BSL Bulletin

A director of a Company is defined in Section 4(1) of the Singapore’s Companies Act, Cap 50 (the “Act”), to include any person occupying the position of director by whatever name called and includes a person in accordance with whose directions or instructions the directors are accustomed to act. It also includes an alternate director or substitute director.

The Act makes no distinction between:-
a) a nominee, an alternate and a substitute director;
b) an executive and a non-executive director; and
c) a local resident and a foreign director

The general duties of a director arise both under common law and by statute. The Act is the key legislation regulating directors’ duties.

(1) Duty to act in the best interest of shareholders as a whole
A director of a company must act in good faith in what he considers to be the best interests of the company and not for any collateral purpose.

(2) Duty to use powers for proper purposes of the company
A director in a company must not exercise powers which are beyond the powers entrusted to, in the memorandum or articles of association of the company, or be contrary to public policy or illegal, and must be for the company’s benefit as a whole.

(3) Duty to avoid conflict of interest
As a fiduciary, a director of a company must not allow himself to get into a position where there is a conflict between performing his duty as a director and his own interests. As an extension of this duty, a director is not entitled to make a personal profit or obtain a personal advantage in exercising his powers.

(4) Duty to use reasonable diligence, exercise due care and skill
A director of a company has a duty to exercise his powers with due skill and care so that they do not, among other things, cause the company loss by his negligence. He also has a duty to use reasonable diligence in the discharge of the duties of his office.

(5) Duty to act honestly
A director of a company should act honestly and not make improper use of any information or asset acquired via his position as a director of the company to gain an advantage for himself, or someone else or to cause harm to the company.

(6) Duty to make disclosures
A director of a company has a general duty to make the following disclosures, whether directly or indirectly:-

a: transaction or proposed transaction made by the company where he has an
interest in;
b: holding of office in other firms/and corporations; and
c: shares in the company and related corporations of the company.

(7) Duty to maintain proper accounts
A director of a company must take all reasonable steps to maintain proper accounting records, and to provide shareholders with copies of the financial statements and to report on the state of the company’s affairs at the annual general meeting of the company.

(8) Duty to rely on information and advise
A director of a company is allowed to rely, subject to certain conditions, on reports, statements, financial data and other information prepared or supplied by any of the following persons, on reasonable grounds to be reliable and competent:-

a: Employee of the company
b: Professional advisor
c: Any other director or committee of directors

Productivity and Innovation Credit

In the 2010 Singapore Budget, the Minister of Finance introduced the Productivity and Innovation Credit (“PIC”), a new tax incentive scheme. The objective of PIC is to act as the catalyst for businesses to improve work processes, re-design jobs and help employees create more value, innovate to compete with new products and services and increase revenue streams. The aim is to grow productivity by 2% to 3% each year for the next 10 years.

With this in mind, PIC is introduced in the following six areas:

1. Acquiring prescribed automation equipment
2. Training both in-house and external courses
3. Acquiring Intellectual Property Rights (“IPR”)
4. Registering of patents, trademarks, designs and plant variety
5. Carrying out Research and Development (R&D) activities in Singapore
6. Carrying out Design activities in Singapore

Overview of PIC
All businesses including sole proprietorships, partnerships and companies, are eligible for PIC based on the amount they invest and incur in any of the above activities covered. They can deduct up to 250% of their expenses incurred up to a cap of $300,000 on each of the above listed activities. PIC is granted on qualifying expenditure incurred during the basis periods for Years of Assessment (“YA”) 2011 to 2015.

Potentially a taxpayer who spends $300,000 on each of the above six activities would qualify for a deduction up to $4.5m in one YA. The qualifying expenditure is net of grants and subsidies provided by the Government. For the first two YA, a combined cap of $600,000 is set to help small and medium enterprises benefit from PIC without them having to rush to complete the implementation of their investments.

PIC allows the taxpayer to claim 150% in excess of the base expenditure or allowance which is granted on the qualifying expenditure.

For example, if a company spends say $400,000 on qualifying expenditure in YA 2011, then it is entitled to claim as follows:

Normal Deduction =$400,000

PIC capped at $300K @1.5 =$450,000

Total = $850,000

The total deduction given to the taxpayer in YA 2011 is $850,000, which is available to be set off against the taxpayer’s business income.

