No. 16 of 2018 - ENHANCEMENT OF THE MARITIME SECTOR INCENTIVE – SHIPPING ENTERPRISE (SINGAPORE REGISTRY OF SHIPS) (MSI-SRS)

No.16 of 2018 - ENHANCEMENT OF THE MARITIME SECTOR INCENTIVE – SHIPPING ENTERPRISE (SINGAPORE REGISTRY OF SHIPS) (MSI-SRS)

Published 12 Dec 2018

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• [Shipping Circulars](https://www.mpa.gov.sg/media-centre?type=Shipping+Circulars)

MARITIME AND PORT AUTHORITY OF SINGAPORE

SHIPPING CIRCULAR

NO. 16 OF 2018

MPA Shipping Division

460 Alexandra Road

#21-00, PSA Building

Singapore 119963

Fax: 6375-6231

http://www.mpa.gov.sg

12 December 2018

Applicable to: This circular should be brought to the attention of all

Singapore-flagged ship owners that are assessed under Section 13A of the

Singapore Income Tax Act.

ENHANCEMENT OF THE MARITIME SECTOR INCENTIVE – SHIPPING

ENTERPRISE (SINGAPORE REGISTRY OF SHIPS) (MSI-SRS)

1 The shipping industry has continuously evolved over the years to adapt

to the changing business landscape and market dynamics. In recent years,

changes have also been made to accounting standards to provide greater

transparency for users of the financial statements. In particular, the introduction

of the Financial Reporting Standards (FRS) 115 and 116 and the corresponding

FRS 115 and 116 tax treatments in Singapore have impacted the shipping

sector.

2 To keep pace with industry developments, provide greater tax certainty

and to ease the administrative burden for the shipping sector, we are pleased

to inform that the following enhancements will be made to the MSI-SRS:

a. the scope of withholding tax exemption for charter payments for ships

and container lease payments will be expanded to cover finance lease

payments. The expanded scope will only be available to MSI companies;

b. the scope of income tax exemption under the MSI-SRS will be expanded

to cover finance lease income from leasing of ships; and

c. MSI-SRS companies may make an irrevocable option to adopt a

simplified tax treatment for MSI-SRS income. Upon election, the MSI-

SRS company shall, on a bundled basis, (i) rely on the FRS 116

accounting classification of sublease income and does not need to

reclassify the qualifying sublease based on the underlying asset for tax

purposes for ships and containers; and (ii) does not need to classify

lease expenses and capital allowance claims in respect of qualifying

assets for tax purposes as these claims will be disregarded.

3 We have also taken the opportunity to provide clarification on the FRS

115 tax treatment for shipping companies in this circular.

4 Please refer to Annexes A and B for details of the above enhancements

and clarification.

5 Any queries regarding this circular should be directed to the International

Maritime Centre (IMC) Division (Email: imc_mpa@mpa.gov.sg; Tel: +65 6375

1927/1766).

CAPT DAKNASH GANASEN

DIRECTOR OF MARINE

MARITIME AND PORT AUTHORITY OF SINGAPORE

Annex A – Enhancements to the MSI-SRS

a) Expansion in scope of withholding tax (WHT) exemption

1 Under Singapore’s tax regime, WHT exemption is available on:

i. payments to non-residents (excluding permanent establishments in

Singapore1) for the charter of any ship under

agreements/arrangements classified as operating leases for tax

purposes; and

ii. rents or other payments to non-residents (excluding permanent

establishments in Singapore1) for the use of qualifying containers for

the carriage of goods by sea under agreements entered into on or

before 31 December 2022 and classified as operating leases for tax

purposes.

2 In addition to the above, MSI-SRS companies also enjoy automatic WHT

exemption on qualifying payments made in respect of qualifying financing

arrangements, including charter arrangements which are classified as finance

lease treated as sale2 for tax purposes, entered into on or before 31 May 2021

to finance the purchase or construction of Singapore ships, subject to

conditions.

