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COVID 19 Support Measures Singapore Web2

While we are still in the extended Circuit Breaker period, which is anticipated to end on 1 June 2020, businesses and individuals may want to review their respective positions to ensure they are not missing out on the support measures that have been announced by the Singapore Government in the past few months.

Singapore: COVID-19 Support Measures
Baker Tilly Singapore Coronavrius Resource Hub Using An AAA Battery Model To Power Us Along Tax

Last week, my op-ed "Settling the (tax) score after the fall" (BT, May 22) described how a theme of vengeance could end up hurting many taxpayers especially if they slacken in their tax affairs during these trying times. Some have told me that the tone of the article was "scary" even if it represents some "hard truths" in the world of taxation. As we prepare to exit the circuit breaker, here is a more benign piece aimed at spreading positive vibes especially in the tax field...

Using an AAA battery model to power us along
Monday, July 27, 2020

Jobs Support Scheme: Boon for businesses or bane for beancounters?

 

Contributors:

Susan Foong, Assurance Practice Leader at Baker Tilly Singapore   

Loh Eng Kiat, Tax Practice Leader at Baker Tilly Singapore   

 

The Jobs Support Scheme (JSS) is meant to help enterprises retain their local employees during this period of grave economic uncertainty, by way of the Government providing cash subsidies to co-fund between 25% to 75% of the first $4,600 of gross monthly wages paid to each local employee in a ten-month period.

For many businesses, the JSS possibly represented a huge lifeline, with exceptional support being provided during the ‘circuit breaker’ period where the wage support for the months of Apr and May 2020 were topped-up to 75% for all firms regardless of sector.

An additional sweetener for eligible businesses come in the form of the automatic nature of periodic JSS payouts, whereby application for the scheme is not required. This contrasts with some countries in the region whereby wage support is only possible after cutting through some red tape.

With over 140,000* employers benefiting from this significant wage support measure, the scheme obviously has a very wide reach and can therefore affect beneficiaries of differing profiles in a fair number of ways. In the field of accounting and taxation, if some of the implications are not properly dealt with, it can leave a sour taste for the persons involved despite the noble intentions behind the scheme. We discuss some of these considerations next.

 

Accounting Perspectives

Should JSS payouts be recognised as income for accounting purposes?

As a basic starting point, from an industry perspective, recognition of JSS payouts as income for accounting purposes does not seem to be in doubt, although the questions of when and how remain to be addressed.

In this regard, a response contained within the Inland Revenue Authority of Singapore (IRAS) website to one of the FAQs pertaining to JSS can be instructive in addressing the timing aspect. The clarification is that while the payouts are calculated with reference to wages paid in certain months, they are meant to support businesses during the period of economic uncertainty in which the payouts are received.

Further, the guidance provided within Financial Reporting Standard 20 Accounting for Government Grants and Disclosure of Government Assistance (FRS 20) should be considered, wherein the standard indicates: “Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.”

Taken together, the above effectively means that (1) the months in which JSS funds get disbursed (namely April 2020, May 2020, July 2020 and October 2020); and (2) the reference to months such as October and November 2019 to obtain corresponding wage amounts from, serves only to accelerate the JSS calculation and facilitate faster payouts, are, in itself, unimportant in the decision of when the JSS-related income gets recognised for accounting purposes. As also noted in Financial Reporting Bulletin 6 (“FRB 6”) issued by the Institute of Singapore Chartered Accountants (ISCA), “[t]he timing and manner in which the grant will be received should not affect the accounting for the grant”.

The above should not be wholly surprising given the prevalence of accrual basis accounting over cash basis accounting; however, it bears mentioning that the accounting for JSS should still be applied with some use of judgement. In this context, the Singapore Government meant to co-fund the wages of local employees for ten months by way of the JSS, and for most companies the ten months period of economic uncertainty likely commenced in April 2020 (when the country entered ‘circuit breaker’ phase). That said, companies in the more affected sectors (e.g. tourism, hospitality, etc) should not be precluded from recognising the JSS-related income earlier, say starting from March 2020 if they are able to justify their economic circumstances and, if required to do so, provide the necessary accounting disclosures in their financial statements.

 

Is there a choice in the accounting presentation?

Another pertinent accounting question relates to how the JSS-related income ought to be presented. With reference to FRS 20, the grant income can be presented either (1) separately as grant income or under “other income”; or (2) deducted against the salary costs. While ISCA’s FRB 6 suggests that greater transparency will be achieved with the first method, ultimately both methods are regarded as acceptable from an accounting standpoint. In other words, this is an area where businesses get to choose. As we turn to discussing certain tax implications subsequently, it may become apparent that according businesses with a choice (of using either method) can result in practical difficulties further down the road.

 

Tax Perspectives

From a tax practitioner’s standpoint, a somewhat surprising corollary of the JSS is that the payouts will be tax-exempt, based on a recent clarification made by the IRAS. This is so when one juxtaposes this expressly stated outcome against the IRAS’ guiding principle** in general circumstances that grant/payout will typically be taxable if it is given to defray operating expenses.

