TAXATION IN SINGAPORE

an overview
1. Overview
In Singapore, the statutory income of a year of assessment is based on the assessable income of the preceding year (i.e. accounting year for companies/ calendar year for individuals). Singapore taxes income on territorial basis. Income subject to tax includes gains or profits from any trade, business, profession, vocation, and employment; dividends, interest or discounts; pensions, charges or annuities; rent, royalties, premiums; profits arising from property; and any gains or profits of an income nature not falling within any of the categories above. There are various tax incentives available for different industries that are encouraged in Singapore. The granting of tax incentives is mainly administered by the Economic Development Board (EDB). Where a tax incentive is granted, the company will enjoy the tax incentive within the granting period and its qualifying income will be either exempt from tax or taxed at a lower rate than the corporate tax rate, currently 18%. Capital gains or losses are not taxable or deductible in Singapore. However, where a series of similar transactions have been carried out, the Inland Revenue Authority of Singapore (IRAS) may take the view that the transactions were conducted with profit motive and assess the gains as trading profits. In determining the chargeable income, expenses must be incurred wholly and exclusively in the production of income for that year of assessment to be deductible. However, there are certain expenses specifically disallowed in the Singapore Income Tax Act, for example, expenses incurred for private registered vehicle and leasing private hire cars. Singapore does not have controlled foreign company legislation or thin capitalisation rules. A Singapore company may hold an investment in an offshore subsidiary which receives tax free income .This may be accumulated by the subsidiary and not subject to Singapore tax unless the income is remitted to Singapore.

February 2007

2. Taxation of companies
Singapore imposes tax on income of any person (which is defined in the Singapore Income Tax Act to include a company incorporated or registered in Singapore or elsewhere, individual, Hindu joint family, trustee, executor, club, and association): accruing in Singapore; derived from Singapore; and received in Singapore from outside Singapore.

3. Tax residence of a company

For Singapore tax purposes, the tax residence of a company is practically determined by the location where the directors of the company hold their board meetings and exercise de facto control. Management and control, in the context of determining the resident status of a company, does not mean the management or control of day-to-day business operations but refers to the superior directing authority over the fundamental policies and decisions of the company. The location of incorporation does not impact the location where a company is deemed to be tax resident in Singapore. A company must indicate the location where its management and control is exercised on its tax return. If the companys management and control is outside Singapore, it will need to determine the location where it declares itself resident, which may give rise to tax issues in that jurisdiction.

3.1 Resident company A Singapore resident company is liable to Singapore tax on its Singapore-sourced income and on its foreign-sourced income, but only to the extent that such foreign-sourced income is remitted to Singapore. Singapore sourced income covers passive income (dividends, interest, distributions from unit trusts) sourced in Singapore as well as active trading income, unless the company can demonstrate it is nonSingapore sourced. In this regard, if a Singapore resident company is trading in securities or other assets, the gains will likely be regarded by the IRAS as revenue in nature and subject to Singapore tax.

4. Foreign-sourced income
4.1 A Singapore resident company is subject to tax on its foreign-source income (unless exempted) upon receipt or remittance in Singapore. Such income is regarded as received in Singapore if it is: remitted to, transmitted or brought into, Singapore; applied in or towards satisfaction of any debt in respect of a trade or business carried on in Singapore; or applied to purchase any movable property which is brought into Singapore.

4.2 The foreign income exemption Specified foreign income (i.e. foreign-sourced dividends, foreign branch profits and foreign-sourced service income) received by a Singapore resident company is tax exempt provided the following conditions are met: a. In the year the income is received in Singapore, the headline (highest) corporate tax rate of the relevant foreign jurisdiction is at least 15%; and b. The specified foreign income received in Singapore must have been subjected to tax in the foreign jurisdiction (either paid or payable). This condition will not be met if: i. ii. the foreign income is not subject to tax in the foreign jurisdiction except if by a formal tax incentive; and after paying income tax on the foreign income in the foreign jurisdiction where the income was sourced, the foreign income was moved to or invested in another foreign jurisdiction that does not levy any income tax before the income is remitted back to Singapore.

c.

The IRAS is satisfied that the tax exemption would be beneficial to the Singapore company.