3 To keep pace with industry developments and to simplify the WHT

exemption regime for MSI companies, the scope of WHT exemption under

paragraph 1 will be expanded for MSI companies to include arrangements

classified as finance leases (regardless of whether it is a finance lease treated

as sale or not) for tax purposes with effect from 12 December 2018. No

separate application is required to enjoy the exemption. Effectively, this means

that MSI companies will no longer need to submit self-declaration forms to avail

themselves of the WHT exemption on qualifying charter payments under

arrangements classified as finance lease treated as sale for tax purposes

1 Payers do not need to withhold tax on charter / container lease payments made to a permanent establishment in

Singapore. The permanent establishment has to declare the charter fees / container lease income received in its

annual income tax return and will continue to be assessed to tax on such fees.

2 Refers to a finance lease of a ship that is treated as sold by the lessor to the lessee pursuant to Regulation 4(1) of

the Section 10D Regulations.

4 The expanded scope of WHT exemption for charter payments for ships

and container lease payments, and the effective period of the WHT exemption

is summarised in the table below:

Table 1: Summary of WHT Exemption for Charter of Ships and Container Lease

Payments

WHT Exemption Operating Lease Finance Lease

All taxpayers MSI-SRS

Charter payments for ships

Application / Self- No No

declaration Form

Required?

Qualifying No restriction on date of Agreements/ arrangements

Agreements/ agreements/ arrangements entered into on or before 31

Arrangements entered into December 2023

Flag Restriction? No Singapore-flagged ships only

Tenure of WHT No restriction Payments made on or after 12

Exemption December 2018 till end of

charter agreement/ arrangement

Cessation of N.A. Earlier of:

WHT Exemption (i) End of charter agreement/

arrangement; or

(ii) Date of deregistration or

suspension of ship from

SRS.

Container lease payments

Application / Self- No No

Declaration Form

Required?

Qualifying Agreements entered into on or before:

Agreements 31 December 2022 31 December 2023

Tenure of WHT Till end of agreement Payments made on or after 12

Exemption December 2018 till end of

agreement

Cessation of N.A. Earlier of:

WHT Exemption (i) End of lease agreement; or

(ii) Date that the company

ceases to own or operate any

Singapore-flagged ships

Annex A – Enhancements to the MSI-SRS (Cont’d)

b) Expansion in scope of tax exemption of charter income to include

finance leases

1 Currently, MSI-SRS companies enjoy, amongst others, tax exemption

on income derived from the charter of Singapore flagged ships plying in

international waters under operating lease arrangements.

2 To keep pace with industry developments and to provide greater tax

certainty, with effect from 12 December 2018, the scope of qualifying income

under paragraph 1 will be expanded to include that derived from arrangements

classified as finance leases for tax purposes.

3 Please note that the expanded scope of exemption does NOT apply to

income derived from incidental container leasing activities undertaken by MSI-

SRS companies [i.e. Section 13A(1CG) of the Income Tax Act refers].

Incidental container leasing income derived under finance lease arrangements

will continue to be assessed based on the prevailing Singapore corporate

income tax rate.

4 The scope of the expanded tax exemption of qualifying income is

summarised in the table below:

Table 2: Summary of Scope of Tax Exemption for Charter Income

Operating Lease Finance Lease

Tax Exemption on Yes Yes, if income is derived on

Charter Income or after 12 December 2018

Flag Restriction Singapore-flagged ships only

Restriction on No

Date of

Agreement

Entered into?

Application No. Company has to report qualifying income under

Required? Section 13A of the Income Tax Act when filing income tax

returns for the relevant Year of Assessment.

