Singapore Tax Policy on Foreign-Sourced Income
Understanding Singapore Income Tax Requirements On Foreign-Sourced Income
A frequently asked about area of taxation, a corporation’s income tax liability can change when the income originates from a territory outside Singapore. This article has been written to offer some clarification the regulations surrounding taxation of income sourced by Singapore companies from foreigners or foreign sources. For general information on corporate income tax, please see Ottavia’s guide. This information is provided as general guidance and not as a substitute for professional advice.
Per the Income Tax Act of Singapore, corporate income tax is imposed on income that is either a) earned from business activities in Singapore; or b) subject to certain exemptions, received in Singapore from outside the country. The first part defines income sourced within Singapore. The second defines income received or deemed to be received in Singapore.
Determining whether income is subject to taxation requires answering the following questions:
- Does the company’s income qualify as foreign-sourced income?
- If so, was the income deemed to be ‘received’ in Singapore?
- Was the income received in Singapore subject to overseas taxation?
Does the company’s income qualify as foreign-sourced income?
Per the Singapore Tax Ordinance, Profits Tax is levied on entities under the following conditions:
- the entity operates a business or carries on a profession or trade in Singaporean territory;
- the entity derives profits from the business, trade or profession; and
- the profits are sourced in Singapore; or
- the profits are ‘received’ in Singapore but sourced from overseas (per certain exemptions as examined later)
While the first two criteria are straightforward, the concept of locality of the source of income can be contentious and complex to grasp. Unfortunately, no universal rule is applicable in every scenario, as whether profits are determined to arise in or be derived from Singapore depends on their nature and the nature of the transactions which gave rise to them. While by no means exhaustive or the exclusive determiner of the locality of the source of the income, the following broad principles are important to consider:
- First and foremost, one looks to see what activity the taxpayer has engaged in to give rise to the profits and where the activity was done. The proper approach is to identify the specific operations of the business which produce the profits in question and where those operations took place.
- In many cases, profits earned by a business with its principle place of business in Singapore and no presence overseas will be treated as sourced in Singapore for the purposes of taxation.
- A key factor in determining the locality of profits is where the contracts for purchase and sale are effected. The meaning of ‘effected’ extends beyond the execution of the contracts, and also encompasses negotiation, conclusion and execution of the terms of the contract.
- Where a business has earnt commission through the securing of buyers for products or of suppliers of products required by their customers, the activity which originally gave rise to the commission income is the arrangement of business to be transacted between the principals. The source of the income is determined to be the place where the commission agent performs their activities. Therefore, income will be treated as sourced in Singapore where such activities are performed in Singapore.
When considering the relevant facts, the quality and nature of the activities giving rise to profits matters much more than their quantity. This is to say that the deciding factor in these arguments is the cause and effect of any activities on the profits.
Was the income deemed to be ‘received’ in Singapore?
Once income has been determined to be foreign-sourced, it is important to determine whether it was received in Singapore. If not, it is exempt from taxation. Amongst analysts and the business community there has been extensive debate on what meets the criteria of foreign-sourced income ‘received in Singapore’. In an attempt to provide clarification and avoid confusing corporate taxpayers, the Inland Revenue Authority of Singapore (IRAS) has attempted to further define the term and how it impacts a company’s tax liabilities. Per IRAS clarifications, foreign-sourced income ‘received in Singapore’ implies the following:
Funds Entering Singapore
The IRAS section 10(25)(a) clarification states “any amount from any income derived from outside Singapore which is remitted to, transmitted or brought into Singapore”. This refers to money, dividends, or any other form of monetary payment paid into a Singapore-based bank account held by a Singapore-based company originating from an overseas source. This can also refer to cash, cheques and other forms of money orders that have been physically transported into Singapore and received by a company. To qualify the money that the company receives should be the result of business activities undertaken by the company such as service fees, consultation, sales, etc and should contribute to the business’ revenue or profit.
