Between a Rock and a Hard Place:  The CPF Paradox

By David Sandison

Tax Partner

PricewaterhouseCoopers

To strengthen and enhance the social safety net for Singapore citizens, the Government has, over the past few years, been fine-tuning the tax treatment of Central Provident Fund (CPF) contributions. This has included raising the employer’s CPF rate by 1.5% from 13% from 1 July 2007, introducing a workfare scheme for low-wage workers, modifying the CPF system to complement this scheme, and increasing the limit or expanding the scope of deductions for CPF top ups. This is to name but a few of the measures taken.

All these changes have been made with a view to encouraging Singaporeans to save for retirement. Unfortunately though, in striving to achieve social stability in Singapore, the Government has overlooked a select group of individuals, that is, those who take on roles as non-executive, or independent, directors of local companies (“NEDs”). These stalwarts seem to have fallen between two stools; and I don’t mean at the Cricket Club bar.

The difficulty appears to stem from the fact that NEDs are not employees; they have no contract of employment. In addition, the CPF Board does not regard them as carrying on a trade, business, profession or vocation. In most cases therefore, they are unable to contribute to the CPF at all. If for some reason they do make contributions, and these are accepted by the CPF, then they are voluntary contributions, which you would naturally think must somehow qualify for tax relief along with contributions made by the rest of the population.

Enter the income tax problem. There are only two ways that a person can get tax relief for his CPF contributions. The first is under section 39(2)(g) of the Income Tax Act (“ITA”). Relief is only available here however, where the contributions are obligatory by reason of a contract of employment, or by reason of the rules or constitution of the CPF.

Not surprisingly, as a NED will not have a contract of employement in the first place, there can be no contractual obligation; and as he is not, in fact, an employee, he is not obliged under the CPF Act to make contributions. Exit option one.

The second way is under section 39(2)(h) which covers a person carrying on a trade, business, profession or vocation. Deductions, up to certain limits, are given for contributions made “on his own account”, in other words, voluntarily. “There is your answer”, you might be tempted to think. You would be a little wide of the mark.

The problem here arises from a throw away amendment to the ITA in 1993 that was designed to ensure that NEDs were taxed in the same way as any other employee and could not get out of paying tax on benefits in kind and the like. The amendment quite simply and innocently changed the definition of “employee” to include directors of a company. As section 39(2)(h) only applies to, effectively, the selfemployed, then NEDs fell outside the definition. Their only recourse then was to section 39(2)(g), which of course we have seen they are excluded from also.

This rather sad and inequitable state of affairs was pointed out to the Ministry of Finance (“MOF”) by the Singapore Institute of Directors (“SID”) in May this year. The response was, somewhat, disappointing. Essentially it confirmed that all this had been done as part of “policy” to exclude NEDs who could otherwise have “an exclusive advantage” as they could then “decide their own preferred amount of CPF contributions each month and get full exemption on that amount”.

It is difficult to see what this exclusive advantage could be. The otherwise happily self employed can decide their own preferred amount of CPF contributions (up to specified limits), provided they have at least put away the mandatory Medisave contribution. So there should be no difference with NEDs. The only consolation, apparently, is that NEDs do not have to make Medisave contributions!

It is clear that this is an unfair situation as it cannot be part of any sensible policy intention to exclude a minority group of people who, after all, are carrying on a business, profession or vocation in taking on these roles, just like any other sole trader selling chick blinds or fixing your plumbing; and it is contrary to the general aim of ensuring Singaporeans can put something aside for old age.

I think that there are two things that need to be done. The first is to rectify the situation with the CPF Board and get them to confirm/accept, that NEDs qualify as any other member of the self employed community to make voluntary contributions (and of course, mandatory Medisave contributions). The second is to persuade the MOF to amend the legislation again. This would simply mean moving the definition of employee from the general definitions section (which means it applies throughout the ITA), to section 10, which taxes “gains or profits from any employment”. All that then would be needed would be to insert a limitation on scope by saying: “For the purposes of this section only, employee includes….”. That then allows section 39(2)(h) to rescue the situation.

Nobody has any objection to NEDs paying tax on their perks and benefits. That is only fair; but NEDs must, I am sure, object to being left lying between two stools, metaphorically speaking.