How Singaporeans Can Save Taxes On Foreign Sourced Income
If you live in Singapore and are earning in foreign currency, you have reason to rejoice because Singapore has a significantly progressive tax framework, which is based on its liberal business-fostering policy framework.
In Singapore, both corporations and individuals are taxed on incomes generated in the country, as well as on foreign sourced income channelled into the country.
However, Singapore has strived to establish the country’s clout as an attractive wealth management destination; therefore, there have been numerous reforms in its taxation policy when it comes to the qualification of foreign sourced remitted income. Hence, foreign residents and companies who do not possess Singapore residency status for the purpose of taxation are free to transfer money into their Singapore bank accounts without facing any tax liabilities.
Before we get deeper into the topic, it is important to first understand what really qualifies as foreign sourced income. Income that does not arise from a trade or business carried out in Singapore is considered as foreign sourced income.
Now, it is not as simple and easy as it seems. Foreign sourced income must come under one or more of the following categories to receive exemption:
- Foreign Sourced Dividend : The dividend earned is considered to be a foreign-sourced dividend if it is compensated by a non-Singapore tax resident corporation.
- Foreign Branch Profits : Revenue generated by business operations of a Singapore-based company registered as a branch in a foreign nation. However, this does not include non-trade or non-business income of the foreign branch.
- Foreign Sourced Service Income: Income generated by a resident taxpayer for services provided through a permanent place of operation in a foreign nation.
Reviewing the Potential Problems That May Arise
Thus, if your income lies in any of the above categories, then you will be exempted from income tax. However, there might be a couple of pitfalls that could potentially arise on tax exemption on foreign sourced income. These could be any of the following troublesome issues:
- The Hopeless “Subject to Tax” Clause
Where the incomes are not subjected to tax under some incentive schemes of the foreign source country, are regarded as having met the “subject to tax” condition by the Inland Revenue Authority of Singapore (IRAS).
- The Stubborn “Fixed Place” Condition
For foreign sourced service income, the IRAS always determine the “fixed place of operation”, before deciding on the tax exemption. It refers to a place of management, an office, or a certain amount of floor space, with a degree of permanence and regular usage.
- The Cruel Income Repatriation Route
The vast majority of overseas investments are executed through either a Special Purpose Vehicle (SPV), or an intermediate holding company.
In Singapore, a tax resident must take this decision with a lot of caution, especially when the profits generated through their investments need to be repatriated to the city-state. In an effort to encourage foreign investment, many countries do not tax (or barely tax) such SPVs or intermediate holding companies.
However, when this income is repatriated in Singapore, it receives no relief and is liable for taxation at the specified corporate tax rate of 17%. Secondly, no relief is provided for any foreign taxes paid by the subsidiaries of an intermediate holding company.
- The No-Nonsense Tax Residency Stipulation
The IRAS usually takes into account from where the management and control of the company was exercised while deciding the residency of a company and issue a Certificate of Residence (COR).
The meaning of this “control and management” is derived from common law principles— being the directing authority that controls the affairs of a company. It usually involves the strategic management of the core decision-making body in an organization, such as the Board of Directors.
These factors include the decision-making body’s clout in raise capital, controlling bank accounts, approving mergers and acquisition deals, appointing the team responsible for executing the company’s operations, etc.
- The Abusive Treaty Shopping Monitor
The Singaporean government is no pushover for foreign and local investors who think they can flout important anti-avoidance laws and transfer pricing regulations by taking advantage of its liberal business policy framework. This is vital since economic material necessities under anti-avoidance provisions can supersede and forbid treaty benefits.
“Treaty shopping” is heavily frowned upon by the IRAS and they take strong exception to the abuse of Singapore DTAs by businesses with negligible commercial involvement in its economy.
- The Controversial Cash Pooling Scheme
Several large corporations have started to engage in the malpractice of “cash pooling”, which involves the aggregation of all excess fund and channelling them through a designated central bank. This money is subsequently lent out to certain entities whenever they require funding. In such cases, these corporations will not be able to file for tax exemptions.
As you know now, there are quite a few ways for your foreign sourced income to get trapped in the chase for income tax exemption. However, if you are safe from all of the above reasons, congratulations to you because what you earned will rightfully, and more importantly, legally be yours!