Impairment Loss on Trade Debts
Financial Reporting Standard (FRS) 109 - Financial Instruments has replaced FRS 39 - Financial Instruments: Recognition & Measurement and applies to companies for financial years beginning on or after 1 Jan 2018. The FRS 109 tax treatment is the only applicable tax treatment once taxpayers adopt FRS 109 for accounting purposes. There is no option to opt out of the FRS 109 tax treatment.
Learn more about the FRS 109 tax treatment.
If your company does not need to comply with FRS 109 for accounting purposes, it can continue to apply the pre-FRS 39 tax treatment or FRS 39 tax treatment (as the case may be).
Under FRS 39, general and specific provisions for bad and doubtful debts are no longer made. For income tax purposes, impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature. Similarly, any reversal of such losses is taxed.
If your company has opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts is deductible for tax purposes. General provision for doubtful debts remains non-deductible.
Your company does not need to file any supporting documents with its Corporate Income Tax Return to claim tax deduction. However, supporting documents must be kept and submitted upon IRAS’ request.
Intellectual Property (IP) Licensing Expenditure
IP licensing expenditure incurred by your company to license intellectual property rights (IPRs) for use in its trade or business is tax-deductible under Section 14 or Section 14C of the Income Tax Act 1947 if they are used for a qualifying Research and Development (R&D) project.
Enhanced Deduction for Qualifying IP Licensing Expenditure
To support business innovation, the tax deduction for qualifying IP licensing expenditure has been enhanced from 100% to 200% on up to $100,000 of qualifying IP licensing expenditure for each Year of Assessment (YA) from YAs 2019 to 20251. For qualifying IP licensing expenditure incurred in excess of $100,000 for each YA, companies can claim 100% tax deduction.
The enhanced tax deduction does not apply to:
- IP licensing expenditure not allowable as a deduction under Section 14 or Section 14C of the Income Tax Act 1947
- All related party licensing arrangements
- Any IPRs where a writing-down allowance has been previously made to the person under Section 19B of the Income Tax Act 1947
- Payments made for the use of trademarks. Your company can claim 100% tax deduction under Section 14 of the Income Tax Act 1947 if the trademarks are used for its trade or business
Qualifying IP Licensing Expenditure
This refers to the licence fees incurred on the licensing of qualifying IPRs from another person but excludes:
- Any part of the expenditure that is subsidised by grants or subsidies from the Government or a statutory board
- Expenditure on the transfer of ownership of the rights
- Legal fees and other costs related to the licensing of any rights
Qualifying IPRs are:
- Copyrights* (excluding any rights to the use of software)
- Registered designs
- Geographical indications
- Lay-out designs of integrated circuit
- Trade secrets or information that has commercial value*
- Plant varieties
* Exclusions from the Expressions 'Trade Secret', 'Information that has Commercial Value' and 'Copyright'
In line with the policy intent of Section 19B, in the definition of IPR, the expressions 'trade secret' and 'information that has commercial value', and any work or subject matter to which the expression 'copyright' relates, exclude the following:
- Information of customers of a trade or business, such as a list of those customers and requirements of those customers, gathered in the course of carrying on that trade or business
- Information on work processes (such as standard operating procedures), other than industrial information, or technique, that is likely to assist in the manufacture or processing of goods or materials
- Compilation of any information as described in (1) or (2) above
- Such other matter as the Minister may by regulations prescribe
Interest expenses normally accrue on a debt liability (e.g. loans, bank overdraft).
Interest expenses relating to non-income producing assets are not tax-deductible. When your company has interest expenses that are attributable to non-income producing assets, it has to make interest adjustments in its tax computation.
Examples of non-income producing assets are:
- Vacant properties acquired for long-term investment
- Investments in shares/ securities
- Interest-free loan or amount owing by non-trade/ sundry debtors
- Interest-free loan or amount owing by related companies (non-trade)/ shareholders
Interest adjustment is not required for interest-free loans or amounts owing by directors as it constitutes staff cost. The interest-free benefits are taxable as employment benefits of the directors - these must be included in directors' Form IR8A. The interest-free benefits can be computed by multiplying the interest-free loan due from each director as at the balance sheet date with the average prime lending rates.
Information on prime lending rates may be found at the Monetary Authority of Singapore's website.
Method for Computing Interest Adjustments
IRAS computes interest adjustments using the total asset method (TAM).
Under the TAM, interest adjustment (disallowable interest expense) =
Cost of non-income producing assets* x Interest expenses
Cost of total assets*
Learn more about the TAM (PDF, 135KB) and the income tax implications arising from the adoption of Financial Reporting Standard (FRS) 39 and FRS 109.
* Before the introduction of FRS 39 on 1 Jan 2005, assets were valued using the historical cost or the original cost of the asset without taking into account any depreciation or valuation surpluses and deficits.
With the adoption of FRS 39 for accounting purposes, financial assets and liabilities are now shown at fair value, cost or amortised cost.
For companies that have adopted FRS 109 from 1 Jan 2018, learn more about the income tax treatment arising from the adoption of FRS 109 - Financial Instruments (PDF, 915KB) (refer to paragraph 7 of page 18).
Interest Incurred on Late Central Provident Fund (CPF) Contributions
The CPF Board may impose interest if CPF contributions are not paid to the Board on time. As this is an offence under the Central Provident Fund Act 1953, the late interest payment is a penalty and is not tax-deductible.
Interest Incurred on Late Payment of Fees to a Management Corporation for a Strata Title Plan (MCST)
Late payment interest may be imposed if contributions (including management fees) are not paid to the MCST on time. As the late interest payment is not a penalty for committing an offence, it is tax-deductible if it is incurred in the production of income.
Interest Incurred on Loans to Re-finance Prior Loans or Borrowings
Where a re-financing loan is taken out and the money from the loan is used solely to repay an existing loan, the characterisation of the re-financing loan (i.e. whether it is a revenue or capital loan) follows that of the loan that was repaid.
- Where the existing loan is a revenue loan:
A re-financing loan is regarded as a revenue loan if it is taken solely to repay an existing loan that was entered into for a revenue purpose (e.g. the existing loan was taken to fund the purchase of stock-in-trade or inventories of a business). The interest expense incurred on the re-financing loan is allowed deduction under Section 14(1) of the Income Tax Act 1947.
- Where the existing loan is a capital loan:
A re-financing loan is regarded as a capital loan if it is taken solely to repay an existing loan that was entered into for a capital purpose (e.g. the existing loan was taken to fund the purchase of fixed assets or long term investments of a business or to augment the capital structure of a business).
The deductibility of the interest expense incurred on the re-financing loan follows that of the repaid loan based on the direct link test under Section 14(1)(a) of the Income Tax Act 1947.
If interest deductions were previously allowed on the repaid loan, the interest expense on the re-financing loan is accorded similar interest deductions. If the interest expense incurred on the repaid loan was subject to adjustments under the Total Assets Method (TAM), the TAM similarly applies to the re-financing loan.
If the interest expense on the repaid loan was not tax-deductible, the interest expense on the re-financing loan is similarly not tax-deductible.
There may be instances where a re-financing loan is not used solely to repay an existing loan (e.g. the principal amount of the re-financing loan obtained is higher than the principal of the existing loan and the balance of the re-financing loan is used
for other purposes). In such cases, whether the interest expense on the portion of re-financing loan not used to repay the existing loan is tax-deductible is determined by the purpose of the additional loan amount (i.e. whether the purpose of the
additional loan amount is for a revenue or capital use).