Quora Answer: Is Tax Mitigation More Important Than Investment Performance for Entrepreneurs?

The following is my answer to a Quora question: “Is tax mitigation more important than investment performance for entrepreneurs?” 

That is putting the car before the horse.  Tax mitigation is a consideration when you are making money.  If your investments are not performing, if your revenue generation is diminishing, then tax exposure is the least of your problems.  Tax planning is never done with the sole intent of minimising tax exposure, and in isolation from generating revenue and growing the business.  Sometimes, it makes more sense to pay more taxes when it will generate a revenue opportunity that makes it worth it.

Quora Answer: Is Life Insurance a Business Expense?

The following is my answer to a Quora question: “Is life insurance a business expense?” 

Life insurance policy premiums may be considered a business expense if it is a means to mitigate against loss of personnel, as part of business succession planning, and as a keyman insurance.  For whole life and term plans, this may be tax deductible.  For group health, it may or may not, depending on the nature of coverage.  It would be difficult to justify it for an investment-linked or endowment plan, and the realised gains from such a policy would be taxed as an income.

Quora Answer: Can a High Tax Rate Decrease Inflation?

The following is my answer to a Quora question: “Can a high tax rate decrease inflation?” 

Managing tax rates is part of fiscal policy.  Increasing taxes curbs spending since the cost of consumption goes up.  This reduces demand for goods and services.  Reduction in demand leads to an easing on inflation.  Done properly, a higher tax rate can decrease inflation.

Quora Answer: What are the Downsides if the Tax Loopholes were Fixed?

The following is my answer to a Quora question: “What are the downsides if the tax loopholes were fixed and every billionaire and corporation paid what they owe?” 

There is no such thing as a perfect tax legislation.  You cannot tax everything, and you cannot account for every single scenario.  Like any act of legislation, there is a need to balance different needs and address the consequences of legislation.  For example, if you raise corporate taxes, directors might look into taking their remuneration as benefits to director and wages.  If you raise personal income tax, they would consider taking their profits as dividends.  If you raise both, the cost is either passed to the consumer, or the business moves elsewhere where there is a tax incentive. 

Examining the tax code and tax policies across multiple jurisdictions, utilising the services of tax consultants, does not mean there are loopholes.  That is a layman’s way of understanding these things.  It is a cost benefit analysis.  If people understand the rules, they can take advantage of it better.  This is neither inherently immoral or unjust.  This is business. 

A better question would be how do we ensure that wealthy corporations and individuals pay what is deemed a fair tax for the revenue generated from the country or region?  This is no longer about mythical loopholes, but having better legislation.  To have better legislation, the electorate needs to organise, and elect better candidates.  Once they are elected, they need to be held to account.  A further discussion would be what is deemed a fair rate of taxation?  That is what elected representatives are supposed to derive in consultation with stakeholders.

Quora Answer: Is Keyman Insurance Tax Deductible?

The following is my answer to a Quora question: “Is keyman insurance tax deductible?” 

In Singapore, there are some considerations to be addressed before it can be.  The premiums incurred on a keyman insurance policy is deductible, but only if all the following conditions are met.  Firstly, the purpose of the policy is to insure the business against loss of profits arising from the death or disability of the keyman.  Secondly, the capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the keyman.  This means that the payout is tied to the impact of the keyman’s verifiable contribution on revenue.  Thirdly, the insurance policy remains the property of the business, and there be no assignment of the benefits under the policy to the insured or his family.  Should the business intent to pay out to the family of the keyman or the keyman, it must be a distinct transaction from the insurance payout itself, and cannot be through some form of assignment of proceeds.  Aside from all this, the insurance policy does not provide for a cash surrender or investment value.  This precludes whole life and investment-linked plans.  It has to be a term policy.  Also, the loss of the keyman should not affect the entire profit making structure of the business. 

Singapore’s Income Tax Act 1947, Section 14, allows deduction for expenses that are wholly and exclusively incurred in the production of income only.  Section 15, of the same act, further provides, among other things, that capital expenditure is not deductible.  Generally, businesses can claim deductions on premiums incurred on any insurance policy where an employee or a nominee of the employee is the beneficiary of the policy.  This is considered a provision of employment benefits, which constitutes part of staff costs.  Conversely, if the beneficiary of the policy is the business itself, premiums incurred are not deductible because the expense is not incurred in the production of income, but to acquire a capital asset, which in this case, is the insurance policy. 

