Tax Implications Of Investment Companies †MyAssignmenthelp.com

Question: Discuss about the Tax Implications Of Investment Companies. Answer: Introduction This paper deals with provisions in relation to the tax implications which are imposed in an investment holding company and an investment dealing company operating in Singapore. The tax implications on both the companies are different in relation to the deductibility of expenses, capital allowance and business losses. These are governed through the provisions of the Singapore Income Tax Act 1947. Primary difference between an investment holding company and an investment dealing company are that a holding company primarily derives it income from passive income sources and dealing company derives its income from direct income sources (Dyreng, Hoopes Wilde, 2016). This is because an investment holding company is the owner of investments like shares and properties on long term basis and gets investment income such as rental, dividend or interest income. The basic purpose of such company is holding investment. On the other hand an investment dealing company also holds investments in form of shares and property however they are treated as a trading stock and income is derived by selling and purchasing such investments (TAX@SG, 2018). Application of the SITA on the companies The SITA is the primary legislation which deals with provisions in relation of computation of tax towards these companies. This section of the report deals with the implications of subsection 10 (1)(a), 10E, 10(1)(f) and 10(1)(d) on these companies in relation to their tax implications. In relation to an IH company income tax is payable on incomes which have accrued or been derived from Singapore or income which have been attained from outside Singapore in Singapore such as income from foreign received in Singapore. The major form of income which is gained by a IH are dividends and interest dealt by s10 (1)(d) and Rental income which is dealt with by s10(1)(f) of the SITA. In relation to dividends a one-tier corporate tax system is adopted by Singapore. The final tax is the tax which has been paid by a Singapore company in relation to its chargeable income. Thus all dividends which are paid are paid by a corporate organization in Singapore in the hand of the shareholders are exempted from tax. In relation to foreign sourced dividend income the income which has been attained in Singapore is to be taxed at 17% which is the present rate of corporate tax unless an exemption of tax has been provided. Incomes from dividends are categorized into four groups for the purpose of tax treatment. The first group consists of shares which are non-income producing, the second group deals with shares through which tax-exempt dividend income is generated, the third group consists of shares which produce income and is remitted to Singapore during the taxable year and shares which produce income but are not remitted to Singapore (IRAS, 2018). Dividend Income (10)(1)(d) In relation to the first group expenses cannot be deducted as dividend income taxable is not produced in Singapore by the expenses incurred on shares. In the second group the net dividend income of the same year is allowed to be offset by the expenses which is more than the dividend income from other shares of the same group. The treatment for the third group is same as the second. In relation to the fourth group expenses cannot be deducted as income taxable within Singapore is not produced by them however they may be carry forwarded. For example Shares in company Net dividend (income)/Loss Without concession With concession X (100000) (100000) (100000) Y 1500000 DISREGARDED 1500000 Net dividend income 100000 NIL *NET LOSS IS NOT TAKEN INTO CONSIDERATION Interest Income 10 (1)(d) Interests when remitted or accrued in Singapore are taxed at the rate of 17% which is the present rate of corporate tax. Rental income 10(1)(f) Rent when remitted or accrued in Singapore are taxed at the rate of 17% which is the present rate of corporate tax.The concession in relation to this kind of income is provided on a block basis. Under this system the properties which produce income constitute a single block where the rental loss from one property is deducted with respect to the net rental income arising from other properties. However non-income producing properties are excluded. For instance Property x and y had been rented out by company A Without concession With concession NET INCOME of $40000 from property X $40000 $40000 NET loss of $50000 from property Y Disregarded $50000 Net Income (rental) $40000 NIL Deductible expenses Expenses which can be deducted in relation to an investment holding company can be categorized into three categories namely direct expenses, statutory expenses and indirect expenses. Direct expenses are those which are incurred by the company directly for the purpose of deriving income such as interest on loans for purchasing the property, agents fees and maintenance fee. When the expenses which have been incurred by the company directly in relation to deriving the income are more than they income they cannot be used to set-off against the other sources of income. For instances the expenses incurred against an exempted source of Income such as one-tier dividends