Starting an Online Business in Singapore Part 4: Taxation
One of the challenges of operating an e-commerce business is knowing your tax liabilities. E-commerce transactions are often multi-jurisdictional in nature and generally involve anonymous parties. As an e-commerce business owner you must be aware of the Singapore tax issues that could arise as a result of running an online business.In general, the Singapore tax regime is very liberal and provides very generous incentives for business owners. There are two principal taxes that apply to e-commerce in Singapore: Income tax and Goods and Services Tax (GST).
The main concerns regarding the application of income tax on e-commerce transactions are in the following areas:
- Tax issues with regards to source;
- Tax issues with regards to residence; and
- Tax issues with regards to income classification.
Source of taxation
Given that Singapore follows a territorial basis of taxation, tax is imposed on the income (a) accruing in or derived from Singapore or (b) received in Singapore from outside Singapore. However, there exists some difficulty in applying this principle to e-commerce as it deals with electronic borderless transactions and not to the trade of physical goods and services. It eventually comes down to whether the e-merchant is trading in Singapore or with Singapore. In determining this, one has to take into account:
- The place of contract
- The place where operations relating to the e-transactions take place and from which profits are derived such as:
- Where is the labor employed?
- Where is the capital invested?
- In which location are the goods manufactured?
- In which location are the goods stored?
- Where are the payments made for expenses incurred?
- In which location are the sales proceeds received?
Although the above factors act as a guiding principle, they may be difficult to apply unambiguously in reality. For instance, an order may be received in one country via a server located in another country. The goods may be manufactured in one country but sent to another country for storage. Evidently, it is difficult to determine the source of income in this case. The only way of meeting this challenge is to closely examine as to which jurisdiction is most connected to the e-transaction on the basis of the factors mentioned above.
The Singapore tax authority has provided clarifying opinions on certain taxation scenarios that are common to e-commerce trade and are detailed below:
- Scenario 1: A company with its business operations in Singapore, sets up a website in Singapore. In this case the company supplies tangible and intangible products in Singapore; hosts its website with a Singapore web-hosting service provider; and the website enables customers to place orders, make payments and receive the delivery of tangible goods physically or intangible goods online. In this case, income derived from business conducted through the website would be considered as income sourced in Singapore and be subject to tax in Singapore.
- Scenario 2: Company with its business operations in Singapore, sets up a website in a foreign country. In this case the company supplies tangible and intangible products in Singapore; does not operate a branch in a foreign country; hosts its website with a web-hosting service provider in a foreign country; and the website enables customers to place orders, make payments and receive the delivery of tangible goods physically or intangible goods online. In this case, although the website is hosted in a foreign country, the fulfilment of the business obligations is done through its operations in Singapore i.e. the Singapore based company provides information on the website, answers queries, delivers the tangible products, etc. Therefore, the income derived from its e-commerce transactions via the website will be considered as income sourced in Singapore and subject to tax in Singapore.
- Scenario 3: Company with its business operations in Singapore, sets up a website and branch in a foreign country. In this case the company supplies tangible and intangible products in Singapore; operates a branch in a foreign country; hosts its website with a web-hosting service provider in a foreign country; and the website enables customers to place orders, make payments and receive the delivery of tangible goods physically or intangible goods online. The branch performs various activities including supporting the technical aspects of the website to handling and completing e-commerce transactions. In this case, since the branch carries out its activities largely outside Singapore, its profits so derived would be considered as sourced in the foreign country. Therefore, such profits are not subject to tax in Singapore unless remitted back to Singapore.
- Scenario 4: Company with its business operations outside Singapore, sets up a website in Singapore. In this case the company manufactures tangible products and supplies intangible products in a foreign country; does not operate a branch in Singapore; hosts its website with a Singapore web-hosting service provider; and the website enables customers to place orders, make payments and receive the delivery of tangible goods physically or intangible goods online. In this case, the website merely facilitates the conduct of e-commerce and a substantial part of the business activities are carried out in the foreign country. Therefore, such income would not be considered as sourced in Singapore, and not subject to tax in Singapore.
- Scenario 5: Company with its business operations outside Singapore, sets up a website and branch in Singapore. In this case the company manufactures tangible products and supplies intangible products in a foreign country; operates a branch in Singapore; hosts its website with a Singapore web-hosting service provider; and the website enables customers to place orders, make payments and receive the delivery of tangible goods physically or intangible goods online. The branch performs various activities including supporting the technical aspects of the website to handling and completing e-commerce transactions. In this case, since the company’s business operations are carried out outside Singapore, it is not subject to tax in Singapore. However, as the branch’s operations are undertaken in Singapore, the profits so derived would be considered sourced in Singapore. Therefore, the branch profits are taxable in Singapore.
A company is considered as tax resident in Singapore if the control and management of the business is exercised in Singapore i.e. if the directors manage and control the business and hold board meetings in Singapore. An individual is a tax resident in Singapore if (s)he is a Singapore citizen, Singapore Permanent Resident, or a foreigner who has stayed or worked in Singapore for 183 days or more in the tax year.
