Gear up for the new section 10L of the Singapore Income Tax Act 1947

From Jan 1, 2024, gains received in Singapore from the sale of foreign assets will be treated as income chargeable to tax, based on the newly enacted section 10L of the Singapore Income Tax Act 1947. It is crucial for businesses to assess the potential impact section 10L can have and take the necessary steps.

In this article, Sim Siew Moon, Senior Partner and Head of Tax and Lee Vin Wee, Tax Partner, delve into the complexities of section 10L and what businesses should be mindful of moving forward.

This article was first published in The Business Times on 16 December 2023.

Gear up for the new section 10L of the Singapore Income Tax Act 1947

Singapore has taken the bold step to enact section 10L in the Singapore Income Tax Act 1947, treating gains received in Singapore from the sale of foreign assets as income chargeable to tax. This will apply to gains from such sale that occurs on or after Jan 1, 2024 by entities that do not have adequate economic substance in Singapore. If foreign taxes are suffered on such gains, Singapore will grant a foreign tax credit claim to alleviate such foreign taxes suffered.

A foreign entity (that is, not incorporated, registered or established in Singapore) that is not operating in or from Singapore is not within the scope of section 10L.

Gains derived by individuals and gains derived from the sale of foreign assets (not being an intellectual property right) under the following circumstances are not subject to the provisions of section 10L:

• carried out as part of, or incidental to, the business activities of a prescribed financial institution.
• carried out as part of, or incidental to, the business activities or operations of an entity, whose income is exempt from tax or is taxed at a concessionary tax rate under certain tax incentives schemes in Singapore under the Act or the Economic Expansion Incentives (Relief from Income Tax) Act 1967.
• carried out by an entity that is an excluded entity.

To assist taxpayers in understanding section 10L, the Inland Revenue Authority of Singapore (IRAS) has issued an e-Tax Guide on 8 December 2023 to explain the income tax treatment of gains and losses from the sale or disposal of any movable or immovable property situated outside Singapore.

We highlight below some key takeaways when applying and administering section 10L.

Presence of permanent establishment (PE) overseas

A group falls within the scope of section 10L if the entities of the group are not all incorporated, registered or established in Singapore; or if any entity of the group has a place of business outside Singapore.

If you belong to a group that operates only in Singapore, with only Singapore entities (“Singapore group”), you will not fall within the scope of section 10L, but you need to be mindful that if one of the entities in your group has a place of business (for example, a branch or a PE) in a foreign jurisdiction, the group will be considered a relevant group for the purpose of section 10L.

While one would be expected to generally know whether their group has a foreign branch, it must be said that one may not know if their operations create a PE overseas until a PE analysis is undertaken or until an audit is conducted by the foreign tax authorities.

Therefore, Singapore groups should conduct a tax review of its operations to ascertain if they are within the scope of section 10L.

Advanced ruling on economic substance test

You must ensure that you have adequate economic substance to fall outside section 10L. Economic substance is generally measured by:

1. Whether the operations (that is, core income generating activities) of your entity are managed and performed in Singapore by your employees or outsourced to third parties or group entities; and
2. Whether your entity has adequate human resources and premises in Singapore to carry out the operations of the entity such as:

• The number of full-time or full-time equivalent employees of your entity (or other persons managing or performing your entity’s operations) in Singapore;
• The qualifications and experience of such employees or persons;
• The amount of business expenditure incurred by your entity in respect of its operations in Singapore;
• Whether the key business decisions of the entity are made by persons in Singapore.

If you wish to seek certainty on the adequacy of economic substance when a proposed sale or disposal of foreign assets is expected to occur, you can make an application to the IRAS for an advanced ruling. Such a proposed sale or disposal should take place within one year from the date of application.

The advantage of such a ruling, if obtained, is that it is valid for five Years of Assessments, provided the relevant facts and representations made remain unchanged and there is no change in the tax laws or interpretation of the tax laws.

Tax exemptions under Section 13 of the Income Tax Act 1947

Come Jan 1, 2024, if section 10L is applicable to your gains on disposal of foreign assets, then exemptions under section 13 will not be applicable - including the exemption of gains or profits from the disposal of ordinary shares (13W).

Therefore, if you have been claiming section 13W tax exemption for qualifying disposal of ordinary shares in the past, you need to review if your entity is within the scope of section 10L going forward.

Sale or disposal price of the foreign asset

It is important for you to note that if the sale or disposal of the foreign asset is at a price less than its open-market price (OMP), and section 10L applies to you, you will determine the amount of gain of the said foreign asset in this way:

A+B-C

Where:
A is the amount of the gains actually received in Singapore;

B is the OMP for the foreign asset; and

C is the actual price for the sale or disposal of the foreign asset.

If no amount of the gains is received in Singapore, then IRAS will not tax the difference between B and C.

If any part of the gains (say $100) is received in Singapore, then the $100 and the difference between B and C will be subject to tax in the year that the $100 is received in Singapore.

In the case where the foreign assets are transferred at say, their net book values (NBV) during a group’s internal restructuring, no accounting gain will arise. If the OMP is higher than the NBV, the above formula would cause an amount (that is, the difference between B and C) to arise. As there is no actual gain, it remains to be seen how the formula would be applied as no gain can be received in Singapore.

Losses from sale or disposal of foreign assets

You should note that losses from the sale or disposal of foreign assets (where if it had been a gain, the gain would be within the scope of section 10L) can be used to set-off section 10L gains that are chargeable to tax. The balance of loss can be carried forward to a future Year of Assessment for set-off against future section 10L gains that are chargeable to tax. There is no mention of any test to be satisfied for the use of such losses.

Unlike the utilisation of tax losses where the substantial shareholding test needs to be met, it appears that the losses under section 10L are available for set-off against future section 10L gains that are chargeable to tax even if there is a substantial change in the shareholder(s) of the entity. It remains to be seen if this will change going forward.

Conclusion

Section 10L was introduced to address international tax avoidance risks relating to non-taxation of disposal gains in the absence of real economic activities. It reiterates Singapore’s focus on attracting and anchoring substantive economic activities in the country.

It is here to stay. So, are you ready for section 10L?

The writers are from Baker Tilly TFW LLP. Sim Siew Moon is Senior Partner, Head of Tax; Lee Vin Wee is Tax Partner. The views are the writers' and do not necessarily reflect the views of the global Baker Tilly organisation or its member firms.