices, receipts and other relevant transactions for every year of assessment are well-documented.
There are certain consequences for individuals and companies that either file their taxes late or do not file taxes at all. The IRAS may take necessary actions such as charging a late filing fee, issuing an estimated Notice of Assessment (NOA), requesting the guilty party to appear in court, and worse, issue an arrest warrant. All of these can be detrimental to your business.