The Accounting and Tax Treatment of Business Losses in Singapore

Singapore is a famously easy country to do business in, and while companies are geared toward the creation of profit, technological changes, market upheavals and macro-level economic challenges may affect their bottom line. In these situations, even the best run business can sustain losses. In an uncertain economic climate, sustainable revenue generation is the biggest challenge and the highest priority for every company. Key to easing pressure is optimising cash flow and forward-thinking management of businesses losses.

Ottavia offers this broad overview of how losses are treated in Singapore to help prospective and existing business-owners better plan for their financial future. As one of the city’s leading business services firm, we offer a range of effective and reliable accounting and tax services at competitive rates to local businesses.

Understanding the provisions governing the tax and accounting treatment of Singapore businesses in the jurisdiction in which it operates is crucial. In addition to the loss carry-forward system offered by many jurisdictions, Singapore’s advance tax regime allows for companies to carry back losses. The disadvantage of a system whereby only loss carry-forward is offered is that the company’s ability to utilise tax losses depends on its future profitability – the company receives a deduction on future taxes for losses incurred today. Loss carry-back is a huge relief to smaller or newer companies with less certain future, which allows them to claim back tax paid previously on losses suffered in the current period. This scheme is offered to all entities including sole proprietorships and partnerships.

How business losses are treated

Corporate taxpayers in Singapore may offset trading losses against all incomes earned in the same accounting period, including that from dividends, interest or rental.

The company may carry forward unutilised losses indefinitely to offset against future profits.

Conditions of qualification

To claim a loss carry-forward, a business is subjected to a shareholding test. To qualify, a business must undergo no substantial change in the shareholders and the extent of their shareholdings as at the relevant dates. These relevant dates are the last day of the year (31 December) in which the company originally incurred the loss and the first day of the tax year of assessment (1 January) in which the company intends to deduct the loss.

The shareholding test compares the percentage of shareholdings in the company held by each shareholder as at the relevant dates. No substantial change in shareholders and their shareholdings will be found if the percentage of shares held by common shareholders (those holding shares during the two relevant dates) as at the relevant dates is 50 per cent or greater.

Corporate Group Relief

Companies may transfer any unutilised trading losses incurred in the current year to another company within the same corporate group. Pending the meeting of certain conditions, these transferred losses are deducted against the assessable income of the claimant or transferee company for the same year of assessment. Transferor companies may transfer 100 per cent of their loss items to a claimant company providing that the claimant is capable of absorbing the losses.

Conditions of qualification

Both the transferor and the claimant companies must each:

  • Be Singapore incorporate companies
  • Belong to the same corporate group
  • Satisfy a shareholding threshold of 75 per cent, whereby:
    • ne company directly or indirectly beneficially holds 75 per cent of the ordinary share capital of the other or,
    • a third Singapore incorporate company directly or indirectly beneficially holds 75 per cent of the ordinary share capital in both the transferor and the claimant company
  • Have the end date for the accounting year

NB: The ordinary shareholding must be continuously maintained at a level equal to or above 75 per cent during the period that ends on the basis period’s last day. The shareholders must demonstrate beneficial right to the residual profit or assets.

Disqualified loss items

A number of loss items do not qualify for transfer within a corporate group. These include:

  • Loss items in respect of income that is wholly exempt from taxation
  • Loss items in respect of specific categories of trade or activities where rules or laws are in place to quarantine unutilised capital allowances and losses. These can include income from the hiring of a motor vehicle under Section 10H and income from finance leases under Section 10D of the Income Tax Act, et cetera)
  • Loss items of foreign branches
  • Unutilised Section 14Q deductions that arose in YA 2012 or prior
  • Loss items of companies who have been provided with any incentives granted under the Economic Expansion Incentives Act (e.g. technopreneur investment incentive scheme, overseas investment and venture capital incentive, investments in new technology company)
  • Expenses of dormant companies gone unutilised as of the end of the year
  • Unutilised losses from the current year arising from an excess of expenses over an investment holding company’s investment income
    • Current year unutilised losses of Section 10E companies – i.e. an investment company or any company that derives income from the business of making investments.

Relief via the Loss Carry-Back Scheme

To better support small corporate taxpayers as well as small proprietors and partnership firms during periods of economic downturn, the loss carry-back scheme was introduced by the Government of Singapore in 2006.

With effect from the Year of Assessment (YA) 2006, current year losses may be carried back and claimed on tax that was previously paid. A maximum aggregate trade loss of S$100,000 was allowed to be carried back to the YA preceding the current year.

