If you are a tax resident of Singapore, have set up businesses beyond Singapore and have paid taxes in other countries, your income might not be double taxed in Singapore. This is because Singapore's tax framework advocates fairness by ensuring that cross-border trade will not be penalised by double taxation, which could be detrimental to international business.
Read on to find out more about double taxation and how you can avoid it in Singapore.
What Is Double Taxation?
Double taxation is when 2 countries impose tax on the same taxpayer, and in this context, it refers to a business. In other words, the company’s income is being taxed twice, with the first source from the country where income is generated, and the second being the country of residence where payment is made. The second-mentioned is typically the home country, or where the business is from.
Through domestic tax laws or tax treaties with other countries to avoid double taxation, countries can offer different tax relief types.
Avoiding Double Taxation Through Double Tax Treaties
What Is the Double Tax Agreement (DTA)?
The double tax treaties, also known as Double Tax Agreement (DTA), one agreed upon between two countries to avoid double taxation that result from the domestic tax laws.
Advantages of the Double Tax Agreement (DTA)
DTA is implemented to clearly detail when and how tax is imposed in the country where income arises, or where payment is received. In a nutshell, it provides clear guidance on the respective country's taxing right, from the country of origin and the country where the business has expanded to.
DTA can also counteract international tax evasion by prohibiting the exchange of information between the tax authorities and contracting state. Additionally, you can also claim tax relief for tax paid overseas.
What Types of Income Would Go Through Double Taxation?
Double taxation may occur if you earn incomes from the following:
- Business profits
- Shipping and air transport
- Associated enterprises
- Income from immovable property
- Capital gains
- Royalties and fees for technical services
- Dependent personal services
- Independent personal services
- Directors' fees
- Sports persons
- Non-governmental pensions and annuities
- Remuneration and pensions from government service
- Researchers and teachers
- Trainees and students
- Government income
Who Can Benefit From Double Tax Treaties
Only tax resident companies of Singapore can reap the benefits of a double tax agreement application.
Under the Singapore Income Tax Act, a resident is recognised as:
- A body of persons or a company: This means that a body of persons or a company is in control and manages the business that is in Singapore
When you receive earnings from a treaty country, you are eligible to file for tax relief under the relevant tax treaty. To do so, you will have to submit a Certificate of Residence as proof of your Singapore Tax Residency to the foreign country.
How to Relieve Double Taxation in Singapore
If you are thinking of expanding beyond Singapore but worried about double taxation, fret not as Singapore has double taxation treaties put into place to ensure that you won’t be taxed twice. Your company can claim foreign tax credit (FTC) for tax paid in a foreign jurisdiction against the Singapore tax payable on the same income.
There are 2 ways you can claim foreign tax credit and avoid double taxation.
Unilateral Tax Credit (UTC)
As of 2009, a Unilateral Tax Credit (UTC) will be permitted for all foreign income received in Singapore by local tax residents from territories that do not have the Double Taxation Agreement with Singapore.
Double Tax Relief (DTR)
A Double Tax Relief (DTR) is a relief provided in the form of a tax credit to relieve double taxation. It allows you as a local tax resident to claim the credit on the tax amount paid in foreign territory against the Singapore tax that is owed on the same income. If the foreign tax was made according to the Double Taxation Agreement and is limited to the lower of the foreign tax paid and the Singapore tax that would have been due on the same income, a DTR will be approved.
Qualifying Conditions to Claim FTC
Singapore offers double tax relief to qualifying businesses, allowing you to reduce your tax liability and optimise your business operations.
Here's how it works and the kinds of taxes that may apply to your business:
Withholding Tax: When services are provided by a foreign country (like Singapore), the foreign jurisdiction may impose a withholding tax on the income. This is the first tax that your business may incur.
Corporate Tax in Singapore: As a Singapore company, you should pay corporate tax to the Inland Revenue Authority of Singapore (IRAS). The current corporate tax rate is 17%.To qualify for double tax relief, your business must meet the following criteria:
- Tax Residency: Your company must be a tax resident of Singapore.
- Foreign Tax Payment: Foreign income tax must have been paid in the jurisdiction where the income was generated.
- Taxable Income in Singapore: The income earned must also be subject to tax in Singapore.
- Net Profit Position: Your company should be in a net profit position, as double tax relief applies to the lower foreign tax or Singapore tax incurred. If your business is in a net loss position, no tax is payable; thus, no relief is available.
By qualifying for double tax relief, you can enjoy tax credit or relief on the lower of the foreign tax or Singapore tax incurred, reducing your overall tax burden. For example:
If your foreign tax is 20%, Singapore's 17% tax is the relief.
And if your foreign tax is 10%, this is the relief, with the balance of 7% to be paid in Singapore. You just need proof of the tax paid in the foreign jurisdiction.
On top of the above, there are exceptions. Do refer to the table below to check if your company is in the following positions:
|In a financial loss position||Unfortunately, if your company is in a loss position, no FTC will be granted.|
|With permanent establishments overseas||If your company has an overseas permanent establishment and your foreign income is made through this permanent establishment, this income will usually be taxed overseas. As such, a FTC will only be given if the income is also taxed in Singapore.|
|Making passive income||Making passive income (e.g. dividend, interest) from outside Singapore will typically be taxed in foreign territory in the year of receipt. This income will be taxed in Singapore in the year of remittance, and a FTC will be granted when the income is being taxed in Singapore.|
How to Claim FTC
You should file your FTC claim when you file Form C of your Income Tax Return. If you are claiming FTC, take note that you cannot use Form C-S.
Documents supporting your FTC claim do not have to be submitted with your Form C. You’ll need to prepare the following documents for your company
- Territory in which foreign tax was paid
- Description of rendered services, and if the income was made through a permanent establishment in the foreign territory and your basis for this claim (if applicable)
- Nature of income
- Payer’s name
- Gross income, withholding tax rate and amount of tax withheld in foreign currency (alongside the corresponding S$ amount)
- Date of withholding tax receipt/ voucher
- Withholding tax receipt/ voucher
- For double tax relief claim, the applicable Article of the Double Taxation Agreement under which the tax was withheld
Tax Exemption of Foreign Income
As a tax resident company in Singapore, you can enjoy tax exemption on foreign income remitted into Singapore.
Types of foreign income
The three specific types of foreign income include:
1. Foreign branch profits
2. Foreign-sourced dividends
3. Foreign-sourced service income
Meet These Conditions to Qualify for Tax Exemptions
The tax exemption will be permitted when all of the following conditions are fulfilled:
- The Comptroller is convinced that the tax exemption would be advantageous to the person residing in Singapore.
- The highest corporate tax rate of the foreign territory from which the income is made is at least 15% at the time the foreign income is paid in Singapore
- The foreign income had been subjected to tax in the foreign territory from which they were made. The rate at which the foreign income was taxed can differ from the headline tax rate
How to Apply for Tax Exemption
Provide the required information in Form C of your Income Tax Return:
- Territory from which the income is received
- Nature and amount of received income
- Headline tax rate of the foreign jurisdiction
- Confirmation that foreign tax has been made in the territory from which the income was paid to satisfy the "subject to tax" condition.
If you are filing Form C-S and not Form C, you should include the above information in your company's tax computation and keep hold of any supporting information.
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