Tax Incentives for Singapore Businesses
The government of Singapore provides several incentives to promote entrepreneurship in the country. In collaboration with the Inland Revenue Authority of Singapore (IRAS) which is the tax authority of Singapore, it has implemented tax reduction schemes targeted at businesses, especially startups in Singapore. This article provides an overview of these provisions.
As a result of Singapore government’s concerted policies, Singapore has emerged as the dominant regional startup hub. It’s pro-business policies, ease of doing business and efficient tax regime are key reasons. The government constantly introduces new incentive schemes for businesses in Singapore to assist them with their growth and expansion.
This article will highlight the salient tax schemes available to Singapore businesses that provide exemptions and deductions to the business and help promote the growth of Singapore-incorporated companies.
Tax Exemption Scheme for New Startups
The tax authority in Singapore provides a special tax exemption to startups for the first three assessment years. The main objective of this scheme is to promote entrepreneurship and help startups grow and establish a base in the country.
This scheme is available to all startup companies in Singapore with the exceptions of any company whose:
- Principal activity is that of investment holding; or
- Principal activity is that of developing properties for sale, investment or both.
Eligible startups must fulfill the following three conditions to qualify for the tax exemption:
- The company must be a Singapore registered company.
- The company must be a tax resident for that assessment year in Singapore.
- The number of shareholders of the company must not exceed 20 in that assessment year.
The eligible startups in Singapore will be exempted from any tax on the first S$100,000 of the normal chargeable income. Additionally, the company will be exempted up to 50% of tax on the next $200,000 normal chargeable income. This exemption is applicable to the startup for its first 3 consecutive assessment years. As a result of these benefits, the effective tax rate of most startups is drastically reduced in the first three years of their operation.
NoteNormal chargeable income is the income that is taxed at the prevailing corporate tax rate.
Productivity and Innovation Credit (PIC) Scheme
The PIC scheme offers a credit to business owners in the form of a tax deduction (note that a tax deduction is a qualifying expense which reduces your taxable income). The deduction is available to any business that invests in activities the involve innovation. The scheme is an incentive to businesses to continually invest in innovation to improve their operational efficiency and productivity which in turn promotes the growth of the company.
All business entities registered in Singapore are entitled to the scheme and the benefits it offers. These include companies, partnership, sole proprietorship and branches or subsidiaries of foreign holding companies.
The scheme covers the following 6 qualifying business activities:
- Acquisition and Leasing of IT and Automation Equipment
- Employee Training
- Acquiring Licenses of IPR
- Registration of Patents, Trademarks, Designs and Plant Varieties
- R&D activities
- Investing in Design Projects
The allowable tax deductions for the above six qualifying activities is 400% (with a maximum of $400,000) of the expenses spent yearly on the qualifying activities. This cap is $600,000 for SMEs who qualify for the PIC+ Scheme described below. Note that the 400% scaling means that even if a company spends only $150,000 on PIC+ activities, it will be able to claim a deduction of 4 times that amount i.e. $600,000.
The PIC+ Scheme was introduced in the Budget of 2014. The primary purpose of the scheme is to promote innovation by SMEs. To qualify for the PIC+ Scheme the following is necessary:
- The Revenue of the business should not exceed $100 million and
- The Number of employees in the business should not exceed 200.
According to the PIC and PIC+ Scheme, the business eligible for tax deductions also has the option to convert up to $100,000 of the amount they spend (on the qualifying activities) into a cash payout from the government. This cash payout is non-taxable. The cash payout conversion rate was previously 60% which has been reduced to 40% in the 2016 budget. In other words, the business receives a cash payout of $40,000 from the government for spending $100,000 on the qualified activities. Furthermore, this cash payout is not taxed. The Finance Minister has extended the PIC Scheme till 2018.
Deduction for Charitable Work
The Business and IPC Partnership Scheme provides deduction to companies that promote charitable work. This scheme was introduced in the Budget of 2016. The government of Singapore, in collaboration with the Inland Revenue Authority of Singapore (IRAS), developed the scheme. According to this scheme, Singapore companies can avail a tax deduction of 250% on salaries and expenses that they pay to their employees in case the company sends its employees to volunteer and extend their services to Institutions of Public Character (IPC). The main aim of this scheme is to promote philanthropy in the country.
The following are eligible for this scheme:
- Companies, partnerships, sole proprietorships and registered business trusts that carry out business in Singapore; and
- Any body of persons such as clubs and trade associations deemed to carry on business in Singapore.
Qualifying Expenditure and Deductions
The following expenses qualify for this scheme:
- Basic wages paid while providing services to IPCs and
- Expenses incurred with respect to the services provided to IPCs.
The total deduction applicable for a business is 250% of the qualifying expenditure that the business incurs.
The expenditures under the scheme are capped at $ 250,000 per financial year for a business and the expenditure levied on any individual IPC is capped at $ 50,000.
Double Tax Deduction for International Expansion
This scheme helps Singapore businesses expand overseas. The scheme offers 200% tax deduction on expenditures made by a company for supported market expansion and investment development activities abroad.
All Singapore incorporated companies whose primary purpose is to promote trading of goods and providing services are eligible for this deduction.
The qualifying expenses for which a business can claim this deduction include:
- Market surveys and feasibility studies.
- Overseas trade offices.
- Overseas trade fairs.
- Advertising in approved local trade publications.
- Manpower expenses for Singaporeans posted overseas.
- Overseas advertising and promotional campaigns.
A business can automatically claim 200% deduction on the first S$100,000 expenses made by the business for the qualifying expenses. In such cases, approval of IE Singapore is not required. However, if the expenditure exceeds S$100,000 the business will have to seek approval from IE Singapore.
Wage Credit Scheme
Introduced in the 2013 budget, this scheme extends support to Singapore businesses who may be facing a tight labor market. According to the scheme, the government co-funds any wage increase provided to employees of a company between 2013-2020. This helps businesses adjust to a wage increase in Singapore’s tight labour market.
An employer is eligible for the scheme if:
- The employer pays the employee a gross monthly wage of less than S$4,000.
- The employer has increased the employee’s gross monthly wage by at least S$50 in the qualifying year (which includes the years from 2013-2017).
An employee is eligible for the scheme if:
- The employee is a Singapore citizen
- The employee receives Central Provident Fund (CPF) from an employer for a period of at least of 3 months in the previous year
- The employee is on a company’s payroll for at least 3 months in that qualifying year.
An employer receives:
- 40% co-funding for any wage increase between the period 2013-2015 or
- 20% co-funding for any wage increase between the period 2015-2018
- 15% co-funding for any wage increase in 2019
- 10% co-funding for any wage increase in 2020
Singapore is a country with one of the lowest tax rates in the world. But on top of its low rates, the country provides numerous tax incentives and cash grants to help the growth of businesses thereby reducing the effective tax rates even further. Additionally, the hassle-free legal system and efficient business policies make Singapore a very attractive place for entrepreneurs to start their business. The country also provides a natural hub for expansion to Asia and Australia. If you wish to set up a new business, Singapore is a very attractive choice for these reasons.