Answering the Tax Riddles in Singapore’s Jobs Support Scheme

Eng Kiat Loh

Eng Kiat Loh is the tax practice leader at Baker Tilly in Singapore.

The author wishes to thank Susan Foong, assurance practice leader at Baker Tilly in Singapore, for her feedback and help pertaining to the accounting aspects and treatment mentioned in this article. However, any errors on accounting-related considerations are solely those of the author.

In this article, the author discusses Singapore’s Jobs Support Scheme, which provides cash subsidies to businesses to cover employee salaries during the COVID-19 pandemic, and offers solutions to potential tax problems raised by the measure.

Copyright 2020 Eng Kiat Loh. All rights reserved.

Job retention policies have been used by many governments during this difficult pandemic period to limit social and economic hardship. A recent study suggests that as of June 12, at least 75 percent of OECD countries had some form of job retention scheme.¹

In Singapore, the Jobs Support Scheme (JSS) is meant to help enterprises retain their local employees during this period of grave economic uncertainty. Through the JSS, the government will provide cash subsidies to fund between 10 and 75 percent of the first SGD 4,600 (approximately $3,300) of gross monthly wages that an employer pays each local employee for a stipulated period.

The JSS probably served as a lifeline for many businesses during the so-called circuit-breaker period — that is, the period during which the government mandated, inter alia, full home-based learning for schools and the closure of most physical workplace premises to prevent the spread of COVID-19² — when the JSS provided exceptional support. In April and May, the wage support topped up to 75 percent for all firms, regardless of sector.

An additional sweetener for eligible businesses is the automatic nature of periodic JSS payouts — no application necessary. This contrasts with some countries in the region where wage support can only be obtained after cutting through a good bit of red tape.

With over 140,000 employers³ benefiting from the wage support, the scheme obviously has a very wide reach, and it can affect beneficiaries of differing profiles in different ways.

In the field of taxation, the JSS can potentially result in some awkward outcomes when its design elements interact with long-standing local tax principles. The earliest set of final corporate income tax returns affected by the JSS will not be due before the end of November 2021. To avoid leaving a bitter aftertaste, I urge the relevant authorities to consider the issues raised below with greater granularity, particularly with the recently announced extension of the JSS scheme.⁴

At the outset, it is important to note that at the time of this writing, the Ministry of Finance is in the process of proposing amendments to the Income Tax Act that would, inter alia, clarify the tax treatment of the COVID-19 support measures for businesses. Whether the final amendments will address all of the concerns raised in this article — and whether they will do so thoroughly — remains to be seen. The schedule called for a period of consultation from July 20 to August 7, and the MOF is expected to publish a summary of the comments received and its responses by the end of September. This article reflects some of the feedback that I have provided in response to the consultation.

The Tax Exemption Baseline

From a tax practitioner’s standpoint, a somewhat unexpected piece of the JSS is that the payouts will be tax-exempt according to a recent clarification from the Inland Revenue Authority of Singapore (IRAS). It is surprising, juxtaposed with the IRAS’s “general guiding principles,” which state that grants or payouts will typically be taxable when they are given to help defray operating expenses.⁵

If the authorities see fit to give legislative force to IRAS’s stated position, I believe that the baseline plan of tax exempting JSS payouts may give rise to some tax-related difficulties, which I hope future legislation and guidance materials will address.

There is a need for further IRAS clarification to be provided along the lines of allowing (and, hopefully, also confirming) the full tax deductibility of the underlying wages that are defrayed by the JSS payout. To illustrate this, consider a simplified example: A business with no revenue this year, wages of SGD 100, and a JSS payout of SGD 75 will simply not pay income taxes for the year. Some may suggest that such a business should only be entitled to a tax deduction based on the net business outlay of SGD 25 (that is, SGD 100 less SGD 75). However, allowing the SGD 100 of underlying wages to be claimed in full as a tax deduction can provide tax savings in future years. The higher tax savings from full tax deductibility can potentially enhance the fiscal support that the JSS provides to businesses.

Indeed, if the wages constitute the running costs of a business undertaking, Singapore’s tax deductibility rules should not preclude a full tax deduction. Business expenses are generally deductible⁶ if they are “wholly and exclusively incurred in the production of income.” The fact that the company earns little or no business revenue — or that the tax-exempt JSS payout is (unfortunately) the main income stream — should not alter this basic position.

An accounting presentation method may unwittingly thwart the desired outcome of a full tax deduction for underlying wages linked with tax exemption on JSS income. Under International Financial Reporting Standard 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the grant income can either be presented separately as grant income (or under “other income”) or deducted against salary costs. If businesses adopt the latter accounting option and present JSS grant income in the more opaque manner and deduct the grant income against the salary costs, then they may be more likely to neglect to make a book-tax adjustment to treat the JSS grant income as tax-exempt. By doing so, the businesses would indirectly and inadvertently suffer tax on the JSS grant, which is not the government’s intent. In other words, the principle of “tax follows accounting” cannot apply in this instance, and the IRAS (as the administering body disbursing JSS payouts) should automatically rectify this mistake for the benefit of the taxpayer based on the information at its disposal. Alternatively, and at the very least, the IRAS should provide a simple and penalty-free option allowing the taxpayer to amend its tax returns in this particular situation.

