The Singapore-Japan Double Tax Treaty
Japanese enterprises of both large and small scale are making a beeline for Singapore, the hub of the economically vivacious Southeast Asia. With the Chinese economy losing steam and the domestic economy irked by ageing population and natural calamities, Japanese enterprises are keen on tapping the growth of the Southeast Asian economies. Singapore, with its pro business environment, attractive tax regime, world-class infrastructure and, more importantly, a cosmopolitan and English-speaking workforce, is very attractive for the Japanese enterprises basing their operations here.
Many Japanese companies are shifting their strategic functions to Singapore, including headquarter activities, strategic business development, research & development and supply chain management & control. This trend has gained momentum in recent years following the devastating natural calamities that have impaired the Japanese economy in recent years. The shift not only serves as a disaster recovery strategy, but also helps companies meet market expansion requirements, as well as facilitates quicker decision making and efficient management.
Meanwhile, the global investment community’s attention is trained on the Japanese economy, which is witnessing strong signs of comeback aided by surefire elements of “Abenomics”. Also, Japan’s successful bid to host the 2020 Olympics will set the land of the rising sun back on the growth path. The quantitative easing implemented by the new Prime Minister Shinzo Abe is reviving the third largest economy in the world, and exporters are having a favorable turn of fortune. The equity and real estate markets are remarkably gaining after the Olympic deal.
International investors and enterprises can gainfully strategize their investments and operations in the region and either of the jurisdictions by understanding the provisions of the tax agreement concluded between Singapore and Japan. The following articles explore the provisions of the Avoidance of Double Taxation Agreement (DTA) signed between the two countries.
Singapore-Japan DTAThe Republic of Singapore and the Government of Japan signed a DTA in 1994 and the DTA has been effective since 1 January 1996. The DTA was subsequently amended by a protocol signed in 4 February 2010. Prior to this version of the DTA, there were two earlier Conventions signed between the Government of the Republic of Singapore and the Government of Japan in 1961 and 1971 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The latest version signed in 1994 has replaced the earlier conventions.
|Nature of Income||Normal Withholding Tax Japan||Normal Withholding Tax Singapore||Treaty Rate|
|Dividends||20.42% from 1 Jan 2014||Nil||5% or 15%|
|Interest||20.42% or 15.315%||15%||10%|
Scope of Application
The provisions of the DTA apply to persons who are residents of one or both of the Contracting States. “Person” includes an individual, a company and any other body of persons, which is treated as an entity for tax purposes. The provisions of the DTA shall be applicable to all taxes imposed on income on behalf of a Contracting State. The provision covers all taxes imposed on total income or on elements of income including taxes on gains from the alienation of movable or immovable property, taxes on the total amount of wages or salaries
In the case of Japan, the provisions shall apply to the income tax, corporation tax and local inhabitant tax. In the case of Singapore, the agreement covers income tax.
The term “a resident of a Contracting State” means any person who is liable to pay tax in a contracting state by reason of his domicile, residence, place of head or main office, place of control and management, or other similar criterion.
In the case of an individual, who is a resident of both countries, his tax residency shall be determined by the location of his permanent home; but if permanent home is in both countries or in neither of them, then the center of vital interest shall be taken into account. When both permanent home or vital interest factors fail to determine the residency, then habitual abode will be considered, and if the individual does not have habitual abode in both the countries, then the nationality will be taken into consideration and where the individual is a national of both countries or neither of them then the contracting states shall determine the residency through mutual agreement.
If the person, other than an individual, is a resident of both the contracting states, then the competent authorities of the contracting States shall determine the residency through mutual agreement by taking into consideration all relevant factors.
“Permanent establishment” (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE includes office, factory, workshop, farm, plantations, installations such as drilling rig, places of extraction of natural resource such as mines, quarry, oil wells etc. Building site or construction, assembly or installation project constitutes a permanent establishment only if it lasts more than six months.
Supervisory activities by an enterprise of a contracting state carried on in the other State for more than 6 months in connection with a building site or a construction, installation or assembly project, which is being undertaken in that other State will constitute a PE.
Storage facilities held for certain purposes, such as storage of goods for the purpose of display, delivery, processing etc., would not amount to a PE. Likewise maintenance of a fixed place solely for the purpose of carrying on activities that are of a preparatory or auxiliary in character will also not amount to PE.
