Understanding Singapore’s Double Tax Treaties
Singapore has a number of agreements with other companies that attempt to limit an individual or company’s potential exposure to double taxation. These tax treaties are designed to enable affected companies trading in multiple jurisdictions to access relief from double taxation through tax exemptions, credits, or a reduction in their withholding tax rates. The specific form of relief and its extent will vary between countries and will also depend on the specific items of income that were derived.
The provisions of a tax treaty are broadly reciprocal – applying to both signatory countries – and non-discriminatory – meaning those receiving relief will not be in a worse tax position if they were a resident of the other country for tax purposes. In the event the other country does not have a treaty with Singapore, companies and individuals may still be able to benefit from Singapore’s unilateral tax credits.
The growth in scale and the evolution in complexity of international trade alongside the increasingly globalised nature of most businesses has given rise to the need for governments to address the issue of double taxation. Where individuals and organisations look beyond their own borders for business and investment opportunities, they will require additional guidance and support to avoid being taxed twice – both at the source and where the income was received. Many seek to structure their business operations to optimise their taxation position, helping to reduce overheads and allowing more funds with which to grow their portfolio or business, thereby increasing their competitiveness. Singapore’s double tax agreements (DTAs) or tax treaties can assist in this regard.
What is meant by ‘double taxation’?
Double taxation refers to where multiple countries impose taxes on the same taxable income or capital derived by the same taxpayer. This is to say that the income is taxed a minimum of twice – at the source where the income arose and at the country where the taxpayer resides and where the income is received. Through domestic tax laws and international treaties, countries attempt to reduce or eliminate the burden of double taxation. Various forms of relief are employed to mitigate or eliminate the penalty imposed by double taxation.
Double Tax Agreements
A double tax agreement (DTA) is a bilateral agreement between two countries that protects taxpayers residing in one and deriving income in another from double taxation.
What are the benefits of a DTA?
A DTA provides taxpayers peace of mind and certainty as to when, how and where their income will be taxed based on where the activity that produced it was conducted, where payment was made, what the nature of the payment was and the size of payment. It is a definition of jurisdiction between the tax authorities of the two countries and clearly defines the rights of each country with regards to taxation. Under a DTA, taxpayers may claim for relief for taxes paid overseas.
Additionally, the treaty aims to combat tax evasion through the use of international tax havens through sanctioning the sharing of information between the party states.
Who benefits from the DTAs that Singapore is a signatory of?
Only Singapore residents may make use of the benefits provided by the DTA. A resident is defined as such by Section 2 of the Income Tax Act as:
An individual: A person who, in the year preceding the year of assessment, resides in Singapore except for such temporary absences therefrom as may be reasonable and not inconsistent with a claim by such person to be resident in Singapore, and includes a person who is physically present or who exercises an employment (other than as a director of a company) in Singapore for 183 days or more during the year preceding the year of assessment; and
A company or body of persons: Means a company or body of persons the control and management of whose business is exercised in Singapore.
Any company or individual earning foreign income from a treaty country may submit a Certificate of Residence to the foreign country as proof of Singapore tax residency to claim relief under the relevant treaty. Tax residents of treaty countries will be required to submit a completed Certificate of Residence from Non-Residents to the Inland Revenue Authority of Singapore (IRAS) that has been duly certified by the treaty country’s own tax authority.
Forms of income covered by the provisions of a DTA
- Income derived from immovable property;
- Business profits;
- Air transport and shipping;
- Associated enterprises;
- Directors’ fees;
- Non-governmental annuities and pensions;
- Researches and teachers;
- Students and trainees;
- Fees and royalties for technical services;
- Capital gains;
- Sports-persons and artistes;
- Independent and dependent personal services;
- Pensions and remunerations paid in respect of government service;
- Income of government; and
- Other income.
What Singapore’s DTAs cover
While each DTA concluded by Singapore will have specific terms differentiating it from another country’s tax treaty with Singapore, each will be guided by the same general principles:
- The DTA is to be limited in scope to only tax residents of the treaty countries (Singapore and the other party).
- The DTA is limited to income taxes and excludes customs and excise duties.