‘Passing On’ the Payments

Another tax-related difficulty stems from conflating the intended tax-exempt outcome of JSS amounts with behavioral expectations. Such expectations may arise from both the general public — for example, in recent weeks numerous comments on the forum page of the Straits Times website have borne titles like “Managing agents should try to pass on JSS payouts where possible,” “Condo managing agents should pass on JSS payouts to clients,” and “Make firms that don’t need wage subsidy payouts return them” — and also from the authorities. As an example of the latter, the Ministry of Manpower (MOM) recently issued as advisory titled “Labour supply companies should pass on the benefits from the Jobs Support Scheme to your clients.”⁷ The MOM advisory recognizes that there are companies involved in labor supply services that contract employees out to work for their clients, and it sets out MOM’s general expectation that — with an exception for some outsourced service providers — labor supply companies (LSCs) should pass on the JSS payouts for those employees to the clients that continue to pay full fees for the employees’ contracted services. The MOM reaches this conclusion because the policy intent of the JSS is to provide wage support for local employment.

Leaving aside the naturally difficult issues of honorable behavior and the like, it is far from straightforward to figure out the impact of JSS payouts being tax-exempt when the benefits are passed on. To my knowledge, under the rules in effect as accessed on August 20, 2020,* the tax-exemption outcome would be found in a one-line response to FAQ 10 on the IRAS section of its website that contains JSS-related information: “The JSS payout will be exempt from income tax in the hands of employers.”⁸ While the brevity and sweeping nature of this statement is unambiguous — and it is certainly helpful in many general situations — it is clearly an insufficient answer to the tax questions presented when JSS benefits are passed on. For example, assuming adherence to the MOM advisory, the LSCs’ clients will not be receiving JSS payouts per se, instead they may be receiving service-fee rebates from the labor suppliers. Even if the service-fee rebates can be causally linked and traced to the underlying JSS payout, the fact that the existing rule only mentions JSS payouts (that is, it does not mention any derivative amount) and suggests a legal employer-employee relationship is necessary may cause the tax-exemption outcome to be effectively denied — or, at the very least, made contentious — for both the clients and the labor suppliers.

The MOM’s general expectation regarding LSCs give rise to at least three other potential concerns:

• Passing on JSS benefits within this model framework invariably means that LSCs must be prepared to be almost fully transparent with their clients regarding the profit margins they earn on the local employees involved (at least on those earning less than SGD 4,600 of gross monthly wages). It is unclear to me whether transparency on the profit margins of LSCs constitutes market practice, although admittedly this goes beyond the scope of my professional expertise.

• An LSC with greater tax acumen and a strong desire to maintain privacy regarding its profit margins may be disinclined to continue traditional employer-employee relationships. By shifting to independent consultant contracts — that is, the use of contract for service, rather than contract of service — the LSC can practically eliminate its entitlement to JSS payouts, and therefore it may have no benefits to pass on to its clients. To prevent an (otherwise noble) attempt by the Singapore government to support businesses and protect local employment from being thwarted in this manner, it may be necessary to scrutinize independent consultant contracts more critically, even when the context is purely domestic. For example, the concept of an independent agent exclusion in the permanent establishment context typically requires that the agent is independent in both a legal and an economic sense, and this line of inquiry can be extended to the LSC situation as well.

• If an LSC recognizes both the JSS payouts and the exact amount being passed on to the client in the income statement, then the tax deductibility of the latter expense can — based on local tax principles — be unwieldy. This is because the amount cannot be said to be “wholly and exclusively incurred in the production of income” when the chronology suggests that it is incurred after the income is earned. For that expense to be tax-deductible, the LSC may need to rely on section 14X of the ITA, a specific provision covering deductions for expenditures incurred to comply with statutory and regulatory requirements. If, however, the MOM advisory pertaining to passing on of JSS benefits simply represents “soft law” or a moral suggestion, then incurring the expense might not fall squarely within the specific provision focused on compliance with statutory and regulatory requirements. Be that as it may, this may largely be academic because JSS payouts are meant to be tax-exempt; in other words, both the JSS payments and the amount passed on should be disregarded for Singapore tax purposes.

A Final Point on Philanthropy

In my previous article⁹ I touched on numerous news reports highlighting the return or donation of JSS payouts by a few large companies in Singapore.

In the case of donations, it is worth mentioning that some donations in Singapore can in fact generate 250 percent tax deduction value. Donors can carry forward unutilized deductions resulting from qualifying donations for five years.

When unused capital allowances and trade losses can be carried forward indefinitely (if the requisite conditions are met), there appears to be no compelling reason why there needs to be a five-year limit for unused donations. This issue is magnified since the JSS-linked donations can be sizeable, with the amount based on a percentage of wages rather than nominal amounts.

If the 250 percent tax deduction rate for qualifying donations reflects a desire to encourage greater charitable efforts, then this period of extreme economic downturn should give policymakers the incentive to strengthen the tax code’s support of philanthropy and remove the five-year time limit — introduced nearly two decades ago — once and for all.