This article will cover on the below topics:
- Must Know of Foreign sourced Income.
- Types of Foreign Sourced Income
- Claiming of Tax Breaks
- Tax planning
Must Know of Foreign-sourced Income
- To be consider foreign sourced income, income must be derived from outside Singapore. When remitted to or received in Singapore, it is considered taxable and is generally taxed twice – once in foreign tax authority and a second time in Singapore.
- Even if the income is not remitted back to Singapore but the income is used to pay one or more debts incurred or purchase moveable property brought into Singapore is also consider taxable.
- However, there are certain cases in which income derived from outside and remitted into Singapore but is exempted from tax.
- To determine if it is foreign source or not, the location of the operations that generated the income is the deciding factor.
- Foreign-sourced income is only taxable if it originates from a company based in Singapore, this means that foreign-based companies which do not have a Singapore office may use banks and fund management institutions based in Singapore without being taxed.
- Foreign sourced may be used to invest in assets from other countries but the company is not permitted to use such foreign expenses or investments to claim tax deductions in Singapore local sourced income.
- 3 methods that company can enjoy tax breaks on foreign income as follows:
- Full Tax exemption of specified foreign income such as foreign-sourced dividends, branch profits and service income.
- Foreign income is derived in a jurisdiction that has an Avoidance of Double Taxation Agreement (DTA) with Singapore, company can claim tax break; and
- Foreign tax credit for the taxes paid in the foreign jurisdiction against the Singapore tax payable on the same income.
Tax Exempted Foreign Sourced Income
Certain forms of foreign-sourced income are exempt from Singapore taxation.
The three categories of specified foreign income that exempted if they meet the criteria are:
- Foreign-sourced dividend;
- Foreign branch profits; and
- Foreign-sourced service income.
These exemptions have been in place since June 1, 2003. The scope of tax exemptions related to foreign-sourced income has been increasing over recent years. This is because the government has been trying to make it easier for companies to use money earned from investments and operations in other countries so that the companies can better fund their corporate financial needs in Singapore.
Tax Exemption Conditions
According to Section 13(9) of the Income Tax Act, tax exemptions are only to be granted for foreign-sourced income if all of three conditions are fulfilled.
- The first of these is that the foreign income must already have been taxed in the foreign tax jurisdiction in which it was received. This is also known as the “subject to tax” condition. The rate at which the foreign income was taxed does not matter. The Comptroller of Income Tax regards this condition as having been fulfilled if the income is tax-exempt in the foreign tax jurisdiction due to tax incentives granted for carrying out substantive business activities there.
- The second condition is that the highest corporate tax rate of the foreign tax jurisdiction from where the income originates must be at least 15% when the foreign income is received in Singapore. This condition is known as the “foreign headline tax rate” condition.
- The third condition requires the Comptroller to believe that the granting of the tax exemption would benefit the relevant resident individual or company.
Once all three conditions are satisfied, the individual or company may begin enjoying tax exemptions granted.
Receiving a Tax Exemption
To receive a tax exemption for foreign-sourced income, certain information must be supplied in the income tax return. These include the nature and amount of income received, the jurisdiction from which the income is originally from, the headline tax rate of the foreign tax jurisdiction, and a confirmation that tax has already been paid in the jurisdiction from which the income is derived. Those who are filing Form C-S instead of Form C ought to include the above information in the company’s tax computation while also retaining any supporting documents and information.
Claim of Tax Breaks
Under normal circumstances, foreign income earned by a company based in Singapore is subject to taxation twice. The income may be taxed in the jurisdiction from where it originates. It may also be taxed when it is remitted into Singapore. However, a Singapore company may be able to avoid this problem of double taxation by claiming foreign tax credit or tax exemption as above.
If a company has a permanent establishment abroad and the income is derived through that permanent establishment, this income will usually be taxed abroad. Foreign tax credit will only be granted if this income is also taxed in Singapore.
Conditions to claim foreign tax credit are as followings:
- A company must be a tax resident for the basis year in question,
- Have paid tax on the same income in the foreign tax jurisdiction, and
- Have income subject to taxation in Singapore. Companies in a loss position may not claim foreign tax credit.
A foreign tax credit is divided into two categories namely:
- Double tax relief is where Singapore has DTA agreement with foreign jurisdiction and
- Unilateral tax credit is there is NO DTA agreement
Double tax relief is provided for under a Double Taxation Agreement (DTA). It allows a Singapore tax resident to claim tax credit for the tax amount paid in another country against the Singapore tax which is payable on the same foreign sourced income. If the foreign tax was paid according to the provisions stated in the DTA and double tax relief is capped at the lower of the amount of foreign tax paid and the amount of Singapore tax that would usually have been payable on the same income.
Unilateral tax credit is granted with regard to foreign-sourced income received in Singapore by Singapore tax residents where there is no DTA between two countries.