cannot be set off against those incomes which are taxable. The expenses which the organization has to bear in relation to compliance with legal and statutory provisions such as audit fees and bank charges are known as statutory expenses. Expenses which do not fall under the category of direct or statutory expenses are known a s indirect expenses. These expenses are that of transport expenses and director fees. Concession in relation to such expenses have been provided by the IRAS however it is restricted to 5% of the overall turnover value if it is less than the actual expenses (IRAS, 2018). In case of deductible expenses in a investment dealing company comparatively less restrictive approach is taken as in a investment holding company. The rules for determining their deductibility of expenses are as follows. Any expense or outgoing which has been incurred in relation to the income producing investment are to be deducted. However these are only deducted against the incomes which have been derived from such investments these provisions have been provided through Section 10E of the SITA. The balance which is not eligible to be set off has to be disregarded. Capital allowance In relation to the nature of an investment holding company it is not allowed to make a claim for capital allowance as the incomes which is made by it is only from passive sources such as rent and interest. No benefit can be provided to an investment holding company which may arise out of the Productivity and Innovation Credit Scheme. This type of company is also not allowed to take group relief for the purpose of setting off losses against other organization within the group. In addition any unutilized losses occurring during the tear are not allowed to be brought forward (IRAS, 2018). An investment holding company which has been incorporated after February 25 2013 is not allowed to make a claim tax exception for startup companies. They only enjoy partial exemption of taxes up-to $300,000 which is for the first $10000 at 75% and the remaining 290,000 at 50%. On the other hand investment dealing is allowed to make a claim of capital allowance under the SITA for the use of plant and machinery towards deriving the income. The balance of an allowance shall not be considered which cannot be set off in the year. As the investment dealing company indulges in trade it has the right to enjoy the benefits under Productivity and Innovation Credit Scheme. Tax exceptions can also be claimed by the company in the first three assessment year. However the company is not able to claim group relief as capital allowance and losses which are not utilized are not considered (IRAS, 2018). Tax advice on both the structure It has been provided that the client wants to operate an investment company and where its purpose would be to invest in shares and real properties. If the client adopts the structure of an holding company he would not be able to indulge IN trading activities which he would be able to do in relation to a dealing company. In addition as the holding company is only able to make passive income their income tax would be calculated under the above discussed process where any loss which has not taken place in relation to an income producing investment cannot be deducted from the taxable income. It is also clear that as the holding company does not indulge in trade it is not allowed to have capital allowance which the client can have in relation to an investment dealing company. In addition the client will also be excluded from tax assessment for the first three years in relation to a dealing company where as he would only be provided an exception up-to $300000 at 75% for initial $10000 and 50% for latter $290000. Thus it is best advised to continue the business in from of a investment dealing company. Summary Thus the report can be concluded by stating that the tax implications of an investment holding company and investment dealing company are different. These differences occur in relation to capital allowance and deductibility of expenses. The restrictions imposed in both the structures by section 10E are same. Any additional losses in relation expenses for one sources of income cannot be set off against income derived from another source in a holding company. References Dyreng, S. D., Hoopes, J. L., Wilde, J. H. (2016). Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), 147-186. Investment Holding Companies - IRAS. (2018). Iras.gov.sg. Retrieved 3 February 2018, from https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxes/Specific-industries/Investment-Holding-Companies/ IRAS (2018). Iras.gov.sg. Retrieved 3 February 2018, from https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/Businesses/Basic%20Format%20of%20Tax%20Computation%20for%20an%20Investment%20Holding%20Company.pdf IRAS (2018). Retrieved 3 February 2018, from https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/News_and_Events/Events/Seminar%20on%20Taxation%20of%20Investment%20Holding%20Companies%202017 IRAS streamlines e-Tax Guides on Ascertainment of income from business of making investment - TAX@SG. (2018). TAX@SG. Retrieved 3 February 2018, from https://taxsg.com/2011/09/08/iras-streamlines-e-tax-guides-on-%E2%80%9Cascertainment-of-income-from-business-of-making-investment%E2%80%9D/