Annex A – Enhancements to the MSI-SRS (Cont’d)

c) Irrevocable election to opt-in, on a bundled basis, to (i) dispense with

the need to reclassify income derived from the subleasing of ships and

containers based on the underlying asset; AND (ii) NOT claim tax

deduction and/or capital allowance on the lease of qualifying assets

Background

1 FRS 116 introduces changes to lease accounting, while the FRS 116 tax

treatment retains the existing tax treatment for leases. The table below

summarises the relevant changes to lease accounting under FRS 116 and the

corresponding FRS 116 tax treatment:

Table 3: Summary of Accounting and Tax Treatments under FRS 116

FRS 116 Accounting Treatment FRS 116 Tax Treatment

Intermediate A sublease3 would be classified An IL is required to reclassify

lessor (IL) as an operating lease (OL) or the sublease by reference to

finance lease (FL) by reference to the underlying asset before

the Right-of-Use (ROU) asset applying the relevant income

arising from the head lease, tax treatment.

unless (i) the underlying lease is

a short-term lease or of low value; If the reclassified sublease is

and (ii) the IL has elected to treat regarded as an OL or FL not

the head lease as a short-term treated as sale (FLNTAS), the

lease. For such exceptions, the IL would be taxed on the lease

sublease shall be classified as an income; if the reclassified

OL. sublease is regarded as a FL

treated as sale (FLTAS), the IL

would be taxed on interest

income on an accrual basis.

Lessee Unless exemption applies, (i) an A lessee is allowed tax

ROU asset representing the rights deduction on the contractual

to use underlying leased assets; lease payments incurred under

and (ii) a lease liability arrangements classified as OL

representing the obligation to or FLNTAS for tax purposes.

make lease payments, would be Where lease arrangements are

recognised. Subject to an election classified as FLTAS for tax

by the lessee, short-term leases purposes, the lessee is eligible

and leases for which the to claim capital allowance

underlying asset is of low value (except for subleases under

may be exempted from the FRS 116) and interest expense

requirement. instead of contractual lease

payments.

Adapted from IRAS’ e-Tax Guide – Tax Treatment Arising from Adoption of FRS 116 or

Singapore Financial Reporting Standard (International) 16 – Leases (First Edition published on

8 Oct 2018)

3 A sublease is a transaction for which the underlying asset is re-leased by a lessee (the IL), and the lease between

the head lessor and the IL (head lease) remains in effect.

2 Arising from feedback from the shipping industry on the compliance

burden, the following measures would be introduced to ease the administrative

burden for MSI-SRS companies.

FRS 116 election

3 An MSI-SRS company would be given the option to make an election

(herein after known as the “FRS 116 election”) to:

(i) dispense with the need to reclassify qualifying income derived

from the subleasing of ships and containers based on the

underlying asset, and instead would adopt the accounting

classification of the sublease based on the ROU asset from the head

lease before applying the appropriate tax treatment4; AND

(ii) NOT claim tax deduction on (i) contractual lease payments; (ii)

interest expense; and (iii) capital allowances, as the case may be, in

respect of the lease of qualifying assets. Qualifying assets refer to

(i) ships and on-board equipment that are integral to the operation of

the ships; and (ii) containers, intermodal equipment and other

equipment that are integral for the operation of containers, which are

used to derive incentivised income.

4 The FRS 116 election which may be made at any time during the MSI-

SRS company’s incentive period will apply to qualifying income derived and

lease payments incurred on or after the 12 December 2018 or the first day

of the Year of Assessment (YA) in which the election is made, whichever

is later. Once made, the election is irrevocable throughout the MSI-SRS

company’s incentive period. Appeals for a revocation of the option exercised

earlier will not be considered under any circumstances. Should the MSI-SRS

company cease to own or operate any Singapore flagged ships, the normal tax

rules shall apply for all leases going forward (regardless of when such leases

are entered into).

5 Specifically, the following tax treatment will apply to an MSI-SRS

company upon election:

Scope of election

a) the MSI-SRS company will not be required to:

(i) reclassify qualifying income derived from the subleasing of

ships and containers based on the underlying asset; and

(ii) classify lease payments on qualifying assets as OL or FL for

tax purposes5 by agreeing to disregard its claims for such

lease payments;

b) for (ii), the election will apply to all qualifying assets that are leased

in by the MSI-SRS company, including existing assets and assets

used to derive both incentivised and non-incentivised income. The

MSI-SRS company cannot selectively choose to apply the treatment

to the incentivised tax category only. With the election, the claim on

the relevant share of expenses/capital allowances attributable to the

non-incentivised tax category will also be disregarded;

4 An MSI-SRS company that makes the FRS 116 election will still be required to classify the subleases that are FLs

into FLTAS and FLNTAS.

