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TAX NEWS - January 2010

Singapore: New rules on deemed sourcing, transfer pricing and company amalgamation introduced

The Income Tax (Amendment) Act 2009, published in the Singapore Government Gazette of 29 December 2009, contains provisions to put into effect tax changes announced in Budget 2009, as well as other changes arising from the periodic review of the income tax system. The amendments, which will impact multinationals, include a relaxation of the deemed sourcing rules, a specific provision on the arm's length principle and new rules on the amalgamation of companies.


Deemed sourcing rules

The new rules introduce significant changes to the tax treatment of certain management fees paid to nonresidents. Subject to relevant tax treaty provisions, payments that are deemed to be sourced in Singapore under sections 12(6) and 12(7) of the Income Tax Act (ITA) are subject to Singapore withholding tax when made to nonresidents.

In a press statement issued by the Ministry of Finance in 1977, it was clarified that, where services are performed outside Singapore for, or on behalf of, residents or permanent establishments in Singapore, or even between associated companies, and such transactions are at arm's length and not with intent of siphoning off Singapore income, the following rules apply:

- Where an arrangement, management, guarantee or services relating to a loan or indebtedness is performed outside Singapore, the payments for such arrangement, guarantee, management or services are treated as not covered by the provisions of section 12(6)(a).

- Where the assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information is performed outside Singapore, the payment for such assistance or service is treated as not covered by section 12(7)(b). This does not refer to royalties, however, which have always been subject to tax.

- The reimbursement or allocation of administrative expenses incurred by a head office outside Singapore and claimed by a branch in Singapore, and the reimbursement or allocation of expenses between associated companies, are governed by section 14. Neither are affected by the provisions of section 12(7)(c). Payments to persons outside Singapore not associated with the payers in Singapore are treated as not covered by the provisions of section 12(7)(c).

The Income Tax (Amendment) Act 2009 seeks to give legal effect to the 1977 clarification. Hence, subject to stipulations on the nonresident recipient provided in new sections 12(6A)(a) and 12(7A), the following payments would not be deemed derived from Singapore under those provisions of the ITA and, hence, should not be subject to Singapore withholding tax if they are for services rendered outside Singapore:

- Payments for arrangements, management or service related to a loan or indebtedness;

- Payments for the rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information; and

- Payments for management or assistance in the management of a trade, business or profession.

With respect to 3), there is no longer a requirement for the management fees charged by related companies to be reimbursed at cost (without any mark-up) for the payments not to be deemed to be derived from Singapore (as required under the ruling in the 1977 press statement).

It should be noted that, under the new section 12(6A)(b), payments for guarantees relating to any loan or indebtedness would not be considered to be deemed derived from Singapore under section 12(6) if the guarantee is provided by a nonresident guarantor without a business presence in Singapore, or, if the guarantor has a business presence in Singapore, the guarantee is not effectively connected with that Singapore business presence.

The new legislation applies to payments made on or after 29 December 2009. For Singapore withholding tax compliance purposes, the date of payment or deemed payment is the earliest of the following dates:

- Where the date on which income accrues to a nonresident person is stipulated under a written contract or agreement, the date of payment of the income will be the date of accrual as stipulated therein;

- Where the date of payment of the income is not specified in a written contract or agreement, but instead the demand for payment of the income is by way of an invoice from the nonresident person, the date of payment is deemed to be the date printed on the invoice (regardless of the credit term that may be given by the nonresident person);

- The date the income is credited to the account of the nonresident person (it may not be actually paid over to the nonresident but is reinvested, accumulated, capitalized, carried to any reserve or otherwise dealt with on behalf of the other person); or

- The date actual payment of the income is made.


Arm's length principle

A new section (section 34D) has been introduced in the ITA to specifically legislate the arm's length principle with effect from 29 December 2009. This section now provides the Comptroller of Income Tax the legal authority to make adjustments if related party transactions are not carried out on an arm's length basis, without the need to rely on the general antiavoidance provisions (section 33) of the ITA. Taxpayers should review their intercompany transactions to ensure they are on arm's length terms and prepare adequate documentation to demonstrate such to avoid any potential tax adjustment by the Comptroller.


Amalgamation of companies

The Income Tax (Amendment) Act 2009 seeks to provide guidance on the Singapore income tax treatment of corporate amalgamations. Instead of transferring a business between related companies and then liquidating the transferor company, companies now have the option to amalgamate companies when carrying out a group restructuring. Generally, in an amalgamation, two or more Singapore companies (the amalgamating companies) can amalgamate and continue as one company (the amalgamated company), which can be either one of the amalgamating companies or a new company. On amalgamation, the old companies cease to exist. Although the new tax rules do not result in a totally tax-free merger, they seek to ensure that the amalgamated company largely "steps into the shoes" of the amalgamating companies and that the amalgamation may be carried out in a largely income tax-free manner. The new rules are effective as from 22 January 2009.
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