SIT Internal

TOPIC 9
Taxation of Foreign Income
 Outline
SIT Internal

• Understand Singapore’s Basis of Taxation of

Foreign Income

• Tax Exemption rules for Foreign Source Income

• Different Methods of Seeking Relief from Double

Taxation
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Why is this important ?

• Singapore is on Territorial Basis of taxation
• Under Section 10(1) of the SITA, tax is levied on
- Income accruing in or derived from Singapore (“Singapore
sourced”); or
- Income received in Singapore from outside Singapore
(“foreign sourced” - remittance)
• Foreign sourced income is income that does not arise from a
trade or business carried on in Singapore

• Foreign sourced income is taxed in the foreign countries and

the same income is now taxed again when it is remitted or
deemed remitted to Singapore --> Double taxation
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Why is this important ?

• Double taxation implications unless the foreign income qualifies for
relief under the tax exemption system (S13) or the foreign tax credit
system

• Individuals: All foreign sourced income received in Singapore by a

non-Resident individual and a Resident individual is exempted from
tax, provided it is not received through a partnership in Singapore
and meets the “beneficial tax exemption” condition.

• Companies / Partnership: Specified foreign sourced income tax

(dividend, branch profits, service income) exempted under S13(8)

Section 13 of the SITA – Exempt income

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Received/Remittance
A foreign sourced income is deemed to be received in Singapore
when the income is:-

• Remitted to, transmitted or brought into Singapore or

• Used in or towards the satisfaction of any debt incurred in

respect of a trade or business carried on in Singapore or

• Used to purchase movable property brought into Singapore

If the foreign income is not received in Singapore and maintained

offshore, then it will not be taxed in Singapore

~ S10(25)
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Tax Exemption for Foreign-Sourced

Income
Foreign Sourced income exemption (FSIE) scheme:- S13(7A) to 11
of the SITA,

Tax exemption is granted to all tax residents who received

income from the following sources :

• Foreign sourced dividends

• Foreign branch profits

• Foreign sourced service income

~ S13(8)
 Foreign sources
SIT Internal

• Foreign sourced dividend – dividend paid by a non-Singapore

tax resident company. Applicable even if the underlying
source comes from income of a trade or business carried on
in Singapore

• Foreign Branch profits – Registered as a branch in the foreign

country and the profits from a trade or business carried on
outside Singapore by the foreign branch. Excludes non-
trade/business income of the foreign branch

• Foreign sourced service income - foreign sourced if the

service is rendered through a fixed place of operation in a
foreign jurisdiction.
 Foreign sources
SIT Internal

• “Service income” excludes employment-related income and

refers to professional, technical, consultancy or other services
provided by a person in the course of its trade, profession or
business.

• Fixed place of operation refers to place of management;

office; availability of floor space, must have features of
1. Permanence
2. at the disposal of the taxpayer on a ongoing basis
3. Regularity to carry on its business or profession of
providing services.
4. Does not use it to perform only auxiliary or preparatory
activities
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Foreign sources
Quiz – fixed place of operation?

• A Singapore engineering firm rents an office in country A merely for the

purpose of supplying information regarding the firm’s expertise.
• A Singapore law firm rents an office on a temporary basis in country B for the
purpose of carrying out detailed research and study relating to the only case the
firm is appearing before a court in country B.
• A Singapore architect firm has a rented office in country C. The office is used
by a team of architects and employees employed from country C to undertake
one project after another on an on-going basis
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Tax Exemption for Foreign-Sourced

Income
Conditions [S 13(9)]

1. Foreign income is subject to corporate tax in the foreign

jurisdiction from which income is derived;

2. Headline tax (highest corporate tax rate) of the foreign

jurisdictions from which income is received is at least 15% in
the year the income is remitted to Singapore; and

3. Comptroller is satisfied that the tax exemption would be

beneficial to the person resident in Singapore.
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Qualifying Conditions
“Subject to tax” condition
• Means that income tax must have been paid or is payable in the
foreign jurisdiction from which the income is received.

• Not met if the income is exempted from tax in the foreign

jurisdiction. However if the exemption is due to substantive
business activities carried out in the foreign jurisdiction, the
condition is met as a concession. Substantive business activities
include activities carried out by employees with expertise and
actual expenditures were incurred to carry out the activities.
Similar to those tax incentives granted by Singapore where
companies granted a lower tax rate are required to commit certain
business activities/expenditures in Singapore. Company should
maintain supporting documents, including a copy of the tax
incentive certificate and a declaration
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Qualifying Conditions
• Not met if after paying income tax, the foreign income is moved to
or invested in another foreign jurisdiction that does not levy any
income tax on such income before the income is remitted to
Singapore.

