Double Taxation in the Global context
According to Investopedia: “Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level. Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.”
There are two main types of double taxation:
1. Corporate Double Taxation
It is a situation in which corporate earnings are taxed twice at two different levels but include the same income. A corporate organization’s net income is taxed as corporate tax, and when the same income is distributed to shareholders as a dividend, it is again taxed by way of a dividend tax. Corporate double taxation is common not only in the United States but in several countries around the world.
2. International Double Taxation
International double taxation mainly concerns multinational entities that operate in jurisdictions other than their home country, but it can also affect foreign income earned by individuals in foreign countries. There are instances where foreign income is taxed in the country where the income is derived, as well as the country where an investor resides.
Many countries such as USA, China and Australia still adopt a worldwide Taxation system. Oftentimes referred to as Double Liability, we will now look in the Singapore’s context and how Singapore copes with this issue of Double Taxation.
Double Taxation in the Singapore context
There is NO DOUBLE TAX in Singapore.
Unlike other countries globally, Singapore adopts a very much different Tax system. Singapore’s tax system is based on the grounds that double taxation obstructs international trade and business via penalizing corporations engaging in inter-border trade.
To achieve this, Singapore has made extensive measures to enter into Double Tax Agreements (DTAs) with a substantial number of countries. There are also Unilateral tax credits that is applicable to all foreign-based income that does not have a DTA with Singapore. We will also look into claiming benefits under the Avoidance of Double Tax Agreements using Certificate of Residence.
Double Tax Agreements (DTAs)
DTAs should eliminate the resulting double taxation by either having the income: Taxed in only one of the two relevant countries, eg business profits, or Subjected to a lower (preferential) tax rate in one of the two relevant countries as compared to the domestic tax rate.
Businesses based in Singapore are protected from double taxation, unlike other jurisdictions as mentioned above.
This enables businesses based in Singapore to compete with foreign businesses and expand globally as compared to other countries.
It also gives foreign business owners the freedom to base his business in Singapore, receiving profits from the comfort of his own country without being double taxed.
Conditions to Claim for Tax Relief under Singapore DTAs:
the claimant must be a tax resident in Singapore
the income must be such that it is subject to tax in Singapore
the income must be received or deemed to be received in Singapore, and
the tax has been paid or is payable on the income in the foreign country.
Unliteral Tax Credits
Unilateral Tax Credits (UTC) can be used in case of countries with which Singapore does not have a DTA. A UTC is allowed for the foreign tax paid by Singapore tax residents on the different types of income derived from that foreign country, such as Income generated from any professional, consultancy and other services, Dividend income, Employment income and Branch profits.
Claiming benefits under the Avoidance of Double Tax Agreements (DTAs) using Certificate of Residence
The Inland Revenue Authority of Singapore (IRAS) has set up various tax schemes and incentives to reduce taxpayers’ tax burden. Among these is the Certificate Of Residence (COR).
A COR may be issued to any individual or company which is a Singapore tax resident. One of the benefits granted to any individual or company which has a COR is access to lower tax rates, acquisition of tax credits, or even tax exemption.
There are several criteria that must be fulfilled before the IRAS can give out a COR to a company. The most important of these is that the company must have its control and management policies maintained by its Singapore office. Thus, the company must prove policies, control, and strategic management of the company are exercised in Singapore. It should also be mentioned that the location of the company’s incorporation does not necessarily have to be the same as the location of the company’s tax residence. Due to multiple cases of manipulation and fraud, the IRAS keeps a close eye on all companies that apply for a COR. The COR and evidences required to receive one are assessed by the IRAS before it hands out the certificate.
Some people may be unsure if they or their company are capable of obtaining a COR. In such cases, a visit to a consultation firm may be helpful. Such firms will give the potential applicant more information about the COR. Those who are or whose company is eligible may also seek the consultation firm’s help in making a tax assessment.
For international business, it is not only important to find a jurisdiction with reasonable low tax rate but also one that have many DTA to prevent suffer double taxation