Budget March 2014

Budget 2014 Corporate tax measures Presented by Chai Wai Fook (Partner, Tax Services) 6 March 2014

Budget 2014: Corporate tax measuresPage 3 Agenda ► Overview ► Extending the PIC scheme ► Introducing PIC+ for SMEs ► Extending PIC benefits to training of individuals under centralised hiring arrangements ► Extending the R&D tax measures ► Refinements to the section 19B writing down allowance scheme ► Refining the three-local-employees condition for PIC cash payout ► Summary of other tax changes

Budget 2014: Corporate tax measuresPage 4 Abbreviations CPFCentral Provident Fund EDBSingapore Economic Development Board GSTGoods and Services Tax IPRIntellectual property rights IRASInland Revenue Authority of Singapore ITAIncome Tax Act (Chapter 134) PICProductivity and Innovation Credit R&DResearch and development SMESmall and medium enterprise WHTWithholding tax YAYear of assessment

Budget 2014: Corporate tax measuresPage 5 Budget 2014 Overview ► No spectacular changes introduced to our tax system ► Corporate tax rate remains at 17% ► GST rate remains at 7% ► Productivity continues to be at the front and centre of our economic transformation ► Inclusive growth ► Addressing rising healthcare and education costs ► Increases in employer CPF contribution ► Pioneer Generation Package

Extending the PIC scheme

Budget 2014: Corporate tax measuresPage 7 Extending the PIC scheme Pre- Budget PIC scheme available for YA 2011 to YA 2015 Post- Budget PIC scheme extended until YA 2018

Budget 2014: Corporate tax measuresPage 8 Extending the PIC scheme Further points to note: ► Claim must be net of grants and subsidies provided by the Government or any statutory board ► PIC cash conversion option continues to be available S$1.2m Combined expenditure cap for each of the qualifying activities across YA 2016 to YA 2018

Introducing PIC+ for SMEs

Budget 2014: Corporate tax measuresPage 10 Introducing PIC+ for SMEs PIC scheme (Ongoing) PIC+ scheme (New) Applies to:All businessesQualifying SMEs* Duration of scheme:YAs 2011 to 2018YAs 2015 to 2018 Expenditure cap per qualifying activity per YA: S$400,000S$600,000 Enhanced tax deduction:400% What qualifies:Six PIC qualifying activities * An entity is a qualifying SME if: (a) Its annual turnover is not more than S$100m Or (b) Its employment size is not more than 200 workers This criterion will be applied at the group level if the entity is part of a group.

Budget 2014: Corporate tax measuresPage 11 Introducing PIC+ for SMEs PIC scheme S$400,000 expenditure cap PIC+ scheme S$600,000 expenditure cap S$1.4m combined expenditure cap S$1.4m Combined expenditure cap for each of the qualifying activities up to YA 2015 YA 2013 YA 2014YA 2015 For qualifying SMEs eligible for PIC+, the expenditure cap per qualifying activity can be combined as follows for YA 2015:

Budget 2014: Corporate tax measuresPage 12 Introducing PIC+ for SMEs PIC+ scheme YA 2016 S$600,000 expenditure cap YA 2018 S$600,000 expenditure cap YAs S$1.8m combined expenditure cap S$1.8m Combined expenditure cap for each of the qualifying activities for YA 2016 to YA 2018 YA 2017 For qualifying SMEs eligible for PIC+, the expenditure cap per qualifying activity can be combined as follows for YAs 2016 to 2018:

Budget 2014: Corporate tax measuresPage 13 PIC+: What does it mean to you ► The Ministry of Finance has clarified that the SME criterion on employment size will likely be applied at the end of the basis period ► Uncertainty of whether the requirement to meet the SME criterion on turnover or employment size to be met annually until YA 2018 ► SMEs need to self-assess their eligibility for PIC+ Self-assess your eligibility as qualifying SME 1

Budget 2014: Corporate tax measuresPage 14 PIC+: What does it mean to you ► Ongoing compliance focus by the IRAS to ensure that PIC benefits are properly claimed ► Onus on taxpayers to have supporting documentation on PIC claims upon request by the IRAS ► Finance or in-house tax team should keep documentation to verify your status as a qualifying SME (e.g. headcount details) Record keeping is critical 2

Extending PIC benefits to training under centralised hiring arrangements

Budget 2014: Corporate tax measuresPage 16 Extending PIC benefits to training under centralised hiring arrangements PIC benefit 400% tax deduction for up to S$400,000 of qualifying training expenditure per YA Business incurs training expenses on individuals under centralised hiring arrangement Individuals are regarded as legal employees Not claimable Business incurs training expenses on individuals under centralised hiring arrangement Yes, claimable subject to conditions (with effect from YA 2014) Details to be released by end March 2014 CurrentProposed Individuals are not regarded as legal employees

Budget 2014: Corporate tax measuresPage 17 Centralised hiring arrangements: What does it mean to you ► Businesses which meet the qualifying conditions related to the deployed individuals can avail of the PIC benefits ► Onus on the claimant to keep supporting documents on the recharges of employment costs by a related entity ► Imperative to understand the documentation requirements and ensure proper compliance Know the documentation requirements 1

Budget 2014: Corporate tax measuresPage 18 Centralised hiring arrangements: What does it mean to you ► Another condition is that the related entity does not claim deductions on the training expenses recharged to the claimant entity relating to the deployed individual ► Related entity has to identify such non-claimable training expenses and exclude the related recharges from tax Active monitoring of training expenses recharged 2