Payment of debts
Section 10(25)(b) of the IRAS clarification documents says that “any amount from any income derived from outside Singapore which is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore”.
In the event a company owes money in Singapore, either to a supplier, a bank or resulting from legal proceedings, and that company uses foreign-sourced income to pay down all or a portion of the debt, any money used is deemed to be ‘income received in Singapore’. Regardless of if the money resided in an overseas bank account for a length of time, once it is used to settle a debt within Singapore it is considered to be received in Singapore. The most important point is that for the debt to paid within Singapore – rather than overseas – the money must somehow be brought into the country.
Movable property and goods
Section 10(25)(c) of the clarification documents released by IRAS states: “any amount from any income derived from outside Singapore which is applied to purchase any movable property which is brought into Singapore”. Also known as movables, movable property simply refers to items that can be moved from one place to another as opposed to land, real estate and other kinds of fixed property incapable of being moved.
When considered for an individual, movable property refers to their personal belongings. For companies, the term is broader and can refer to equipment, raw materials, goods, and any other movables directly connected to the business. When foreign-sourced funds located in overseas banks are used to buy equipment in foreign countries that is subsequently shipped to Singapore, the money used to originally make the purchase – regardless of where it was spent – is deemed ‘income received in Singapore’.
One potential point of confusion is how much tax IRAS is able to charge on depreciated goods. IRAS has since clarified that taxation will be calculated on what was originally paid for the movable property, not its net worth or book value at any given date.
The following clarifications have also been released in an attempt to clarify potentially ambiguous terminology:
- ‘Based in Singapore’ – foreign sourced income is only eligible for taxation where it applies to a company based in Singapore. Therefore, foreign-based companies without a local office are able to use Singapore-based fund management institutions and banks without the risk of taxation.
- ‘Overseas investment’ – Businesses may use foreign-acquired income for the purposes of investing in additional assets as long as these assets do not enter Singapore. Conversely, a business may not claim these expenses or investments as tax deductions on their Singapore corporate income tax.
- ‘Non-income funds’ – IRAS may be willing to exempt non-income funds from taxation in the event that the taxpayer is able to provide proof that the funds in question have nothing to do with business-related income. In order to do this, the business should specify what income and non-income funds is, and be able to provide specific dates when the non-income funds you are claiming as exempt were remitted to Singapore. Proof that the income accounts were not touched must be provided.
- Additionally, you must be able to show that any money that was sent to Singapore is not greater than the business’ capital minus any losses incurred. IRAS regulations also allow you to set off overseas losses against foreign sourced income that you have received in Singapore.
Was the income received in Singapore subject to overseas taxation?
Once it has been determined that the foreign-sourced income derived by your company is ‘received in Singapore’ as per the previous section, the next step is ascertaining whether it was subject to overseas taxation. Foreign-sourced income received in Singapore may be determined to be tax exempt where both the following conditions are met:
- The foreign jurisdiction from which the income is received has a headline corporate income tax rate of at least 15 per cent; and
- The specified foreign income has already been subjected to tax in the originating foreign jurisdiction.
In the event that your overseas income does not meet the above criteria, it will be eligible for local taxation. In this case, you will be provided with a tax credit by IRAS on whatever amount of tax you paid overseas, even if there is a tax treaty between Singapore and the country in which the income originated. This is part of the government’s plan to ensure that no company that does business in Singapore is subject to double-taxation.
It should be apparent from the article that is it not always simple to determine the locality of the source of income of any Singapore-business with certainty. If you are an entrepreneur with the goal to pay no or as little taxes as possible on your business income, this objective may be difficult to achieve through a Singaporean company. However, if you’re simply wishing to avoid unfair double taxation while benefitting from the low-tax regime of Singapore, incorporating in our company is an ideal choice.
For more specific information on Singapore income tax for foreigners, incorporation or on your tax responsibilities in Singapore, get in touch with Ottavia today.