Before the amendment to the Companies Act in 2002, all companies were required to file their financial statements in Singapore dollars (S$) with the Registrar of Companies and Businesses (RCB) unless approval to do otherwise was obtained from the RCB. Similarly, all corporate income tax computations were required to be prepared and filed in S$ with the Inland Revenue Authority of Singapore (IRAS).
With the amendment to the Companies Act which took effect from January 1 2003, companies with accounting periods beginning January 1 2003 may file their financial statements in their functional currencies with the RCB. The functional currency (or measurement currency) is the currency of the primary economic environment in which the company operates.
The IRAS issued a circular on December 31 2003 (IRAS Circular) which requires companies that maintain their financial accounts and prepare their financial statements in non-S$ functional currencies in accordance with the requirements under the Financial Reporting Standards (FRS) and the Interpretations of FRS, to file their income tax computations and the accompanying financial statements in their non-S$ functional currencies with effect from year of assessment (YA) 2004. The IRAS Circular contains detailed rules on the tax treatment of various items related to the filing of income tax computations in currencies other than S$.
Although not clearly stated in the IRAS Circular, if a company has a financial year-end other than December 31 and the financial statements for YA 2004 are/would be in S$, the requirement to file income tax computations and the financial statements in non-S$ functional currency apparently will only take effect from YA 2005. Also, if the financial statements of companies for accounting periods beginning from January 1 2003 are prepared in currencies other than the non-S$ functional currencies, the IRAS will require such companies to file their income tax computations for YA 2004 (or YA 2005 as the case may be) in their non-S$ functional currencies and submit the following documents:
income tax computation in non-S$ functional currency;
management accounts in non-S$ functional currency;
audited accounts submitted to the RCB in currency other than the non-S$ functional currency; and
a reconciliation of the amounts reflected in the accounts in 2) and 3).
The IRAS may request other documents to be submitted on a case-by-case basis. It is therefore advisable to request confirmation from the IRAS on the documents to be submitted.
The requirement for companies that maintain their financial accounts and prepare their financial statements in non-S$ functional currencies to file income tax computations and financial statements in non-S$ functional currencies will also apply to partnerships and sole proprietorships if they maintain their financial accounts and prepare their financial statements in non-S$ functional currencies. Financial statements of sole proprietorships and partnerships in non-S$ functional currencies which are submitted with their tax computations should continue to be certified true and correct by the sole proprietors or the principal partners (as the case may be).
Once businesses conducting their operations in non-S$ functional currencies start filing their income tax computations and financial statements in their non-S$ functional currencies, they must continue to do so unless there is a subsequent change of functional currency. Businesses that have submitted a request to file their income tax computations and financial statements in non-S$ functional currencies from a YA earlier than YA 2004 may do so from such earlier YA approved by the IRAS provided the rules in the IRAS Circular are applied in the preparation of the income tax computations.
The following summarizes the IRAS rules to be observed in the preparation of the income tax computations and tax returns in non-S$ functional currencies.
Companies
All items in the income tax computations up to the chargeable income level should be in non-S$ functional currencies.
The rules for existing companies relating to various brought forward items are as follows (for newly incorporated companies whose first YA is 2004 or later, the rules under (e) to (l) apply):
(a) Unabsorbed capital allowance and industrial building allowance (IBA); unabsorbed trade loss and further deductions; unabsorbed donations; unabsorbed investment allowance; tax written down value of existing assets; cost of existing assets and prior year income/expense items taxable/deductible in current year
For companies that were incorporated before January 1 2003 and that have submitted their income tax computations and financial statements in S$ before YA 2004 (or YA 2005 if the companies have a financial year end other than December 31 and the financial statements for YA 2004 are/would be in S$ reporting currency), the above-mentioned items would have been reflected in S$ in the companies' tax assessments before YA 2004 (or YA 2005 as the case may be) or the first YA before YA 2004 that the companies have been granted approval to submit their tax computations and financial statements in non-S$ functional currencies. Such companies are required to make an irrevocable election in writing in the first return submitted in non-S$ functional currency on the manner in which the translation is to be made for the above S$ items. These S$ items can be translated into the non-S$ functional currencies equivalent amounts using either of the following rates:
average month-end exchange rates of the 12 months before the end of the last accounting period in which the financial statements are submitted in S$ (changeover rate); or
average month-end exchange rates of the accounting period that constitutes the basis period for that YA (average exchange rate).