There is an exception to the principle stated above, though.  Premiums incurred on a keyman insurance policy is deductible for income tax purposes although the beneficiary of the policy is the business if the purpose of the policy is to insure the business against loss of profits arising from the death or disability of a keyman.  The principle is that the keyman has the prime responsibility for the profitability of the business.  Hence, premiums paid, in providing protection against loss of profits from the death or disability of the keyman are wholly and exclusively incurred in producing the income of the business or trade. 

Also, the capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the keyman.  For this to be accepted by IRAS, the responsibilities of the keyman in the operations of the business must be prime, shared, or contributory.  Generally, sum assured is limited by the amount of profits directly attributable to the keyman in his capacity of having the prime responsibility for the profitability of the business.  In cases where the capital sum assured exceeds the annual profits of the business, the premiums will not be deductible as they are considered as not wholly and exclusively incurred in the production of income.  This makes sense since it precludes using excessive coverage as a means to reduce tax exposure. 

The insurance policy remains the property of the business, and there must not be an assignment of the benefits under the policy to the insured or his family.  The tax deductions on premiums may be denied if benefits of the policy accrues to the keyman in his personal capacity.  This is because the premiums paid are not wholly and exclusively incurred in the production of income.  Examples that would preclude this would be in a case where the business is a proprietorship.  Sole proprietorships and partnerships are not distinct legal entities.  The assets and liabilities of the business are the assets and liabilities of the proprietor, and that applies to any insurance policy.  Another example would be in the case where the business is a distinct legal entity by the substantially owned by the keyman or his family, which constitutes an unacceptable conflict of interest from a tax perspective.  On the latter case, however, it is possible to appeal to IRAS and have it accepted.  Whether the benefits of the insurance policy has accrued to the keyman in a personal capacity is determined based on the facts of each case. 

As mentioned above, the insurance policy must not provide a cash surrender or investment value.  Any policy providing a cash surrender value or an investment value, the premiums would not be considered as incurred wholly and exclusively to protect against the loss of profits.  This is because the investment payout under the policy, whether a withdrawal of proceeds, or a coupon of any sort, will be made to the business even if there is no claim on the policy.  Therefore, the premiums of such policies do not qualify for tax deduction.  In addition to whole life, and investment-linked plans, this also includes endowment plans, retirement policies and group personal insurance. 

Deduction of premiums on keyman policies do not apply to any case where the loss of the keyman affects the entire profit-making structure of the business, to the extent that the business can no longer carry on as a going concern.  This is because in such a scenario, premiums are clearly in respect of the capital structure of the business, not just for the loss of profits.  An example of this would be a case where a sole-proprietor is denied tax deductions if the keyman insurance is taken up on his own life.  The sole-proprietorship business is not a distinct legal entity, and the death or disability of the key man will affect the entire profit making structure of the business.  However, it is possible to secure tax deductions if the keyman insurance is taken up on an employee provided that all other conditions are met. 

In the event of a payout of any such policy where the premiums are tax deductible, that payout constitutes a trading receipt and is taxable.

Quora Answer: How Do Tax Havens Work?

The following is my answer to a Quora question: “How do tax havens work?  How do the richest people in the country avoid paying taxes?” 

Tax havens refer to low tax jurisdictions that have a policy of actively encouraging foreign individuals or corporations to deposit funds into them through a regime of low tax for the wealthy, and laws that obfuscate the ownership of assets and deposits through various legal structures such as shell corporations and blind trusts.  While depositing funds and owning assets through a tax haven is not illegal, it creates suspicion since most of those funds are either from illegal activities, or more likely, their owners are guilty of tax avoidance. 

Wealthy people can afford financial consultants, private bankers and tax consultant.  They can afford to set up the requisite companies and trust structures to run their earning through since taxes on individual are before expenses, while taxes on other legal persons are after expenses.  These structures allow them to expense out costs to lower their tax liability, and limit their tax exposure.  They also know how to take advantage of tax breaks through those consultants.  The average person does not have access to that level of advice, or the funds to create those structures.