If an e-merchant is not a Singapore tax resident then (s)he will not be subject to tax in Singapore on income derived from an e-transaction with a Singapore customer, unless the transaction is carried out through a permanent establishment in Singapore. Similarly, an e-merchant who is a Singapore tax resident can avoid taxation in foreign jurisdictions by not establishing a permanent establishment in those jurisdictions. In this context, it is important to understand what constitutes a permanent establishment and what doesn’t.
A permanent establishment is defined as a fixed place where a business is wholly or partly carried on including a place of management, branch, office, factory, warehouse, and workshop. Whether or not a server that hosts a web-site constitutes a permanent establishment will depend upon whether it acts as a mere communication tool or if it plays a more substantial role in the e-transaction. For instance in Scenario 4 described above, where a company’s business operations are outside Singapore but its website is located in Singapore, there is no question of the income being subject to Singapore tax as the website only facilitates the transaction. Consequently, there is no double taxation of income.
It is possible for e-commerce owners to be tax residents in more than one jurisdiction thereby resulting in double taxation of income. In the event of double taxation of income, relief can be sought through Singapore’s extensive tax treaty network. If there is no treaty between Singapore and a foreign country, you may still be able to take advantage of unilateral tax credits. For more information, please refer to our Singapore Double Tax Treaties Guide.
One of the e-commerce tax related issues is that of income classification. More specifically, does license fees derived from the use of digitized information (e.g. computer software) classify as trade income or royalty income. According to the Singapore tax authority, license fees payable for the supply of computer software is royalty income as it is a payment made for the “use or right to use any movable property as well as commercial, scientific, technical or industrial knowledge or information”. Given that license fees is royalty income then it will attract withholding tax if the payment is made by a Singapore resident customer (individual or permanent establishment) to a non Singapore tax resident e-merchant supplying the digitized information. The withholding tax rate for royalty payments is currently 10% or a lower rate as provided by the applicable double tax treaty. Note however that royalty payments made to Singapore non-resident e-merchants for shrink-wrap software (i.e. standard software such as operating system software or office application software); downloadable software by an end-user; site license (a license that allows the licensee to install the software on multiple computers or servers for operation within its own business, location or facility); and software bundled with computer hardware will be exempt from tax.
Goods and Services Tax
The Goods and Services Tax (GST) – also known as Value Added Tax (VAT) in other countries – is an indirect consumption tax levied on the supply of goods and services in Singapore and the import of goods into Singapore. It is applied to the selling price of goods and services consumed in Singapore. A business entity must be GST registered to charge this tax. Since GST is passed on to the end consumer, it is not a cost to the company but is paid by consumers. The current rate of GST is 7%. Sale and lease of residential land, and financial services are exempt from GST. There is no GST on export of goods and services outside Singapore. For import of goods, GST is payable directly to Singapore Customs at the point of importation into Singapore. GST registration is compulsory for all companies whose annual turnover exceeds or is expected to exceed S$1 million. Companies that are only involved in the export of goods and provision of international services are exempt from GST registration. A company can opt for voluntary GST registration.
GST and E-Commerce
- If you are GST registered and sell goods via the Internet and the goods are delivered in Singapore then the goods will be subject to GST.
- If you are an e-merchant and the goods are exported by you or via your freight forwarder then the goods are considered to be zero-rated supplies and are exempt from GST. You will need to maintain the necessary documents to prove your exports.
- If the physical delivery of the goods is from a place outside Singapore to another place outside Singapore, it is outside the scope of Singapore GST law and no GST need be charged.
- The sale of digitized goods such as online movies, e-books, or computer software that can be downloaded by the customer via the Internet is considered to be a supply of services and is also subject to GST just as the supply of physical goods.
- The supply of international services is considered a zero-rated supply and therefore exempt from GST. For a supply to qualify as an international service it must meet the following conditions:
- It is supplied under a contract with a person who belongs in a country outside Singapore;
- It directly benefits a person who belongs in a country outside Singapore and who is outside Singapore at the time the services are performed; and
- It is not supplied directly in connection with goods in Singapore.
- If you import goods by post or by air and the value of the goods exceeds S$400 then you must pay GST to the Singapore Customs.
- If you are “importing” digitised goods then you are not required to pay GST when you download these digitised goods, regardless of their value.
- If you sell digitised goods such as music and software over the Internet to an individual consumer or a business entity, you must charge 7% GST unless the customer does not belong in Singapore. To determine whether the customer belongs to Singapore or a foreign country, the business address, domain name, and IP address can be used as indicators.
- All prices displayed, advertised, published over the internet for any supply of goods or services should be inclusive of GST.
- If you sell advertising space on your web-page or website that allows access to both Singapore and overseas viewers/browsers then it is a zero-rated supply and exempt from GST. However, if the advertisement is placed on a website or webpage that only allows access to Singapore viewers/browsers (i.e. .sg domain), then it is a standard-rated supply and subject to GST.
- Provision of web-hosting services is also subject to GST unless it classifies as an international service.
For more information on GST implementation, filing GST returns and GST schemes please refer to our Singapore GST Guide.
To learn more about setting up an e-commerce business in Singapore, refer to the following other articles in our five-part guide:
- Starting an Online Business in Singapore – Step-by-Step Guide
- Starting an Online Business in Singapore – Industry Overview
- Starting an Online Business in Singapore – Regulatory Regime
- Starting an Online Business in Singapore – Funding and Financial Assistance