Any unused balance for the above items translated during the changeover rate will be carried forward to subsequent YA(s) in the non-S$ functional currency converted using the changeover rate.
Any non-S$ functional currency equivalent amount translated using the average exchange rate but not used or fully used in that YA will be carried forward to the subsequent YA in S$ by translation using the same average exchange rate for that YA. Translation of the items from S$ into non-S$ functional currency and back into S$ to be carried forward for each YA will cease once such balances are fully used.
If the non-S$ functional currency has depreciated against the S$ over the year, the translation of S$ items to non-S$ functional currency using the average exchange rate would likely result in a higher non-S$ functional currency equivalent as compared to using the changeover rate. Conversely, if the non-S$ functional currency has appreciated against the S$ during the year, the translation of S$ items to non-S$ functional currency using the changeover rate would result in a higher non-S$ functional currency as compared to using the average exchange rate. See example 1.
Tax computations (or revised tax computations for companies that have obtained approval to file their tax computations in non-S$ functional currency before YA 2004) submitted to the IRAS must be prepared in accordance with the election.
Example of changeover rate |
|
Accounting year-end of company |
December 31 |
First YA to submit income tax computation in non-S$ functional currencies |
YA 2004 (Basis period : year ended December 31 2003) |
Changeover rate for converting YA 2003 S$ items in YA 2004 tax computation |
(Aggregate of month-end exchange rates for the period from January 1 2002 to December 31 2002)/12 months |
Example of average exchange rate |
|
Accounting period of company |
January 1 2003 to December 31 2003 |
First YA to submit income tax computation in non-S$ functional currencies |
YA 2004 (Basis period: year ended December 31 2003) |
Average exchange rate for converting YA 2003 S$ items in YA 2004 tax computation |
(Aggregate of month-end exchange rate for the accounting period from January 1 2003 to December 31 2003)/12 months) |
Example 1 |
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YA 2004 |
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Changeover rate |
$1 : S$1.8 |
|
Average exchange rate |
$1 : S$1.8 |
|
Changeover Rate |
Average exchange rate |
|
Unabsorbed losses b/f from YA 2003 |
$1,000 (S$1,800/1.8) |
$1,000 (S$1,800/1.8) |
If unabsorbed losses remain unutilised in YA 2004, amount to be carried forward to YA 2005 |
$1,000 |
S$1,800 ($1,000 x 1.8) |
YA 2005 |
||
Average exchange rate |
$1 : S$1.6 |
|
If non-S$ functional currency depreciates against S$ |
||
Changeover Rate |
Average exchange rate |
|
Unabsorbed losses b/f to YA 2005 |
$1,000 |
$1,125 (S$1,800/1.6) |
Average exchange rate |
$1 : S$2 |
|
If non-S$ functional currency appreciates against S$ |
||
Changeover Rate |
Average exchange rate |
|
Unabsorbed losses b/f to YA 2005 |
$1,000 |
$900 (S$1,800/2) |
(b) Current year deduction/capital allowance of assets acquired before basis period of first YA to file tax computation in non-S$ functional currency
Deduction of the unabsorbed capital allowance, IBA, trade loss, donation and investment allowance should be made in the non-S$ functional currency value translated using the changeover rate or average exchange rate elected by the company. Similarly, current year capital allowance and IBA claimed on assets and industrial buildings acquired before the basis period of the first YA in which the company files its income tax computation in non-S$ functional currency will also be computed based on the non-S$ tax written down values of such assets and industrial buildings translated based on the above rates elected by the company.
As mentioned above, if the company elects the changeover rate, any unused balance will be carried forward to subsequent YA(s) in the non-S$ functional currency. Conversely, if the average exchange rate is elected, the unused balance must be carried forward to subsequent YAs in S$ by translating the non-S$ functional currency back to S$ using the average exchange rate for that YA.