• Exception is for foreign sourced dividend - the dividend is

temporarily deposited into a custodian account outside the
jurisdiction in which the dividend is sourced solely before remitting
into Singapore.

• “Temporary”: The dividend must be remitted to Singapore within 1

year from the date of deposit into the custodian account; and no
additional income is generated from the custodian account, other
than the incidental interest paid on the sum in the custodian
account. The incidental interest is taxable when received in
Singapore.
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Qualifying Conditions
“Subject to tax” condition on Foreign Sourced dividend received
in Singapore:-

• Dividend tax: Income tax levied on the dividend by the foreign

jurisdiction e.g. dividend withholding tax; and

• Underlying tax: Foreign Income tax paid on the foreign profit

out of which the dividend is paid
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Qualifying Conditions
Quiz: Does the FS dividend meet the “Subject to tax” condition?
Adapted from IRAS
([Link]
Tax_Guides/etaxguides_IIT_Tax%20Exemptions%20Foreign%20Sourced%20Income_2013-[Link])
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Qualifying Conditions
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Qualifying Conditions
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Headline Tax Rate – 15%

• Refers to the highest corporate tax rate of the said
foreign jurisdiction in the year the foreign income
is received in Singapore.

• It needs not be the actual tax rate imposed on the

foreign income in that country.

Wef 31 May 2006, the headline tax rate is the

highest of the stipulated tax rate in the special
legislation instead of the highest rate of tax
specified in the main tax legislation.
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Headline Tax Rate – 15%

This applies when the specified foreign income received in Singapore

(a) is chargeable to tax under a special tax legislation of the foreign tax
jurisdiction that is independent of the main legislation which charges
tax on income; and

(b) the special tax legislation imposes lower tax rate than the tax rate
under the main legislation; and

(c) the lower tax rate is not due to a tax incentive granted for carrying
out substantive activities in that foreign jurisdiction (e.g. special tax
legislation enacting incentives for income derived from carrying out
manufacturing activities in Special Economic Zones).
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Methods of relief from double taxation

(1) Exemption method: the country of residence will not tax the
FS income
(2) Credit method – Singapore approach (discussed in detail
below)
– Double taxation relief (DTR)
– Unilateral taxation relief (UTR)
(3) Deduction method: the net FS income (after foreign tax)
rather than the gross income is brought to tax
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Comparison of types of relief

Example:
Singapore resident taxpayer receives $9,000 of foreign income net of 10% foreign tax.
Its Singapore sourced income is $100,000. Partial tax exemption and expenses have
been disregarded.
Deduction Exemption Credit
Singapore sourced 100,000 100,000 100,000
income
Foreign sourced 9,000 (net Exempt 10,000 (Gross
income amount) income)
Chargeable income 109,000 100,000 110,000

Tax payable @ 17% 18,530 17,000 18,700

Less: Double tax relief - - (1,000) – to provide

(“DTR”) / Unilateral tax SG tax relief on the
credit (“UTC”) foreign tax suffered

Net tax payable 18,530 17,000 17,700

 Foreign Tax Credit (FTC) method
SIT Internal

Double Taxation Relief (DTR) for treaty countries – S50

• A DTR is the relief provided for under an Avoidance of Double
Taxation Agreement (DTA) to reduce double taxation, in the
form of a tax credit.
• allows the Singapore tax residents to claim a credit for the
amount of tax paid in the foreign jurisdiction against the
Singapore tax that is payable on the same income.
• capped at the lower of the foreign tax paid and the Singapore
tax that would have been payable on the same income.
 Foreign Tax Credit (FTC) method
SIT Internal

Unilateral Tax Relief (UTR) for non-treaty country – S50A

• A UTR will be granted on all foreign-sourced income received
in Singapore by Singapore tax residents from jurisdictions that
do not have DTAs with Singapore.
 Foreign Tax Credit method SIT Internal

The company must satisfy all of the following conditions in order to

claim FTC:
• Tax resident in Singapore for the relevant basis year;
• Tax has been paid or is payable on the same income in the
foreign jurisdiction;
• Income is subject to taxation in Singapore.
• No FTC will be given to a company in a loss position

Note: FTC must be made no later than 2 years after the end of the
YA in which the foreign income is chargeable to tax in Singapore.

