In Singapore generally travel expenses are deductible for your business if you can substantiate the claim and prove that the expense was incurred in the “production of assessable income”.  Any expenses incurred for the use of a motor car are not eligible for a deduction except where the expense relates to

• taxis,
• cars registered and used wholly outside Singapore,
• cars used for a rental car business,
• company cars (Q-plate) registered before 1 April 1998, and
• cars used for the business of driving instruction by licensed driving schools or instructors.

Expenses incurred in commuting to and from one

Incidental travel expenses which are related to earning income are generally deductible under Australian Tax Law.  An example would be the expenses incurred in traveling in a taxi between your office and your clients office for a business meeting. This is a business related reason and thus deductible. However, travel between your home and work place are not deductible as your home is not used for generating revenue. There are exceptional circumstances that have been identified as being deductible.

If your business is classified as Itinerant, that is, travel is fundamental for your work, you have a ‘web of work places’ and no fixed place of employment, there is continual travel in order to carry out your duties and your home is considered your base of operations, then a deduction is available for travel expenses incurred from your home and work place(s). An example of the type of business would be a teacher who is involved in teaching at multiple schools and uses their home as a base for preparation and storage of materials.

In addition your business is entitled to a deduction if an employee travels from their home to a client’s premises and then on to the office. To be entitled to this deduction 3 criteria must be met:

• Your employee must have a regular place of employment and travel to it habitually
• The travel is undertaken to an alternative destination which is not a regular place of employment (this would not apply, for example, to an employee of a consultancy firm who is placed on assignment for a period with a client)
• The journey is undertaken to a location at which your employee performs substantial employment duties.

When preparing your business’ expense policy and procedures consider the tax implications of the above before committing to any reimbursement of employees travel.

In Japan the tax law limits the allowable deduction your business can claim for entertainment related expenses.
In 2009 the limit is based on the paid-in capital amount of your company.
If your business has a capital amount of less than JPY 100 million then the deduction is limited to JPY 5.4 million or 90% of the actual entertainment expense which ever is lower. 
If your capital is greater than JPY 100 million then entertainment expenses are non-deductible.

Entertainment expenses are defined in Japan to include payments which are for the purposes of reception, entertainment, consolation and gifts.
Expenses incurred for eating and drinking which are less than JPY 5000 are not included in entertainment expenses which are subject to the limitation described above. These will be outright deductible.
In order to ensure your business obtains the correct deduction you must ensure that all relevant receipts relating to the expenses are kept and should include the following additional information:

• Date
• Number of participants
• Names of participants

Entertainment under the US code has been defined to mean any activity that provides for entertainment, amusement or recreation, including meals for clients and employees.
Business related entertainment expenses incurred that are ordinary, necessary and meet either the directly related test OR the associated test are deductible under US tax law.

In order for your business to successfully claim a deduction under the directly related test the entertainment expense must

• be in a clear business setting such as at a convention room, office.
• have a main purposes of conducting business
• engage in business during the entertainment
• have a greater than general expectation of earning income or some other specific business benefit

In case there are

Generally for deductibility the entertainment expense must be incurred in respect of business associates such as customers, clients, legal advisers, auditors, employees and must be related to the production of income and related directly to or associated with the claimant

Lets compare the basic rules on eligibility to deduct entertainment expenses across the region, starting with Australia. Generally entertainment expenses are not deductible. The term entertainment expenses has been defined as entertainment in the form of food, drink or recreation. Recreation includes amusement, sport and other types of leisure activities. This is known to include recreation and amusement in vehicles, vessels or aircraft such as joyflights and sightseeing tours. Examples of entertainment are business lunches, cocktail parties, sporting or theatrical events, and also covers accommodation or travel associated with any of these items.

The Australian Tax Commissioner has issued a ruling which determines whether food and drink constitutes the provision of entertainment. In summary when identifying whether food and drink is deductible for your business ask yourself the following questions:

• Why is the food and drink provided?
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Welcome to 2010. I am currently vacationing in Cape Town South Africa and enjoying the free time to think clearly without the distractions of my paid career.

So what does 2010 have in store for us in terms of the international systems. Starting in the USA, the health care reform package will result in new taxes being levied. Some of the expected taxes include:

• Tax penalties on individuals, such as independent contractors, who opt not to obtain health coverage.
• A payroll tax on businesses that do not provide health benefits for their staff. This is aimed at encouraging small businesses to provide health coverage.
• A tax surcharge on high income individuals for which approximately one third are small business owners.