(c) Foreign exchange gain/loss
As regards S$ unrealized foreign exchange gain/loss of a revenue nature which is deemed realized in a subsequent YA in which the tax computations are filed in non-S$ functional currency, the amount deemed realized in S$ is required to be translated to the non-S$ functional currency based on either the changeover rate or average exchange rate in accordance with the election made by the company. Where the functional currency of the company is changed as a result of compliance with the FRS, any foreign exchange gain/loss arising from this change is a translation gain/loss and, therefore, will not be taxable/deductible for Singapore income tax purposes.
(d) Payment of dividends in non-S$ functional currency
For resident companies that pay dividends in non-S$ functional currencies, the amount of tax to be deducted from the section 44 account should be translated into S$ using the exchange rate prevailing at the date of each dividend payment.
For the purpose of the dividend voucher/notification, the S$ equivalent amounts of the gross dividend, tax deducted and net dividend (where the net dividend is shown) should be translated from the amounts in non-S$ functional currencies using the same exchange rate prevailing at the date of each dividend payment.
(e) S$ dividends from Singapore resident companies; S$ interest from loan stocks and tax deducted at source
Any S$ dividends received from Singapore resident companies and any S$ interest received from loan stock where Singapore tax has been deducted at source should be translated into the non-S$ functional currency using the average exchange rate for the YA concerned. Where non-S$ dividends are received from a Singapore resident company that conducts its business in a non-S$ functional currency, the recipient must translate the S$ equivalent of the dividends as stated in the voucher/dividend notification into its own functional currency using the average exchange rate for the YA, even if its own functional currency is the same as the non-S$ currency of the dividend.
Tax deducted at source in respect of Singapore franked dividends or interest from loan stocks will be allowed based on the actual S$ amount withheld by the payer company as shown on the Singapore tax vouchers. See example 2.
Example 2 |
|
Dividend income received in US$ in year 2003 |
$1,000 |
S$ equivalent of dividend reflected in dividend voucher |
S$1,800 |
S$ equivalent of tax deducted at source reflected in dividend voucher |
S$396 |
Average exchange rate for YA 2004 |
$1 : S$1.6 |
Gross dividend assessed in YA 2004 (S$1,800/1.6) |
$1,125 |
Tax at 22% (US$1,125 x 22% x 1.6) Less : Tax deducted at source Tax payable |
S$396.00 S$396.00 |
(f) Other current-year items
There is no need to translate certain current-year items (for example, current-year adjusted trade profit/loss; current-year capital allowance/IBA of assets/industrial buildings acquired in or after year of filing tax computation in non-S$ currency; current- year donation and rental income) as they will be reflected in the company's tax computations based on the actual non-S$ functional currencies as recorded in the financial statements. For current-year further tax deductions and investment allowances that are based on current-year expenditure in non-S$ functional currencies, the amounts to be shown on the companies' tax computations will be computed based on the actual non-S$ functional currencies amount incurred (as recorded in the companies' financial statements).
(g) Partial tax exemption
The partial tax exemption of up to S$100,000 ($59,880) chargeable income of companies for a YA will be translated into the company's non-S$ functional currency equivalent using the average exchange rate for that YA.
(h) Tax incentives
Where tax incentives under the Economic Expansion Incentives (Relief from Income Tax) Act have been granted to companies in the form of a preferential rate applied on an amount exceeding a certain quantum denominated in S$, this amount in S$ will be translated into the non-S$ functional currency based on the average exchange rate for the relevant YA.
(i) Tax payable
Tax payable by companies will be in S$, computed as in example 3.
Example 3 |
|
(j) Double taxation relief & unilateral tax credit
Where double taxation relief or unilateral tax credit is to be allowed, the relief or credit is restricted to the lower of Singapore tax on the foreign-source income (after deducting allowable expenses and other deductions) or the foreign tax paid on the same income. For this purpose, the Singapore tax on foreign-source income should be computed as in example 4.
Example 4 |
|
Foreign tax paid as reflected in the company's non-S$ functional currency will be translated to S$ equivalent using the average exchange rate for the YA.
