An Introduction to Singapore Tax System

Most investors turn to Singapore for establishing their operations for several reasons. The ease of setting up and operating businesses is a prime motivator. Another central determinant is Singapore's tax regime - well-known for its attractive corporate and personal tax rates, tax relief measures, absence of capital gains tax, one-tier tax system etc. 

Governing Tax Law and Authority in Singapore

The Income Tax Act os Singapore is the governing statute regarding corporate and individual taxation matters.

The Inland Revenue Authority of Singapore (IRAS), was formed in 1960 and was formerly known as the Inland Revenue Department. It integrated all the key revenue collection agencies into one body, enabling the administration and collection processes to become more streamlined and better managed.

The IRAS is responsible for collecting income tax, property tax, goods & services tax, estate duty (for deaths occurring before 15 Feb 2008), betting taxes and stamp duties. As the main tax administrator for the Ministry of Finance, IRAS plays a role in tax policy formulation by providing policy inputs, as well as the technical and administrative implications of each policy. IRAS also actively monitors developments in external economic and tax environment to identify areas for policy review and changes. It aims to foster a competitive tax environment that encourages enterprise and growth. The other non-revenue functions performed by IRAS include representing the government in tax treaty negotiations, providing advice on property valuation and drafting of tax legislation.

IRAS has also made its mark as an efficient tax administrator and a service-friendly tax collector. It regularly publishes information on the latest tax regulations and procedures to provide greater clarity to taxpayers on their tax obligations. It listens hard to the feedback of taxpayers and leverages on technology to make the experience of tax filing more pleasant and hassle-free. Today, most individual taxpayers can complete their income tax filing in less than 10 minutes.

Types of Taxes in Singapore

1. Income Tax is chargeable on income of individuals and companies.

2. Property Tax is imposed on owners of properties based on the expected rental values of the properties.

3. Estate Duty has been abolished.

4. Motor Vehicle Taxes are taxes, other than import duties, that are imposed on motor vehicles. These taxes are imposed to curb car ownership and road congestion.

5. Customs & Excise Duties - Singapore is a free port and has relatively few excise and import duties. Excise duties are imposed principally on tobacco, petroleum products and liquors. Also, very few products are subject to import duties. The duties are mainly on motor vehicles, tobacco, liquor and petroleum products.

6. Goods & Services Tax (GST) is a tax on consumption. The tax is paid when money is spent on goods or services, including imports. 

7. Betting Taxes are duties on private lottery, betting & sweep-stake.

8. Stamp Duty is imposed on commercial and legal documents relating to stock & shares and immovable property.

9. Others - The two main taxes are the foreign worker levy and the airport passenger service charge. The foreign worker levy is imposed to regulate the employment of foreign workers in Singapore.

Key Points of Singapore Tax System

1. Tax Jurisdiction - Singapore follows a territorial basis of taxation. In other words, companies and individuals are taxed on Singapore sourced income. Foreign sourced income will in principle be taxed when it is remitted or deemed remitted into Singapore (a non-resident individual is exempt from tax on foreign sourced income received in Singapore). All foreign income in the form of dividends, branch profits and service income from jurisdictions with headline tax rates of at least 15% are exempt from Singapore tax. For more info, see Foreign Source Income Taxation in Singapore guide.
    
2. Corporate Tax Rate is capped at 18%. By keeping corporate rates competitive Singapore continues to attract a good share of foreign investment. For a comprehensive account of Corporate taxation in Singapore, please visit the Singapore Corporate Tax Guide.
    
3. Individual Tax Rate start at 0% and is capped at 20% for residents and a flat rate of 15% for non-residents. By keeping individual rates low it encourages people to work hard. It also makes risk-taking worthwhile and encourages entrepreneurship.
    
4. Singapore currently follows a one-tier corporate tax system, where tax paid by a company on its profits is not imputed to the shareholders. 
    
5. Goods and Services Tax - To increase the resilience of taxes as a source of government revenue, Goods & Services Tax (GST) was introduced in 1994. This balanced mix of tax on consumption and income reduces the vulnerability of revenue intake to adverse changes in economic conditions and strengthens the resilience of Singapore's fiscal position. For more details, see Singapore Goods and Services Tax (GST) Guide
    
6. Tax deduction and allowance - Operating expenses incurred in the production of income are generally tax deductible. For more info, see Calculating Income Tax Liability in Singapore guide.
    