- Each DTA will refer to the concept of Permanent Establishment (PE). Whether a company or individual has or does not have a PE in a given country determines whether or not their income is taxable by that country’s tax authority. PE fundamentally means a fixed place where the individual or company’s business is partly or wholly carried on. This may include:
- A place of management;
- An office;
- A branch;
- A warehouse;
- A factory;
- A workshop;
- A plantation or farm;
- A work site or building or a construction, assembly or installation project;
- A quarry, mine, oil well, or other place where natural resources are extracted;
- Without prejudicing the generality of the aforementioned examples, an individual will be considered to have a permanent establishment in Singapore if they:
- a) Carry on supervisory activities connected to a work site or building, or an assembly, installation or construction project.
- b) Have another person acting on their behalf in Singapore who either maintains a stock of merchandise or goods for the purpose of delivery on behalf of that person, has and habitually exercises an authority to conclude contracts, or habitually secures orders either almost wholly or wholly for that person, or for another enterprise controlled by that person.
- Income derived from immovable property is most often taxed at both the country of source (where the immovable property is located) and the country where the recipient is resident. Income from immovable property refers to things such as rental income from real estate. Singapore’s DTAs proscribe that the country of residence allow a credit for the tax paid at the country of source.
- Business profits that are not attributable to activities undertaken in relation to a PE are not taxable. However, where profits are generated through a PE, the controlling enterprise may deduct a reasonable amount of expenses attributable to that PE.
- Shipping or airline profits derived by an enterprise in one treaty country from the other treaty country may be eligible for a full or partial exemption. When full exemptions are provided, the company’s relevant income will only be taxed in their country of residence.
- The country of source for dividend income has the right to tax the income, and it may be taxed in the country of residence of the recipient. While a country of source would usually impose a reduced withholding tax rate on the dividend or grant either a partial or full tax exemption, this is not the case here. Singapore’s one-tier corporate system does not levy a withholding tax on dividend payments, meaning that whether they are taxable in the recipient company is a matter for the domestic tax laws and the specific text of the treaty to decide.
- Income from interest will either be exempted from tax or taxed at a reduced rate in the source country (the country from which the income arose).
- Royalties benefit from either partial or complete exemption, but it is important to note that the specific definition of royalty income may differ between treaties.
- Income resulting from the provision of professional services is normally taxed in the country of residence of the individual rendering the services. Where an individual has a fixed base in Singapore, such as an office or clinic, income generated by professional services will be taxed identically to their business profits. This category covers dentists, physicians, lawyers, architects, engineers, accountants and the like. Specific tax treaties provide an exemption for the individual where they are present in Singapore for fewer than 183 days of a tax year, and where the services are performed for a resident of the other treaty country.
- Income resulting from employment will be subject to taxation in Singapore where the employment is exercised in Singapore, unless: a) the employee is not in Singapore for more than 183 days of a tax year, b) their employer is a resident of the other treaty country, c) a permanent establishment in Singapore of an enterprise in a treaty country does not bear their remuneration. Specific treaties make the additional condition that the employee’s income be subject to taxation in the other treaty country.
- In the case of directors’ fees, the source country is considered to be the resident country of the company paying the fee. No exemption will generally be granted and the in most cases the full domestic tax rate will apply.
- Salaries, wages, pensions or other similar rewards paid by the government of any treaty country for personal services performed by a person in Singapore on behalf of that government are tax exempt in Singapore, and will only be taxed in the other treaty country.
- Any remunerations paid to visiting teachers or professors by a treaty country for their teaching at a Singapore-based institute of education is exempt from Singaporean tax.
- The full amount of income earned by a self-employed person in Singapore is liable for taxation in Singapore, net any tax-deductible expenses incurred to earn that amount.
- Depending on the specific DTA in question, the right to tax capital gains from the sale of shares and the sale of immovable property varies.
- Singapore will grant a tax credit in respect of foreign income, based on the lower of either the foreign tax paid or the Singapore tax payable. Subject to two conditions, foreign-sourced income is exempt from taxation in Singapore – the year the income was received in Singapore, the headline tax rate (the highest corporate income tax rate) of the foreign jurisdiction where the income originated from was at least 15 per cent, and that the foreign income has already been subject to tax in a foreign country.
Methods through which double taxation can be relieved in Singapore
These methods are defined either under the country’s domestic taxation laws or specified in the tax treaty, In Singapore, the methods are as follows:
Tax credits will be granted on foreign tax suffered by a taxpayer against domestic tax imposed on the same income. The specific amount of relief is generally limited to the lower of the tax paid or payable in the foreign and home country. This is known as the ordinary credit method in opposition to the full credit method, under which tax paid in the country of source is allowed to be submitted as a credit in full.
