BSL Bulletin

In the 2010 Budget, the Minister for Finance unveiled a $5.5 billion budget with a key focus to increasing productivity by 2 to 3 per cent a year over the next decade to raise Singapore to an advanced economy based on high skilled people, innovative economy and Distinctive Global City.

To achieve these objectives, the Minister introduced the PIC scheme to incentivise investments in six qualifying activities which enhances skills, productivity and innovation as follows.

1. Acquisition or leasing of PIC Information Technology (“IT”) and Automation Equipment;
2. Training of Employees;
3. Acquisition and In-licensing of Intellectual Property Rights (“IPRs”);
4. Registration of Patents, Trademarks, Designs and Plant Varieties;
5. Research and Development Activities; and
6. Design projects approved by DesignSingapore Council.

The design and attraction of this PIC scheme is that it co-funds the cost of investments in those qualifying activities by granting enhanced tax allowance/deduction which help to reduce the cost of the investments of the businesses for the 5 Years of Assessment (“YAs”) 2011 to 2015. Significant enhancements to the scheme were introduced in subsequent Budgets 2011 to 2013.

Overview of PIC

All businesses including sole proprietorships, partnerships and companies are eligible for PIC in respect of qualifying expenditure incurred in the basis period from YAs 2011 to 2015. The qualifying expenditure is net of grants and subsidies from Government and capped at $400,000 per YA for each of the above mentioned qualifying activities. The expenditure cap has been combined for YAs 2011 and 2012 into $800,000 and for YAs 2013 to 2015 into $1,200,000.

With the PIC, a taxpayer may claim 300% enhanced allowance/deduction in excess of the 100% base allowance/deduction granted on the qualifying expenditure. Potentially, a taxpayer who spends $400,000 on each of the above six activities in one YA would enjoy total allowance/deduction of $9.6 million (ie $400,000 x 6 x 400%).

Any unutilised tax allowance/deduction under PIC, subject to ownership continuity test and other relevant conditions, are available for

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

Taxpayers must make the claims for PIC in their income tax returns for each relevant YA.

PIC Cash Payout

The taxpayer may opt to convert up to $100,000 of their total expenditure in all the six qualifying activities into a non-taxable cash payout per YA from YA 2011 to 2015. This election once made is irrevocable.

The maximum cash payout is calculated as follows:

All businesses, sole-proprietorships, partnerships, companies (including registered business trusts), are eligible to apply for the cash payout, provided that it has:

1. incurred qualifying expenditure and are entitled to PIC during the basis period;
2. active business operations in Singapore; and
3. at least 3 local employees* (Singapore citizens or Singapore permanent residents) with CPF contributions in the last month of the quarter or combined consecutive quarters.

*excludes sole-proprietors, partners under contract for service and shareholders who are directors of the company

To apply for PIC cash payout, taxpayer has to submit the completed PIC Cash Payout Application Form and relevant annexes to IRAS. Quarterly applications may be made after the end of each quarter or combined consecutive quarters in the business’ financial year, but not later than the filing due date of income tax return (ie 15 April for sole-proprietorship and partnership and 30 November for company). The cash payout will generally be disbursed within three months of IRAS’ receipt of the application form and relevant annexes where the information is complete.

PIC Bonus

A new PIC Bonus is introduced in the Budget 2013 as a more targeted approach to encourage businesses to invest in PIC activities. The PIC Bonus gives businesses that invest a minimum of $5,000 per YA in PIC qualifying expenditure a dollar-for-dollar matching cash bonus for YAs 2013 to 2015, subject to an overall cap of $15,000 for all 3 YAs combined.

This is in addition to the existing PIC benefits of 400% tax deductions/allowances and/or 60% cash payout. To enjoy the PIC Bonus, businesses must have made a claim for the 400% tax deductions/allowances and/or the PIC cash payout. However, contrary to PIC cash payout which is non-taxable, the PIC Bonus is a taxable receipt.

To be eligible for the PIC Bonus, businesses must have:

1. incurred at least $5,000 in PIC-qualifying expenditure (net of grant or subsidy by the Government or any statutory board) during the basis period for the YA in which a PIC Bonus is claimed;
2. active business operations in Singapore; and
3. at least 3 local employees* (Singapore citizens or Singapore permanent residents) with CPF contributions in the last month of the quarter or combined consecutive quarters

* excludes sole-proprietors, partners under contract for service and shareholders who are directors of the company

This article discusses the general framework for claiming PIC benefit under each category of qualifying activity as follows.

