This is a comprehensive guide to the double-tax treaties and agreements in Singapore.
Singapore has one of the most comprehensive double tax treaty networks in the world, with 88 treaties and another five that have been signed and are awaiting ratification. There are a further eight limited treaties, including Exchange of Information agreements, so Singapore has over 100 double tax agreements with other countries.
Each treaty that Singapore has concluded follows a model published by the OECD, with some modifications. The purpose of a double tax treaty (DTT) is to prevent income derived by a Singapore company in a country other than the Singapore from being subject to double taxation. When a Singapore company earns income outside of Singapore, double taxation can arise when the two jurisdictions tax the same economic transaction differently because of conflicting rules relating to the inclusion of income and deduction of expenses. A DTT seeks to deal with these differences in a way that the taxpayer does not suffer double tax on income.
Each treaty covers the taxation of business profits as well as other types of income such as interest, dividends, royalties and income from immovable property.
The terms of the treaty will either allow an exemption from tax on certain types of income or a reduction of the rate at which tax is imposed. For example, withholding tax on dividends paid out of Canada is normally 25%. The DTT with Singapore reduces that rate to 15%.
Let’s look at the details of Singapore’s double-tax treaties.
Tax treaties apply to residents of each signatory jurisdiction. This means that Singapore branches of foreign companies are not eligible for tax treaty benefits. In the cases of tax transparent vehicles like limited partnerships and trusts, you need to look at the residency of the partners or the trustee to see whether the treaty will apply. In certain circumstances, the two signatory countries may both regard the taxpayer as a resident of their country. In that case, a tie-breaker provision provides for residency to be the country where central management and control of the company takes place.
Often the foreign country’s tax authorities will require proof that the Singapore company is a tax resident of Singapore to be eligible for the benefits of the treaty. This will come in the form of a Certificate of Residence (COR) issued by the IRAS. To obtain a COR from the IRAS, the Singapore company needs to prove it is resident in Singapore, usually by showing that the control and management of the company is exercised in Singapore.
This can be proven by producing minutes of meetings of the board of directors of the company in Singapore with strategic decisions being made at those meetings as to the operations of the company. Having operations on the ground with employees also assists in demonstrating that the company is a tax resident of Singapore.
Foreign-owned investment holding companies, with purely passive sources of income or receiving only foreign-sourced income are generally regarded as non-residents because these companies usually act on the instructions of its foreign directors/shareholders. If the control and management of such a company in Singapore can be demonstrated, then the company will be eligible for a COR.
If a company has a permanent establishment (PE) in another country, that other country is entitled to tax any profits attributable to that PE. A PE is a fixed place of business through which the company carries on its activities like an office, factory or sales outlet. In some cases, simply the presence of an employee in the other country, or an agent of the company that has authority to conclude contracts on behalf of the company can be sufficient to create a PE.
If a PE exists, then it can be quite a complicated process to determine what profits are attributable to that PE – for example, can some of the profits booked in the home country be attributable to the PE and therefore taxable in the other country? The determination of income attributable to a PE requires detailed analysis by a professional tax advisor such as Acclime.
- Income from immovable property – Such income, eg rent on a building is taxable in which the property is located
- Business profits – Business profits of a Singapore company earned in another country are only taxable to the extent those profits are attributable to a PE in that other country
- Income from ships and aircraft – Generally, the income is only taxable in the country in which the operator of the vessel or aircraft is present, unless the operations take place solely in the other country
- Dividends, interest and royalties – Any types of these incomes are taxable in the jurisdiction they arise, which is usually done in the form of a withholding tax on remittance. However, the treaty puts a limit on the rate of tax that can be imposed, which is at or below the domestic withholding tax rate
- Capital gains – Capital gains may be taxed in the country in which they arise (though no capital gains tax in Singapore). Taxation on the disposal of shares is only levied (generally) in the shareholder’s country of residence
- Personal exertion income – Several provisions are governing personal exertion income. Although each treaty needs to be looked at individually, the general rule is where independent person services are provided (for example lawyer, architect, doctor), the income is taxed in the state where the services are rendered, if rendered through a PE there.Otherwise, the services are taxed in the country the individual is a resident, as long as he/she did not spend more than 183 days in the other state during a year. The same goes for dependent personal services, for example, an employee of a Singapore company goes on a business trip to Malaysia – his/her salary for the business trip is still taxable in Singapore unless the total time spent on business trips in Malaysia exceeds 183 days in a year.
Directors fee generally are taxed in the country of residence of the company of which the individual is a director.
Income of artists and sportspeople are taxed in the country in which the performance or sporting event takes place.
Elimination of double taxation
Each treaty contains a provision mandating that tax payable in one state on income arising in that state shall be allowed as a credit against tax payable in the other state on such income. This rule is, of course, subject to any domestic laws regarding the taxation of foreign income.
In Singapore, many types of foreign income will be exempted from tax, hence no credit will be given for taxes paid in other jurisdictions. In some cases, such as royalties paid out of another country to Singapore, the withholding tax on those royalties will be available as a credit against the tax payable on those royalties in Singapore.
Exchange of information
The treaties allow for information to be exchanged between the tax authorities in each jurisdiction that is a signatory to the treaty to the extent it applies to tax matters in relation to a taxpayer. In fact, Singapore has with a number of countries (including the USA) a treaty that deals solely with exchange of information. With those countries, more comprehensive DTTs have not been negotiated.
Mutual agreement procedure
If a tax resident of Singapore suffers tax in another jurisdiction which it believes has been incorrectly imposed, it may either challenge that taxation directly in the country in which it was imposed, or invoke the Mutual Agreement Procedure (MAP) of the relevant treaty.
The MAP is a facility through which IRAS and the relevant foreign tax office resolve disputes regarding the application of the DTA. MAP is designed to provide an amicable way for IRAS and the relevant foreign competent authority to agree on the application of the DTA with a view to eliminating any double taxation that may otherwise arise. Where the agreed MAP outcome between IRAS and the relevant foreign competent authority is accepted by the relevant taxpayer, it is binding on the parties.
If a taxpayer does not accept the outcome of the MAP process, then the only recourse is to challenge the imposition of taxation in the relevant jurisdiction’s court system.
Singapore has up to 100 double tax treaties with different countries around the world, allowing businesses outside of Singapore not to have to pay their taxes twice. Additionally, the DTA grants exemption or reduction on some taxes. The entry of this treaty eliminates tax evasion and encourage cross-border trade efficiency. Because of this treaty, taxation has become fair to those who have companies outside of Singapore and are also eligible to any benefits from the treaty.
Acclime is a professional in tax, if you need advice or have any questions, don’t hesitate to get in touch.
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