Commonly referred to as Double Tax Relief (DTR) in Singapore, claims for tax credit relief should be made when the company or individual files their annual income tax returns (Form C), and should be shown on a company’s tax computation. Before tax credit relief claims will be considered, documentary proof such as a letter from the foreign tax authority, dividend vouchers or withholding tax receipts will need to be shown to substantiate claims that the remitted income was subject to tax in the treaty country.
Double taxation may also be avoided where foreign income is deemed to be exempt from domestic taxation. Exemptions may be granted on all or part of the foreign income.
Tax Exemption for Foreign-Sourced Dividends, Branch Profits, and Service Income – Section 13(8) of the Singapore Income Tax Act
Singapore tax resident companies may benefit from tax exemption on foreign branch profits, foreign-sourced dividends and foreign-sourced service income remitted into Singapore per the following conditions:
- The headline tax rate of the foreign country from which the income was received was at least 15 per cent and
- The headline tax rate of the foreign country from which the income was received was at least 15 per cent and
Additionally, a tax exemption will be granted on any foreign-sourced income earned or accrued by resident partners of partnerships as well as resident non-individuals where the income was earned outside of Singaporean territory on or prior to 21 January 2009 and received in Singapore between 22 January 2009 and 21 January 2010.
To claim a tax exemption on specified foreign income, the taxpayer will not need to submit substantiating documentation (such as notices of assessment or dividend vouchers issued by a relevant foreign jurisdiction) alongside their tax returns to support a claim that the foreign income in question qualifies for the exemption. Instead, they will only be required to declare on the appropriate section of their returns that the income qualifies for the exemptions and subsequently provide the following information:
- Amount and nature of income (e.g. foreign branch profits, foreign-sourced service income or foreign-sourced dividends).
- Country from which the income originates
- The current headline tax rate of the income’s country of origin
- Amount of foreign tax payable or paid in the country of origin on the income
Tax Exemptions for Individuals – Section 13(7A) of the Singapore Income Tax Act
Where an individual is a tax resident of Singapore, all foreign income received by them will be deemed exempt from taxation if the Comptroller of Income Tax is satisfied that the tax exemption will be beneficial to the individual.
Tax rate reduction
When this form of relief is applied, relevant income will be taxed at a lower rate. This relief is applicable to royalties, profits from international air transport and shipping and dividends.
Relief by deduction
After deducting foreign tax suffered, domestic tax is applied on the foreign income. The Singaporean tax code does not allow deduction of foreign income tax, but a deduction may be given indirectly under the remittance basis, as Singapore would tax the net of foreign tax (amount of foreign income received) in Singapore.
Tax sparing credit
Under the provisions of a double tax agreement, a tax credit is generally only available in the country residence if the income has already been taxed in the country of origin. A tax sparing credit is a unique form of credit in which the country of residence grants a credit to the value of tax which would otherwise have been paid in the country of source, but was not. In other words, the income was ‘spared’ under special laws designed to promote local economic development.
This provision is primarily found in double tax agreements between Singapore and a developing country which has elected to offer tax incentives aimed at attractive foreign investment. As a developed country which is capital exporting, Singapore has granted this provision in several double tax agreements to promote domestic investment in the developing nation.
H2 An example of tax relief under different methods
Unilateral tax credits
Per section 50A of the Income Tax Act, certain kinds of income derived by Singapore tax residents in countries with which Singapore does not currently have a double tax agreement may be eligible for a unilateral tax credit for the value of the foreign taxes paid on said income. These kinds of income are:
- Profits derived by an overseas branch of a company that is a tax resident in Singapore; or
- Income earned through the provision of any consultancy, professional or other service in any territory outside of Singapore
Aditionally, as per Section 50A, royalties sourced from non-treaty countries may also be eligible for a unilateral tax credit. The royalty must not be:
- Borne either indirectly or directly by a permanent establishment in Singapore or a person resident in Singapore; or
- Deductible against any income sourced in Singapore.
One of the most common uses of double tax agreements is determining whether a reduction or exemption of tax on certain kinds of income is possible.
Broadly, the following kinds of income are subject to a domestic withholding tax:
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The Singaporean tax treaty network
Every double tax agreement concluded by the Government of Singapore since 1965 is categorised as one of the following:
- Comprehensive – generally covering all types of income
- Limited – only covering income derived from air transport and/or shipping
- Treaties either limited or comprehensive that have been signed but not ratified by the parties yet and lack the force of law.