How do taxes affect business decisions?

TL;DR: 

• Individual Income tax (Sole Prop): 2%-24% 

• Corporate tax: Flat 17% . 

• Up to 62.5% Tax exemption for the first $200k taxable income for newly incorporated companies.

• Being GST registered has its pros and cons. 

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Do you want to maximize your tax savings?

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In Singapore, according to ACRA, from Jan 2022 to Jan 2023, an average of 5257 new businesses are formed every month. Taxes play a significant role in shaping business decisions; Understanding the tax rates, exemptions, and regulations can help businesses make informed decisions that can positively impact their business. This article will explore how taxes affect business decisions.

Tax rates for different company structures

One way taxes affect business decisions is through the different tax rates for various company structures. In Singapore, companies can be structured as sole proprietorships/ partnerships, or private limited companies. Each structure is subject to different tax rates. Individuals registered as sole-proprietors or partners with the Accounting and Corporate Regulatory Authority (ACRA) are considered self-employed. They are required to report their business income as part of their total personal income. This business income is then subject to individual income tax rates.

Tax rates:

Sole Proprietorships/Partnership:

2% to 22% (YA 2017 to YA 2023)

2% to 24% (YA 2024 onwards)

Private Limited: 17%

The effective tax rate that a self-employed pays on their total personal income depends on various factors, including their income level, tax deductions, and reliefs. 

However, assuming that their entire income is subject to the current personal income tax rate, they would be potentially paying an effective tax rate of 17% and more, if they earn above an annual income of around SGD320,000. 

Correspondingly, a private limited company earning more than SGD320,000, pays a flat rate of 17%. This tax rate is attractive to many businesses and is one reason why many choose to structure their businesses as a private limited.

Ultimately, a Pte Ltd company may potentially pay a lower tax rate compared to a sole proprietorship, in the long run, at 17%, or potentially lesser with the many tax incentives offered, which shall be discussed below.

Tax exemption for different company structures

Another way taxes impact business decisions is through the different tax exemptions available for various company structures. Sole proprietorships/partnerships have no tax exemptions. But, the owner may enjoy personal tax benefits when the government grants them. Self-employed individuals can also reduce their income tax via several methods. 

One includes, cash donations made to an approved Institution of a Public Character (IPC) or the Singapore Government for causes that benefit the local community are deductible donations. DPM and Minister for Finance, Mr Lawrence Wong, announced in Budget 2023 that in order to continue encouraging Singaporeans to give back to the community and to provide strong support for the charity sector, the 250% tax deduction for qualifying donations will be extended for another three years till 31 December 2026. However, not all registered charities are approved IPCs. Donations made to a charity without approved IPC status are not tax-deductible. 

Refer to this link for the list of IPCs: https://www.charities.gov.sg

Another, includes voluntary contributing to CPF. The tax relief applies to both mandatory MediSave contributions and voluntary CPF contributions.

The CPF Relief is capped at the lower of:

1. 37% of net trade income assessed;

2. CPF relief cap of $37,740; or

3. the actual amount contributed.

On the contrary, there are many corporate rebates and tax exemptions schemes available for a new pte ltd.

In YA 2020, corporate income tax rebate was 25%, capped at SGD15,000. Also, the Start-Up Tax Exemption (SUTE) scheme introduced in 2005, provides qualified start-ups with a special tax exemption for the first 3 years of assessments. YA 2020 onwards, newly incorporated companies in Singapore can enjoy a 75% tax exemption on the first S$100,000 of chargeable income for the first three years of assessment. A further 50% exemption on the next $100,000 of normal chargeable income. This exemption is a significant advantage for start-ups and can help them reinvest their earnings back into the business. 

In other words, 

First $100,000 in taxable profits will be taxed at 4.25%.

Next $100,000 will be taxed at 8.5%.

Anything over $200,000 will be taxed at 17%.

Let us take a look at a comparison with $300,000 taxable profit.

There are also Partial Tax Exemptions for companies who do not qualify for start-up exemptions or for those beyond the first 3 years of their incorporation. First $10,000 in taxable profits will be taxed at 4.25%. From $10,000 - $190,000, they will be taxed at 8.5%. And Over $200,000 will be taxed at 17%.

See link for conditions to qualify and claim for such schemes:

https://www.iras.gov.sg/taxes/corporate-income-tax/basics-of-corporate-income-tax/corporate-income-tax-rate-rebates-and-tax-exemption-schemes

Fresh from the oven, Budget 2023 introduces the Enterprise Innovation Scheme (EIS). This scheme encourages  R&D, intellectual property(IP) registration, IP rights acquisition and IP rights licensing. One of the enhancements is raising the tax deduction to 400% for the first $400,000 of staff cost and  consumables  incurred on qualifying  R&D projects conducted in Singapore for each YA from YA 2024 to YA 2028. With an additional 150% tax deduction on the balance of qualifying R&D expenditure in excess of $400,000.