Engagement of a broker, general commission agent or any other agent of an independent status for carrying out business in one of the contracting state will not amount to PE. If the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise, is acting on behalf of an enterprise and habitually exercises an authority to conclude contracts, secure orders, or maintains and delivers stock of goods or merchandise on behalf of the enterprise in a contracting state then the agent is deemed to be a PE. However if the activities carried out by the agent is auxiliary in nature it will not amount to a PE.
A resident company of a contracting state controlled or being controlled by a resident company of other contracting state shall not by itself amount either company a PE of the other.
Tax on Dividends
Dividends paid by a resident company of a Contracting State to a resident of the other Contracting State may be taxed in that other State. However it may be subjected to tax in the Contracting State of which the company paying the dividends is a resident. But where the recipient of the dividend is the beneficial owner and resident of the other contracting state, the tax so charged shall not exceed-
- 5% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
- 15% of the gross amount of the dividends in all other cases.
This provision shall not apply if the recipient has a PE in the contracting state of which the company paying the dividends is a resident and such dividend received is effectively connected to that PE. Such income from dividends connected to a PE will be treated as a Business Profit and subjected to tax treatment accordingly.
A company resident of a Contracting State, deriving income from the other Contracting State, shall not be taxed by the other state on the undistributed profits even if the undistributed profits consist wholly or partly of income or profits arising in such other State. The other State may not impose any tax on the dividends paid by the company to persons, who are not residents of that other State.
Singapore does not impose tax on dividends in the hands of the recipient, because of its single tier taxation system.
In Japan a “withholding surtax” on dividends has been introduced since 1 January 2013 after the Tohoku Earthquake in order to secure financial resources for the restoration of the local economy. This temporary surtax, of 2.1% on withholding tax on dividends will remain in effect from 1 January 2013 through 31 December 2037.
From 31 December 2013, the concessionary tax rate for dividends on listed stocks, which is currently 10% for locals and 7% for foreigners, will be abolished and normal rates of 20% for locals and 15% for non-residents will be applicable on dividends paid on or after 1 January 2014.
Therefore, until 31 December 2013, for the residents the normal withholding tax on dividends derived from listed stock is 10.147% and 20.42% on dividends from other non-listed stocks. From 1 January 2014, the withholding tax for residents will be 20.315% on listed stock dividends and 20.42% for unlisted stock dividends. In the case of foreigners, it will be 15.315% for dividends from listed stocks and 20.42% for dividends from unlisted stocks.
Note that the tax rate comprises of the national tax and local tax and the surtax is applicable on the national portion of the tax. The Japan-Singapore treaty rates are competitive and it must be noted that if the treaty rates are less than the aggregate non-treaty tax rate the surtax is not applicable.
Tax on Interest
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount.
The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived from that other State.
Interest arising in a Contracting State on loans and debentures made to an enterprise engaged in industrial undertaking in that state to a resident of other contracting state is exempt from tax of that first-mentioned Contracting State. Such enterprises shall be approved by the competent authority and industrial undertaking shall include manufacturing, assembling, processing, construction & civil engineering, ship-building, breaking & docking, energy & water supply, mining & mineral works, plantation, agriculture, fishery & forestry and others declared as industrial undertaking.
The above provisions shall not be applicable if the beneficial owner of the interest, has a PE or fixed base in the contracting state in which the payer is resident and the interest paid is effectively connected with such PE or fixed base. Likewise, if interest arises in the contracting state where the payer is resident, however if the payer has a PE in the other contracting state in which the beneficial owner is resident and the interest is paid in connection with an indebtedness related to that PE then the interest is said to arise in the other contracting state.
If the interest paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of interest paid will be taxable according to the laws of each Contracting State.
It must be noted that in the absence of the DTA foreigners receiving interest from Japanese residents will be subjected to 15% Singapore withholding tax and Singapore residents will be subjected to 20.42% or 15.315% (on deposits and bonds) until 2037.
Tax on Royalties
Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State.
However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10% of the gross amount of the royalties. Royalties encompass payments of any kind received as a consideration for the use of, or the right to use, any copyright patent, trademark, design or model, plan, etc.
