There are a lot of questions regarding companies receiving foreign income in Singapore. Do we have to pay this tax on this? Well, here we have the answers. We look at IRAS (Inland Revenue Authority of Singapore) website for direction.
First of all, the definition. Foreign income refers to income derived from outside Singapore. Generally, such income is taxable in Singapore when remitted to and received in Singapore. In many cases, such income is taxed twice - once in the foreign jurisdiction and a second time in Singapore. However, there are tax benefits available to alleviate the double taxation suffered. Foreign-sourced income is foreign income that does not arise from a trade or business carried on in Singapore.
Next. we look at the tax break on foreign income. From IRAS site, there are 3 ways Singapore tax residents can enjoy tax breaks on foreign income. They are:
- Upfront exemption or reduction in tax imposed on the foreign income, when foreign income is derived in a jurisdiction that has an Avoidance of Double Taxation Agreement (DTA) with Singapore;
- Tax exemption of specified foreign income such as foreign-sourced dividends, branch profits and service income; and
- Foreign tax credit for the taxes paid in the foreign jurisdiction against the Singapore tax payable on the same income.
So now, what is this Double Taxation Agreement. Here, we like to refer you to Wikipedia. I think this source of information should be reliable. In Wikipedia, the double taxation means "is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). This double liability is often mitigated by tax treaties between countries.
The term 'double taxation' is additionally used, particularly in the USA, to refer to the fact that corporate profits are taxed and the shareholders of the corporation are (usually) subject to personal taxation when they receive dividends or distributions of those profits, It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises." (Please refer to https://en.wikipedia.org/wiki/Double_taxation for more information)
Luckily, we don't need to do a lot of research to find out which countries has a DTA with Singapore, We can find all these information from here which listed down all the DTAs.
So make sure if you are incorporating an offshore company, please refer to this list in Singapore or the list in your home country as well to avoid expensive mistakes. The penalty in Singapore can be 3x the tax that you failed to pay. I am not sure about other countries. But when money is concerned, is better to be careful.
The instructions from IRAS's website stated that to claim or enjoy DTA benefits, the Singapore-resident company must show the treaty partner that it is tax-resident in Singapore. To do this, the company can:
Next, we like to talk about the categories of foreign income. There are 3 categories and they are:
- Foreign-sourced dividend
- Foreign branch profits
- Foreign-sourced service income
The tax exemption will be granted when all of the three conditions below are met :
- The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore;
- The foreign income had been subjected to tax in the foreign jurisdiction from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and
- The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
The following information are required to claim tax exemption:
- Nature and amount of income received;
- Jurisdiction from which the income is received;
- Headline tax rate of the foreign jurisdiction; and
- Confirmation that foreign tax has been paid in the jurisdiction from which the income was received. This is to satisfy the "subject to tax" condition.
When we talk about the headline tax, it means the highest tax rate. So it also means that if my gain may not be taxed at the highest rate. If I make $100,000, I maybe taxed at 3%. If I am making $1,000,000, I may have to pay that 15%. This is how it works. That explains why there are companies who setup so many MNCs to "shift" their profit here and there to level down the effective tax. Is that legal? My view is if the tax authority laid down the rules, just follow accordingly.