Acquisition or leasing of PIC IT and Automation Equipment

Businesses can claim PIC benefits on expenditure incurred to acquire or lease qualifying IT and automation equipment. Currently, a prescribed list of IT and automation equipment provides tax certainty to businesses for their PIC claims as items on the prescribed list qualifies for PIC automatically. The list has been expanded and will be updated regularly to take into account feedback from businesses. Examples of qualifying IT and automation equipment include computers, software, facsimile, injection mould machines, bar-coding system, etc.

Where the automation equipment is not on the prescribed list, taxpayers can apply, on a case-by-case basis, to IRAS to seek approval to claim enhanced allowance/ deduction under the PIC scheme. The approval criteria is recently liberalised in the Budget 2013 as follows:

1. The equipment automates or mechanises, whether in whole or in part, the work processes, whether core or non-core of the business; and
2. The equipment enhances productivity of the business (for example, in terms of reduced man hours, more output or improved work processes).
3. Equipment that is a basic tool will be allowed if: It increases productivity compared to the existing equipment used in the business; or It has not been used in the business before.

When claiming for PIC on qualifying IT and automation equipment, please note the following:

• PIC is given on due claim.
• Enhanced allowance must be claimed together with the base allowance.
• Allowance on the qualifying equipment is given on “per equipment basis”, except where the allowance is subject to expenditure cap.
• Under cash payout option, cost of the equipment in excess of the cash conversion cap does not qualify for base allowance.

There is a minimum ownership requirement of one year for PIC IT and Automation Equipment. The taxpayer must submit the Disposal of Qualifying Assets Form to inform the Comptroller if the minimum ownership condition is not met and IRAS will claw back the PIC enhanced allowances/deduction or recover the PIC cash payout disbursed unless the disposal/lease comes within the auto-waiver from claw-back provisions.

Where PIC enhanced allowance/deduction has been claimed, the form must be submitted together with the income tax return for the YA of the disposal/lease of the qualifying asset. The taxpayer should reflect a claw-back of the enhanced allowance/deduction granted in its income tax return and tax computation for the YA of disposal/lease.

Where Cash Payout has been claimed, the Disposal of Qualifying Assets Form must be submitted to IRAS within 30 days from the date the PIC IT and automation equipment is disposed of/leased out (unless auto-waiver applies). The cash payout must be repaid to IRAS within 30 days from the date of the PIC Cash Payout Recovery notice. Penalties may apply for non-compliance of the 30-day notification period or 30-day cash payout recovery period.

Training of Employees

For the YA 2011, only training expenditure incurred on employees will qualify for PIC. However, for the YAs 2012 to 2015, this is extended to non-employees who are engaged by business to carry on its trade (e.g. real estate agents, representatives of financial advisers/capital markets services licence holders and insurance agents) and individuals who lease assets from a business to provide a service to others (e.g. taxi hirers).

In-house training

Prior to the YA 2012, only in-house training courses accredited / approved by the Workforce Development Agency or Institute of Technical Education (“ITE”) qualify for enhanced deduction under PIC.

From the YA 2012, businesses may claim enhanced deduction on qualifying expenditure on in-house training programmes that are non-Workforce Development Agency accredited or ITE approved, subject to a cap of $10,000 and the overall cap on qualifying training expenditure.

The qualifying expenditure includes 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 other remuneration paid to in-house trainers for other duties including preparation of course contents and training materials, salaries and other remuneration paid to administrative support staff, absentee payroll, accommodation, travelling and transport costs, overheads like utilities are specifically excluded.

External Training

PIC enhanced deduction is also available for qualifying training expenditure incurred on training provided through an external training provider. The qualifying training expenditure includes training fees paid / payable to the external training service provider, registration or enrolment fees, examination fees, tuition fees and aptitude test fees. Expenses such as hotel accommodation, travelling and transport costs incurred by businesses for the external trainer will qualify for PIC.

Acquisition and In-Licensing of IPRs

Acquisition of IPRs

100% writing down allowance (“WDA”) and 300% PIC enhanced WDA are granted on the qualifying cost of acquisition of qualifying IPRs.

Qualifying IPRs means patent, copyright, trademark, registered designs, geographical indication, layout design of integrated circuit, trade secret and information with commercial value and plant variety acquired for use in the trade or business. They exclude IPRs approved by the Economic Development Board relating to media and digital entertainment contents.

Qualifying acquisition cost means the cost of acquisition excluding legal fees, registration fees, stamp duty and other costs related to the acquisition.

Both the legal and economic ownership of the IPR must be acquired by the taxpayer. Sole-proprietorship does not qualify for this scheme.

