![]() ![]() ![]() This would mean that, where interest expense and borrowing costs were heavily “front-loaded” (e.g., front-end fees) and incurred more than 12 months prior to the deemed date of business commencement, the taxpayer would lose the deduction relating to such costs. However, the runway for the completion of certain capital assets and profit-making structures to enable a taxpayer’s business to commence may take several years. In other words, interest expenses and prescribed borrowing costs would only be considered for deduction if such expenses were incurred in the 12 months leading up to the deemed date of commencement of business. Section 14R of the ITA allows businesses to claim a tax deduction for revenue expenses incurred up to 12 months before the deemed date of business commencement. They often secure significant loan facilities for the purposes of funding such capital expenditure or securing standby funds should there be a need for drawdown. This is especially so for entities or start-ups that are highly dependent on capital assets. Loan facilities taken by new corporates or start-upsįor newly incorporated entities or start-ups, the timing of incurring such interest or borrowing costs may impact its deductibility. In other words, the factual use of the loan facilities should also correspond with the documented, stated purpose. It goes without saying that the documentation should reflect the underlying commercial substance of the loan arrangement. Businesses should bear this in mind when negotiating and finalising loan facilities documents with the lenders. Failure to put in place such documents may jeopardise a business’s claim for tax deduction. The Singapore tax authorities emphasises the importance of maintaining documents of the loan facilities (e.g., facility agreement, fee letters and correspondences), which provides information such as the nature of the borrowing, how the quantum of the borrowing costs is determined, the intention and purpose of the loan, and duration of the loan, etc. ![]() Falls within the prescribed list of deductible borrowing costs.Must be incurred as a substitute for interest expense or to reduce interest costs.The key principles of borrowing costs qualifying for tax deduction under Section 14(1)(a)(ii) are clear, i.e., the cost: A list of the qualifying borrowing costs has been prescribed under the Income Tax (Deductible Borrowing Costs) Regulations 2008.īack to basics: importance of proper documentation The catch is that such borrowing costs must be incurred as a substitute for interest expense or to reduce interest costs. With effect from YA 2008, recognising that the debt capital market has become more sophisticated, Section 14(1)(a)(ii) of the Income Tax Act (ITA) was introduced to allow deduction for borrowing costs. Prior to the Year of Assessment (YA) 2008, tax deduction on borrowing costs was generally limited only interest expenses incurred on capital employed in acquiring income chargeable with tax is deductible against the income earned. It is easy to assume that borrowing costs, like most other business expenditure, are deductible against taxable income. With borrowing costs typically of a significant outlay, the tax deductibility becomes an increasingly important consideration for businesses and tax authorities. Such numbers for short-term and long-term debt securities (albeit not including loans) show that businesses are more leveraged today than they were a decade ago. Singapore's corporate debt market has been seeing steady growth, with total outstanding debt arranged by financial institutions in Singapore registering a year-on-year 8% growth to S$523bn as of 31 December 2021. Managing tax issues from borrowing costs provides businesses with opportunities and tax savings in an increasingly leveraged economic landscape. ![]()
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