Singapore DTA Guide

The development of international trade and multinational corporations has increased the issue of double taxation. As a company or individual looking beyond your own country for business opportunities and investments you would naturally be concerned with the problem of double taxation. Consequently you would seek to structure your operations at a minimum tax cost. This is where Singapore's DTAs or tax treaties come into play. 

Tax treaties enable you to access relief from double taxation, either by way of tax credit, tax exemption or a reduced tax rate. These reduced rates and exemptions vary among countries and specific items of income. Treaty provisions generally are reciprocal (apply to both treaty countries). If there is no treaty between your country and Singapore, you may be able to take advantage of unilateral tax credit. Singapore currently has more than 50 comprehensive DTAs to take advantage of and provides specific guidelines for double taxation relief on various types of income. 

This article focuses on Singapore's double tax agreements. To get an overall understanding of corporate taxes in Singapore, see Singapore Income Tax for Companies guide.

What is Double Taxation?

Double taxation arises when two or more countries impose taxes on the same taxpayer in respect of the same taxable income or capital. In other words, the same income is being taxed twice - the country of source where the income arises and the country of residence where the income is received. To relieve taxpayers from the burden of double taxation, countries provide various types of reliefs either under their domestic tax laws or under the tax treaties they have entered into with other countries. 

What is a Double Tax Agreement?

A Double Tax Agreement (DTA) is a bilateral agreement between two countries to avoid double taxation, resulting from the application of their respective domestic tax laws. 

Benefits of DTAs

1. The main objective of a DTA is to provide certainty regarding when and how tax is to be imposed in the country where the income-producing activity is conducted or payment is made. As a result is defines the jurisdictional authority on cross-border transactions.
2. It clearly defines the taxing right of each country.
3. It seeks to prevent international tax evasion by sanctioning the exchange of information between the tax authorities of the contracting countries.
4. It allows you to claim for relief for taxes paid overseas. 

Who benefits from DTAs?

Only Singapore tax residents and tax residents of the treaty country can enjoy the benefits of a DTA. If your company is resident in Singapore (i.e. the control and management of its business are exercised in Singapore) and you earn foreign income from a treaty country, you are entitled to claim for relief under the relevant tax treaty by submitting a Certificate of Residence to the foreign country. This is proof of your company being a Singapore tax resident. If on the other hand, you are a tax resident of a treaty country you will have to submit to the Inland Revenue Authority of Singapore, a completed Certificate of Residence from Non-Residents (Claim for relief from Singapore Income Tax Under Avoidance of Double Taxation Agreement) that is duly certified by the tax authority of the treaty country. 

Contents of DTAs concluded by Singapore

Although each DTA concluded by Singapore has specific terms and may differ from one country to another, there are certain key general principles of a typical DTA, as outlined below: 

1. Scope of the DTA is limited to tax residents of Singapore and the treaty country. DTAs are not applicable to non-residents of either country.
2. Taxes covered by the DTA is limited to taxes on income and excludes customs and excise duties.
3. Defining the concept of Permanent Establishment (PE), as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and normally includes a place of management, a branch, an office, a factory, a workshop and a place of extraction of natural resources, etc. This definition is important as business profits attributable to that PE is taxable in that country.
4. Income from immovable property, such as rental income from real estate, is usually taxed both in the country of source (where the property is situated) and country of residence of the recipient. According to Singapore DTAs, the country of residence will have to allow a credit for the tax paid in the country of source.

5. Tax Credit. Singapore (as the Country of Residence) will give a tax credit in respect of the foreign income based on the lower of Singapore tax payable or foreign tax paid. In addition, foreign-sourced income is also tax exempt in Singapore subject to two conditions - that the year the income is received in Singapore, the headline tax rate (i.e. highest corporate tax rate) of the foreign jurisdiction from which the income is received is at least 15% and that the foreign income has been subjected to tax in the foreign country.

6. Airline or shipping profits derived by an enterprise of one country from the other country are entitled to either full or partial exemption. Where full exemption is provided for, this means that the air transport or shipping income will be taxed in the enterprise’s Country of Residence only.
7. Dividend income may be taxed in the recipient's country of residence and that the country of source (i.e. the country in which the company paying the dividend is resident) has the right to tax the dividend income. Normally the country of source would grant full or partial tax exemption or impose a reduced dividend withholding tax rate. Since Singapore follows a one-tier corporate system it does not levy dividends withholding tax. Whether they are taxable in the treaty country would depend on the domestic tax laws of that country and what the treaty specifies.
8. Interest will be exempted or taxed at a reduced rate in the country in which the interest income arises (source country). In the Belgian and Netherlands tax treaties, residents of these countries deriving interest from Singapore are taxable at the rate of 15% and 10% respectively. In the Japanese treaty, if the interest arises from a loan that is made to an approved industrial undertaking, such interest is exempt from Singapore tax, otherwise a tax of 15% is chargeable. The treaty with Malaysia does not provide for any reduction of tax on interest.
9. Royalty income tax treatment varies from complete to partial exemption.
10. Professional services income is normally taxed in the country of residence of the individual performing the services. When the individual has a fixed base in Singapore (office or clinic) his income from the professional services will be taxed in the same manner as his business profits. Professional services cover physicians, lawyers, engineers, architects, dentists, accountants, etc. Some tax treaties (e.g. with Australia, Netherlands, Pakistan) provide tax exemption if the individual is present in Singapore for not more than 183 days in a tax year and where the services are performed for a resident of the other contracting country.
11. Income from employment will be taxed in Singapore if the employment is exercised in Singapore unless: a. the employee is not present in Singapore for more than 183 days in a tax year b. His employer is a resident of the contracting country c. His remuneration is not borne by a permanent establishment in Singapore of an enterprise of a contracting country. Singapore's tax treaty with Malaysia, UK, Denmark, Norway, Federal Republic of Germany and Sweden requires an additional condition to be fulfilled - the employee's income must be subject to tax in the other contracting country.
12. The source of directors' fees is in the country in which the company paying the fee is resident. The full domestic tax rate would apply as there is no exemption or reduced tax rate.
13. Government payments - Any salary, wage, pension, or similar rewards for personal services paid by the government of a contracting country to persons performing services in Singapore on behalf of that government are exempt from tax in Singapore and will only be taxed in the contracting country.
14. Remuneration paid to visiting professors or teachers, by a contracting country, for teaching at a Singapore based educational institute is exempt from tax in Singapore.
15. Self-employed persons are liable to Singapore income tax on the full amount of their income which is earned in Singapore, net of any tax-deductible expenses which they might have incurred in order to earn that income.
16. The right to tax gains arising from the sale of immovable property and gains from sale of shares varies from DTAs signed with different countries. 

