Historically, Singapore does not tax capital gains. Only gains which are “income” in nature are taxed.
However, come 1 January 2024, Singapore will introduce into law the new section 10L of the Income Tax Act 1947 (“ITA”). Under this new section 10L, Singapore will now tax gains received in Singapore from the sale or disposal of foreign assets. The ambit of this new section 10L will however exclude certain entities – for instance, those entities with “adequate economic substance” in Singapore and whose operations are managed and performed in Singapore.
The introduction of this new section 10L has created quite a stir among the Singapore tax community because this new section 10L, on the face of it, may potentially cover the taxation of capital gains. If it does cover the taxation of capital gains, then this may be a fundamental change in Singapore’s income tax regime because historically, Singapore taxes income, but not capital gains.
It will thus be crucial for multinational corporations (MNCs) and businesses to understand the tax implications arising from this new section 10L. In this Singapore tax update, we will discuss the following:
a. the impetus behind the introduction of this new section 10L;
b. a brief overview of the key features of this new section 10L; and
c. our brief thoughts on this new section 10L.
Impetus behind the introduction of the new section 10L
Based on the official reports of the Parliamentary Debates, the new section 10L will be introduced to address international tax avoidance risks relating to the non-taxation of disposal gains in the absence of real economic activities. This move is intended to be part of Singapore’s long-standing policy to align key areas of her tax regime with international norms. This new tax treatment will be consistent with international standards, such as the rules against harmful tax practices agreed by the Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) of which Singapore is a member, as well as the EU Code of Conduct Group Guidance.
In the same official reports of the Parliamentary Debates, Singapore has also clarified that the policy objective of this legislative amendment is not to tax capital gains in Singapore.
Brief overview of the key features of the new section 10L
Under the new section 10L, gains received in Singapore from the sale or disposal by an entity of a multinational group of any immovable or movable property situated outside Singapore (hereinafter referred to as a “foreign asset”) would be “treated as income chargeable to tax”. This new section 10L applies if the gains would not otherwise be treated as income or if the gains would otherwise be exempt from tax under the ITA.
This new section 10L will however not cover the sale or disposal of a foreign asset by an entity that is part of a group, whereby all the group entities are either incorporated only in one jurisdiction or have places of business only in one jurisdiction.
In addition, section 10L will not apply to a sale or disposal of foreign assets (not being intellectual property rights) in certain circumstances such as:
a. a sale or disposal by a pure equity-holding entity that meets certain specified conditions;
b. a sale or disposal by an entity (which is not a pure equity-holding entity) that has “adequate economic substance” in Singapore and which operations are managed and performed in Singapore;
c. a sale or disposal by either:
i. prescribed financial institutions where the sale or disposal is carried out as part of, or incidental to, their business activities; or
ii. entities under certain tax incentive schemes where the sale or disposal is carried out as part of, or incidental to, activities that qualify for exemption or concessionary tax rates under those schemes.
Only the net amount of gains (after deducting relevant expenditure), that is received in Singapore or deemed to be received in Singapore, is taxable. Where the sale of the foreign asset is at a price less than the open market price of the foreign asset, the Comptroller of Income Tax may treat as the amount of gains received in Singapore, as the amount derived by adding the open market price of the foreign asset to the actual amount of gains received in Singapore and deducting from that total amount the actual sale price.
The final point to note is that section 10L applies only to the gains from the sale or disposal of a foreign asset that occurs on or after 1 January 2024.
Brief thoughts on the new section 10L
This legislative amendment is a step in the right direction in tackling international tax avoidance risks and harmful tax practices and is in any event aligned with international norms and standards. As a country which is heavily reliant on international trade and investments, it is in Singapore’s interest for her tax rules to withstand international scrutiny so that she can continue to attract the flow of trade and investments.
The introduction of the new section 10L is unlikely to have an adverse impact on Singapore’s economy. This is because Singapore has always been focused on attracting and anchoring genuine business activities.
That said, MNCs and businesses can expect a fair degree of uncertainty over the implementation of the new section 10L in practice. Despite the clarification statements (i.e., the policy objective of this legislative amendment is not to tax capital gains in Singapore), the fact remains that the plain wording of the new section 10L does not expressly exclude the taxation of capital gains. It is uncertain how the Singapore tax authority, the Inland Revenue Authority of Singapore (IRAS), and the Singapore tax tribunals/ courts would interpret and apply this new section 10L.
In addition, there may also be a fair degree of uncertainty in terms of how the phrase “adequate economic substance” would be applied in practice. More detailed guidance from IRAS would certainly be helpful to taxpayers. In this regard, it may also be useful for MNCs and businesses to seek Advance Rulings to clarify this aspect especially for those transactions of substantial economic value.
Last but not least, some businesses may face increased record-keeping requirements. We understand however that IRAS will be working closely with the industry to minimise the compliance burden arising from this new section 10L.
Moving forward, MNCs and businesses can expect a fair degree of uncertainty over the interpretation and application of this new section 10L in practice. When in doubt, it may be prudent to seek the counsel of legal advisors.
This client update is authored by our firm’s Tax Partner, Mr. Ma HanFeng.
Please do not hesitate to get in touch with the author directly should you have any queries.