5 Companies should still ensure that the tax computation distinguishes the different categories of incentivised and

non-incentivised expenses.

Lapse of FRS 116 election

c) the election will automatically lapse when the MSI-SRS company

ceases to own or operate any Singapore-flagged ships, regardless

of the reason;

d) capital allowances in respect of qualifying assets should be claimed

based on the remaining tax written down value after taking into

account notional capital allowances for those YAs under election,

notwithstanding that no claim for such allowances was made. Where

an MSI-SRS company ceases to own or operate any Singapore-

flagged ships mid-YA, the capital allowance claim for that YA should

be apportioned accordingly; and

Disposal of qualifying assets

e)

Period of disposal Tax Treatment

During MSI period No balancing adjustments made

Upon exit from MSI scheme Balancing adjustments apply.

(i.e. MSI-SRS company - The tax written down value of the asset

ceases to own or operate should take into account notional capital

any Singapore-flagged allowances for those YA(s) under

ships and the FRS116 election, notwithstanding that no claim

election lapses) for such allowances was made.

• For balancing charge (BC), the BC will

be capped at the amount of capital

allowances actually claimed. In

addition, if capital allowances was

claimed against Section 13A previously,

the BC would proportionately not be

taxable, as per Section 10(4) of the

Income Tax Act.

6 Please refer to Appendix A for illustrations on how the FRS 116 election

applies and Appendix B for FAQs on the election.

Appendix A – Examples to illustrate the application of the FRS 116

election to not claim tax deduction on lease payments incurred, interest

expense and capital allowance on the lease of qualifying assets

Example 1

 Company X (Coy X) is an MSI-SRS company with a 31 December

year-end that owns and operates Singapore-flagged ships

 In YA2020, Coy X chartered in a Singapore-flagged ship to

complement its fleet

YA2019 and before YA2020

Coy X did not charter-in Charter-in ship &

ships FRS 116 election made

No need to classify the

charter-in arrangement as OL

or FL for tax purposes.

Depreciation and interest

expense are “added-back” in

the tax computation and no

capital allowances are to be

claimed.

Example 2a

 Company Z (Coy Z) is an MSI-SRS company with a 31 December year-

end which owns and operates Singapore-flagged ships.

 In YA 2010, Coy Z chartered in a Singapore-flagged ship under a finance

lease treated as sale arrangement (Assume asset cost of $100m).

 Coy Z made the FRS 116 election with effect from YA 2020.

 The ship was disposed with sales proceeds of $30m in YA2025.

 Coy Z continues to own/operate other SRS ships and remains as an

MSI-SRS company.

YA2010 YA2020 YA2025

//

Charter-in SRS ship under FRS 116 election made Ship disposed

FLTAS arrangement

Claim: No need to classify the As Coy Z is still an MSI-



Capital allowances - charter-in arrangement SRS company, no

Initial allowance of $20m as OL or FL for tax balancing adjustments

and annual allowance of purposes. are required to be

$5m per year deferred/ computed.

forgone during YA2010 Depreciation and

to YA2019 interest expense are

[($100m - $20m) / 16 “added-back” in the tax

years] computation and no



Interest expenses capital allowances are

to be claimed during

Add back: YA2020 to YA2024.

Depreciation



Example 2b

(Same as 2a, but the ship chartered in was the only ship operated by the

company and it was reflagged from the Singapore Registry of Ships to a

foreign ship registry on 1 January 2021 before disposal. Coy Z cannot qualify

under the MSI-AIS award)

YA2010 YA2020 YA2022 YA2025

//

C harter-in SRS ship under FRS 116 election made Re-flag ship Ship disposed

FLTAS arrangement (FRS 116 election lapses)

C laim: No need to classify As Coy Z is no longer As Coy Z is not an MSI

Capital allowances - the charter-in an MSI company, its company and its FRS116



Initial allowance of arrangement as OL or FRS116 election would election had lapsed,

$20m and annual FL for tax purposes. lapse accordingly. To balancing adjustments

allowance of $5m per classify the charter-in are to be computed.

year deferred/forgone Depreciation and arrangement as OL or

during YA2010 to interest expense are FL for tax purposes. Balancing charge:

YA2019 “added-back” in the  $25m [$30m# – $20m^

[($1010.m - $20m) / 16 tax computation and Residue of – ($5m x 3 years*)],

years] no capital expenditure: capped at capital

Interest expenses allowances are to be  $20m [$100m - allowances claimed of



claimed during $20m - ($5m x 12 $15m*.

