Avoidance of Double Tax Agreements (or DTAs) is an agreement designed to eliminate this unfair penalty and encourage cross-border trade, signed between Singapore and a DTA country. By the fact that Singapore’s tax structure is based on the premise that double taxation impedes international business by imposing unfair sanctions on companies engaging in cross-border trade. To prevent such double taxation, Singapore has joined DTAs with a wide network of such countries. Therefore, a resident company in Singapore does not seem to face double taxation.
What is Double Taxation?
Double taxation arises when two or more countries tax on the same taxpayer on the same taxable income or capital. In other words, the same income is being taxed twice – the source country where the income is generated and the country of residence where the income is received. To reduce taxpayers from the double tax burden, countries provide various types of relief under domestic tax laws or under tax treaties that they have signed with other countries.
Purpose of Singapore’s DTAs
According to IRAS, DTAs explains the taxing rights between Singapore and the treaty partner on the various types of income generated from cross-border economic activities between the two jurisdictions. The DTAs also stipulates a tax reduction or exemption for certain types of income. Only Singapore tax residents and treaty partner tax residents can enjoy DTAs’ benefits.
Another goal of the DTA is to define the taxing rights of each country. It seeks to prevent international tax evasion by sanctioning the exchange of information between the tax authorities of the signatory states. Besides, it allows you to request a tax reduction on taxes paid abroad.
Residency requirements in Singapore
To take advantage of Singapore’s DTAs benefits in another country, you must be a resident of Singapore or the other country. A Singapore resident is defined under Section 2 of the Singapore Income Tax Act as:
- An individual: A person who, during the year before the assessment year, resided in Singapore except for such temporary absences that may be reasonable and not in conflict with his or her request to reside in Singapore, and include an actual presence or performance of a job (other than as a director of a company) in Singapore for 183 days or more in the year preceding the year of evaluation
- A company or agency of people: A company or agency of people who control and manage their business carried out in Singapore.
Thus, if you or your company fulfills the above residency requirement, you may use the provisions of any Singapore’s DTAs with Singapore as your Resident State. Note that even if a DTA does not exist between Singapore and another country with which you are doing business you can avoid double taxation by taking advantage of Singapore’s Unilateral Tax Credits for Singapore residents.
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:
1. Tax Credit
Ordinary credit: Under this method, the Resident State provides a credit equal to its tax on the income in question. If the tax paid to another country is higher than the tax in the Resident State, the taxpayer would not receive full relief.
Full credit: The full amount of tax paid to another country is available in the form of credit while calculating taxes in the Resident State. If the foreign country charges a higher tax rate that the Resident state, the Resident State gives up some of its tax under this method.
2. Tax Exemption
Double taxation can be avoided when foreign income is exempt from domestic tax. The exemption may be granted on all or part of the foreign income.
- Full Exemption: The income that has been subject to taxation by the non-Resident State is left out altogether from any calculation of taxes by the Resident State. Therefore, relevant income is not included in determining the progressive tax rate that will be applied to the rest of the income.
- Exemption with progression: Under this method, the income in question is not taxed by the Residence State but it is taken into account to determine the progressive tax rate that is to be applied to the rest of the income.
3. Reduced Tax Rate
Under this form of relief, income is taxed at a lower rate and applies to the following classes of income: interest, dividends, royalties, and profits from international shipping and air transport.
4. 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.
5. Tax Sparing Credit
Under a DTA, tax credits are usually only available in the Residence State only if the income has been taxed in the source country. Tax sparing credit is a special form of credit whereby the Residence State agrees to give a credit of the tax which would have been paid in the source country but was not, for example, “spared”, under special laws in that country to promote economic development. Tax Sparing Credits are extremely useful and can reduce the effective tax rate to be lower than that charged by either of the two treaty participants.
The provision for duty-free credit is usually found in DTAs between a developing country with tax incentives to attract foreign investment and a developed country as a capital exporter. The credit is given by the country of exportation of its laws to promote investments.
Tax Relief in Absence of DTA
Singapore residents can avoid double taxation even in the absence of DTA with a particular country. This is since Singapore’s domestic laws have exempted most types of income from foreign sources (including dividend, foreign branch profits, and foreign-sourced service income) received in Singapore on or after June 1, 2003, from taxes if certain conditions are met. In summary, these conditions are:
The highest corporate tax rate (headline tax rate) of foreign countries for which income is received must be at least 15% at the time foreign income is received in Singapore. The foreign income had been subject to tax in the foreign country even though the actual tax rate paid on the income can be different from the headline tax rate.