Understanding Withholding Tax (Section 45)
Summary: Tax incurred when a person makes payments of a specified nature like interests, management fees, or royalties to a non-resident person.
In Singapore, when a business or individual earns income from providing services or work done locally, they are permitted to withhold a portion of the tax to be paid to the Inland Revenue Authority of Singapore (IRAS). This means that when payments of a certain nature are made under the Singapore Income Tax Act to a non-resident, the payer has a legal responsibility to hold back a certain percentage and give this to the IRAS. This held-back amount is known as the Withholding Tax.
The IRAS classifies taxpayers into two categories: resident and non-resident, based on where the company or individual operates. For instance, if a company runs and governs its business in Singapore, it falls under the resident company category. On the flip side, if a foreign company oversees its operation, it’s classified as a non-resident company.
What Kinds of Taxes Can Be Withheld?
Section 45 of the Income Tax Act 1947 lists the types of payments subject to Singapore’s withholding tax. The list includes:
- Commissions, interests, and other loan-related charges.
- Royalties, rights usage, and intellectual property concerns.
- Management fees.
- Payments to non-resident professionals for professional services.
- Compensation for non-resident directors.
- Payment for services rendered, and many more.
The tax amount to withhold varies depending on the type of payment involved. This is where Section 45 provides the specifics. With an extensive variety of payment types, the fees also naturally differ. It’s important to note that failure to pay the withholding tax in Singapore may result in a demand note with an added late penalty charge, which could be as high as 15%.