However, the IRAS has clarified in a Circular that under specified scenarios, the specified foreign income remitted into Singapore by companies that are unable to meet the conditions above but satisfy the qualifying conditions below for the specified scenarios would be exempt from tax in Singapore: i. ii. The taxpayer must be able to track the source of income. There is no round tripping of locally-sourced income via the overseas investment.

iii. The taxpayer in Singapore receiving the specified foreign income cannot be a shell company.

5. Corporate tax rates

With effect from the Year of Assessment 2008, the prevailing corporate tax rate has been reduced from 20% to 18%, and there are partial tax exemptions for up to the first S$300,000 chargeable income (i.e. 75% on the first S$10,000 and 50% on the next S$290,000; the maximum exemption is S$152,500). The corporate tax structure is as follows:
Amount of chargeable income First S$10,000 Next S$290,000 In excess of S$300,000 Effective tax rate 4.5% 9.0% 18.0%

For qualifying new Singapore resident companies that are owned by not more than 20 individuals, there is a 100% tax exemption for the first S$100,000 of chargeable income for the first 3 years. In addition, these companies can also enjoy partial tax exemptions for up to the next S$200,000 of chargeable income.

Comparison of Corporate Tax Rates in the Region

Hong Kong Singapore Taiwan South Korea Malaysia Vietnam

Countries

Australia Indonesia Thailand China New Zealand India Philippines Japan 0 5 10 15 20 25 30 35 40 45

Headline Tax Rate (% )

6. Distribution of profits
Singapore is on a one-tier system under which income tax paid by a Singapore company (regardless of resident or non-resident) would be the final Singapore tax for the Singapore company and its shareholders (regardless of resident or non-resident). Dividend paid under the one-tier system is known as taxexempt (1-tier) dividend and is exempt from Singapore tax in the hands of the shareholders even though they are non-residents of Singapore. There is no Singapore withholding tax on dividend payments. A company can declare and pay dividends to its shareholders so long as there are sufficient distributable revenue reserves.

7. Losses
For a loss to be deductible, it must be incurred on revenue account and must arise from the carrying on of a trade, business, profession or vocation. Loss relief is available to a company which incurred the loss and can be claimed in the year or years subsequent to the year in which the loss is incurred. The loss can be claimed against other non-trade income (e.g. interest income). Unutilised losses, capital allowances and donations can be carried back up to S$100,000 to the immediate preceding year and carried forward indefinitely to offset chargeable income subject to the shareholders continuity test. The company is required to operate the same trade to utilise any brought forward unutilised capital allowances. 7.1 Group relief system Singapore has a group relief system allowing the transfers of excess current year losses, capital allowances (other than investment allowances) and approved donations among the companies of a qualifying group. The group companies must have the same accounting year-end. A group comprises a Singapore incorporated company and its qualifying Singapore incorporated subsidiaries. A company is a qualifying subsidiary if at least 75% of its ordinary share capital is owned, directly or indirectly by the Singapore parent company.

8. The double tax relief system

Where the foreign income exemption is not available, for foreign income received in Singapore from a country with which Singapore has a double taxation agreement, or within the list of countries for which Singapore grants unilateral relief, or a Commonwealth country for which Singapore grants Commonwealth relief, the foreign tax suffered should be allowed as a claim against the income brought into Singapore, restricting the maximum relief to the Singapore tax which would have been suffered on the income but for the double tax relief. The IRAS would allocate a portion of the direct and indirect expenses of a company to the earning of the foreign income. Therefore, a company should request the withholding tax receipts from the foreign tax authorities for supporting the withholding tax suffered.

9. Transfer Pricing
Singapore has no formal transfer pricing legislation. However, the IRAS has always expected transactions between related companies to be carried out on an arms length basis i.e., the pricing should be comparable with similar transactions with an unrelated party. In 2006, the IRAS issued a circular, Transfer Pricing Guidelines (the Circular) setting out for the first time in detail its approach to transfer pricing issues. The preface to the Circular notes that The guidance on arms length principle and documentation requirements is applicable to all transactions, both local and cross-border, between a Singapore taxpayer and its related parties. This raises a number of points: Firstly, the IRAS clearly endorses the arms length principle and the methodologies described in the Circular follow the approach to transfer pricing adopted by the Organisation for Economic Cooperation and Development. Secondly, it can be inferred from the Circular that no legislation is planned for transfer pricing. However, it is clear that the IRAS expects and requires the arms length principle to be applied in Singapore. Thirdly, the arms length principle is also applied on transactions between related Singapore entities i.e., to purely domestic transactions.