The 100% WDA and 300% PIC enhanced WDA claim on the qualifying cost are spread over a 5-year period on a straight line basis.

The IPRs must be owned for a minimum period of one year from date of acquisition, failing which, claw back provisions will apply. If the IPRs are owned between 2 to 5 years, there is claw back of WDA but no claw back of PIC already allowed

In-Licensing of IPR

The 2013 Budget proposed that IPR In-Licensing payments will qualify for PIC Enhanced Deduction. The Ministry of Finance has indicated that IPR In-Licensing is not intended to cover franchising arrangements.

IRAS will release further details of the scope and qualifying conditions by April 2013.

Registration of Patents, Trademarks, Designs and Plant Varieties

Costs incurred in registering Patents, Trademarks, Designs and Plant Varieties (“qualifying IPRs”).

Costs include official fees and professional fees. Official fees refer to payments to the Registries of Patents, Trademarks, Designs and Plant Varieties in Singapore and elsewhere for

• Filing of an application;
• Search and examination report on the application for a patent;
• Examination report on the application for grant of protection for a plant variety; or
• Grant of a patent.

Professional fees refer to fees incurred in relation to the registration of the qualifying IPRs including fees payable to a person acting as an agent for

• Applying for the qualifying IPRs in Singapore or elsewhere;
• Preparing specifications or other documents for the purposes of the qualifying IPRs Acts; or
• Giving advice on the validity or infringement of any qualifying IPRs.

Both the legal and economic ownership of the qualifying IPRs must be maintained by the taxpayer.

Renewal costs for trademarks do not qualify for PIC. Costs incurred qualify for PIC regardless of the outcome or success of the application.

Minimum ownership of one year period from the date of filing of the IPR is required otherwise claw-back provisions apply as follows.

• For IPR sold within one year, the lower of sale price of IPR or deduction granted.
• If the IPR is owned between 2 to 5 years, there is claw back of WDA but no claw back of PIC already allowed.

Research and Development (“R&D”) Activities

Under Section 2 of the Income Tax Act, R&D means 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.

It does not include quality control or routine testing of materials, devices or products, cosmetic modifications or stylistic changes to materials, devices, products, processes or production methods or development of a computer software that is not intended to be sold, rented, leased, licensed or hired to 2 or more persons who are not related parties (known as multiple sales requirement).

With effect from YA 2012, the multiple sales requirements condition for software development will be removed.

Some examples of Qualifying R&D activities include using new materials to improve functionality of existing products, fundamentally changing the physical characteristics beyond changes that are merely cosmetic, an innovative product which is the first of its kind in Singapore.

• The qualifying R&D expenditure refers to staff cost, consumables and any such expenditure prescribed by the Minister. The R&D expenditure must be net of subsidy and grant received from the government or statutory board.
• For fees paid to an outsourced R&D organisation, 60% of the fees is deemed staff costs and consumables.
• From YA 2012, costs incurred under R&D cost-sharing arrangements will also be eligible for PIC. The qualifying expenditure will be deemed to be 60% of the shared costs, similar to outsourced R&D.

Tax deductions claimable for R&D expenditure incurred are as follows.

Legal and beneficial ownership of the R&D must vest with the claimant company.

Design projects approved by Design Singapore Council

The design project must be approved by the Design Singapore Council and can be conducted in-house or outsourced.

Only businesses who are the beneficiary of the design activities and not in the trade of providing design services are eligible to claim PIC. The design must be registered in the company’s / partnership’s / sole-proprietorship’s capacity.

To qualify for PIC enhanced deduction, the approved design project must relate to an industrial / product design and result in the final design of a physical product. It must lead to the creation of an intellectual property (i.e. registered design or patent) that is registered with the Intellectual Property Office of Singapore. The applicant must be the sole owner of the registered design. The design project must conduct at least three out of five design phases entirely in Singapore and be completed within 2 years, including the registration of design / patent.

In-house Design Projects

PIC enhanced deduction on in-house design projects is applicable to 100% of staff costs of qualified design professional but excluding directors’ fees.

Outsourced Design Projects

For outsourced design projects, only 60% of the total fees paid / payable to an approved design service provider are deemed to be the staff costs of the qualified design professional engaged by the design service provider and qualify for PIC enhanced deduction.

Where more than 60% of the payments to the approved design provider are made up of staff costs of qualified designers of the outsourced company, PIC enhanced deduction will be based on actual percentage of staff costs incurred.

