Series on Singapore tax laws – Part 3

1.Capital allowances

Capital allowances are given in respect of capital expenditure incurred by a taxpayer on assets that are used in its business. Capital allowances can be claimed in respect of following tangible and non-tangible assets –

• plant and machinery
• industrial buildings and structures
• intellectual property rights
• approved cost-sharing agreements for research and development activities

There are two types of allowances –

• Initial allowances – These are one time allowances which are available to a taxpayer who has incurred qualifying capital expenditure for the purposes of his business. These are usually claimed in the year of assessment in which the asset is first acquired and used in the business.

• Annual allowances – These are claimed annually on a straight-line basis provided that the asset is in use at the end of the relevant basis periods.

However, accelerated annual allowances of 33.33.% are granted for qualifying plant and machinery and allowances of 100% are granted for computers and prescribed equipments.

<<The method and mechanism of computation for each of the movable and immovable assets may vary>>

2. Deductions

For each source of income, expenses incurred (whether directly or indirectly) in producing the respective income are deductible subject to general guidelines. Some of the expenses allowable as deduction are –

• Start-up expenses – Most businesses are allowed to deduct expenses incurred in the 12 months immediately preceding the accounting year in which the business earned its first dollar of trading income.
• Interest expenses – Interest incurred on capital employed in the production of income, and prescribed borrowing costs that are incurred as a substitute for interest or to reduce interest costs, are allowable as tax deduction.
• Research and development (R&D) expenses – The following deductions are available for qualifying R&D expenditure –
  • For R&D carried out in Singapore – 150% of qualifying R&D expenditure upto year of assessment 2018 and 250% of qualifying R&D expenditure upto year of assessment between 2019 to 2025 
  • For R&D carried out overseas – 100% of qualifying R&D expenditure
• Bad debts – Bad debts are deductible to the extent that they are incurred in the business and previously included as trading receipts.
• Charitable contributions – Donations are deductible only if they are made in cash or another prescribed form and to an approved recipient. The deduction allowed for qualifying donations is generally 250% of the value of the donation.
• Fines and penalties – Fines and penalties imposed for violations of the law are not deductible.
• Taxes – Income taxes are generally not deductible in determining income. However, deduction against irrecoverable GST is given under certain circumstances.
• Others –
  • Employee share-based remuneration – Generally, a company is not allowed any tax deduction when it fulfils its employee stock option and share award obligations via the issue of new shares as it has not incurred any cost wholly and exclusively in the production of its income. However, tax deduction for employee share-based remuneration (stock awards or stock option schemes) is allowed, if treasury shares in the company or its holding company are purchased to fulfil such obligations. (Treasury shares are shares that are held by the company in treasury instead of being cancelled)
  • Payments to foreign affiliates – Payments to non-residents, including foreign affiliates, are deductible, provided they are fair and reasonable, are revenue in nature, and can be seen to be relevant to earning the payer’s income.

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