Any unutilized tax deduction or allowances under PIC, subject to ownership continuity test and other relevant conditions, are available for:

– carry back to immediate preceding YA to set off against business’ income
– transfer under group relief system and/or
– carry forward to set off against business’ income for future YAs.

Taxpayers must claim the PIC in their income tax returns for the relevant YA.

Cash Payout
The taxpayer has also the option to claim a Cash Payout capped at 7% at $300,000 of the expenditure and/or allowance granted. In the above example, if the taxpayer chooses to claim the Cash Payout, the impact will be as follows:

Normal Deduction = $400,000
PIC capped at $300k = $450,000
Less: Cash payout option  = ($300,000)
Total Deduction = $550,000

The company will then have $550,000 worth of deduction to set off against its business’ income and at the same time would obtain a Cash Payout of $21,000 at 7% of $300k from IRAS.

IRAS would take three months to process the Cash Payout from the time the application is received, and they will offset against any tax arrears including property, GST and income tax of the business before crediting the taxpayer with the net Cash Payout.

All businesses, sole proprietorships, partnerships, companies including registered business trusts would qualify for the Cash Payout. The qualifying period is between YA 2011 to YA 2013. Businesses must satisfy the following conditions to qualify for the Cash Payout.

1. Incur the expenditure during the relevant accounting period; and
2. Employ at least 3 local employees* (Singapore citizen or Permanent Residents)
with CPF contributions in the last month of accounting period; and
3. Carry on business operations.

* Employees exclude sole-proprietors, partners under contract for service, shareholders who are also
directors of companies
*CPF record of payment for business with equal or less than 10 employees must also be submitted Taxpayer who chooses to convert their PIC into cash must submit a PIC Cash Payout Application Form (“Form”) after the business accounting year end but not later than the filing due date of the income tax return. A hardcopy of the original Form must be submitted.

Once this election to convert PIC to cash is made, it is irrevocable. Furthermore, amongst other things, there is requirement to submit certified statement of accounts of the business by the tax filing due dates.

In addition, IRAS will recover the Cash Payout from Businesses that dispose of-

– purchased automation equipment, IPR (registration costs claimed) within 1 year
– lease out purchased automation equipment within 1 year
– dispose of acquired IPR within 5 years

If any of the above events are triggered, the taxpayer must inform IRAS within 30 days from the date of lease or disposal and repay IRAS within 30 days from the date of IRAS’ Productivity and Innovation Cash Payout Recovery notice.
In the foregoing the discussion will be on the respective categories of expenditure that will qualify for PIC.

(1) Prescribed Automation Equipment

The current list of automation equipment as provided in “Income Tax (Automation Equipment) Rules 2004” should qualify. The Ministry of Finance is currently doing a consultation to expand the list to include other automation equipment to the above qualifying list.

Examples of such equipment include office and graphics software, computers and laptops, automatic storage and retrieval system, leasing of mould machines. Both leasing and purchase of the prescribed automation equipment should qualify except for leasing of software. In addition, the automation equipment must be for the taxpayer’s own use. Such equipment cannot be subleased to another person.

(2) Training
In-house training
Only certain in-house courses approved by Agencies like Singapore Workforce Development and Institute of Technical Education, as well as an in-house trainer conducting the course must be certified by the above agencies would qualify.

The qualifying expenditure includes the salaries and other remuneration (excluding directors’ fees) paid to the in-house trainers for course delivery, rental of external training premises, meals and refreshments provided during the courses and the costs of training materials and stationery.

However, salaries and remuneration paid to in-house trainers for other duties including preparation of course or training materials, salaries and other remuneration paid to administrative support staff, absentee payroll costs, accommodation, travelling and transport expenses, overheads and utilities are specifically excluded.

External Training
PIC is also available for any external training courses conducted by external training service providers that the staff attends. There is no pre-approval required in terms of eligibility or apt of training courses. The qualifying expenditure include course fees paid to any external training service provider, example, registration or enrolment fees, examination fees, tuition fees, etc. However, accommodation, traveling and transport expenses are excluded.