In The UK the big news is the bonus tax. The UK government has announced a new tax of 50% on bonuses paid to employees in the financial sector on amounts in excess of GBP25,000. The French Government has followed suit by imposing a 50% tax on bonuses over

Under section 17 of the Hong Kong taxation law certain expenses are not deductible from a taxpayer’s assessable profits. These include:

• domestic or private expenses
• expenses not incurred for profit-producing purposes
• expenditure of a capital nature, or any loss or withdrawal of capital
• the cost of improvements
• sums recoverable under insurance contracts
• expenses connected with premises not occupied for profit-producing purposes
• tax paid under the Ordinance other than salaries tax paid in respect of employees’ remuneration
• Total payments or provisions made as ordinary contribution and insurance premium which exceed 15% of the total compensation of the relevant employee
• payments to or for benefit of spouses or partners

A specific deduction under Hong Kong taxation law is one specifically defined within the Tax ordinance. A non-exhaustive list of deductions are identified under the Ordinance but subject to certain restrictions and conditions.
To be deductible, a listed outgoing or expense must also satisfy the general conditions of deductibility.

The allowable deductions listed include:

• expenses connected with borrowing money
• rent
• foreign tax
• bad debts
• repair costs
• replacement costs
• the costs of registering trademarks and designs and the costs of registering or granting patents and
• any other deductions prescribed by any rule made under the Ordinance

I will go into the detail on each of these over the next few weeks.

Since January 2008 the new enterprise income tax law has taken effect. This new law specifically identifies those items which are allowed as a deduction from your businesses gross income. Items which are deductible include:

• Costs, expenses, taxes and losses incurred directly relating to the income you derive
• Compensation paid to employees
• Loan interest payments and related borrowing costs
• Entertainment, advertising and promotional expenses
• Depreciation of fixed assets
• Exchange Losses
• Leasing costs
• Donations
• Research and Development
• Investment in venture capital enterprises
• Tax losses
• Foreign taxes

Items which are not deductible include:

• Management fees between associated enterprises
• Dividends paid to investors
• Enterprise income tax payments
• Surcharges on late payments
• Fines and penalties
• Sponsorship fees

We will analyze each of the deductible and non-deductible expenses in future blog entries.

Under Singapore tax law you are entitled to claim a tax deduction for expenses that are wholly and exclusively incurred in generating income.

To qualify for tax deduction, the expenses must also satisfy the following conditions:

• The expenses must be revenue in nature, that is expenses in the normal course of operating your business. Capital expenditure is not allowable as a tax deduction.
• The deduction must not be prohibited under the Income Tax Act.
• The expenses must be incurred, that is, it cant be a contingent liability/ expense.

To assist your tax preparation for your business, the below is a non-exhaustive list of expenses you can claim as deductions

• Accounting, audit, bookkeeping and tax fees
• Advertisement
• Bank charges
• CPF deposits,
• Exhibition expenses
• Interest expenses
• Legal and professional fees
• Medical expenses (restricted to 1% of total remuneration)
• Office upkeep and stationary
• Periodicals & newspapers
• Property tax
• Rental of business premises
• Research and development
• Secretarial fees
• salary, bonus and allowances including director’s remuneration
• Staff training
• Telephone
• Traveling expenses
• Wages
• Water & electricity

Under US tax law to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business.
It is important to separate business expenses from the following expenses:

• The expenses used to calculate the cost of goods sold,
• Capital Expenses, and
• Personal Expenses.

Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value your inventory at the beginning and end of each tax year to determine your cost of goods sold.  Cost of goods sold is deducted from your gross income to to determine your gross profit. Once an expense is included in your cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses maybe included:

• Cost of products or raw materials, including freight
• Storage
• Direct labor costs

Capital Expenses

You must capitalize, rather than deduct, certain costs. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.

• Business start-up cost
• Business assets such as furniture, buildings, computer equipment
• Improvements

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for your business and partly for personal purposes, you may split the total cost between business and personal and deduct the business component.

For example, if you borrow money and use 70% of it for business and the other 30% for the purchase of a car for personal use, you are entitled to deduct 70% of the interest as a business expense. The remaining 30% is personal and not deductible.

This is a general overview if business deductions. We will go into the detailed expenses and their deductibility over the next few US related entries

Under the Hong Kong tax ordinance, in order to ascertain your taxable profits, allowable (general and specific) deductions are subtracted from the taxpayer’s taxable receipts

A general deduction is allowed for all outgoings and expenses incurred in the production of assessable profits in the relevant year of assessment
a general deduction is allowed for all outgoings and expenses incurred by the taxpayer in the production of profits which are chargeable to tax in any period . To be deductible the expenses must have been incurred and must not be prohibited under section 17 of the ordinance.

