Five Ways To Reduce Your Corporate Income Tax Legally in Singapore

Five ways to reduce your Corporate Income Tax legally in Singapore

Tax avoidance is illegal!
Tax reduction is legal!

Year of Assessment 2022 (deadline was 30 November 2022) for Corporate Income Tax is over! Businesses are now getting ready for the GST rate hike from 7% to 8% which will take effect on 1 January 2023. When it comes to corporate taxes, businesses will also have plenty to tinker about as we head into the festive season in December as well as year 2023.

Company (both local and foreign) is taxed at a flat rate of 17% of its chargeable income. While the prevailing Singapore corporate tax rate of 17% is one of the lowest and most competitive in the world, there are still ways for businesses to further reduce their tax bills.

#1 Tax Exemption Schemes

Eligible newly-incorporated companies may enjoy the Tax Exemption Scheme for New Start-Up Companies for their first 3 consecutive YAs from incorporation (75% on the first S$100,000 and 50% on the next S$100,000).

What if you’re not a newly-incorporated company? Fret not!

All other companies enjoy a partial tax exemption (75% on the first S$10,000 and 50% on the next S$190,000). Below is an illustration:

With the above tax exemption schemes, they can bring effective tax rates to as low as 4.25% for newly incorporated companies and 7.93% for all other companies, depending on chargeable income.

#2 Business Support Schemes and Incentives

To promote the growth and expansion of businesses in Singapore, the Singapore government offers a variety of business assistance schemes and incentives to start-ups, small to medium-sized enterprises (SMEs) and Multi-National Enterprises (MNCs). This below guide provides an overview of some of the most common schemes and incentives currently available:

#3 Reliefs / Tax Credit

Exemptions On Foreign-Sourced Income for Tax Relief

Income earned / received from outside of Singapore is considered foreign-sourced income and is usually taxable.

Foreign income earned by Singapore company may be subject to taxation twice – once in the foreign jurisdiction, and a second time when the foreign income is remitted into Singapore.

The Avoidance of Double Tax Agreement (DTA) is a scheme available for Singapore tax resident companies to claim benefits.

Singapore resident companies can also get tax exemption on foreign-sourced income remitted into the country that is specified if it falls under these 3 categories:

1. Foreign-sourced dividend
2. Foreign-sourced service income
3. Foreign branch profits

Foreign Tax Credit (FTC)

Companies may claim FTC for tax paid in a foreign jurisdiction against the Singapore tax payable on the same income. There are 2 types of foreign tax credit that Singapore company may enjoy to alleviate the double taxation suffered.

Group Relief (GR)

Under the GR system,

• Companies in the same group are treated as if they are 1 single company.
• It enables companies to deduct current year unutilized capital allowances / trade losses / donations of 1 company from the assessable income of another company in the same group.

Loss Carry-Back Relief

It allows a 1-year carry-back of current year unutilised capital allowances and trade losses. Companies can offset losses in the current year to claim back taxes paid in the immediately preceding year.

#4 Donation to any approved Institution of a Public Character (IPC) 

It is often said that Christmas is a season of giving! To encourage corporate volunteerism, businesses may claim 250% tax deduction on qualifying expenditure incurred from 1 January 2016 to 31 December 2023 if they are made to an approved IPC or to the Singapore Government to benefit the local community (also referred to as ‘approved donations’).

Below is an illustration: –

A company with its financial year from 1 Jan 2022 to 31 Dec 2022 made donations of $1,000 in Feb 2022, of which $800 are approved donations.

#5 Ad-Hoc Medisave Contributions to Employees

Under Section 14(6A) of the Act, claim of medical expenses incurred for the basis period is restricted to 1% of the total remuneration of the Company’s employees. A 2% tax deduction cap is however available to companies participating in the Portable Medical Benefits Scheme or Transferable Medical Insurance Scheme subject to certain conditions.

Under the Additional MediSave Contributions Scheme, companies can make MediSave contributions of up to S$2,730 per employee per year. Effective from 1 Jan 2018, the capping limit has been raised from $1,500 to $2,730 per employee per year, as an encouragement to companies to make more contributions to their employees’ MediSave accounts for their medical needs. These contributions are tax-free for employees and employers may also gain relevant tax benefits. Further, for the employees, it provides them with healthcare security.

Under such scheme, companies will enjoy the additional tax deduction beyond the 1% limit on the amount of ad-hoc MediSave contributions made, up to the higher medical expenses tax deduction limit of 2%. This is even if the company does not adopt any of the portable medical benefits arrangements. Below is an illustration: –

Conclusion

To conclude, Singapore has a very attractive tax system. With its competitive corporate income tax regime, diversified tax incentives and financial assistance schemes, minimal compliance costs as well as absence of bureaucratic barrier, they certainly make Singapore the first choice for companies and businesses looking to set up and/or relocate to favourable corporate tax regimes.

If you are still uncertain to finding the best strategy to reduce your corporate income taxes in Singapore, let Mighty Glory Corporate Solutions to manage your taxation matters. We keep up-to-date to changes and modifications within the local law and regulations. Most importantly, we help you to stay compliant with local regulations!