Under different circumstances, businesses may choose to set up a company in Singapore but still earn revenue in functional currencies other than local dollars. When this happens to be the case, they are still required to file for income tax as per compliance requirements. However, differences may apply based on their business operations.
For starters, companies who rely on functional currencies as revenue are required to prepare their financial statements using functional currencies. They will then be required to also prepare tax computations using the same functional currency that is displayed within their financial statement. But when it comes to filing their Income Tax Returns, the amounts that are to be declared will all have to be in Singapore currency.
This is achieved by converting functional currency amounts into the equivalent amount represented by Singapore dollars through the assistance of average rate. This is only for the purposes of completing the Income Tax Return forms so business owners can be rest assured that nothing will alter their business operations. Businesses that change functional currency from Singapore dollars to non-singapore currency are all required to comply by applying for transitional rules so that they are able to translate their existing balances into non-Singapore functional currency.
Average rate is calculated based on the average of exchange rates (month-end) during the financial period. To calculate income tax returns after Singapore company incorporation, business owners will be required to rely on the average rate that best applies to their basis period. This can be done by retrieving the foreign exchange rate lists from the Monetary Authority of Singapore website.
It is also advisable to download the rates so that one can calculate the average through adding month-end rates and dividing based on the number of months within their financial period.
Translation Methods (Specific Items)
There are specific items that would require different translation methods when it comes to functional currencies. These include current year capital allowances, other income sources, adjusted profit and loss, and donations. These item values will be reflected within the tax computation based on their actual functional currency value depicted within their financial statements.
For asset sales between related parties, the written down value of the seller’s functional currencies should be translated to the buyer’s functional currency by relying on the exchange rate that prevails the sale date. Loss items are also transferred out based on the transferor’s functional currency. These items will then be translated into the functional currency value of the claimant using the average rate for their year of assessment.
Since tax exemptions on chargeable income are granted in Singapore dollars, they must first be translated into functional currencies with average rate. Therefore, tax payable amounts are calculated by multiplying chargeable income after exemption is applied with the corporate tax rate and the average rate.
These are some of what business owners should be prepared for after they set up a company in singapore. By understanding how tax applies to functional currencies, taxation is made simple.