Conclusion

The Government is relentless in pursuing its goals of increasing productivity and innovation to achieve sustained and inclusive growth for Singapore and building up capabilities to seize the growing opportunities in this rapidly expanding Asian region in the next decade. Invest now before it is too late.

DID YOU KNOW?

ANNUAL GENERAL MEETINGS

What is an Annual General Meeting? (“AGM”)

An AGM is a mandatory annual meeting of the members of a company. A company will present its financial statements before the members so that they can raise questions regarding their investments or other issues.

When must a company hold its AGM?

A company must hold its AGM within the time stipulated in the Companies Act, Chapter 50 (the “Act”)

• Section 175 – within 18 months for new incorporation company. Thereafter, a company must hold an AGM every calendar year with each not more than 15 months after the previous one; or
• Section 201 – not more than 6 months from the close of the Company’s financial year end to lay its profit and loss account before its members;

whichever is the earlier.

For public companies, the AGM must be held not more than 4 months after the year end.

Who is responsible for convening the AGM?

The director(s) of the company is responsible for convening the company’s AGM. If directors did not convene the AGM, any member of the company can apply to Court for an AGM to be held pursuant to Section 175(4)(b) of the Act.

What are the penalties for failing to hold the AGM on time or failure to comply with provisions of the Act relating to the accounts of the company?

• What are the penalties for failing to hold the AGM on time or failure to comply with provisions of the Act relating to the accounts of the company?
• Penalties for failing to lay before the members of the company at its AGM the financial statements pursuant to Section 201 of the Act – director shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$50,000.

If a director fails to comply or fail to take reasonable steps to secure compliance with any provisions relating to the accounts of the company or has by his willful act been the cause of any default by the company of such provision, shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$10,000 or to imprisonment for a term not exceeding 2 years.

What if a company needs more time to hold the AGM?

A company could apply to ACRA for extension to hold the AGM pursuant to Section 175 and/or Section 201 of the Act. A company must set out the reasons for the extension such as auditors needing more time to verify certain overseas transactions etc.

The maximum extension allowed for the application is 2 months and the fees payable is S$50 for each month of extension applied for.

The total fee payable depends on the period of extension applied for under the relevant sections.

How to convene an AGM?

• Directors could hold a board meeting to convene an AGM or pass a board resolution to convene an AGM and approve the Notice of the AGM.

What must be sent to the members of the company for an AGM?

• Notice of AGM
• Financial Statements
• Proxy forms

During the AGM

• Quorum
• Chairman
• Proxy
• Voting

Post-AGM

• Minutes
• Filing of Annual Returns

Notice of AGM

• Notice of AGM must be in writing;
• All members, including estate of a deceased member or the Official Assignee in charge of the affairs of a bankrupt member, directors, current auditors and any other persons specified in the company’s Articles of Association, are entitled to the Notice of AGM;
• Minimum notice period of NOTICE is usually 14 days (plus another day for posting depending on the Articles of Association) though Articles of Association may provide for longer period. The notice period could be shortened if ALL members of the company who are entitled to attend and vote at the AGM agree to it;
• Notice could be served personally by post or by other forms of communication as provided in the Articles of Association.

What are the matters that should be included in the Notice of AGM?

• Date, time and avenue of meeting;
• Ordinary business to be transacted;
• Details of resolutions to be passed; and
• A notice of members’ right to appoint a proxy.

What is the ordinary business of an AGM?

The ordinary business is stated in the Articles of Association of the company and usually includes the following:

• Adoption of financial statements
• Declaration of dividend
• Re-election of director
• Appointment of auditors and fixing their remuneration (if any)

Any other business will be classified as “Special Business”.

Note: The AGM should only deal with matters of which notice has been given. A resolution passed for any matter which was not disclosed in the Notice of Meeting will not be legally valid as a voting member might be absent and therefore has no knowledge of the matter.

Financial Statements

• It is the responsibility of the directors to present to the members of the company the relevant documents as the financial statements, balance sheet and directors’ reports and auditor’s report (if applicable).
• All members who are entitled to attend the AGM should receive a copy of these documents at least 14 days before the AGM so that they can be prepared for the meeting.

Post-AGM

Minutes

• A company is required to keep proper minutes of the AGM pursuant to Section 188 of the Companies Act, Chapter 50. The minutes of the AGM must be signed by the chairman of the meeting and entered into the minute book of the company;
• Minutes are a record of the proceedings of the company’s meeting.

Filing of Annual Returns

• The Annual Return and the financial statements (if applicable) must be filed with ACRA within one month after the AGM has been held.