Temporary Enhancements to the Scheme

Following the beginning of the global economic crisis in 2008, a suite of temporary enhancements was announced for the scheme. For YA 2009 and 2010, the current year’s unabsorbed trade losses could be carried back for a period of up to those three years of assessment immediately preceding the year of assessment wherein the company suffered the losses. Losses are to be setoff in the following order:

  1. Firstly, losses are to be set off to the third YA preceding the YA of loss;
  2. Secondly, where qualifying deductions remain after (a), the remaining balance will be carried back to the second YA preceding the YA wherein the company suffered the loss; and
  3. Thirdly, remaining qualifying deductions after (b) will be carried back to the YA preceding the YA of loss.

The aggregate amount of trade losses capable of being carried back has since been capped at S$200,000.

The carry back scheme offers companies a way to recoup losses incurred through claiming a refund on taxes paid in previous years. The qualifying conditions for this scheme are comparable to requirements governing the carrying forward of unutilised trade losses. The relevant dates for the shareholding test (to be applied on application) are the first day of the year in which the company suffered the losses and the final day of the YA in which the company wishes to deduct the losses.

Companies choosing to carry-back losses should indicate this intention when filing income tax form Form C alongside the tax computation for the relevant Year of Assessment, and submit a revised tax computation for the previous Year of Assessment affected by the carry-back. Companies can claim a refund of taxes paid prior to filing Form C by submitting the ‘Election Form’.

Investment Holding Companies

Pure investment companies may not carry forward losses. Pure investment companies are defined as any company whose activities are confined to holding investments and derive their income from these investments in the form of rental, dividends or interest.

New startup companies should note

Entrepreneurs looking to establish a new company should take note that there is a tax exemption scheme for startup companies. Since 2005, newly incorporated companies meeting certain qualifying conditions can, under the scheme, claim a full tax exemption on the first S$100,000 of normal taxable income made in each of its first three consecutive YAs. Since 2008, the Government of Singapore has offered a further 50 per cent exemption on the next S$200,000 of taxable income for the first three consecutive YAs.

Where a startup company chooses to carry back its losses, qualifying deductions will be set off against assessable income for the preceding YA. Where there is no remaining chargeable income after deduction, the company will not benefit from the above exemption scheme. Instead, should the company carry forward its unabsorbed losses and utilise the tax exemption scheme, it will benefit from savings in the form of minimised tax liability. New startups should carefully consider the consequences of varying treatments of trade loss. Once an election is made to utilise the Enhance Carry-Back Relief System, this decision is irrevocable.

Examples

For this example, company ABC Pte Ltd was incorporated in 2008. In calendar year 2011, it suffered a trade loss of S$100,000. Please refer to the illustration below exploring the implications on its income tax and taxable income.

Should ABC Pte Ltd elect to carry back the loss:

YEAR OF ASSESSMENT 2010 (IN S$)   2011 (IN S$)   2012 (IN S$)
Chargeable profit/loss 150,000 Chargeable profit /loss (100,000) Chargeable profit /loss 300,000
Less: Losses carried back from YA 2011 100,000 Less: Losses carried back to YA 2010 (100,000) Losses brought forward Nil
Chargeable income 50,000 Chargeable income Nil Chargeable income 300,000
Less: tax exemption for new startup 50,000 Less: PartialTax exemption-((10,000*75%)+290,000*50%)) (152,500)
Chargeable income after exemption Nil Chargeable income after exemption Nil Chargeable income after exemption 147,500
Tax Payable @20% Nil Tax Payable @17% Nil Tax Payable @17% 25,075

Total tax liability for the three YAs is S$25,075.

Should the company carry forward the losses of YA 2011 the tax implications will be as follows:

YEAR OF ASSESSMENT 2010 (IN S$)   2011 (IN S$)   2012 (IN S$)
Chargeable profit/loss 150,000 Chargeable profit /loss (100,000) Chargeable profit /loss 300,000
Less: Losses carried back from YA 2011 Nil Less: Losses carried forward to YA 2010 (100,000) Losses brought forward (100,000)
Chargeable income 150,000 Chargeable income Nil Chargeable income 200,000
Less: tax exemption for new startup-((100,000*100%) + (50,000*50%)) (125000) Less: PartialTax exemption-((10,000*75%)+190,000*50%)) (102,500)
Chargeable income after exemption (25,000 Chargeable income after exemption Nil Chargeable income after exemption 97,500
Tax Payable @20% 5,000 Tax Payable @17% Nil Tax Payable @17% 16,575

Total tax liability for the three YAs is S$21,575

As illustrated, this company’s tax liability is greatly lessened where it choose to carry-forward the loss instead of carrying back. New startup companies must consider how they will treat business losses extremely carefully.

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