(3) Intellectual Property Rights
The acquisition of IPR includes the cost of patent, copyright, trademark, registered designs, geographical indication, layout design of integrated circuit, trade secret and information with commercial value, and plant variety.

Both the legal and economic ownership of the IPR must be acquired by the taxpayer. The taxpayer must maintain at least a one year minimum ownership period. Claw-back provisions will apply if any of the following events occur within 5 years from date of acquisition when the IPR –

– comes to an end without renewal;
– is sold, transferred, or assigned all or any part of it
– due to cessation of the trade or business

(4) Patents, Trademarks, Designs and Plant Variety Registration
The qualifying expenditure includes filing and application fees paid to Registries, professional fees incurred for registration of IPRs including fees paid to Intellectual Property Office of Singapore (“IPOS”). Such expenses qualify regardless of the outcome or success of the application. However, both the legal and economic ownership of the IPR must be maintained by the taxpayer.

Claw back provisions will apply should the IPR or application for registration or the grant of IPR is disposed within 1 year from the date of filing of application.

(5) Research & Development activities in Singapore
Under the Singapore Income Tax Act, R&D is defined as

“any systematic, investigative and experimental study that involves novelty or technical
risk carried out in the field of science or technology with the object of acquiring new
knowledge or using the results of the study for the production or improvement of
materials, devices, products, produce or processes, …”

However, R&D inter alia, do not include activities involving quality control, routine data collection, efficiency survey, market research or sales promotion, routine or cosmetic modification to material, devices, products, processes or production methods.

The qualifying R&D expenditure includes staff costs (excluding directors’ fees) and consumables incurred on R&D carried out in Singapore which can be unrelated to the taxpayer’s trade or business. The qualifying R&D can be conducted in-house or outsourced to an R&D organization.

For fees paid to an outsourced R&D organization, IRAS has allowed 60% as the deemed staff costs and consumables. On the other hand, if the taxpayer can substantiate that the staff costs and consumables are equal to or more than 60%, then IRAS may allow the actual costs.

The current RISE and RDA schemes will be phased out from YA 2011. Currently under s14DA of the Singapore Income Tax Act, the taxpayer is entitled to claim 150% of the qualifying R&D undertaken in Singapore which can be unrelated to taxpayer’s trade or business.

With PIC, the first $300,000 R&D expenditure will qualify for 250% deduction, and thereafter the balance should qualify for the 150% deduction under s14DA.

(6) Design activities in Singapore

This is to encourage companies to adopt design innovation. This scheme will be administered by DesignSingapore Council. The approved design activity can be either conducted in-house or outsourced.

To qualify for the scheme, the design project must be related to industrial and product design activities and result in the final design of a physical product. Such activities must be conducted in Singapore and the resulting IP must be registered with IPOS. The taxpayer must be the owner of the registered design and the project must be completed within 2 years.

PIC has opened up avenues for businesses to increase their productivity, thereby increasing their revenue streams. At the same time, they can take advantage of the PIC tax incentive and obtain the tax savings from incurring the relevant expenditures. The five year scheme is expected to cost the Government $2.4b.

DID YOU KNOW?

As announced by the Government at the May Day rally on 1 May 2010, the employer’s CPF contribution rate will be increased by 1% in order to help workers save more for their medical and retirement needs. The increase will be done in two phases to moderate the impact on employers.

The first increase of 0.5% implemented on wages earned from September 2010, will be paid into the Medisave Account (MA). The subsequent increase of 0.5% will take effect 6 months later on wages earned from March 2011, and will be paid to the Special Account (SA).

In summary, the total employer CPF contribution will be 15% from September 2010 and further increased to 15.5% from March 2011.

The higher employer CPF contribution rates will apply from 0% at $50 of earned wages to the new full rate at wages of $1500 for employees who are 35 years old and above and whose monthly earning wages are up to $1500.

In addition, the total maximum CPF contributions payable for an employee in 2010 will be increased from $26,393 to $26,775.00

There are no changes to the graduated contribution rates for employees who have obtained their Singapore Permanent Residents (“SPRs”) status in the 1st and 2nd years. The 1% increase implemented in two phases will apply to SPRs who are currently paying the full CPF rates.

For the revised calculation details, you may wish to refer to the CPF Contribution Rate Booklets available on www.cpf.gov.sg.