Passive income, which includes dividends and interest, derived from a country is normally taxed abroad in the year of receipt. This same income is to be taxed in Singapore in the year of remittance. Foreign tax credit is given after the tax on this income is paid in Singapore.
Our Thoughts
To suffer double taxation is uncalled for, it advisable to seek for tax specialist to understand your income source to assess your eligibility for tax credit. To gain more assurance you can even get an advance tax judgment from IRAS.
FAQs
An Avoidance of Double Taxation Agreement (DTA) is an agreement signed between Singapore and another country (a treaty country) which serves to relieve double taxation of income that is earned in one country by a resident of the other country.
It makes clear the taxing rights between Singapore and her treaty partner on the different types of income arising from cross-border economic activities between the two countries.
The DTA also provides for reduction or exemption of tax on certain types of income.
Only Singapore tax residents and tax residents of the treaty country can enjoy the benefits of a DTA. To find out who are our treaty partners, please refer to the List of Avoidance of Double Tax Agreements.
You are required to make a declaration in your income tax returns by giving the nature and amount of the foreign-sourced income that was remitted to Singapore. You are also required to complete the Declaration Form for Foreign-Sourced Income Received in Singapore From 22 Jan 2009 to 21 Jan 2010 (60KB) for submission to IRAS. Although you have to state the use of the foreign income in the declaration form, the usage of such foreign income will not affect the claim for tax exemption.
The amount of DTR is dependent on the nature of income and subject to the specific terms and conditions as specified in the DTA with the relevant treaty country.
DTR
= Lower of:
- the actual amount of foreign tax paid; or
- the amount of Singapore tax attributable to the foreign income (net of expenses)
For trade income
If the company has a permanent establishment (PE) overseas and the income is derived through that PE, the income would generally be taxed overseas. A DTR would be granted only if the income is also taxed in Singapore.
For passive income (e.g. interest, dividend etc)
Passive income derived from outside Singapore will be taxed in Singapore in the year of remittance.
There are various types of tax incentives available to companies and these are provided in the Singapore Income Tax Act (ITA) and Economic Expansion Incentives Act (EEIA). Some of the tax incentives available are listed in the table below.
| Governing legislation | Types of incentives | Where to apply |
|---|---|---|
| ITA/S13F | Approved International Shipping Enterprise | MPA www.mpa.gov.sg |
| ITA/S13H | Approved Venture Company | EDB www.edb.gov.sg |
| ITA/S14B | Further deduction of expenses relating to Approved Trade Fairs, Trade Exhibitions, Trade Missions or to maintain overseas Trade Office | IE Singapore www.iesingapore.gov.sg |
| ITA/S14E | Further deduction of expenses on Research and Development Project | EDB www.edb.gov.sg |
| ITA/S14O | Tax deduction of special reserves for catastrophic risks of approved general insurers | MAS www.mas.gov.sg |
| ITA/S19C | Writing down allowance for cost sharing agreement | EDB www.edb.gov.sg |
| ITA/S43(9) | Concessionary rate of tax for income of life insurance companies apportioned to policyholders | – |
| ITA/S43C | Concessionary rate of tax for approved offshore general insurance companies | MAS www.mas.gov.sg |
| ITA/S43C | Concessionary rate of tax for approved offshore life insurance companies | MAS www.mas.gov.sg |
| ITA/S43C | Concessionary rate of tax for approved offshore composite insurance companies | MAS www.mas.gov.sg |
| ITA/S43C | Exemption of tax for approved marine hull and liability insurer (onshore and offshore business) | MAS www.mas.gov.sg |
| ITA/S43C | Exemption of tax for approved offshore captive insurance companies | MAS www.mas.gov.sg |
| ITA/S43C | Exemption of tax for approved insurer underwriting offshore qualifying specialised insurance risk | MAS www.mas.gov.sg |
| ITA/S43E | Concessionary rate of tax for Approved Operational Headquarters (OHQs) | EDB www.edb.gov.sg |
| ITA/S43G | Concessionary rate of tax for Approved Finance and Treasury Centre | EDB www.edb.gov.sg |
| ITA/S43Q | Concessionary rate of tax for Financial Sector Incentive Companies | MAS www.mas.gov.sg |
| ITA/S43P | Approved Global Trading Company | IE Singapore www.iesingapore.gov.sg |
| EEIA/ Part II | Pioneer Industries | EDB www.edb.gov.sg |
| EEIA/ Part III | Pioneer Service Companies | EDB www.edb.gov.sg |
| EEIA/Part IIIB | Approved Shipping Logistics Enterprise | MPA www.mpa.gov.sg |
| EEIA/ Part IIIB | Development & Expansion Incentive | EDB www.edb.gov.sg |
| EEIA/Part X | Investment Allowances | EDB www.edb.gov.sg |
| EEIA/Part XIIIB | Overseas Enterprise Incentive | IE Singapore www.iesingapore.gov.sg |
| EEIA/Part VIA | Export Service Company | EDB www.edb.gov.sg |
