What You Need to Know About Singapore Double Tax Agreements
Taxes give small and big businesses major concerns. If a person or business gains income outside the residence state, that income might have double taxation at the residence and source state.
Singapore Double Tax Agreements (DTAs) are helpful in promoting bilateral investment and flows of trade. With DTA provisions, taxpayers have started investing in cross-border business as they can be certain about their taxing rights. They will benefit from double taxation and have access to a platform that helps settle disputes in taxes.
When international trade and multinational corporations started to develop, the necessity to scrutinize double taxation has increased. If you are an individual or company that looks for opportunities and investments in other countries, it is natural to be worried. Especially, about taxation problems, because sometimes you have to pay it twice. In addition, the tax will be based on the income of the host country and your home country. Therefore, you must operate to optimize tax positions and lessen costs that improve global competitiveness.
Double taxation is what defines two different taxes that are based on income. The income can be an individual or business generates in two jurisdictions that are separate. Double taxation is applied when the source and residence state imposes taxes on the generated income. Countries like Australia and the USA have a worldwide taxation system to follow.
Based on this taxation system, a business or an individual that is based in Australia has taxes applied on all of their income, regardless of where it was generated from. This is what causes double taxation. However, other countries, including Singapore, use the territorial taxation system. This is what protects businesses and individuals in Singapore from double taxation.
The rules applied when it comes to determining an individual or company’s tax residence may differ. For instance, assume that a country considers someone as a resident in their country if the person stays there for 100 days per year. In case the other country has the same rule, then there is a possibility that the person is also considered a resident of that country for a year. That is if the person spends 100 days a year in each country. Therefore, the person might have to pay double tax based on their income from both countries.
The DTA of Singapore
The Singapore Double Taxation Agreements treaty is between two jurisdictions that are avoiding double taxation. The DTA defines tax authority that applies in each jurisdiction. It can also be defined how and when the tax is applied by the source and residence state. However, an important thing that is defined by the DTA are provisions for one jurisdiction to provide a tax exemption or credit.
The question is, how can double taxation be prevented in the first place?
- If full taxation rights are allowed in one jurisdiction and the other one is exempted.
- If the limited taxation rights to the source and residence state provide tax credits that can be paid through the source state.
- Full taxation rights are allowed in each jurisdiction and the residence state provides a credit for the taxes paid while in the source state. By doing this, a DTA agreement attempts to stop a problem caused by double taxation and also defending taxation rights of those jurisdictions.
- The primary objective of DTA is to give certainty on how and when the tax must be imposed in the country where an income-producing activity takes place or was paid. Therefore, it is a definition of the jurisdictional authority on cross-border transactions.
- It defines each country’s taxing rights.
- It wants to prevent international tax evasion as it sanctions the information exchange between the contracting countries’ tax authorities.
- This lets you claim relief for the taxes you pay overseas.
Kinds of Tax Relief
To obtain tax relief under the treaty, the taxpayer must submit a Certificate of Residence to the country the taxpayer does not reside in. If you are a resident of Singapore, your Singapore tax residency must be submitted to the treaty country. In case you are a treaty country’s tax resident, you must submit it to the Inland Revenue Authority of Singapore a Certificate of Residence from Non-Residents. It must be certified by the treaty country’s tax authority so you can obtain the tax relief.
The available tax relief from a treaty country is not the same. Most of the time, the residence state gives credit for the taxes paid to a non-Resident State or income is exempted from taxes if you are already paid to a non-resident state based on that income.
This income is still taxable by the Non-Resident State. Likewise, it is left out from any tax calculation of the Resident State. The relevant will not be part of determining the progressive tax rate, which will be imposed on the rest of the income.
Exemption With Progression
The income included is not taxable by the residence state, but it considers the purpose of progressive tax rate determination that must be applied to the remaining income.
The Resident State gives credit that is the same as their own tax on the income involved. If the other country receives higher tax payment compared to the Resident State, the taxpayer does not get full relief.
The paid full tax amount to the other country is in the form of credit while tax is being calculated in the Resident State. If the other country is charging a higher rate, the Resident state must give up its own tax.
Tax Sparing Credit
Most of the time, a tax credit is only granted by the Residence State if the other country actually taxed the income. It is a special credit in which the Residence State gives a tax credit that should have been paid in the source country, but was not charged. Tax sparing credits are very useful and can lessen the effective tax rate, which will be lower than what is charged by two participants of the treaty.
FAQs About DTA
How Does Singapore Double Taxation Agreements’ Negotiation Happen?
Similar to other bilateral treaties, both jurisdictions must have a mutual interest before yearly negotiations are established. Since it is expected for jurisdictions to encourage terms that serve its interest, compromises must be made to achieve a balance of benefits. Both sides might need more than one meeting to come to a resolution for the issues and finalizing DTA terms.
When negotiations are concluded, both jurisdictions must arrange for DTA signing by the important authorities. After signing, both jurisdictions must be ratified before it can be enforced.
How to Find Help for Issues During a Singapore Double Taxation Agreements Application?
The DTA has a Mutual Agreement Procedure (MAP) that can resolve issues related to the DTA application.
Taxpayers who want to take their issues under the MAP must approach the state’s tax authority where they are tax residents.
DTAs that Singapore Concludes
- Avoidance of Double Tax Agreement – These are agreements designed to stop the double taxation applied to the income that comes from transactions between two countries in the agreement.
- Non-Ratified DTA – These DTAs were signed by two countries but they have not yet been ratified by legislative authorities. The non-ratified DTAs are not yet enforced by the law but will most likely take effect.
- Limited treaties – These agreements are less extensive than a DTA but address almost the same issues. Normally, they are only applied to shipping or air transport income.
- Exchange of Information (EOI) – These arrangements only cover the provisions applied to the exchange of information for taxes. Treaty partners are allowed to request information under the EOI arrangement from the Comptroller of Income Tax. DTA includes EOI Arrangements.
Advantages of Singapore Double Taxation Agreements
The businesses based in Singapore avoid double taxation because Singapore has signed a DTA. This way, they can compete with foreign businesses evenly. Therefore, this makes it easier for a Singapore company to open branches globally compared to other countries in the world. The DTA also lets an entrepreneur have the freedom to base their business in Singapore. They also let them gain profits even while in their home country. The money saved can be used for business expansion and other important company expenses.
Unilateral Tax Credit
If you receive the following foreign income from other countries while being a Singapore tax resident that Singapore has not concluded the Avoidance of Double Taxation Arrangement (DTA), you may get a unilateral tax credit.
- Income that comes from a professional, consultancy, and other sources anywhere outside Singapore.
- Profits from an overseas branch of a resident company in Singapore.
- Unilateral tax credit under section 50A also applies to foreign-sourced royalty coming from non-treaty countries, as long as the royalty is not:
- From directly or indirectly a resident in Singapore or any personal establishment in Singapore.
- Deducted from any sourced income in Singapore.
Singapore Double Taxation Agreements are mostly used for determining if it is possible to get an exemption or reduction of tax on certain kinds of income.
The Double Taxation Agreements make their country an ideal place for starting a business especially if you are a foreign investor. If you want to get started with setting up a business in Singapore, you can ask help from 3E Accounting. Our team also offers the best withholding tax services.