A dd back: YA2020 to YA2021. years*)]  $15m will be taxed at

Depreciation the prevailing



* Capital allowances Singapore corporate

for YAs 2010 to income tax rate as

2021 (allowances to

capital allowance was

also be accounted

wholly claimed against

for the 2 years

income under that tax

under FRS116

election, rate.

notwithstanding that

no claim for such # Sales proceeds

allowances was ^ Tax written down value as

made) at YA 2021

* Capital allowances for

Coy Z can continue to

claim remaining

YAs 2022 to 2024

capital allowance of

$5m per year and

interest expense from

YA2022 and beyond.

Depreciation continues

to be “added-back”.

Appendix B – FAQs on FRS 116 election

1) How can the company make the FRS 116 election?

Answer: No application is required. The company has to make the

necessary tax adjustments in its tax computation and provide the following

disclosure in the income tax computation(s) for the YA when it first makes

the election and all subsequent YAs in which the election is in effect:

“The company is under the FRS 116 election tax treatment of

the Maritime Sector Incentive with effect from <12 December

2018 or the first day of YA XX (to indicate the later date)>.”

The company should still maintain sufficient documentation and records

(e.g. lease agreements) to show that the assets are qualifying assets,

should IRAS call for them as part of the audit or verification process.

2) Can the company move back to pre-election tax treatment?

Answer: The election, once exercised, is irrevocable throughout the entire

duration under the MSI. Subsequent appeals for a revocation of the election

made earlier will not be considered under any circumstances. The election

will automatically lapse upon exit from the MSI scheme, of which the normal

tax rules shall apply for all leases going forward (regardless of when such

leases are entered into).

3) What are examples of non-qualifying assets?

Answer: Non-qualifying assets include office equipment (e.g. laptop,

photocopier) and office space. In respect of these assets, the company is

still required to classify the lease arrangements as operating leases or

finance leases for tax purposes in the income tax computation.

4) Can the election be made on a “per qualifying asset” basis?

Answer: No. Once the election is made, the tax treatment applies to all

qualifying assets leased in by the MSI-SRS company.

5) Can a company that does not derive “sublease income” make the

election?

Answer: Yes. The MSI-SRS company can make the election and disregard

the tax deduction and/or capital allowance claim for lease payments.

Should it derive sublease income in future, the tax treatment for sublease

income shall apply by default as part of the election made.

6) Can the company elect to adopt the “sublease income” concession

without disregarding the tax deduction and/or capital allowance claim

for lease expenses?

Answer: No. The election is to be made as a package. If an MSI-SRS

company incurs lease expense and derives sublease income, it cannot

choose to apply only one out of the two measures in isolation.

7) Why can’t the company elect to adopt the “sublease income”

concession without disregarding the tax deduction and/or capital

allowance claim for lease expenses?

Answer: The proposed concession is meant to ease the compliance burden

arising from differences in tax and accounting treatment for sub-lessors and

lessees. This is especially so since an MSI-SRS company can be a sub-

lessor and a lessee as part of their lease transactions. A uniform application

of both options as a bundled package would ensure parity treatment across

all MSI recipients.

8) Does a company that elects to opt in still need to classify the sublease

income which is recorded as a finance lease for accounting purposes

into finance lease treated as sale and finance lease not treated as sale

in accordance with Regulation 4(1) of the Section 10D Regulations?

