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The Guide to Tax Deductions: Expenses You Can Write Off

The Guide to Tax Deductions: Expenses You Can Write Off

Currently, the tax on corporate profits is capped at 17% in Singapore. This is the standard tax rate you will have to pay if you want to operate your company in Singapore.

However, there are exemptions and incentives that are offered by the Government that can lower your company’s effective tax rate.

In this article, we will go through what kind of business models will require you to pay tax, what counts as business expenses, what tax exemptions mean, and how to claim exemptions.

What Kind of E-Commerce Business Models Will Need To Pay Tax?

If you’re wondering, there are no separate provisions within the income tax laws for E-commerce. This means that current tax laws and interpretations for traditional businesses will apply to E-commerce companies as well.

Singapore follows a territorial basis of taxation. This means that tax is imposed on income derived from Singapore, and income received in Singapore from outside of the country.

Nonetheless, this line is blurred for E-commerce companies as most of these companies deal with electronic transactions instead of the actual trade of physical goods. This is why you need to look into the business model of the company, the extent of its operations and where the operations took place.

It eventually boils down to whether the merchant is trading in Singapore or with Singapore.

In a nutshell, your company will need to pay tax if it has:

  1. Business operations in Singapore, with a website hosted in Singapore
  2. Business operations in Singapore, with a website hosted outside Singapore
  3. Business operations in Singapore, with a website and branch outside Singapore
  4. Business operations outside Singapore, with a website in Singapore
  5. Business operations outside Singapore, with a website and branch in Singapore.

Tax will be imposed on the income earned from your website and branch in or outside of Singapore.

How about income derived from an E-commerce intermediary based in Singapore?

What is an E-commerce intermediary? This refers to companies that provide services and products to help the primary company set up facilities and internet connectivity, which also allows the company to run.

The E-commerce intermediary’s income can come from commissions, service fees, subscription fees, registration fees, and more from businesses that utilize its services and products.

So is the income earned by an E-commerce intermediary liable to income tax in Singapore?

Yes, if the intermediary has a presence in Singapore and its business operations are carried out in Singapore. Its income including commission and fees will be counted as income derived in Singapore and is therefore taxable.

Mark acts as a sole agent for a US Tupperware and other kitchen appliances company in Singapore. He brings in goods from the US and helps to distribute the wares to various suppliers. Mark also has a small physical shop. Through these transactions, he earns a certain commission. As a result, this commission is considered as income derived in Singapore. Therefore, it is taxable.

What if I have a physical server in Singapore?

Does the presence of a server in Singapore amount to trading in Singapore and is liable to Singapore tax? Well, the good news is that having a physical server will not amount to trading in Singapore. This is if the server merely acts as a tool for communication and the extent of the company’s business activities and income received in Singapore.

Nonetheless, according to the Income Tax Act (Section 2), a person will be considered trading in Singapore if he has a ‘permanent establishment’ in Singapore.

What Counts As Business Expenses?

Business expenses are the costs you incurred while running your business. In the following, we will provide some examples of common business expenses.

What are Allowable Business Expenses?

Allowable business expenses can be used to offset your tax payable by deducting against your accessible income.

Income tax payable = Business revenue - allowable business expenses

This is subjected to the following rules:

  1. Expenses must be incurred.
  2. Expenses must be related to your business.
  3. Personal expenses cannot be claimed.
  4. Purchase of small fixed assets can be claimed.
    Purchase of large assets can be capitalized on the balance sheet and you can claim a capital allowance for it.
  5. Expenses must be supported by proper documents that are kept for at least five years.

Examples include:

Employee costs

  • Compulsory CPF contributions by the employer
  • Employee insurance
  • Medical costs
  • Salary, bonus, allowances for employees

Finance and professional costs

  • Interest on borrowed money
  • Legal fees that are revenue in nature
  • Corporate Secretarial Fees
  • Accountancy fees

Running costs

  • Advertising
  • Business license renewal fees
  • Capital allowances on fixed assets purchases for business use

The list of allowable business expenses goes on, for more information, visit the IRAS site.

What are Disallowable Business Expenses?

Disallowable business expenses are those expenses that cannot be deducted against your business income. These expenses are often not incurred exclusively to earn your business income, or disallowed under the Income Tax Act.

Examples include:

Employee costs

  • Your salary, bonuses, allowances and CPF contributions
    (Good news: If you are working for your own company and have a written employment agreement, your salary will be considered an allowable expense, meaning you can use it to deduct your tax payable)
  • CPF contribution for your employees above the statutory limit

Capital expenses

  • Capital contributions or withdrawals
  • Purchase of fixed assets (even though this is capital in nature, you can claim capital allowance on this)
  • Depreciation of fixed assets
  • Start-up expenses (incorporation fees, licence fees, registration fees, etc)

Private expenses

  • Cost of travel to and from work
  • Medical expenses incurred on the sole-proprietor or partner
  • Travelling expenses for personal trips

Likewise, the list goes on. Visit the IRAS website here to find out more.

What Is Meant by Tax-Deductible?