[Link]
Credit/#How_to_calculate_FTC
 Foreign Tax Credit method
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FTC is the lower of:

• The actual amount of foreign tax paid; or
• The amount of Singapore tax* attributable
to the foreign income (net of expenses).

* Effective tax rate

[Link]
Corporate-Income-Taxes/Claiming-Reliefs/Foreign-Tax-
Credit/#How_to_calculate_FTC
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Computing Singapore tax attributable to

the foreign income
Administrative practice, where the expenses incurred on a particular source
of foreign income are not separately accounted for, the following formula
may be used to compute the amount of Singapore tax attributable to that
foreign income:
(A / B) x C x D
where:
• A is the gross taxable income from a particular source which qualifies for
foreign tax credit;
• B is the total of the gross taxable income from all sources;
• C is the aggregate chargeable income from all sources, net of partial tax
exemption or tax exemption for new start-up companies ; and
• D is the Singapore tax rate applicable on the income qualifying for
foreign tax credit.
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Working example (Adapted from IRAS)

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Solution (Adapted from IRAS)

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Solution (Adapted from IRAS)

 Foreign Tax Credit (FTC) Pooling
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• Current FTC system: “source-by-source and country-by-country” basis

of FTC computation,
• For example, excess of foreign tax paid over the Singapore tax payable
on royalty from India cannot be used to reduce the Singapore tax
payable on interest from India (different income source).
• For example, any excess of foreign tax paid over the Singapore tax
payable on dividend from China cannot be used to reduce the
Singapore tax payable on dividend from Malaysia (different country).
• For example, any excess of foreign tax paid over the Singapore tax
payable on rental from Indonesia cannot be used to reduce the
Singapore tax payable on dividend from Australia (different income
source, different country).
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Foreign Tax Credit (FTC) Pooling

From YA2012: FTC Pooling applies
• To give businesses more flexibility in their claim of FTCs, reduce
their Singapore taxes payable on remitted foreign income, and
simplify tax compliance.
• Under FTC pooling, a Singapore resident company can elect to
pool the foreign taxes paid (including any underlying tax, where
applicable) on any items of its foreign income.
• The amount of FTC is restricted to the lower of total Singapore
tax payable on those foreign income and the pooled foreign
taxes paid on those income.
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Foreign Tax Credit (FTC) Pooling

A company can elect FTC pooling if:
1. Income tax has been paid on the income in the foreign
jurisdiction from which the income is derived;
2. Headline tax rate of the foreign jurisdiction from which the
income is derived is ≥ 15% at the time the foreign income is
received in Singapore;
3. There must be Singapore tax payable on the foreign income;
and
4. It is entitled to claim FTC on the foreign income.
If the conditions are not met, or companies choose not to elect for
FTC pooling system, the current FTC rules will apply.
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Working example (Adapted from IRAS)

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Solution (Adapted from IRAS)

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Solution (Adapted from IRAS)

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Advoidance of Double Taxation

Agreements (“DTA”) / Tax Treaties
• An agreement concluded between Singapore and
another jurisdiction (a treaty partner) - to relieve
double taxation of income that is earned in one
jurisdiction by a resident of the other jurisdiction
• Spells out the taxing rights between Singapore and her
treaty partner on the different types of income arising
from cross-border economic activities between the two
jurisdictions.
• Reduce or exempt of tax on certain types of income.
[Link]
limited-treaties-and-EOI-arrangements/
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DTA application
• Singapore withholding tax rate on interest is 15%
• If a Singapore tax resident took up a loan with a
Malaysian borrower and the borrower charged interest
of $100.
• Upon payment, the Singapore taxpayer will withhold
$15 (15%) to IRAS and pays $85 remaining to the
borrower.
• Under the Singapore Malaysian DTA, the withholding
tax rate is reduced to 10%
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Advoidance of Double Taxation

Agreements (“DTA”) / Tax Treaties
• Comprehensive and limited (shipping and airline income)
treaties

• In situations where treaty provisions conflict with the domestic

tax law provisions, treaty provisions will prevail

• Applies only to residents, Provide a Certificate of Residence

(COR)
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SUMMARY…
• What constitutes remittance of foreign income into Spore –
S10(25)
• What are the foreign income that qualify for exemption
under S13(8) and the qualifying conditions under S13(9)
- Subject to tax
- Headline tax
• Methods of double tax relief – FTC method
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END