Tax treaties allow businesses to access relief from double taxation. Beneficiaries enjoy tax credits, reduced tax withholding rates, or even tax exemptions. These reliefs differ in every country and depend on the type of income. This article covers all the essential information you need to know about Singapore’s double tax treaties.
What is Double Taxation?
Double taxation occurs when two or more countries impose taxes on the same taxpayer, and in this case, a business. In other words, the same income is taxed twice. The first source comes from the country where the income originates, and the second comes from the country of residence where the income is received. The latter is usually the home country or where the business is from.
To exempt taxpayers from the double tax burden, countries provide various types of relief either under their domestic tax laws or under tax treaties they have entered into with other countries.
How Do Singapore’s Double Tax Treaties Work?
Tax treaty provisions are generally reciprocal (applicable to both treaty countries) and non-discriminatory. If you are doing business with (or from) Singapore from (or with) a treaty country, you are unlikely to face double taxation. However, if there is no agreement between your country and Singapore, you may still be able to take advantage of Singapore’s unilateral tax credits (UTC).
What is a Double Tax Agreement (DTA)?
A double tax agreement (DTA) is a bilateral agreement between two countries to avoid double taxation that may arise due to the implementation of the respective domestic tax regulations. DTA works by clarifying the rules for situations where double taxation can occur because the two countries’ tax laws are conflicting or ambiguous.
What does a DTA do?
- A DTA defines the tax rights of each country and provides specific provisions for tax credits, relief, or exemptions so that double taxation does not occur on income arising from economic activities between the two countries.
- In some situations, a DTA can result in lower net taxes than those imposed by either country (for example, when two treaty countries want to promote trade between them and provide a Tax Sparing Credit).
- A DTA also establishes protocols for the exchange of tax-related information between two countries so that they can accurately monitor the flow of income between them and enforce their tax rules.
You may also want to read this related article:
What Types of Income Covered by the DTA?
These are the types of income that would go through double taxation, hence covered under the DTA:
- Income from immovable properties:
- Business profits
- Shipping and air transportation
- Associated enterprises
- Royalties and fees for technical services
- Capital gains
- Independent personal services
- Dependent personal services
- Directors’ fees
- Artists and sportspersons
- Remuneration and pensions in connection with government services
- Non-government pensions and annuities
- Students and trainees
- Teachers and researchers
- Government income
Visit the IRAS website to see the list of DTAs, limited treaties, and Exchange of Information (EOI) arrangements.
Who Can Benefit from Double Tax Treaties?
To avail of Singapore’s DTA benefits with another country, you must be a resident of Singapore or another country. Singapore residents are defined under Section 2 of the Singapore Income Tax Act as:
- Individual: A person who, in the year prior to the assessment year, was living in Singapore except for temporary absences, which may make sense and do not conflict with the person’s claim to be resident in Singapore, and includes a person physically present or performing work (other than as a director of the company) in Singapore for 183 days or more during the year preceding the appraisal year; and
- Company or body person: This means that a body of persons or a company controls and manages the business in Singapore.
Types of Tax Relief
To obtain relief based on a tax treaty, a taxpayer must submit a Certificate of Residence to a non-resident country. If you are a Singapore resident, proof of your Singapore tax residency must be submitted to the other treaty country. On the other hand, if you are a tax resident of a treaty country, you must submit to IRAS a Certificate of Residence from Non-Residents certified by the tax authorities of the treaty country.
The relief available under a DTA from a treaty country varies from one DTA to another. In most cases, the Resident State will give credit to its residents for taxes paid to a Non-Resident State or exempt income from taxes if taxes have been paid to a Non-Resident State on that income. The specific methods of tax relief available in Singapore are as follows:
The tax credit is given to taxpayers’ foreign taxes against their domestic taxes imposed on the same income. The amount of the tax credit relief is limited to the tax payable or less paid outside the country or country of origin. This is commonly known as the Ordinary Credit Method. Another method is called the Full Credit Method, whereby taxes paid in the home country are allowed as full credit.
The tax credit relief is also known as Double Tax Relief (DTR) in Singapore. Claiming the DTR is done when filing the annual income tax return (Form C) and is displayed in the corporate tax calculation.