As the name says, some expenses are deductible, some are not. Expenses that qualify for tax deduction reduce your taxable income, which also means you pay less tax. So, how do we determine which are those that are deductible against your taxable income?

There are four big conditions that you must adhere to to be considered for tax-deductible.

  1. Expenses must be wholly and exclusively incurred in the production of income, private and domestic expenses are not allowed
  2. Expenses must be revenue in nature and not capital. This can include normal day to day operating expenses (supplies, utilities, rent, etc).
  3. Expenses must be incurred, and there is a legal liability to pay. Payment cannot be an estimated amount of contingent liability.
  4. Expenses must not be prohibited under the Income Tax Act (Section 15). These can include private car expenses, fines, penalties etc.

What Kind of Expenses Are Tax-Deductible?

  1. Home Working Related Expenses

These expenses are catered more towards employees that are required by employers to work from home, resulting in home office expenses such as electricity charges and telecommunication chargers that are not reimbursed by the employer. You can claim these expenses as they are incurred for work purposes to lower your taxable income for the year. Of course, IRAS notes that it is difficult to calculate the exact amount of the running expenses. As such, they will accept the claim if you can provide the below expenses.

Electricity and telecommunication charges:

  • Compare the bills before and after working from home.
  • The difference can be claimed as a deduction.

Wifi charges:

  • If the wifi was set up only to enable you to work from home, you can claim the monthly subscription fee.
  • If the wifi was set up before working from home, it cannot be claimed.
  1. Partial Tax Exemption for Companies (PTE)

All companies including companies limited by guarantee can enjoy PTE unless they have already claimed the Tax Exemption Scheme for New Start-Up Companies.

Temporary relief from Singapore Permanent Establishment (PE) exposure for foreign companies

This is when employees of a foreign company have an unplanned presence in Singapore due to travel restrictions imposed relating to COVID-19. According to IRAS, such unplanned presence due to a pandemic does not equal permanent establishment, therefore tax can be exempted. However, this is still subjected to the following conditions:

  1. The foreign company does not have a permanent establishment in Singapore in 2020.
  2. The foreign company is not facing any economic changes.
  3. The employees are staying in Singapore for not more than 183 days in 2020.
  4. The employees are staying in Singapore only because of the COVID-19 travel restrictions.
  5. The employees will not have stayed in Singapore if not for COVID-19.

As usual, relevant supporting documents should be kept and handed to IRAS when required. This can include flight details, hotel stays, and more.

Double Tax Deduction for Internationalisation Scheme

Companies can claim automatic double tax deductions for expenses incurred from 1 Apr 2012 to 31 Dec 2025. This claim can only be made on qualifying expenses up to a specified expenditure cap under Sections 14B and 14K of the Income Tax Act.

With the recent Budget 2021 announcement, qualifying activities suitable for automatic double tax deduction have increased with effect from 17 Feb 2021. Companies can claim double tax deduction without seeking prior approval from Enterprise Singapore (ESG) or Singapore Tourism Board (STB).

On top of the existing activities, some new qualifying activities include:

  • Virtual trade fairs approved by ESG
  • Product or service certification approved by ESG
  • Overseas advertising and promotional campaigns
  • Design of packaging for overseas markets
  • Advertising in approved local trade publications

For more information on the expenditure cap and qualifying activities, check out the IRAS website here.

Tax Exemption for New Sartups or Start-up Tax Exemption Scheme (SUTE)

SUTE was introduced in 2005 to provide support for local enterprises and entrepreneurship.

This exemption is open to all new companies except:

  1. A company that has its main activity in investment holding
  2. A company that undertakes property development for sale, investment or both

To be eligible, your company must:

  1. Be incorporated in Singapore
  2. Be a tax resident in Singapore for that year of assessment
  3. State that the total share capital is beneficially held directly by no more than 20 shareholders in that year of assessment

For a detailed explanation of the amount qualified for tax exemption, visit the IRAS website here.

If you are looking to start up your company and do not know where to start, Osome provides a one-stop solution for you. Here at Osome, we help you with incorporating your company the right way, take care of all your accounting matters, and help you lessen the stress when starting your first ever business.

How To Claim Tax Exemptions

Knowing how to claim tax exemptions is important too, you do not want to be looking in the wrong places and not find the right information. Not to worry, we have listed the relevant IRAS websites you can visit to apply for your tax exemptions.

From YA 2021, e-filing for estimated chargeable income (ECI) is compulsory for all companies. You can find the form and the steps listed here.

All companies that have a trade or business in Singapore must report their annual income to IRAS by filling up the Corporate Income Tax Return (Form C-S/ C). From YA 2021 onwards, all companies must e-file their form by 30 Nov 2021.

To find the form and the steps you need, visit this website for a detailed walk-through.

Knowing what kind of tax deductions your company is eligible for can help in a lot of ways to reduce your tax payable. Well, it may seem like a long process. However, we highly recommend you look into your expenses and see what can be counted as a deductible expense. Lowering your taxable income will help you get a higher profit after tax will mean you earn more revenue for that year.

If you need help with accounting services, Osome is always here to help. We cater for e-commerce companies as well, assisting with reporting across multiple platforms.

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