Quora Answer: What is the Global Tax Reform?

The following is my answer to a Quora question: “The G20 finance ministers agreed to go ahead with global tax reform.  What is it about?” 

The global tax reform is not solely an agreement among the G20.  140 nations were involved in the discussion, and 136 of those signed it after extensive negotiations.  This began as an American initiative to address an American issue, and they made it a global issue.  The intent was to set taxes for the foreign earnings of American corporations, which has used this as a means to avoid paying corporate taxes in the US.  It was simpler to make it a global problem instead of reforming the American system, which is rotten.  As it is, the tax treaty requires 67 votes in the Senate to be ratified, and in this climate of hyper-partisanship, that would be challenging. 

There are two parts of the reform.  The first past is focused on changing where large companies pay taxes, while the second part is the actual global minimum corporate tax.  The second part would have no teeth without the first since not every single tax jurisdiction in the world is subject to this. 

The first part, called Amount A, would apply to companies with more than €20 billion in revenue. and a profit margin above 10%.  A portion of their profits would be taxed in jurisdictions where they generate sales revenue, 25% of the profits above that 10% margin may be taxed.  After a review period of seven years, this €20 billion threshold may fall to €10 billion.  However, companies which generate revenue from extraction of minerals, such as the oil and gas industry, and mining companies, as well as financial services companies such as banks and insurers, are excluded from this, because their revenue is restricted to specific jurisdictions by law, and may only be taxed there.  Amount A is an attempt to partially redistribute tax revenue from countries that currently tax large multinationals based on the location of their headquarters and operations to countries where their sales revenue is generated.  American corporations would be the single largest group affected by this.  There is also an Amount B, which is a simpler method for companies to calculate the taxes they owe on foreign operations such as marketing and distribution.  The outline, however, provides no new details. 

The second part is the aforementioned the global minimum tax.  It contains two main rules, and then a third rule pertaining to tax treaties.  They are meant to apply to companies with more than €750 million in revenue.  The first is income inclusion, which determines when foreign income of a company should be included in the taxable income of the parent entity.  The minimum effective tax rate is 15%, otherwise additional taxes would be owed in that company’s home jurisdiction. 

The income inclusion applies to foreign profits after a deduction for 8% of the value of tangible assets, and 10% of payroll cost.  These deductions are to be reduced annually over a 10-year transition period.  At the end of transition, the deduction for both tangible assets and payroll would be fixed at 5%.  This will increase the tax costs of cross-border investment and impact business decisions such as hiring and investments. 

The under-taxed payments rule allows a company to deny a deduction for or place a withholding tax on cross-border payments.  If a company in one country is making payments back to its parent entity, which is in a low-tax jurisdiction, then the under-taxed payments rule applies.  Companies that have been in the scope of this for less than five years, have a maximum of €50 million in foreign tangible assets, and operate in no more than five other jurisdictions, are excluded. 

Together, the income inclusion and the under-taxed payments rules create a minimum tax both on companies investing abroad and on foreign companies that investing domestically.  They are both tied to the minimum effective rate of at least 15%, and they apply for each jurisdiction where a company operates.  Additionally, there is the subject to tax rule, used in a tax treaty framework to give countries the ability to tax payments that would otherwise only face a low rate of tax.  The tax rate is set at 9%. 

The changes are meant to be put in place by 2023.  Countries need to write new laws, adopt new tax treaty language, and repeal some policies that conflict with the new rules.  This is the most significant change in international tax laws in the modern era.  Digital services taxes and similar policies are removed as part of implementing this.

Quora Answer: If You Had to Live in a Tax Haven, Where Would You Live?

The following is my answer to a Quora question: “If you had to live in tax haven for good chunk of your life, and had to consider other factors like quality of living, good services and healthcare, where would you want to live?”

When we think of tax havens, countries such as Panama, Western Samoa, and the British Virgin Islands come to mind.  If you are wealthy enough that you want a tax haven to minimise your tax exposure, they are places you might consider putting your money.  They are not necessarily places you want to stay, unless you want to disengage from society.  Most of these tax havens are from the main throughfares of civilisation, and away from prying eyes and oversight.  That is why they are tax havens.  You want to hide your wealth, but you still want to enjoy life. 