The Circular makes it clear that the onus is on the taxpayer to demonstrate prices are arms length and Annex G to the Circular provides guidance on documentation requirements.

10. Withholding tax

Under the provisions of the Singapore Income Tax Act, a company is obliged to withhold tax in respect of certain payments or deemed payments made to non-residents of Singapore. Such payments include interest, licensing fees, royalties, management fees (except pure reimbursement of expenses), consultancy and technical service fees in respect of services rendered in Singapore, directors fee and remuneration and rental of equipment. The withholding tax rates for different nature of payments are as follows: Interest 15% * Royalty, licensing fees 10% Management fees prevailing corporate rate i.e. 18% Consultancy fee, technical service fee for services rendered in Singapore prevailing corporate rate i.e. 18% or 20%. Directors fee and remuneration 20% Rental of equipment 15% Charter fees Nil, 1%, 2% or 3% (subject to provisions of the applicable tax treaty)

12. Taxation of individuals

12.1 Determining tax residency Individual taxation is based on the issue of residence status. Among others, the main criteria for determining whether an individual is a resident for tax purposes are: (a) the physical presence or exercise of an employment in Singapore for more than 183 days in a calendar year; (b) whether the stay in Singapore covers at least three consecutive years of assessment; (c) the usual place of residence or the maintenance of a place of residence in Singapore;

(d) the intention to settle in Singapore

12.2 Taxation of resident individuals A resident individual is taxed on his income derived in or from Singapore. However, a resident individual is exempt from tax on all foreign-source income remitted to Singapore, except where such income is received through a partnership. Individual tax rates for tax residents are on a progressive scale from 0% to 20%. Personal reliefs are only granted to tax residents of Singapore. Rates of income tax for resident individuals for year of assessment 2008

Taxable income (S$) 0 20,000 20,001 30,000 30,001 40,000 40,001 80,000 80,001 160,000 160,001 320,000 >320,000

Rate 0% 3.5% 5.5% 8.5% 14% 17% 20%

Married persons are taxed separately.

12.3 Taxation of non-resident individuals A non-resident individuals Singapore sourced employment income is taxed at the higher of the 15% non-resident flat rate or the tax computed under the residence basis in the absence of a double tax treaty. For consultancy fees for services rendered in Singapore the consultant has the following choices: to suffer a final withholding tax of 15% of the gross income, inclusive of expenses borne by the Singapore payer; or to be taxed at 20% on net income, which the Singapore payer would withhold and pay over to the IRAS. There are restrictions on the expenses that can be deducted against the gross income in arriving at the net amount.

The election has to be made within 45 days of the payment and in the absence of the election the Singapore payer must apply the withholding tax at the flat rate of 15% on the gross income. Non-resident directors fees or remuneration is subject to withholding tax at 20%, subject to the provisions of an applicable double taxation agreement. 12.4 Exemptions for non-residents Total exemptions are granted to the following categories of non-resident visiting individuals: employees exercising employment in Singapore for less than 60 days.

Where there are applicable Double Tax Treaties, tax exemptions are granted to: a. public entertainers, artists, musicians and athletes whose visit is substantially supported from the public funds of the foreign countrys government; b. employment income of crews employed on ships registered in Singapore if their employment is substantially exercised outside Singapore. 12.5 The Not Ordinarily Resident Scheme (NOR Scheme) The NOR Scheme extends favourable tax treatment to qualifying individuals for a period of five years of assessment, provided such individuals meet the following criteria: the individual must not have been a Singapore resident in the 3 consecutive years of assessment before the year he first qualifies for the NOR scheme; and the individual must be a tax resident for the year of assessment in which he wishes to qualify for the NOR scheme.

13. Taxation of Singapore branches of foreign companies

A branch is taxed in much the same way as Singapore companies. Some of the main differences are as follows: A branch is normally treated as a non-resident since it is usually managed and controlled by its head office outside Singapore. A branch is not able to rely on the foreign income exemption or double taxation treaties in respect of foreign-sourced income since it is not a Singapore resident. Singapore customers of a branch are required to withhold tax on certain payments made to the branch since it is not resident in Singapore unless waiver is granted by the IRAS. Withholding tax paid would be available as a credit against the Singapore tax payable based on the branchs taxable profits. However, there is cash-flow impact on the branch as withholding tax is imposed on the gross payment and is payable to the IRAS by the 15th of the month following the date of payment. A branch cannot form part of a qualifying Singapore group for group relief purposes. A branch can repatriate its after taxed profits freely.

