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Foreign-sourced income in Singapore

In Singapore, taxes are imposed on income derived from or accrued in Singapore, as well as foreign-sourced income received in Singapore. With the increase of globalisation, it is not surprising that many tax-resident companies in Singapore are deriving income from overseas. Such income (referred to as foreign income) is taxable in Singapore when remitted to and received in Singapore, which may result in double taxation – once in the foreign country, and a second time when the foreign income is remitted into Singapore.

There is no universal rule to determine whether an income is Singapore-sourced or foreign-sourced. It depends on the nature of the profits and of the transactions which give rise to such profits. The following points can be used as a guide when determining the source of the income:

  1. Identify the operations which produced the relevant profits and ascertain where those operations took place.
  2. If there is no business presence overseas and the principal place of business is located in Singapore, profits earned by that business are likely to be treated as sourced in Singapore.
  3. Determine the place where the contracts for purchase and sale are effected (i.e negotiated, concluded and executed) for profits earned from trading in goods and commodities.
  4. For businesses earning commission, determine where the activities of the commission agent are performed. If such activities are performed in Singapore, the income will be treated as sourced in Singapore.

If an income is determined to be foreign-sourced, it is important to determine whether it is received in Singapore. Under Section 10(25) of the Income Tax Act, income from outside Singapore is considered received in Singapore when it is:

  1. remitted to, transmitted or brought into Singapore in the form of cash, cheque, dividends, electronic transfer etc.;
  2. used to pay off any debt incurred in respect of a trade or business carried on in Singapore; or
  3. used to purchase any moveable property brought into Singapore (e.g. equipment or raw materials connected to your business).

There are concerns that Section 10(25) will discourage foreigners and foreign businesses from using Singapore’s banking and fund management facilities. However, foreign income received in Singapore will only be taxable if the income belongs to an individual who is resident in Singapore or an entity which is located in Singapore. Hence, non-resident individuals and foreign businesses which are not operating in or from Singapore can remit their foreign income to Singapore without being taxed on the income.

As mentioned earlier, foreign-sourced income may be taxed twice – once in the foreign jurisdiction and a second time in Singapore when it is remitted here. However, there are tax benefits available to alleviate the double taxation suffered.

From 1 Jun 2003, a Singapore tax resident company can enjoy tax exemption on its specific foreign income that is remitted into Singapore under the foreign-sourced income exemption (FSIE) scheme. The three categories of specified foreign income are:

  1. Foreign-sourced dividend
  2. Foreign branch profits
  3. Foreign-sourced service income

Under Section 13(9) of the Income Tax Act, tax exemption will be granted when all of the following three conditions are met :

  1. The highest corporate tax rate (headline tax rate) of the foreign country from which the income is received is at least 15% at the time the foreign income is received in Singapore;
  2. The foreign income had been subjected to tax in the foreign jurisdiction from which they were received. The rate at which the foreign income was taxed can be different from the headline tax rate; and
  3. The Comptroller is satisfied that the tax exemption would be beneficial to the resident company.

Getting the Exemption
To enjoy the tax exemption, you have to provide the following information in your Income Tax Return (Form C/ P):

  • Nature and amount of income received;
  • Jurisdiction from which the income is received;
  • Headline tax rate of the foreign jurisdiction; and
  • Confirmation that foreign tax has been paid in the jurisdiction from which the income was received. This is to satisfy the “subject to tax” condition.

If you are filing Form C-S instead of Form C, the above information is to be included in the company’s tax computation and any supporting documents/ information should be retained*.

“Subject to Tax” Condition
To meet this condition, the specified foreign income received in Singapore must have been subject to tax in the foreign country from which the income is received.

For the purpose of this “subject to tax” condition, tax paid or payable on foreign-sourced dividend received in Singapore includes:

  1. the dividend tax, which is income tax levied on the dividend by the foreign country of source; and
  2. the underlying tax, which is income tax paid or payable by the dividend paying company on the income out of which the dividend is paid.

“Subject to tax” concession for substantive business activities
The Comptroller will regard the “subject to tax” condition as being met if the income is exempt from tax in the foreign jurisdiction due to tax incentive(s) granted for substantive business activities carried out in that jurisdiction. The following documents must be prepared and retained*:

  1. A declaration by the company that the foreign jurisdiction has exempted the foreign income from tax because of substantive business activities carried out by the company in that jurisdiction; and
  2. A copy of the tax incentive certificate/ approval letter issued by the foreign jurisdiction. In the case of a foreign-sourced dividend, a dividend voucher (if available) stating that the dividend is exempt from tax due to tax incentive granted to the payer company for carrying out substantive business activities in that foreign jurisdiction will be sufficient.

If FSIE does not apply, resident companies may claim tax credits instead to alleviate the double taxation suffered. The following are the types of tax credits that may be claimed:

  • Unilateral tax credit (UTC) – This is for income remitted from countries which Singapore does not have a Double Taxation Agreement (DTA) with; or
  • Double taxation relief (DTR) – This is for income remitted from countries which Singapore has a DTA with.

Expenses Incurred in Respect of Foreign-Sourced Income
All expenses incurred in respect of foreign-sourced income received in Singapore which qualifies for tax exemption shall be deducted against such foreign-sourced income, and will not be available for deduction against any other taxable income.

Further Readings
Tax Exemption of Foreign-Sourced Income


Disclaimer: This guide is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular tax issue that they encounter, and this guide should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this guide is accurate, Enston accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

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A Brief Guide on Singapore Corporate Taxation

Singapore Merlion

In 2015, Singapore has been ranked as the most business-friendly economy for the tenth year in a row by World Bank. Many factors have contributed to Singapore’s competitive edge: easy access to capital, strategic location, excellent infrastructure, ease of doing business etc. And one prominent factor is Singapore’s tax-friendliness.