(k) Loss items under group relief system
The current-year unabsorbed capital allowance/IBA, current-year unabsorbed trade loss and/or current-year unabsorbed donations of the transferor companies to be claimed by claimant companies under the group relief system will be based on the non-S$ functional currency amounts as shown in the transferor companies' tax computations. If the claimant companies submit their financial statements in non-S$ functional currencies that are different from that of the transferor companies, those loss items will be translated into the claimant companies' functional currencies at the average exchange rate. Where a revision of the claimant companies' tax assessment results in a transfer back of loss items by the claimant companies to the transferor company, the amount transferred back will, similarly, be translated at the same average exchange rate.
(l) Election of section 24 for sale of property
Where section 24 election is made for a related party transaction so that the buyer of assets/industrial buildings may claim capital allowances/IBA based on the remaining capital expenditure unallowed, the tax-written-down value of the assets/industrial building in the seller's functional currency must be translated into the buyer's functional currency using the exchange rate prevailing at the date of sale if the buyer and seller have different functional currencies.
Partners and partnerships
For partnerships whose financial statements are prepared in non-S$ functional currencies, all items up to the allocated profit/loss and the capital allowances claimed should be in non-S$ functional currency. To arrive at the allocated profit/loss and capital allowances, the rules stated under paragraphs (a), (b), (c), (e), (f), (j) and (l) apply. As there will not be any unabsorbed capital allowance, IBA, trade loss, donation or investment allowance at the partnership level, the principal partners of the partnership must make an irrevocable election in writing in the first return submitted in non-S$ functional currencies on the manner of translating the following items using either the changeover rate or average exchange rate:
tax-written-down value of existing assets;
cost of existing assets (for the purpose of calculating balancing charge); and
prior year income/expense items.
The amount of profit/loss and capital allowances allocated to each partner will then be translated into S$ at the average exchange rate for inclusion in the tax computation of each partner. Any loss or capital allowance that cannot be absorbed by a partner will be carried forward to the next YA in S$ in the individual partner's tax computation.
Sole proprietors
For sole proprietors who prepare the financial statements of their businesses in non-S$ functional currencies, all amounts up to the adjusted profit/loss and the capital allowances should be in non-S$ functional currency.
The sole proprietor must make an irrevocable election in writing in the first return submitted in non-S$ functional currencies on the manner of translating the following items using either the changeover rate or average exchange rate:
tax-written-down value of existing assets;
cost of existing assets (for the purpose of calculating balancing charge); and
prior year income/expense items.
The adjusted profit net of the capital allowances for the year in non-S$ functional currency will be translated into S$ at the average exchange rate for the YA.
If the sole proprietorship incurs adjusted losses, such losses together with the capital allowance for the YA translated into S$ at the average exchange rate, can be set off against other sources of income of the sole proprietor or against their spouses' income denominated in S$ (if combined assessments were elected). Any unused losses or capital allowances attributable to the sole proprietorships after all available set-offs have been taken will be carried forward to the following YA in S$.
Income tax return filing requirements
Businesses (both companies and unincorporated businesses) that conduct their operations in non-S$ functional currencies are still required to make the relevant declarations of the data/information sought in the income tax return and its appendices even though their income tax computations are in non-S$ functional currencies.
To comply with this requirement, the relevant items in the income tax return and appendices reflected in the financial statements in non-S$ functional currencies should be translated into S$ equivalent amounts using the changeover rate or the average exchange rate, whichever is applicable. Generally, the non-S$ prior years' items would be translated to S$ equivalent based on the changeover or average exchange rate elected by the businesses, while current year non-S$ items would be translated using the average exchange rate for the YA.
Goods and services tax returns
The IRAS Circular is silent on whether GST-registered traders are allowed to file their GST returns in their non-S$ functional currencies when companies maintain their financial accounts and prepare their financial statements in non-S$ functional currencies in accordance with the requirements stated under the FRS and the Interpretations of FRS. There are no plans to change this in the near future. Therefore, all GST-registered traders are still required to complete and file their GST returns in Singapore dollars. The net GST payable/refundable will be in S$.
Chan Huang Chay (hchan@deloitte.com)
Carol Go (cgo@deloitte.com)
