Let’s talk about sex in the Boardrooms!

Humans compressed over 2 streets.
“No no,” my friends. I want to say, “Let’s talk about TAX in the boardrooms.”
Recently a student asked me some questions on how to apply GST on the transactions that she has to invoice.
Not sure where she is in her company’s management hierarchy. The fact that she is asking questions should be a comforting plus to her boss. Incorrect GST application not only invite unnecessary attention from the authority but may incur financial loss in the form of fines, penalty and manhours to remedy. A 5%-mistake (and soon a 7%) will really eat into your margin. Customer goodwill may be eroded too.

The directors of a computer gaming developer startup were grilling me on the tax implications of some corporate moves that they are considering.

In the past, tax matters were considered private, too technical for the laymen – it was something the tax department or someone from the auditor’s office dealt with, with the tax authorities.
What is the price of not talking about tax in the boardroom?
  • Without good tax management, you will not be considered a good boy ie. a company with good corporate governance; and
  • You will not have the strength & depth to venture overseas and hold yourself up to the sometimes different standards in other jurisdictions.

If you don’t about tax in the boardroom, what do you guys actually talk about? [wink.. wink..]

HG Metal and its S44A balance

HG Metal, a listed company in Singapore, is a stockist and manufacturer of steel products. The company has a S44A balance of approximately $1.6mio.
It also wish to conserve funds to expand its capacity to meet growing demand.

Actions taken
To meet the contradiction in shareholders’ need to take advantage of the S44A balance with dividend payout against the company’s wish to conserve funds for investment, the company came out with the following initiatives:-

  • For the year ended 30 Sep 2006, the company has announced a special dividend of 4cts per share ie. 3.6cts (frankable) and 0.4cts (tax exempt).

A shareholder may seek a tax refund on the “frankable” portion. The refund would depend on the difference between the corporate tax rate of 20% and his personal tax rate.

  • HG Metal has also simultaneously annouced a 2-for-5 rights issue @20cts. Shareholders have the option to use part or all of the special dividend to take up the rights.

Isetan Singapore and S44 tax credits

“Minority investors want Isetan to pay out tax credits” as per today’s ST on page 29.

With $61mio tax credits, the investors are asking for only $2 dividend from a maximum $7.50 for a full advantage on the credits.

Does Isetan has the monies?
As per Jun 2006 accounts, it is reported that it has a $100mio cash in its balance sheet. Then why not pay since cashflow is not an issue?

Has the cash been earmarked for investment?
No such info presented. It is reported that the answer lies with the higher tax rate on income received in Japan as compared to Singapore.

Isetan Tokyo, which owns 61% of Isetan Singapore, would have to pay a higher tax in Japan on dividends received from Singapore.

Moral of the story

  • Minority investors should not expect to receive much dividends from a company with this kind of tax complication.
  • If you are investing for dividend yield, then please do your homework.

Year-end Corporate Tax Planning

Mr Kang Choon Pin and Mr Russel Aubrey of Ernst & Young presented the following list of helpful tips to achieve some tax savings as 2006 draws to an end.

  1. Bring forward your plans to buy plant and machinery.
  2. Make accruals for expenses incurred.
  3. Make provisions for doubtful debts.
  4. Review your closing stock for obsolescene and damages.
  5. Take advantage of lower effective tax rate for taxable income below $100,000.

Reference – Ernst & Young, You and the Taxman, Sep/Oct 2006.

Hong Kong drops sales tax

What is proposed?
5% sales tax that would raise HKD3.8bio per annum.

Why the drop?
Politically inconvenience. Sadly it reflects very poor planning.

What is the current budget situation in HK?
1. About 1/3 of income earners pay tax. Very narrow tax base.
2. They have been living admist budget deficits.

I wonder how have they been funding their budgets year in year out.
More land sales? How much more land you can sell?
More Disneylands? Oops.. that is certainly a costly exercise.

Any alternatives?

  • More “sin” taxes ie. on cigarettes and liquors. Maybe it is a good outcome afterall.
  • Capital gains tax – very painful for Hong Kongers as “buying and selling” is a favourite past time activity there.
  • More taxes on car – another possible good outcome of no sales tax – it would help with the smog.

I hope Hong Kongers will take action to avoid borrowing from the future generations and spend today.

GST – It is unfair to me.

Goods and Services Tax (GST) is a pay-as-you-consume tax.

So if I were to buy anything ie. anything until the day I die and buried, part of my cash is actually going to the government coffer.

Even if I were to buy from a non-GST registered retailers, he/she would charge a price that would cover the costs of its raw materials etc etc. As most of what we consumed are imported, GST is levied on these imports as they leave the ports.

All my expenses during my retirement will be funded by savings I am accumulating since I started work. These savings are derived from after-income-tax income.

Tax and tax on the same income?

Let say my income tax bracket is 10% and GST is 7%. I assume I spend every cent of my disposable income after tax. Let’s say, my annual income is $100,000.

$90,000 would be my after-income-tax income. 7% of $90,000 is $6,300.

I would have paid $16,300 in taxes for $100,000 income ie. 16.3%.

While this illustration is taking to the extreme, it serves to illustrate the importance of looking at your total tax burden over time.

I was looking forward to my retirement. But now I have to work harder as I have to protect my savings against normal inflation rate + a factor of GST.

So it now look that I will pay GST until all my funeral expenses are paid from my estate.