What you are really thinking about is what is termed low-tax jurisdictions, which is a step up from tax havens.  These are cities or countries which are likely major financial centres.  They tend to have no capital gains tax, and low corporate taxes.  They would be places such as the US state of Delaware, Hong Kong, Singapore, Ireland, and the Baltic states.  Corporations do not base themselves in these place solely because of the low tax environment, although that is a major factor.  They are also easily accessible to hinterland markets.  Hong Kong is a gateway to China.  Ireland is part of the EU.  Singapore is the centre of Southeast Asia. 

In that respect, Singapore would be near the top of the list.  It is a global city.  It is a major travel hub.  And it has a high standard of living.  Life expectancy is among the highest in the world.  Healthcare is among the best.  Crime is low.  And there is enough entertainment in the city and the neighbourhood.

Quora Answer: Are Political Leaders Corrupt if They Hide Assets Using Offshore Shell Companies in Tax Havens

The following is my answer to a Quora question: “Are leaders of countries corrupt if they hide assets using offshore shell companies located in tax havens?” 

There is corruption in the ethical sense, and there is corruption in the legal sense; they are not necessarily the same.  An act may be ethically corrupt, but legal.  In this case, political leaders hiding assets overseas may be operating within the confines of the law, but the intent of the act is ethically corrupt.  We need to consider why they feel the need to hide assets overseas. 

In many cases, political leaders were business leaders before running for office.  In such a case, having assets overseas would make business sense, from access to markets to ease of doing business, to spreading risk, especially if the home country is unstable.  That being said, when they run for office, it is expected that they declare these assets overseas.  The only plausibly legitimate reason why they need not declare their assets is because there is an unstable political environment, where a legitimately installed government may be overthrown.  This is not something anyone in developed economies consider, but it is a real concern in places where the change of government is neither peaceful, nor strictly legal. 

In many cases, political leaders sequester funds overseas to avoid taxes, or to hide their gain from office, which is often illegal.  Any such disclosure of how they have benefited from their time in office would be politically embarrassing.  In such a case, it is both legally and ethically corrupt.  In all cases, it would make sense that they would put these assets under legal entities in low tax jurisdictions.  In addition to the tax advantages, these places also promise privacy, and a compliance regime that does not require public disclosure.

Indonesian Plans for a Carbon Tax

Indonesian plans to impose a carbon tax.  This was always expected.  Indonesia submitted its post-2020 climate pledges to reduce global emissions, their intended nationally determined contributions (NDC), to the to the United Nations Framework Convention on Climate Change (UNFCCC). 

Indonesia signed the Paris Agreement, and ratified it through Law No. 16 of 2016.  Indonesia submitted its NDC in 2016, and sealed its voluntary pledge to reduce emissions by 29% to 41% by 2030.  These are ambitious targets.  To achieve this emissions reduction target, Indonesia is in the process of drafting a more progressive emissions reduction scheme under the draft Presidential Regulation on Instruments of Carbon Economic Value for NDC (Carbon Economic Value Bill).  This will likely take a while, and there are contentions as to whether the government would reserve the sole right to regulate the trade, allow private transactions, or have a mix of both. 

The proposed scheme would be to regulate the carbon trade, provide payments based on performance in reducing greenhouse gas emissions, and impose a levy on carbon emissions.  The Carbon Economic Value Bill is in the process of being finalised, and is expected to enacted by the end of the year, or more likely, the first quarter of 2022. 

The current Indonesian administration is pursuing an amendment of Law No. 6 of 1983, the General Provisions and Taxation Procedures (Tax Law) to include a new carbon tax scheme.  The proposed amendment would be the fifth amendment to the bill.  This bill is registered with the Majelis Permusyawaratan as one of thirty-three bills included in the priority national legislation programme.  This bill is intended to become the legal basis to impose a levy on greenhouse gas emissions outlined in the Carbon Economic Value Bill. 