If, due to the special relationship existing between the payer and the recipient, the royalties paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of royalty will be taxable according to the laws of each Contracting State.
The provisions shall not be applicable if the recipient of the royalty has a PE or fixed base in the contracting state in which the payer is resident and the royalty paid is effectively connected with such PE or fixed base.
The general Japanese withholding tax rate on royalties paid to non-residents is 20.42% and the corresponding Singapore rate is 10%.
Treatment of Capital Gains
Tax on Capital Gains
Gains from the alienation of immovable property, may be taxed in the Contracting State in which such property is situated. Gains derived by a resident of a contracting state from the alienation of movable property connected to a PE or a fixed base located in the other contracting State may be taxed in the other state. Gains derived from the alienation of such PE or the fixed base itself may also be taxed in the other state.
Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic by an enterprise of that Contracting State or movable property pertaining to the operation of such ships or aircraft are taxable only in that Contracting State.
Gains of a resident of a contracting state derived from alienation of shares of a company resident in the other contracting state shall be taxed in the other contracting state provided the said alienator’s stake or ownership amounts (including related parties share) to at least 25% of the entire share capital of such company at any time during the taxable year or the basis period for the year of assessment; and such alienation amounts to at least 5% of the entire share capital of such company
Gains from the alienation of any property or assets, not covered under this provision shall be taxable only in the State of which the alienator is a resident.
Singapore does not tax capital gains. In Japan capital gains are treated as ordinary income and taxed accordingly for corporate income tax purposes.
Treatment of Business Profits
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. But only that portion of the profit that can be effectively attributable to the PE can be taxed in the other Contracting State.
For the purpose of determining the profits of the PE it shall be allowed all expenses and deductions that could be reasonably attributable to the PE and deductable if the PE were an independent enterprise and profits of the PE shall be determined as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE.
A PE’s mere purchase of goods or merchandise for the enterprise shall not render profits attributable to that PE. Profit attribution to the PE must be made by the same method every year unless there is a valid reason for the contrary.
Where information available to the competent authority is inadequate the provisions of the agreement shall not impede the laws of the contracting state or the discretion of the competent authority.
Treatment of Associated Enterprises
If an enterprise or persons involved in an enterprise of a Contracting State participate directly or indirectly in the management, control or capital of an enterprise of the other Contracting State the enterprises involved are said to be associated enterprises.
The terms and conditions of operations and transactions between the associated enterprise will differ from those made between independent enterprises, thus affecting the profitability and income of the enterprises.
In the case of associate enterprises the DTA provides that the contracting states may deem a taxable income that would have otherwise accrued if the parties were independent and tax the enterprises accordingly.
If a contracting state taxes a resident enterprise on profits, and such profits are already taxed by the other contracting state, but the first mentioned state deems such profits would have accrued to the enterprise if not for the associated enterprise condition, it shall make appropriate adjustment to the amount of the tax charged on those profits, provided the other State considers the adjustment justified. The competent authorities of the Contracting States shall if necessary consult each other.
Treatment of Income from Shipping & Air Transport
Profits derived by an enterprise of a Contracting State from the operation of ships and aircraft in international traffic shall be taxable only in that Contracting State.
The provisions applies to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency.
Treatment of Income from Property
Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Income from immovable property of an enterprise and income from immovable property used for the performance of independent personal services shall also be covered by this provision.
Income from direct use, letting or use in any other form of immovable property shall be covered by the agreement. The term “immovable property” shall comprise of properties as defined by the law of the contracting state in which the property is located. It shall include accessories, equipments, livestock, rights and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits and sources of natural resources. Ships and aircraft shall not be regarded as immovable property.
Treatment of Personal Income
Salaries & Wages
Salaries, wages and other similar remuneration derived by a resident of a State for employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration may be taxed in that other State. However, even if the employment is exercised in the other Contracting State, the recipient shall only be subjected to tax in the first mentioned state in the following circumstances:
- the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
- the remuneration is paid by, or on behalf of, an employer who is a resident of the first-mentioned State; and
- the remuneration is not borne by a PE which the employer has in the other State
Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.