Methods of relieving double taxation in Singapore

The methods of relieving double taxation are given either under a country's domestic tax laws or under the tax treaty. The available methods in Singapore are as follows:

Tax Credit Relief

A tax credit will be given for the foreign tax suffered by a tax payer against his domestic tax imposed on the same income. The amount of tax credit relief is normally restricted to the lower of the paid/payable in the foreign and home country. This is known as the ordinary credit method vis-a-vis the full credit method, where the tax paid in the country of source is allowed as a credit in full. 

Tax credit relief is commonly referred to as Double Tax Relief in Singapore. The claim for DTR should be made while filing annual income tax returns (Form C) and should be shown in the company's tax computation. Documentary proof (e.g. withholding tax receipts, letter from the foreign tax authority, or dividend vouchers) to show that the remitted income has been subjected to tax in the treaty country is required, before DTR claims can be considered. 

Tax exemption

Double taxation can be avoided when foreign income is exempt from domestic tax. The exemption may be given on the entire or part of the foreign income. 

Tax exemption for foreign-sourced dividends, branch profits, and service income Sec 13(8)

A Singapore tax resident company can enjoy tax exemption on its foreign-sourced dividends, foreign branch profits, and foreign-sourced service income that is remitted into Singapore if the following conditions are met:

• The highest corporate tax rate (headline tax rate) of the foreign country from which the income was received is at least 15% and
• The foreign income had been subjected to tax in the foreign country from which they were received. The rate at which the foreign income was taxed can be different from the headline tax rate. 

Furthermore, tax exemption will be granted to all foreign sourced income earned/accrued outside Singapore on or before 21 Jan 2009 to resident non-individuals and resident partners of partnerships in Singapore, and received in Singapore during the period from 22 Jan 2009 to 21 Jan 2010.

To enjoy the tax exemption on the specified foreign income, you need not submit documents (such as dividend vouchers, notices of assessment issued by the relevant foreign jurisdiction etc) with your income tax returns to substantiate that their specified foreign income qualifies for the exemption. Instead you only need to declare in the appropriate section of your income tax returns that your specified foreign income qualifies for the tax exemption and furnish the following particulars:

1. Nature and amount of income (i.e. foreign-sourced dividend, foreign branch profits or foreign-sourced service income)
2. Country from which the income is received
3. Headline tax rate of the country from which the income is received and
4. Amount of foreign tax paid/payable in the country from which the income is received. 

Tax exemptions for individuals Sec 13(7A)

For tax resident individuals in Singapore, all foreign income received in Singapore will be exempt from tax if the Comptroller is satisfied that the tax exemption is beneficial to the individuals. 

Reduced tax rate

Under this form of relief, income is taxed at a lower rate and is applicable to the following classes of income: interest, dividends, royalties and profits from international shipping and air transport. 

Relief by deduction

In this case, domestic tax is applied on the foreign income after deducting foreign tax suffered. Singapore does not allow a deduction of foreign income tax. However a deduction is given indirectly as under the remittance basis, Singapore would tax the amount of foreign income received (i.e. net of foreign tax) in Singapore.  

Tax sparing credit

Under a DTA, tax credit is usually available in the country of residence only if the income has been taxed in the country of source. Tax sparing credit is a special form of credit whereby the country of residence agrees to give a credit of the tax which would have been paid in the country of source but was not, i.e., "spared", under special laws in that country to promote economic development. 

The tax sparing credit provision is usually found in DTAs between a developing country which offers tax incentives to attract foreign investment and a developed country which is capital exporting. The credit is given by the capital-exporting country under its laws to promote investments. 

Tax relief example under different methods

Unilateral tax credit

If you are a Singapore resident receiving the following foreign income from countries which Singapore has yet to conclude an Avoidance of Double Taxation Agreement (DTA), you can now get a unilateral tax credit for the foreign taxes paid on such income under Section 50A of the Singapore Income Tax Act.

1. Income derived from any professional, consultancy and other services rendered in any territory outside Singapore.
2. Dividends or
3. Profits derived by an overseas branch of a Singapore resident company. 

Unilateral tax credit under Sec 50A would also apply to foreign sourced royalty from non-treaty countries, provided the royalty is not

1. borne directly or indirectly by a person resident in Singapore or a permanent establishment in Singapore or
2. deductible against any Singapore sourced income 

Singapore's tax treaty network

All the Double Taxation Agreements concluded by Singapore since 1965 to date are categorized as follows:

1. Comprehensive Avoidance of Double Taxation Agreements - These agreements generally cover all types of income.
2. Limited Treaties - These agreements cover only income from shipping and/or air transport.
3. Treaties which are Signed but not Ratified - These are either comprehensive agreements or limited treaties which are not ratified and therefore do not have the force of law.