Answer: Yes, the classification of finance leases based on Regulation 4(1)

of the Section 10D Regulations and the application of the appropriate tax

treatment is still required. The election only absolves the requirement to

reclassify the sublease income derived into operating lease and finance

lease based on the underlying asset in accordance with IRAS’ e-Tax Guide:

Tax Treatment Arising from Adoption of FRS 116 or Singapore Financial

Reporting Standard (International) 16 - Leases.

Annex B – Clarification on the FRS 115 tax treatment for shipping

companies

1 Under FRS 115 – Revenue from Contracts with Customers, entities

recognise revenue to depict the transfer of promised goods or services to

customers in an amount that reflects the consideration which the entity expects

to be entitled in exchange of satisfactory delivery of those goods or services.

FRS 115 is effective from annual periods beginning on or after 1 January 2018

and does not apply to lease contracts within the scope of FRS 116 – Leases,

amongst others.

2 For tax purposes, the accounting revenue as determined in accordance

with FRS 115 would be accepted as revenue for tax purposes, with a few

exceptions.

Impact for shipping companies

3 Under a time charter contract, the charterer pays a lump sum rate for the

use and hire of the ship (lease component) as well as the services of the crew

(service component). While the nature of the transaction remains the same,

under the new accounting standards, shipping companies are required to split

the transaction into two – the “lease” component will be accounted for in

accordance with FRS 116, while the “service” component will be accounted for

separately in accordance with FRS 115.

Clarification

4 In connection with the above, this circular seeks to clarify that both the

“lease” and “service” components of the time charter contract will

continue to be incentivised under the MSI (i.e. there would not be any cut

back in scope of the incentivised income) following the change in

classification/presentation in the financial statements due to changes in

accounting standards.

5 To facilitate IRAS’ assessment of the companies’ income tax affairs,

please provide the following disclosure in the income tax computation, where

relevant:

“This service income is part of a time charter contract for which

the charter meets the qualifying conditions for tax exemption

under Section 13A of the Income Tax Act. This disclosure of

service income as a separate component is due to the

accounting requirement under FRS 115.”

The company should maintain sufficient documentation and records (e.g. to

prove that the service income relates to the time charter contract), should IRAS

call for them as part of the audit or verification process.

WHT Exemption		Operating Lease			Finance Lease
		All taxpayers			MSI-SRS
Charter payments for ships
Application / Self- declaration Form Required?	No			No
Qualifying Agreements/ Arrangements	No restriction on date of agreements/ arrangements entered into			Agreements/ arrangements entered into on or before 31 December 2023
Flag Restriction?	No			Singapore-flagged ships only
Tenure of WHT Exemption	No restriction			Payments made on or after 12 December 2018 till end of charter agreeme…
Cessation of WHT Exemption	N.A.			Earlier of: (i) End of charter agreement/ arrangement; or (ii) Date of…
Container lease payments
Application / Self- Declaration Form Required?	No			No
Qualifying Agreements	Agreements entered into on or before:
	31 December 2022			31 December 2023
Tenure of WHT Exemption	Till end of agreement			Payments made on or after 12 December 2018 till end of agreement
Cessation of WHT Exemption	N.A.			Earlier of: (i) End of lease agreement; or (ii) Date that the company …
				Operating Lease			Finance Lease
Tax Exemption on Charter Income			Yes			Yes, if income is derived on or after 12 December 2018
Flag Restriction			Singapore-flagged ships only
Restriction on Date of Agreement Entered into?			No
Application Required?			No. Company has to report qualifying income under Section 13A of the I…
				FRS 116 Accounting Treatment			FRS 116 Tax Treatment
Intermediate lessor (IL)			A sublease3 would be classified as an operating lease (OL) or finance …			An IL is required to reclassify the sublease by reference to the under…
Lessee			Unless exemption applies, (i) an ROU asset representing the rights to …			A lessee is allowed tax deduction on the contractual lease payments in…
Period of disposal	Tax Treatment
During MSI period	No balancing adjustments made
Upon exit from MSI scheme (i.e. MSI-SRS company ceases to own or opera…	Balancing adjustments apply. - The tax written down value of the asset…

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