Singapore won’t tax your revenue twice if you do worldwide business and have already paid taxes in another nation. The foundation of Singapore’s tax system is the idea that double taxation discourages international commerce by unfairly punishing businesses that make cross-border trade. To avoid such double taxes, Singapore has signed Avoidance of Double Tax Agreements (or DTAs) with a wide range of such nations.
Learn more about Singapore’s double tax treaties in this article.
WHAT IS DOUBLE TAXATION?
When two or more nations levy taxes on an individual taxpayer for the same taxable income or capital, this is known as double taxation. In other words, the same income is subject to taxation in both the nation of origin (where it originates) and the country of residence (where it is received). Countries offer a variety of reliefs to taxpayers to lessen the cost of double taxation, either as part of their own domestic tax legislation or as part of international tax treaties.
SINGAPORE DOUBLE TAX AGREEMENTS
A DTA is a bilateral pact made between two nations to prevent double taxation that would come from the implementation of their own domestic tax laws. Due to Singapore’s wide network of DTAs, businesses operating there or from there won’t be subjected to double taxation.
Residency
You need to be a resident of Singapore or the other nation in order to benefit from a Singapore DTA. Section 2 of the Singapore Income Tax Act defines a Singapore resident as:
- A person who lived in Singapore in the year before their evaluation, with the exception of brief absences that were justified and did not contradict their claim to be a resident of Singapore. Anyone who was physically present in Singapore or who had spent at least 183 days working there during that year qualifies (besides serving as a business director).
- A group of people or a corporation whose management and control of its operations are exercised in Singapore.
Permanent Establishment
An office, factory, or retail shop are examples of permanent establishments (PE) where a corporation conducts its operations. Any earnings attributed to a company’s PE may be subject to taxation in the PE’s home nation. In some situations, the mere existence of an employee in a foreign nation or an agent with the capacity to sign contracts on the company’s behalf might be enough to establish a PE.
Income Covered
Although each signed Singapore DTA contains particular clauses and may differ from one country to the next, DTA abides by the fundamental principles listed below:
- Immovable property income: Such revenue, such as rent on a building, is taxed in the jurisdiction where the property is located.
- Business profits: Only the portion of a Singapore company’s foreign business income that can be linked to a PE in that foreign nation is subject to tax.
- Income from ships and planes: Unless the activities are conducted exclusively in the other country, the revenue is typically only subject to taxation in the nation where the vessel’s or aircraft’s operator is located.
- Dividends, interests, and royalties: Any of these income kinds are subject to taxation in the country where they are earned, often in the form of a withholding tax on remittance. The treaty, however, places a cap on the maximum tax rate that can be imposed, which must be equal to or lower than the domestic withholding tax rate.
- Professional service income: Income from professional services is typically taxed in the nation where the service provider resides. His professional services revenue will be taxed in the same way as his company profits if the person has a fixed base in Singapore (an office or clinic). Professional services are offered by accountants, doctors, lawyers, engineers, architects, dentists, and other specialists. If a person resides in Singapore for fewer than 183 days during a tax year and the services are rendered for a resident of another contracting nation, several tax treaties offer tax exemption.
- Employment income: Unless the employee is absent from Singapore for more than 183 days in a tax year, his employer is a resident of the contracting country, or his remuneration is not supported by a PE in Singapore of an enterprise of a contracting country, income from employment will be taxed in Singapore if the employment is exercised there. A further prerequisite that must be met in order for a tax treaty to be valid is that the employee’s income must be taxable in the other contracting nation.
- Government service payment: Any salary, wage, pension, or other similar payment made by the government of a contracting nation to an individual providing services in Singapore on that government’s behalf is free from Singaporean taxation and is only subject to taxation in the contracting country.
METHODS OF RELIEVING SINGAPORE DOUBLE TAX TREATIES
The means of avoiding double taxation are specified in either a nation’s internal tax legislation or a tax treaty. The following are the options accessible in Singapore:
1. Full exemption
Any tax calculations made by the resident state completely exclude any income that has been taxed by the non-resident state. Therefore, while establishing the amount of progressive tax that will be imposed on the remaining income, the relevant revenue is not taken into account.
2. Exemption with progress
With this approach, the taxable income is not subject to residence state taxation, but it is included for calculating the progressive tax rate that will be applied to the remaining taxable income.
3. Regular credit
With this approach, the resident state offers a credit on the taxable income that is equal to its own tax. The taxpayer would not be given complete relief if the tax paid to the other nation was more than the tax in the resident state.
4. Full credit
When determining the taxes owed in the Resident State, the whole amount of taxes paid to the other nation may be taken into account as a credit. Under this technique, the resident state forfeits some of its own tax if the foreign nation levies a greater tax rate than it does.
5. Tax-sparing credit
In most cases, a tax credit is only granted by the residence state if the income has really been taxed in the other nation. A unique type of credit known as a “tax sparing credit” allows the residence state to grant a credit for taxes that “would have been paid” in the nation of origin but were not, or “spared,” instead. Tax Sparing Credits are very beneficial and can lower the effective tax rate such that it is lower than the tax rate imposed by either of the two treaty parties.
DTA CONCLUDED BY SINGAPORE
With the majority of the world’s major economies, Singapore has negotiated a vast network of DTAs or other comparable tax agreements. These might be any of the following kinds:
1. Avoidance of DTA
These agreements aim to avoid double-taxing income from transactions between the two signing nations.
2. Non-ratified DTA
These DTAs were signed by the two nations but have not yet been approved by their respective legislative bodies. Although non-ratified DTAs do not currently have legal effects, they will probably do so in the future.
3. Limited treaties
Despite being less comprehensive than a DTA, these agreements cover related topics. They often only pay for profits from shipping and/or air transportation.
4. EOI arrangements
Exchange of information (EOI) Agreements exclusively contain clauses governing the information exchange for tax-related reasons. Under an EOI Arrangement, the Comptroller of Income Tax may provide information upon request from treaty partners.
Unilateral Tax Credit
If you are a Singapore tax resident and receive the following foreign income from nations with which Singapore has not yet signed a DTA, you may be eligible for a unilateral tax credit under Section 50A of the Singapore Income Tax Act for the foreign taxes you paid on such income.
- Any professional, consulting, or other fees earned outside of Singapore for work done elsewhere.
- Dividends
- Profits made by an organization with a Singaporean base that has a branch abroad
As per Section 50A, the unilateral tax credit would also apply to overseas royalties from non-treaty nations as long as they are not:
- Born in Singapore, either directly or indirectly, through a resident or a permanent establishment there
- Deductible from any income earned in Singapore.
CONCLUSION
Singapore has over 100 DTT with other nations, preventing corporations operating outside of Singapore from paying taxes twice. The DTA also offers tax exemptions or reductions. With the introduction of this treaty, tax avoidance is eliminated, and efficient cross-border commerce is boosted. This treaty has also made taxation more equitable for persons who have businesses outside Singapore.
If you need tax guidance or have any queries, don’t hesitate to contact Relin Consultants, experts in the field.