Overview

In Singapore, income accrued in or derived from Singapore and income received in Singapore from overseas are taxable. IRAS assesses the amount of tax based on the income earned by the company in the preceding financial year. In other words, the income earned in the financial year 2016 will be taxed in 2017, which is referred to as Year of Assessment (YA) 2017.

With effect from 2010, all companies are taxed at a flat rate of 17% on its chargeable income i.e. taxable revenues less tax-allowable expenses. In addition to the competitive tax rate, Singapore government offers incentives, subsidies and schemes which lowers the effective tax payable further.

Here are some of the tax schemes available to lower the tax payable:

I) Tax Exemption Scheme for New Start-Up Companies

To promote entrepreneurship and support the growth of local enterprises, this scheme was introduced in YA 2005. This is available to all new companies except investment holding companies and companies engaged in development of properties.

To be eligible for this scheme, companies must satisfy the following qualifying conditions:

  1. Incorporated in Singapore;
  2. Tax resident in Singapore for that YA;
  3. Have no more than 20 shareholders. (there must be at least one individual shareholder holding at least 10% of the issued shares)

Qualifying companies can enjoy full exemption on the first $100,000 chargeable income and a further 50% exemption on the next $200,000 of chargeable income for the first three consecutive YAs.

II) Partial Tax Exemption for Companies (PTE)

From the fourth YA onwards, companies can enjoy the partial tax exemption.

All companies can enjoy PTE, unless they have already claimed the Tax Exemption Scheme for New Start-Up Companies. Qualifying companies can enjoy:

  • 75% tax exemption on the first $10,000 of chargeable income; and
  • A further 50% tax exemption on the next $290,000 of chargeable income.

III) Corporate Income Tax Rebate

All companies (including Registered Business Trusts, non-resident companies that are not subjected to final withholding tax and companies with income taxed at a concessionary tax rate) are granted 50% corporate income tax rebate, subjected to an annual cap of $20,000, for YA 2016 and YA 2017.

IV) Productivity and Innovation Credit Scheme (PIC)

Under PIC, companies have to carry out active business operations in Singapore and engage in one of the following six qualifying activities:

  1. Acquisition and Leasing of PIC IT and Automation Equipment
  2. Training of Employees
  3. Acquisition and Licensing of Intellectual Property Rights
  4. Registration of Patents, Trademarks, Designs and Plant Varieties
  5. Research and Development
  6. Investment in Design Projects

Qualified companies can opt for the following to boost tax savings:

Tax Deductions/Allowances 400% tax deductions/allowances on up to $400,000 of spending per year in each of the qualifying activity.
Cash Payout Convert up to $100,000 of total spending in all six activities for each YA into a non-taxable cash payout.
For qualifying expenditure incurred:

  • From YA 2013 to 31 July 2016, the cash payout rate is 60%.
  • On or after 1 Aug 2016 to YA 2018, the cash payout rate is 40%.


V) Tax Breaks on Foreign Income

With the increase of globalisation, it is not surprising that many tax-resident companies in Singapore are deriving income from overseas. Such income (referred to as foreign income) is taxable in Singapore when remitted to and received in Singapore, which may result in double taxation – once in the foreign country, and a second time when the foreign income is remitted into Singapore.

To alleviate the double taxation suffered, resident companies may claim the following:

Foreign Tax credit (FTC)

Under FTC, companies may claim credits for the foreign tax paid against the Singapore tax payable on the same income. There are two ways to claim:

  • Unilateral tax credit (UTC) – This is for income remitted from countries which Singapore does not have a Double Taxation Agreement (DTA) with; or
  • Double taxation relief (DTR) – This is for income remitted from countries which Singapore has a DTA with.

Tax Exemption of Foreign-Sourced Income (FSIE)

Under FSIE, a Singapore tax-resident company can enjoy tax exemption on specified foreign income (i.e. foreign-sourced dividends, foreign branch profits and foreign-sourced service income) provided that the following conditions are met:

  • The headline corporate tax rate of the foreign country from which the income is received is at least 15%;
  • The foreign income has been subjected to tax in the foreign country; and
  • The Comptroller is satisfied that the tax exemption would be beneficial

FTC Pooling System

Introduced in 2011, the FTC Pooling system provides greater flexibility to businesses in their FTC claims, reduces the tax payable in Singapore on remitted foreign income and simplifies tax compliance. Under this system, resident companies may elect to aggregate the foreign taxes paid.

To be eligible:

  • The headline corporate tax rate of the foreign country from which the income is received is at least 15%;
  • Foreign income tax is paid on the income in the foreign country from which the income is derived;
  • The company is entitled to claim FTC under the Income Tax Act; and
  • There is tax payable on the foreign income in Singapore.

VI) Tax Residency of Company

The basis of taxation is generally the same for resident and non-resident companies. However there are certain benefits that are available to resident companies only.

Some of the benefits include:

  • Tax benefits under DTA concluded between Singapore and treaty countries;
  • FSIE; and
  • Tax exemption for new start-up companies.

To determine the tax residency of a company, the location where the business is controlled and managed will be looked at. This would mean that a company is a tax resident in Singapore when the control and management of the company is exercised in Singapore.

VII) Withholding Tax on Non-Resident Companies

For non-resident companies, when payment of a specified nature (e.g. interest, commission, fee in connection with any loan or indebtedness; royalty etc. 1) is made to them, tax must be withheld.

The rate of withholding tax depends on the nature of payment. For example, 15% has to be withheld for payment of interest derived by non-resident companies through operations carried on outside Singapore.

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