Singapore Tax Guide to Foreign-Sourced Income

Information on Foreign-sourced Income

In Singapore, income is subject to different rates of taxation depending on various factors. One of these factors is the location of the income’s source. The Income Tax Act states that any income accrued in or derived from Singapore or received in Singapore from another country is taxable. However, there are certain cases in which income sourced from abroad is specifically exempt from tax. The Income Tax Act also states that income which is received in Singapore but has its source in another country is deemed to have been received in Singapore if any of the following criteria apply: if the income is remitted to, transmitted into, or brought into Singapore; if the income is used to pay one or more debts incurred while operating a business or trade carried on in Singapore; or if the income is used to purchase moveable property brought into Singapore.

To determine the location of the income’s source, the location of the operations that generated the income is ascertained. If the business’s main corporate location is in Singapore, the income will be deemed to have been sourced in Singapore. All income which is neither derived from a trade nor business carried out in Singapore is to be classified as foreign-sourced income.

Taxation of Foreign-Sourced Income

Foreign-sourced income is only taxable if it originates from a company based in Singapore. According to the Inland Revenue Authority of Singapore (IRAS), 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. Although income sourced from abroad may be used to invest in assets from other countries, the company is not permitted to use such expenses or investments to claim tax deductions in Singapore. However, the IRAS also allows taxpayers to offset any losses from abroad against foreign-sourced income that has been received domestically.

Tax Exemptions and Foreign-Sourced Income

Certain forms of foreign-sourced income are exempt from Singapore taxation. This is the case because the Singaporean government intends to maintain the country’s status as a center of global business. The government also believes that these exemptions will also improve the condition of the country’s economy.

Companies which are tax residents are able to benefit from tax exemptions on any specified foreign income remitted from countries other than Singapore. Specified foreign income refers to any of the following forms of income from abroad: foreign-sourced dividends, foreign-sourced 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.

A foreign tax credit is divided into two categories. These are double tax relief and unilateral tax credit. 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 income. If the foreign tax was paid according to the provisions stated in the DTA and 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, double tax relief will be granted. Unilateral tax credit is granted with regard to foreign-sourced income received in Singapore by Singapore tax residents. However, this tax credit may only be claimed if the income is from a tax jurisdiction that does not have a DTA with Singapore.

To claim foreign tax credit, 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. 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. Passive income, which includes dividends and interest, derived from a country other than Singapore 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.

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.

Foreign Tax Credit

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.