Income Tax in Singapore
The Act does not provide a clear definition of the term “income”. However, Section 10 categorizes income into six groups. These groups are income from trade, business, profession, or vocation; employment income; dividends, interest, or discounts; pension, charge, or annuity; rents, royalties, premiums, and any other profits arising from property; and any other gains or profits of an income nature that are not part of any of the other categories. Income tax is to be imposed on the chargeable income of a person; however, qualifying expenses incurred in the production of the person’s income may be deducted from the person’s income.
Singaporean tax laws take three different types of income into account; these are statutory income, assessable income, and chargeable income. Statutory income for any YA is the aggregate of a person’s income from each source for the year preceding the YA. Assessable income is the remainder of statutory income after deducting any losses incurred in any trade, business, profession, vocation, or qualifying donations. Chargeable income for any YA is defined as remainder of one’s assessable income after reliefs and deductions allowed in Part 10 of the Act. As the reliefs and deductions are only available to individuals and Hindu joint families residing in Singapore, this then means that for persons other than individuals and Hindu joint families, chargeable and assessable income are the same.
Resident status (Singapore PR or local or non-Singapore Residents)
The Act categorizes all taxpayers as being either residents or non-residents. Taxpayers’ resident status will affect their income tax liability and obligations. In Singapore, tax residents are those who are Singaporean citizens, permanent residents in Singapore, or foreigners who have lived or worked in Singapore for 183 days or more in the tax year. An individual’s tax resident status applies for the whole YA and takes the duration of the individual’s stay or employment in Singapore into account.
The Not Ordinarily Resident (NOR) Scheme was introduced in 2002 in an attempt to bring foreign talent to Singapore. This scheme grants tax exemptions on contributions made by the beneficiary’s employer to an overseas pension fund for five consecutive years, subject to qualifying conditions. It also allows the beneficiary to pay income tax on only the portion of income that corresponds with the number of days spent in Singapore. To apply for NOR status, an individual must not be a Singapore tax resident in any of the past three YAs, but in the YA in which the individual qualifies for NOR status, the individual must have been a Singapore tax resident.
There are two tests that can be used to determine one’s residential status: qualitative and quantitative. According to the qualitative test of residence, individuals who reside in Singapore in the year preceding the YA are regarded as tax residents in Singapore. This test takes the following into consideration: family ties in Singapore, available accommodation in Singapore, purpose of living in Singapore, and permanence of residence. The quantitative test of residence applies to individuals who would not be regarded as residents under the qualitative test. An individual who is physically present in Singapore or exercises employment there for at least 183 days in the calendar year preceding the YA is considered to be a tax resident. The IRAS has implemented administrative concessions for foreigners working in Singapore to remove any inequitable tax situations.
Companies can also have resident status in Singapore. A company is deemed to be resident in Singapore if the control and management of its business is exercised in Singapore. For the purposes of resident status, control and management is deemed to be policy-level decision-making carried out by the board of directors. Where a company is registered or the location of its registered office are irrelevant to determining the residence of the company. Both resident and non-resident companies are liable to tax on income accrued in or derived from Singapore and offshore income received in Singapore unless the foreign income is tax-exempt. Non-resident companies are also taxable on certain forms of income deemed to have derived from Singapore.
Singapore Individual Tax Rates
Individual income tax in Singapore imposed on resident individuals and Hindu joint families is based on the progressive tax system. The first S$20,000 of chargeable income is not taxable, and the highest possible tax rate that can be imposed on a resident individual or Hindu joint family is 22%. Non-resident individuals are subject to a flat tax rate of 20% of Singapore-sourced income. However, certain other sources of income such as interest and royalties may be subject to different tax rates. There is also a withholding tax imposed on certain types of income withdrawn by or paid to non-resident individuals. Non-resident Singaporean citizens with Singapore-sourced income are also eligible for reliefs. The progressive rates set out in Part C of the Act’s Second Schedule are used to calculate the value of the reliefs.
Singapore is frequently cited as an example of a country whose low corporate income tax rates and multiple tax incentives serve to draw in and hold investments from all over the world. Singapore’s low corporate income tax rates are a major contributor to its economic growth and foreign investment. The headline corporate tax rate in Singapore is 17%, and companies resident in Singapore are also entitled to a maximum tax exemption of S$152,500 of their chargeable income under the partial tax exemption scheme. Qualifying new companies in Singapore are also entitled to a maximum exemption of S$200,000 of their normal chargeable income for the first three qualifying consecutive YAs. Non-resident companies are also eligible for the partial tax exemption scheme. As is the case with resident companies, non-resident companies are subject to a corporate tax rate of 17%. Trustees, executors, clubs, and associations are also subject to the same 17% tax rate.