7. Tax Losses and Allowances - Losses arising from the carrying on of a trade or profession are deductible and may be set off against income from other sources. The balance may be carried forward indefinitely. Capital losses are not deductible.
    
8. Group relief for losses - A company' s current year's non-utilised capital allowances and losses may be transferred for tax purposes to another company in the same group.
    
9. Capital gains/losses - Singapore has no capital gains tax. Capital loss expenses are correspondingly not allowed as deductions.
    
10. Investment and tax incentives are offered to companies investing in Singapore. 
     
11. Foreign source exemption - Foreign dividends (as well as branch profits and income from services) are generally tax exempt.
     
12. Withholding tax - Interest, royalties, rentals from movable properties, management and technical fees, and director's fees paid to non-residents (individuals or companies) are subject to withholding tax in Singapore.  For more info, see Singapore Withholding Tax guide.
     
13. Tax treaties - Singapore has concluded 54 bilateral comprehensive tax treaties as of 1st January 2007 to avoid double taxation. for more info, see Singapore Tax Treaties guide.
     
14. Treatment of Stock Options - Stock option gains in general are taxed as employment income. However, there are various schemes available to reduce the tax burden.
     
15. Tax Year - The tax year in Singapore is the calendar year and referred to as the "Year of Assessment" or "YA". Income is subject to tax on a preceding year basis, i.e. business income from year 2008 will be taxed in the YA 2009. In the case of a trade, business, profession or vocation, the accounting year forms the basis period for a Year of Assessment.
     
16. Amendments to Income Tax Act - The Singapore Government believes in a progressive tax regime and suitable amendments are made to the Income Tax Act from time to time, to increase the competitiveness of Singapore's tax environment. For more info, see Recent Tax Amendments in Singapore.

Historical Evolution of Singapore's tax regime

Early beginnings

Debated since before World War I, income tax had been introduced briefly during World War I and II to raise revenue for the war effort. But the tax was unpopular, and with many opposing the need for it, income tax stayed off the agenda.

The end of World War II highlighted the need for new infrastructure and fresh sources of revenue, giving renewed impetus to the introduction of income tax.

In 1947 Income Tax was introduced in Singapore under the British colonial government. In 1948 the Income Tax Act was imposed. The Act was based on the Model Colonial Territories Income Tax Ordinance 1922, which was devised for British colonies at that time. Therefore, Singapore's tax laws share common historical roots with those of Malaysia, Australia, New Zealand and South Africa.

1960s

With Independence in 1965, Singapore promoted a policy of rapid industrialisation and building an export oriented industrial base, to stimulate growth and employment. Hence in the 1960s labour-intensive industries were encouraged by tax incentives. The Economic Expansion Incentives Act was introduced in 1967. Companies which managed to grow their exports enjoyed as much as a 90% tax exemption on the increased export income. Interest paid on foreign loans granted to a local industrial company was tax exempt.

1970s

In the 1970s growth of the service sector was high on the government's agenda. Tax policy played its part in the financial sector with the exemption of interest on Asian dollar bonds from 1973. Shipping was also actively promoted. Income from the operation and charter of Singapore ships drew tax exemptions. Tax measures to support urban redevelopment were also introduced. Different property taxes were also phased out. Tax policies in the 1970s were also influenced by social needs. Contributions to the Central Provident Fund were tax deductible and other tax relief measures were introduced.

1980s

As Singapore became more developed, it became a more expensive place for businesses in the 1980s. Measures to revamp the economy, with the aim of making it more competitive was introduced. Changes to government policies, incentives and taxes were considered. The late 1980s marked a significant shift towards lowering both corporate and individual taxes. In 1987 corporate tax rates were lowered from 40% to 33%.

1990s

This period witnessed major changes in tax policies. There was a shift towards lower direct taxes and the focus was on indirect taxes. The trend towards indirect taxation resulted in the introduction of the Goods and Services Tax (GST) in 1994. It is a tax on domestic consumption and applies to all goods and services supplied in Singapore except for financial services and residential properties. It was in this period that the trend of lowering corporate and individual tax rates accelerated.

2000 and beyond

This is the phase of innovation and entrepreneurship. A number of measures were, and are being introduced to attract foreign talent and investment. Tax rates were further lowered and currently capped at 18% for corporates and 20% for individuals. This period witnessed the introduction of group relief and the one-tier corporate tax system.