“Outgoings” are sums actually paid out whereas an expense includes a liability to pay. Therefore, deductibility is not necessarily confined to amounts which have actually been paid but are due and payable.

Outgoings or expenditure must be incurred in the production of taxable profits if they are to be deductible. To determine if an expense is deductible there have been numerous cases to assist in applying this rule. 2 core examples include:

Severance Payments related to cessation of business these have been concluded as deductible as they were made to satisfy contractual and statutory obligations which the taxpayer had incurred in the course of running its business and earning its assessable profits

Foreign taxes paid by a Hong Kong taxpayer have been characterized as deductible. The imposition of sanctions by the tax authorities in the relevant jurisdictions for failure to pay the taxes would have forced the taxpayer to cease its operations, the taxes were held to have been paid with a view to producing profits and were deductible.

Next we will look at the specific deductions.

I think it is important to note at this point some key differences in tax related terminology
This entry will focus on the distinction between a tax deduction and a tax credit.
The core concept is that deductions reduce the amount of your income that is taxable. Tax credits reduce the actual amount of tax owed.

A tax deduction represents an expense incurred by you the taxpayer. These amounts can be subtracted from your gross income when preparing your income tax returns. As a result, the tax deduction will lower overall taxable income and thus lower the amount of tax paid. In previous and upcoming entries we have/ will analyze all the types of deductions available to your business in multiple jurisdictions (Australia, China, Hong Kong, Japan, Singapore and the USA).

A tax credit, on the other hand, is broken down into two different concepts:
The recognition of tax payments already made.
A benefit allowed to your business through the tax system which reduces your the amount of tax payable.
Examples include:

• Credits for foreign taxes paid
• Disabled Access Credit - tax credit for making their businesses accessible to persons with disabilities (USA).
• Fuel Tax Credits (Australia)

Example

                                                                               

Net Business Income		$150,000
Office Rent	$10,000
Office Expenses	$5,000
Total Deductions		$15,000
Taxable Income		$135,000
Tax Payable	15%	$20,250
Foreign Tax Credit		$15,000
Net Tax Payable		$5,250

So you can see that the deductions reduce the income which tax is charged upon, while the tax credit reduces the actual amount of tax paid to the government. We will look into the tax credits available in each country in the near future.

So how can a small or medium business determine their allowable deductions in Australia?

Any expense that you incur must be directly related to earning assessable income before you are entitled to claim it as a deduction. 

Common deductions that can be claimed include:

Advertising expenses
Are eligible for a deduction if you incur these to:

• sell you inventory,
• hire employees or
• gain publicity of your business name

Business travel expenses
These are deductible if you have:

• written evidence of all expenses
• travel records, if your business travel was for six or more consecutive nights away from home.

Fringe benefits tax
Can be claimed as a deduction for the costs you incur when you provide a fringe benefit to an employee including any fringe benefits tax you pay.

Expenses related to your home work area
If you operate your business from home, you may be able to claim a deduction for:

• occupancy expenses, such as rent, mortgage interest, rates, land taxes and house insurance premiums
• running expenses, such as phone, internet fees, depreciation of office furniture and equipment etc.

If your home is your place of business and you have an area set aside exclusively for business activities, you may be able to claim both running and occupancy expenses.
If you carry on your business elsewhere and also do some work at home, you cannot claim occupancy expenses even if you have a home work area set aside.

Phone expenses
If you use a phone solely for business, you are entitled to claim a deduction for the phone rental and calls, but not for installation costs as these are capital in nature. If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs. The following formula can be used to determine the percentage of phone rental expenses you can claim.

(Number of business calls made and received x 100) / Number of total calls

Super contributions (pension fund for those who are not Australian)
You are entitled to claim a deduction for super contributions you make for yourself or your employees to a complying super fund or retirement savings account.

Salary and wages If you operate your business as a company you can claim a deduction for any salary and wages it pays to you or any other employees. If you operate a partnership or sole proprietor then only salaries paid to employees are deductible. Salaries paid to the [partners or your self are not deductible.

Tax-related expenses
You can claim the expenses you incur in managing your business taxes. These expenses include:

• Bookkeeping costs associated with preparing your business records
• Fees for preparation and lodgement of tax returns and activity statements
• Costs relating to objecting or appealing against an assessment
• Costs associated with attending a Tax Office audit.

Income tax returns are the most imaginative fiction being written today.

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