Read here for more information: https://www.iras.gov.sg/schemes/disbursement-schemes/enterprise-innovation-scheme-(eis)

When you are starting your business, one would imagine that there will be 101 things to worry about. Why not take one off your mind;  Let companies like Blaze Global advise you on your business structure to optimize your bottom line. 

Do I need to be GST registered?

In 2022, the Singapore Government announced a two-step GST rate increase from:

(i) 7% to 8% with effect from 1 Jan 2023; and

(ii) 8% to 9% with effect from 1 Jan 2024.

Goods and Services Tax or GST is a tax on goods and services in Singapore, including imports. GST is also known as the Value-Added Tax or VAT in various countries. It is charged by all GST-registered businesses. Which means, businesses with taxable turnovers of S$1 million or more are required to register for GST. This includes sole proprietorship, partnership and pte ltd. Those below S$1 million may volunteer to register for GST. 

These businesses with a lower turnover may choose to register voluntarily to take advantage of input tax credits. Input tax credits allow businesses to claim back the GST they paid on their purchases and expenses, reducing their overall tax liability. GST-registered companies with negative Net GST will receive monies from IRAS. However, this is not the case for non-GST registered companies. Thus, such non-registered SMEs will be negatively affected by the ultimate rate of 9% GST. They may decide whether to absorb the increased cost or transfer the incremental expense onto the customer. With this, <S$1m taxable turnover companies with high input tax should consider volunteering to get registered.

Companies like, Blaze Global Pte Ltd, can help evaluate if it makes sense for your company to voluntarily register for GST.

Do I need to be audited?

With GST registration, many would ask: Do I need to be audited? With this, the requirement for an audit is another factor that affects business decisions in Singapore. 

On the one hand, sole proprietors/partnership do not need to audit their accounts or file annual returns with ACRA as any profits will be taxed as personal taxes. 

On the other hand, since 1st July 2015, there is a small company concept which determines exemption from statutory audit. A company qualifies as a small company if:

(a) it is a private company in the financial year in question; and

(b) it meets at least 2 of 3 following criteria for immediate past two consecutive financial years:  

1. total annual revenue ≤ $10m.

2. total assets ≤ $10m;

3. no. of employees ≤ 50.  

Thus a small company with the above definition is exempted from audit.

In other words, larger Private limited companies that fail 2 or more criterias, are required to have their financial statements audited. Do note, however, smaller companies may choose to have an audit voluntarily to demonstrate their financial stability to investors and lenders. This will increase confidence of both investors and clients. 

If you are growing your business and wish to find out how getting audited may help, you may wish to speak to an accountant to weigh the pros and cons. 

However, being GST registered means that you may be subjected to audit by IRAS relating to your GST transactions.IRAS provides a checklist, known as Assisted Self-Test Kit (ASK). ASK helps businesses, especially those who have just registered for GST or are filing GST for the first time, to self-assess their GST submissions and to discover past GST errors early.

Refer to this link for ASK : https://www.iras.gov.sg/taxes/goods-services-tax-(gst)/getting-it-right/voluntary-compliance-initiatives/assisted-self-help-kit-(ask)

It is important to prevent a case of incorrect GST returns. One may be penalised for up to 200% of the tax undercharged or over-claimed for the submission of incorrect GST returns, and be liable to a fine and imprisonment term. Engage accountants like Blaze Global to improve compliance and ensure books and supporting documents are all in order for potential audits.

Reliable Tax Advice

Reliable tax advice is vital for making informed business decisions. With complex tax laws and regulations, businesses need to seek guidance from experienced tax professionals to ensure compliance and optimize their tax position. Reliable and sound tax advice can help businesses identify tax-saving opportunities, understand their tax obligations, and avoid potential penalties and fines. 

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In conclusion, taxes have a significant impact on business decisions in Singapore. Understanding the different tax rates, exemptions, and regulations is crucial for making informed decisions that can positively impact a business's bottom line. Businesses need to seek reliable tax advice to navigate the ever changing and complex tax landscape and ensure compliance with Singapore's tax laws and regulations. 

With so much to think about, let Us make things simple. 

Blaze global is here, so you may focus on what truly matters. 

For example, after reading the article and you wish to change your business from a sole proprietorship to Pte Ltd, reach out to us. The transition can be as easy as ABC.

We, Blaze Global, are more than just your Business Advisor or Accountant. We aim to partner with you and bring your business to greater heights! Repetitive tasks aside, we help optimize processes, analyse results and advise on business risks; providing essential decision-making data, analysis and support. We offer consulting services to serve a variety of businesses. Whether you’re an early stage startup or an established business, we aim to bring value specific to your business. Our services are available online, through the use of technology and cloud computing. 

Get in touch with us today to learn more about our services and what our team can do for you.