Extending the R&D tax measures

Budget 2014: Corporate tax measuresPage 20 Extending the R&D tax measures R&D tax measure Proposed This tax measure will be extended for 10 years until YA 2025 Current Additional 50% tax deduction on qualifying R&D expenditure up to YA 2015 for R&D conducted in Singapore Section 14DA(1) of the ITA

Budget 2014: Corporate tax measuresPage 21 Extending the R&D tax measures R&D tax measure Current Further tax deduction on expenditure incurred in relation to R&D projects approved by the EDB on or before 31 March 2015 Proposed This tax measure will be extended for five years until 31 March 2020 Section 14E of the ITA

Budget 2014: Corporate tax measuresPage 22 Extending the R&D tax measures R&D tax measure Current Tax deductions on R&D expenditure incurred for undertaking R&D in areas unrelated to their existing trade or business for R&D conducted in Singapore Proposed This tax measure will continue to apply in line with the above extensions

Refinements to the section 19B writing down allowance scheme

Budget 2014: Corporate tax measuresPage 24 Extending and refining the section 19B Writing Down Allowance scheme 100% Writing Down Allowance ► Under s19B of the ITA, businesses can claim 100% Writing Down Allowance (WDA) over a period of five years on the acquisition costs of prescribed intellectual property rights (IPRs) including: ► trade secret or information that has commercial value Accelerated WDA scheme for MDE companies ► Media and digital entertainment (MDE) companies can avail of accelerated scheme with writing down period of two years, subject to EDB’s approval Current

Budget 2014: Corporate tax measuresPage 25 Extending and refining the section 19B Writing Down Allowance scheme Current Additional 300% WDA under PIC scheme ► As part of the PIC scheme, businesses may also claim an additional 300% WDA on qualifying IPRs (excluding IPRs granted waiver of the legal ownership condition and IPRs for MDE content), subject to certain expenditure caps Lapses after ► Both the s19B WDA and the accelerated WDA scheme for MDE companies will lapse after YA 2015

Budget 2014: Corporate tax measuresPage 26 Extending and refining the section 19B Writing Down Allowance scheme Proposed 100% WDA ► S19B WDA will be extended for five years until YA Accelerated WDA for MDE companies ► Will be extended for three years until YA 2018 ► All other existing conditions of the s19B WDA remain unchanged Additional 300% WDA under PIC scheme ► Businesses can continue to claim benefits under the PIC scheme which has been extended to YA 2018 and is subject to the relevant expenditure caps

Budget 2014: Corporate tax measuresPage 27 Extending and refining the section 19B Writing Down Allowance scheme Proposed Legislation of negative list to clarify types of items that would not meet the description of “information that has commercial value” ► A negative list will be legislated to expressly exclude the following two categories of information: ► Customer-based intangibles ► Documentation of work processes ► To encourage economic exploitation of confidential information that is of the same class or nature as trade secrets and other forms of IPR expressly listed in the definitions ► List will be published on IRAS’ website by end April 2014 and will be legislated by end December 2014

Budget 2014: Corporate tax measuresPage 28 Section 19B WDA changes: What does it mean to you Customer-based intangibles and documentation of work processes 1 ► Examples of “customer-based intangibles” and “documentation of work processes” include customer listings and standard operating processes (as clarified by the Ministry of Finance) ► What constitutes “customer-based intangibles” and “documentation of work processes” may vary from business to business ► It would be helpful if more specific guidance and examples are provided when the IRAS releases the negative list ► It would be helpful if IRAS seek public consultation and feedback on what should be included in the negative list before it is legislated

Budget 2014: Corporate tax measuresPage 29 Section 19B WDA changes: What does it mean to you ► Taxpayers should perform a review on their WDA claims to ensure that they do not include “customer-based intangibles” and “documentation of work processes” ► Taxpayers should also conduct a review of their in-licensing IPR claims under the PIC scheme to determine whether it includes any “customer-based intangibles” and “documentation of work processes” 2 Self-review

Refining the three-local-employees condition for PIC cash payout

Budget 2014: Corporate tax measuresPage 31 Refining the three-local-employees condition for PIC cash payout Incurred qualifying expenditure and entitled to the PIC during the basis period for the qualifying YA CurrentProposed Qualifying conditions for PIC cash payout Condition remains the same Business must have active business operations in Singapore Business must have employed at least three local employees Condition remains the same Three-local-employees condition must be met for a consecutive period of at least three months prior to claiming the cash payout (take effect for PIC cash payout applications from YA 2016)

Summary of other tax changes

Budget 2014: Corporate tax measuresPage 33 Summary of other corporate tax changes ► Extension of tax deduction scheme for registration costs of intellectual property (until YA 2020 for 100%) ► Allowing the tax deferral option under the PIC scheme to lapse ► Waiving the WHT requirement for payments made to Singapore branches ► Extending and enhancing the Land Intensification Allowance scheme

Budget 2014: Corporate tax measuresPage 34 Summary of other tax changes ► Allowing the Investment Allowance scheme for aircraft rotables to lapse ► Refinements to tax incentive schemes for qualifying funds

Budget 2014: Corporate tax measuresPage 35 Singapore Budget 2014 Synopsis ► Please visit to download a copy of our Singapore Budget 2014 Synopsis

Thank you

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 Ernst & Young Solutions LLP. All Rights Reserved. APAC no ED None Ernst & Young Solutions LLP (UEN T08LL0784H) is a limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.