If the authorities see it fit to give legislative force to the above outcome, it is submitted that this baseline (of tax-exempting JSS payouts) can give rise to a number of tax-related difficulties, to which we hope future legislation/guidance materials can seek to address. 

 

The tax deductibility issue

One of these have been mentioned in a previous op-ed (BT, May 26) in which inter alia, a clamour was made for further IRAS clarification to be provided along the lines of allowing (and hopefully, also confirming) the full tax deductibility of the underlying wages in question that get defrayed by the JSS payout. If this is to be allowed, higher tax savings from such full tax deductibility can ensue and potentially enhance fiscal support to businesses. On this note, it would also be harder to appreciate why businesses may wish to adopt the accounting option of presenting JSS grant income in the more opaque manner of deducting the same against the salary costs even if it’s an allowed alternative within the accounting rules as discussed above.

This is because in such a setting, there is increased likelihood that businesses may simply take the more intuitive option of deducting the (defrayed/lowered) wage costs for tax purposes rather than the full equivalent and in so doing, indirectly and inadvertently suffer tax on the JSS grant.

 

The “passing on” issue

Another tax-related difficulty stems from conflating the intended tax-exempt outcome of JSS amounts with behavioural expectations. Such expectations may arise from both the general public (e.g. numerous articles in the Straits Times (Forum page) in recent weeks with titles as manifest as “Managing agents should try to pass on JSS payouts where possible”, “Condo managing agents should pass on JSS payouts to clients”, “Make firms that don't need wage subsidy payouts return them”, etc) as well as the authorities. In the latter case, there is in fact a recent advisory^ titled “Labour supply companies should pass on the benefits from the Jobs Support Scheme to your clients” issued by the Ministry of Manpower (MOM).

This MOM advisory expresses the awareness that there are companies involved in labour supply services where employees are contracted out to work for their clients, and sets out MOM’s general expectation that labour suppliers (with the exception of certain outsourced service providers) should pass on the JSS payouts for such employees to the clients who continue to pay full fees for the employees’ contracted services. This is given that the policy intent of JSS is to provide wage support for local employment.

Leaving aside the naturally difficult issues of righteous behaviour and the like, it is not even straightforward to realise the outcome of tax exempting JSS payouts in situation(s) where such benefits are to be passed on. To our knowledge, currently^^ this tax exemption outcome is simply stated as a one-liner response^^^ to FAQ #10 on the IRAS website section providing JSS-related information as follows: “The JSS payout will be exempt from income tax in the hands of employers.” While the brevity and sweeping nature of this statement is unambiguous and no doubt helpful in many general situations, it is clearly insufficient to address situation(s) where JSS benefits are to be passed on.

For example, and in the context of adhering to the above-mentioned MOM advisory, the clients (of the labour suppliers) will not be receiving JSS payouts per se but may instead be receiving service fee rebates from labour suppliers. Even if such service fee rebates can be causally linked and traced to the underlying JSS payout, the fact that the referenced tax-exemption statement thus far (1) mentions only JSS payout specifically and does not cover any derivative amount; and (2) suggests the need for a legal employer-employee relationship, can cause the tax-exemption outcome to be effectively denied (or at the very least, made contentious) for both the clients and the labour suppliers in this scenario.

In passing, one may also note that the passing on of JSS benefits within this model framework invariably means that the labour supply companies are prepared to be almost fully transparent with their clients with respect to the profit margins they earn on the local employees involved (at least on those earning less than $4,600 of gross monthly wages). It is unclear to us whether the provision of such clarity on the profit margins of labour supply companies constitutes market practice although admittedly this goes beyond the scope of our collective professional expertise.

In closing, with the final JSS payout expected in October 2020 and the earliest set of final corporate income tax returns with JSS impact not due before the end of November 2021, there is likely still time for the authorities involved to address the above issues (and possibly more) with granularity. As we suggest, the issues can indeed be multi-faceted and needs to be carefully thought through and dealt with. Otherwise, and especially for those tasked with accounting and tax responsibilities, it can leave a bitter aftertaste.

 

Notes:

* https://www.iras.gov.sg/irashome/News-and-Events/Newsroom/Media-Releases-and-Speeches/Media-Releases/2020/Over-140-000-employers-to-receive-$4-billion-in-next-Jobs-Support-Scheme-payout-from-28-May/

** https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxes/Taxable-and-Non-Taxable-Income/Tax-Treatment-of-Grants/-Payouts-Commonly-Received-by-Companies/

^ https://www.mom.gov.sg/covid-19/advisory-on-labour-supply-companies#:~:text=Given%20the%20intent%20of%20JSS,for%20the%20employees'%20contracted%20services

^^ At the time of writing, the authors of this article are aware that the Ministry of Finance (MOF) is proposing certain amendments to the Income Tax Act to inter alia, clarify the tax treatment of measures announced for COVID-19 support to businesses. Whether the final amendments would be sufficient to fully address the points raised in this article remains to be seen, given that there is an ongoing period of consultation from 20 July to 7 August 2020, and a summary of the main comments received together with the MOF’s responses would be published by the end of September 2020.

^^^ https://www.iras.gov.sg/irashome/Schemes/Businesses/Jobs-Support-Scheme--JSS-/

 

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