14. Taxation of joint ventures

A joint venture between two companies will be classified as a partnership unless the joint venture is formed by incorporating a company. If this is the case, the joint venture company would be taxed as a company. A partnership is not a separate assessable entity for Singapore income tax purposes as it is not a person in law. Therefore, each partner company will be assessed separately on its respective share of income from the partnership / joint venture.

15. Taxation of Partnerships

A partnership is not a separate legal entity under law but an agreement between two or more persons, which includes companies and individuals, to share profits of a business. Generally a partnership agreement is drawn up setting out how the partnership is to be managed. Partnerships may have between two and twenty partners. Once there are more than twenty partners, the business entity must be registered as a company. A foreign company cannot be a partner in a Singapore partnership, unless it has registered a branch in Singapore to participate in the partnership. A partnership is not a separate assessable entity for Singapore income tax purposes as it is not a person in law. Therefore, each partner will be assessed separately on its respective share of income from the partnership. One of the partners must be designated as the precedent partner who will be responsible for completing the annual partnership return (Form P) for Singapore income tax purposes showing the allocations of the partnerships income and expenses. The Form P must be accompanied by partnership accounts but there is no requirement that the accounts be audited.

Taxation of Limited liability partnerships (LLPs)

An LLP is a form of legal entity that allows businesses to operate as partnerships but with the status of a separate legal entity. An LLP is a business structure that offers all its members limited liability while allowing them to retain the flexibility of operating as a traditional partnership. A partner of an LLP is not personally liable for the malpractice of other partners in the firm. The partner is however personally liable for his own negligence and personal misconduct. An LLP will be treated as transparent for income tax purposes. Deductions of excess capital allowances, industrial buildings allowances and donations against non-LLP income of the partners are to be restricted to the contributed capital. There are also rules governing the treatment of property sold to and by the LLP where the counterparty is, or is to become, a partner of the LLP.

Representative office
A foreign company may establish a representative office in Singapore to undertake promotional and liaison activities on behalf of its parent company only. The office, however, directly or on behalf of its parent company, must not be engaged in business, conclude contracts, provide consultancy for a fee, undertake transshipment of goods, or open or negotiate any letters of credit. The restrictive nature of the activities which the representative office may undertake may take this structure impractical from a commercial perspective. The costs of the representative office may be covered by its head office. A representative office is not subject to income tax where no income is attributable to the representative office (i.e. a cost centre).

The information contained in this document is for general reference only. While all reasonable care has been taken in the preparation of this document, Shanker Iyer & Co cannot accept any liability for any action taken as a result of reading its contents without consulting us with regard to all relevant factors.

Copyright @ 2007 Shanker Iyer & Co

Where there is a double taxation treaty with Singapore, the tax treaty would apply and may reduce or exempt the income from Singapore withholding tax. Interest derived by non-residents through their branches or operations in Singapore is subject to withholding tax at the prevailing corporate tax rate. Interest payments to the Singapore branch of a foreign bank or between approved banks and their branches are not subject to withholding tax.

11. Tax treaty network

Only Singapore resident companies can rely on Singapores wide tax treaty network. Currently, Singapore has concluded 55 comprehensive tax treaties as follows: Asia Pacific Australia Bangladesh Brunei China Fiji India Indonesia Japan Korea Malaysia Mongolia Myanmar New Zealand Pakistan Papua New Guinea Philippines Sri Lanka Taiwan Thailand Vietnam Europe Austria Belgium Bulgaria Cyprus Czech Republic Denmark Finland France Germany Hungary Kazakhstan Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Slovak Republic Sweden Switzerland Turkey United Kingdom Middle East Bahrain Egypt Israel Kuwait Oman UAE Others Canada Mauritius Mexico South Africa

In addition, there are 8 comprehensive agreements signed pending ratification: China, Estonia, Malta, Morocco, Qatar, Russian Federation, and Ukraine.