Under Indonesia’s Tax Bill (Article 44G), carbon emissions with a negative impact on the environment will be subject to a minimum carbon tax of Rp 75 per kilogramme of CO₂e or other equivalent measurement unit.  This would be around US$5.20 per tonne CO₂e.  The proposed carbon tax would be imposed on individuals or entities purchasing goods containing carbon or engaged in activities that generate carbon emissions.  The Tax Bill contains general carbon tax provisions, which include catch-all provisions to tax any goods or activities that cause environmental externalities, such as depletion of natural resources, environmental pollution, or environmental damage. 

According to the bill, goods containing carbon include, but are not limited to, fossil fuels that cause carbon emissions.  Regulated activities are defined as activities that produce carbon emissions in the energy and transportation, agriculture, forestry and peat lands, industry, and waste treatment sectors.  Indonesia’s NDC identified these sectors as the five main sources greenhouse gas emission contributions.  Aside from this, the full scope of the carbon tax is still undefined, and details are still scarce. 

If all five targeted sectors are taxed without any exemption, many businesses will be affected and will have to recalculate their strategies in response to a carbon tax that directly puts a price on greenhouse gas emissions.  Businesses in carbon-intensive sectors such as coal-fired power plants, oil and mining, pulp and paper, cement, plastic, petrochemicals, and palm oil plantations, among others, will be the most heavily affected.  Industry player have already voiced their concern, and there have been nascent attempts to lobby against it through business associations.  Their primary contentions that the carbon tax places too high a burden on businesses, and not the government.  Businesses have also questioned the calculation of the carbon tax rate. 

Brown energy companies are rightly concerned about the imposition of Indonesia’s carbon tax scheme.  It is expected that there will be incentives provided for taxpayers to lower their greenhouse gas emission.  It is expected that the carbon tax may help generate investment in the renewable energy sector.  This could support the government’s intention for renewable energy to account for at least 23% of the country’s total energy mix by 2025.  That is an ambitious goal.  Currently, the share of renewable energy is 10.9%.  Coal-fired plants dominate the supply of power in Indonesia and are a major source of revenue. 

It is expect that with the expected exponential increase in carbon credits, and the pressure on brown energy businesses, there will be an increasing shift to more sustainable energy generation.  It is about the money.  There is a blue ocean market for generating profit through the issuance of Verified Carbon Units (VCUs), and the sale of carbon credits on the international voluntary carbon market.  As the government moves toward the enactment of the Carbon Economic Value Bill, to regulate carbon trade and provide payments based on performance, more players will explore opportunities to generate additional revenue streams. 

There are a number of projects and initiatives that intend to take advantage of these new developments in carbon trading.  We will closely watch the market in the next few months to see if Indonesia can keep to the ambitious timetable it set.

Quora Answer: Do You Pay Capital Gains Tax When You Sell a House Managed by a Trust?

The following is my answer to a Quora question: “Do you pay capital gains tax when you sell a house managed by a trust?”

Singapore has no capital gains tax.  The realised gain from the sale of the property itself has not tax.  However, there are the conveyancing fees.  If the property is sold within four years, you would also need to pay the seller’s stamp duty, and this is a variable cost depending on many other factors.  In summary, while there is no tax liability for the realised gain itself, there are still costs and fees related to the sale of the property itself.

Quora Answer: Can a Global Minimum Corporate Tax Make Singapore More Compelling as an Investment Hub?

The following is my answer to a Quora question: “Can pushing for a global corporate tax deal make Singapore a more compelling investment hub?” 

Singapore is not in favour of the global minimum corporate tax.  The G20 have agreed on a 15% tax rate.  Singapore’s base corporate tax rate is 17%.  On the surface, it looks like Singapore’s tax rate is higher than the proposed global minimum.  However, with incentives, tax breaks, and other factors considered, corporations based in Singapore can pay even less than 10%.  The proposed G20 rate undercuts our tax advantage. 

Currently, this is a moot argument because for the EU to be on board for this, it has to be a unanimous decision.  Ireland, Estonia, and much of Eastern Europe is against this.  The Biden administration proposed something higher, but even the compromise 15% will have problems being accepted by both House and Senate, with all the Republicans and some Democrats against it.