Artists & Sportspersons
Income derived by a resident of a State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State. However such incomes shall be exempt from tax if they are accrued for such activities exercised in one of the contracting state under some mutually agreed exchange programmes or substantially supported by public funds of the Government, a political subdivision, a local authority or a statutory body of the other Contracting State.
Any pension or any annuity derived by an individual, who is a resident of a Contracting State, from the other Contracting State shall be taxable only in the first-mentioned Contracting State.
Pensions and other similar remuneration and annuity arising in a Contracting State and paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority or a statutory body, to a resident of the other Contracting State in consideration of services rendered in the discharge of governmental function, may be taxed in the first-mentioned State.
Teachers, Professors and Researchers
An individual, who is a resident of a Contracting State immediately before making a visit to the other Contracting State, on invitation visits that other Contracting State for a period not exceeding two years solely for the purpose of teaching or research or both at any university, college, school or other similar educational institution, which exists primarily for research purposes or other similar public institution, in that other Contracting State shall be exempt from tax in that other Contracting State on his remuneration for such teaching or research. This provision shall not apply if such teaching or research is purely for private interest.
Students & Trainees
Students and trainees who were a resident of a contracting state immediately before visiting the other contracting state, where he is temporarily present as a student at a recognized university or similar institutions, or as a recipient of grant, award or allowance from government, charitable, religious or other similar organizations or as a business apprentice shall be exempt from tax in the other state.
Taxation in the other state shall be exempted on all remittances and grants received from abroad and any remuneration not more than 360,000 yen or its equivalent in Singapore currency, in the taxable year or assessment year, in respect of services in that other State, provided the services are performed in connection with his study, research or training or are necessary for the purposes of his maintenance.
Likewise an individual who is a resident of a contracting state immediately before visiting the other contracting state, where he is temporarily present for a period not exceeding 12 months, under a contract with an enterprise or government, educational, religious, literary or charitable organization of the first mentioned state to acquire technical, professional or business experience from a person other than such enterprise or organization shall be exempt from tax on remunerations in the other sate. Taxation in the other state shall be exempt on all remuneration not exceeding 1,420,000 Yen or its equivalent sum in Singapore currency, during any taxable year or year of assessment, as the case may be.
Likewise a resident of a contracting state before visiting the other contracting state under arrangements with the government of the other contracting state shall be exempt from tax of the other contracting state on remuneration received for the purpose of study, training or research provided such remuneration does not exceed 1,420,000 Yen or its equivalent sum in Singapore currency, during any taxable year or year of assessment, as the case may be.
Elimination of Double Taxation
The DTA provides relief from double taxation where income is subject to tax in both Contracting States.
In the case of Japan, Singapore tax payable in respect of income derived from Singapore shall be allowed as a credit against the Japan tax payable in respect income derived from Singapore. The Japan tax payable in respect of income derived from Japan shall be allowed as a credit against Singapore tax payable in respect of that income. The credit thus provided shall not exceed the respective country’s tax as computed before the credit is given.
Where it is a dividend income paid by a Singapore company to a Japan company or resident owning a minimum of 25% voting rights in the paying company, Japan shall take into account Singapore tax payable by that company in respect of its income out of which the dividend is paid, but the credit shall not exceed that part of the Japan tax chargeable, as computed before the credit is given. Correspondingly in the case of a Singapore recipient a credit equivalent to Japanese tax payable by the company in respect of its income out of which the dividend is paid shall be taken into account.
With the ASEAN community becoming a reality and the surge in the Southeast Asian economies, Japanese firms and investors will immensely benefit by establishing their regional base in Singapore. Many firms from both countries are actively seeking partnership in order to garner the regional growth opportunity. Japan’s economy is also gradually turning around, so Singapore companies with expertise in clean energy and the environmental sector or catering to the silver market can tap on the evolving opportunities in the calamity-prone and ageing Japan. Furthermore, real estate and infrastructure developers can strike gold if they target the Olympic boom. Equity investors are set to benefit if they leverage on the turning tides of the Japanese exporters. The DTA and the existing FTAs between the two countries will aid the companies and investors targeting the regional markets.
For more details on the specific provisions covered under the tax treaty between Singapore and Japan, please refer to the IRAS Website.
For general information on Singapore DTAs, refer to Singapore Double Taxation Agreements (DTA) Guide.
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