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.
Unlike other countries globally, Singapore adopts a very much different corporate tax system. Singapore’s tax system is based on the grounds that double taxation obstructs international trade and business via penalising 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, e.g. business profits, or Subjected to a lower (preferential) tax rate in one of the two relevant countries as compared to the domestic tax rate.
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.
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 evidence 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.
Tax Relief Without Double Tax Agreements (DTA)
In any case where there is no DTAs with a particular country, Singapore residents may avoid double taxation. This is because in Singapore, multiple types of foreign-sourced incomes are exempted should they fulfil the criteria. The types of exempted foreign-sourced income include:
Foreign branch profits
Foreign service income
Here are the 2 criteria to fulfil to avoid double taxation in Singapore:
Income received from the foreign country must be minimum 15%
Income received have been taxed in the foreign country
This is called unilateral tax credit, and one of the methods of reducing your double taxation in Singapore.
Alternative Ways to Reduce Double Taxation in Singapore
Aside from unilateral tax credit, there are other ways to reduce your double taxation.
Tax credit (Double Tax Relief)
Reduced tax rates
Reliefs by deductions
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.
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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.
What is an Avoidance of Double Tax Agreement?Timothy2020-07-01T10:39:59+08:00
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.
How income is assessed?Timothy2020-07-01T10:39:31+08:00
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.
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.
= 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.
Claiming Double Tax Relief – What is double tax relief (DTR)?Timothy2020-06-24T12:32:59+08:00
Foreign income earned by a Singapore company may be subjected to taxation twice. Once in the foreign country, and a second time when the foreign income is remitted into Singapore.
A double tax relief (DTR) is the credit relief provided for under an Avoidance of Double Taxation Agreement (DTA) to reduce this double taxation. A DTR is granted by allowing the Singapore tax resident company to claim a credit for the amount of tax paid in the foreign country against the Singapore tax that is payable on the same income.
A company is a tax resident of Singapore if the control and management of its business is exercised in Singapore.