Documentary evidence such as letters from foreign tax authorities, tax withholding receipts, and dividend vouchers are needed to show that the income remitted has been taxed in the treaty country.
Double tax avoidance can be done when foreign income is exempt from domestic taxes. This can be given part or all of the foreign income. Singapore taxpayers can enjoy exemptions from dividends sourced from abroad, service fees sourced from abroad, and foreign branch profits deposited in Singapore if they meet the following requirements:
- The headline tax rate (highest corporate tax rate) of the foreign country from which the income was received is at least 15%.
- 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.
Tax exemptions may also be granted to foreign sources of income earned outside of Singapore to resident non-individuals and resident partners of partnership in Singapore.
To enjoy tax exemption on specified foreign income, you do not need to submit documents such as dividend vouchers, appraisal notices issued by relevant foreign jurisdictions, etc. Instead, you only need to state in the appropriate section of your income tax return that your specified foreign income is eligible for tax exemption and provide the following details:
- Nature and amount of income (i.e., dividends sourced from abroad, profits from foreign branches, or service income originating from abroad),
- the country where the income is received,
- the headline tax rate of the country where the income is received, and
- the amount of foreign tax paid/payable in the country from which the income is received.
Reduced Tax Rate
Under the Reduced Tax Rate relief, income is taxed at a lower rate. It applies to the following income classes: interest, dividends, royalties, and profits from international shipping and air transportation.
Relief by Deduction
Domestic tax is applied on foreign income after the foreign tax suffered has been deducted. Singapore does not allow the withholding of foreign income tax, but the deduction is indirectly based on the remittance. This means that Singapore will impose a tax on the amount of foreign income it receives (after deducting foreign taxes) in Singapore.
Tax Sparing Credit
Under the DTA, a tax credit is usually available in the country of residence only if the income has been taxed in the country of origin. The Tax Sparing Credit is a special form of credit in which the country of residence agrees to provide a tax credit that would have been paid in the country of origin but was not “spared” by special laws in that country for promoting economic development.
The Tax Sparing Credit provisions are usually provided in DTAs between a developing country that offers tax incentives to attract foreign investment and a developed capital-exporting country. The capital-exporting country grants credit under its laws to promote investment.
Unilateral Tax Credit
Suppose you are a Singapore taxpayer who receives the following foreign income from countries for which Singapore has not signed a DTA. In that case, you can get a unilateral tax credit for foreign taxes paid on that income under Article 50A of the Singapore Income Tax Act.
- Income derived from professional, consulting, and other services rendered in any territory outside Singapore;
- dividend; or
- profits earned by the overseas branch of the Singapore resident company.
The unilateral tax credit under Section 50A will also apply to royalties sourced overseas from a non-treaty country, provided that royalty is not:
- Covered directly or indirectly by a person who is residing in Singapore or a permanent establishment in Singapore; or
- deductible against any income sourced from Singapore.
DTA is most often used to determine whether it is possible to obtain tax deductions or exemptions on certain types of income.
In general, the following income is subject to withholding tax in Singapore:
|Type of Income||Withholding Tax Rate|
|Interest, commission, fees, or other payments in connection with any loan or debt||15%|
|Royalties or lump sum payments for the use of movable properties||10%|
|Management fees||The applicable corporate tax rate is 17%|
|Rent or other payments for the use of movable properties||15%|
|Technical assistance and service fees||The applicable corporate tax rate is 17%|
|Proceeds from the sale of real property by a non-resident property dealer||15%|
Conflicting tax policies between countries can result in double taxation for certain types of income. Singapore ensures that double taxation does not occur when a company trades from or with Singapore. It goes so far as to explicitly exempt all foreign-sourced income of a Singapore company from tax in Singapore as long as it meets specific criteria. In most cases, it is easy to qualify for this exception. Furthermore, even if there is no treaty between a country and Singapore, a Singapore resident can take advantage of Singapore’s unilateral tax credits to avoid double taxation for transactions with that country.
If you need more information about Singapore’s tax system or filing of tax returns, feel free to talk to us.