A foreign company may opt to incorporate a subsidiary company or register a branch office in Singapore. Subsidiary companies are regarded as tax residents in Singapore unless management and control are exercised abroad. The residency status of a Singapore subsidiary affects the subsidiary’s distribution of profits. Conversely, branch offices are not regarded as tax residents unless management and control are exercised in Singapore. Branch offices located in Singapore can repatriate after-tax profits to their head office without incurring further tax liabilities. There is no withholding tax to be paid when branch profits are repatriated. Both subsidiary companies and branch offices are subject to the standard corporate tax rate of 17%.
Some foreign companies may also opt to register a representative office when the company’s activities in Singapore are generally restricted to support or auxiliary services. Representative offices are barred from carrying on any trade or business in Singapore, signing any contracts, or opening any letters of credit on behalf of their head offices. According to the Singapore Companies Act, representative offices are not recognized as legal presences. They are also not regarded as taxable entities because they are cost centres, not profit centres. However, the IRAS may elect to tax a representative office based on a notional profit of 5% of the expenditure incurred by the representative office in Singapore.
Tax Exemption Schemes and Rebates
In Singapore, there is a tax exemption scheme to strengthen new Singaporean companies and support entrepreneurship in Singapore. This scheme was introduced in 2005. Eligible companies will receive a full exemption on the first S$100,000 of normal chargeable income and a further 50% exemption on the next S$200,000 of normal chargeable income for the first three consecutive YAs. However, starting from YA 2020, these figures will change. From YA 2020 onwards, companies that qualify for this tax exemption scheme will receive a 75% exemption on the first S$100,000 of normal chargeable income and a further 50% exemption on the next S$100,000 of normal chargeable income for the first three consecutive YAs.
Singapore also has a partial tax exemption scheme to help build up small and medium enterprises in Singapore. At the moment, companies which are eligible will receive a 75% exemption on the first S$100,000 of normal chargeable income and a further 50% exemption on the next S$290,000 of normal chargeable income. However, as is the case with the tax exemption scheme for new start-up companies, the details will change from YA 2020 onwards. Starting from YA 2020, eligible companies will receive a 75% exemption on the first S$100,000 of normal chargeable income and a further 50% exemption on the next S$100,000 of normal chargeable income.
In Budget 2018, the Singaporean government announced a corporate income tax rebate of 40% of corporate income tax payable, subject to a cap of S$15,000. The prior figure had been a rebate of 20% of corporate income tax payable, subject to a cap of S$10,000.
Singapore only imposes a tax on income; it does not have a capital gains tax. Capital gains may refer to “investment income” that arises in relation to real assets, such as property, financial assets such as bonds or shares, and intangible assets such as goodwill. Any receipts of a revenue nature will be regarded as income and be liable to income tax if they fall within the charging provisions of Section 10(1) of the Act. Revenue and capital receipts are differentiated by the following principles: income is seen as having been produced by capital, an asset forms part of an amount of fixed capital if it is retained in the business with the object of producing capital, and only receipts in respect of circulating capital are taxable as income.
Territorial scope of Singapore’s Tax System
The phrase “accruing in or derived from Singapore” in the Act describes the territorial scope of Singapore’s tax system. This means that Singapore has the right to tax income if the source of the income is in Singapore. A person will not be liable for income tax unless income has accrued to the person. Income cannot be said to have accrued to a person unless the person has an unfettered right to deal with it.
Another important phrase found in the Act is “received in Singapore from outside Singapore”. This causes foreign-sourced income to be taxable in Singapore, but only if the income is received in Singapore and not tax-exempt. According to Section 10(25) of the Act, the following amounts are to be regarded as income received in Singapore from abroad: any amount from any income derived from outside Singapore which is remitted to, transmitted, or brought into Singapore; any amount from any income derived from outside Singapore which is applied in or towards the satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; and any amount from any income derived from outside Singapore which is applied to purchase any movable property brought into Singapore. Those who have qualified overseas taxable income must declare that they do in their tax forms.
Singapore uses deemed-sourced provisions to remove the uncertainty of applying source rules based on case principles. Deemed-sourced provisions create a source of income in Singapore where none may exist under general tax law. Forms of income that may be classed as deemed-sourced provisions include a non-resident’s business profits, employment income, interest, royalties, technical assistance fees, management fees, rent for movable property, income of non-resident owners of ships or aircraft, and income of non-residents from cable or wireless undertakings.
Singapore’s intricate, carefully-crafted tax system has played an important role in turning the country into a global business powerhouse and allowing the Singaporean economy to become one of the world’s most vibrant. Singapore’s tax system has also attracted many a foreign investor to Singapore because of its tax rates, tax relief measures, and absence of capital gains tax. If not for its judicious use of tax money, Singapore would not have achieved the level of economic prosperity that it currently enjoys.