How to Avoid Double Taxation in Singapore?

If you are involved in an international business and are already paying taxes in a foreign country, then you do not have to pay double taxes in Singapore.

This kind of tax benefit can only be used when you are familiar with the entire process. Tax treaties are important to get relief from double taxation in the form of tax credits, reduced rates, or tax exemptions.

There are numerous tax incentives in Singapore, including a double tax treaty.

The purpose of this article is to explain the concept of double tax and how it can be avoided in Singapore.

What is a Double Tax?

Double tax means two or more countries have imposed the same kind of tax on the taxable income of the same taxpayer. In simple words, it means the taxation of the same income twice in two or more different countries.

To facilitate taxpayers by preventing double taxation, many countries like Singapore offer different types of tax relief under tax treaties and laws.

What is the Double Tax Agreement?

A Double Tax Agreement (DTA) is a tax-related agreement between two countries to prevent double taxation and promote cross-border trade. Benefits of the DTA are:

DTA is essential in elaborating the double tax rules to the taxpayers so that they can fully calculate the tax that they will have to pay in a certain country. Companies can go through the DTA to get the required information on cross-border transactions.
DTA defines the taxing rights of Singapore and helps in preventing international tax evasion.
Businesses can flourish by cross-border trade and avoiding heavy taxes.

Who can apply for DTA?

Section 2 of the Singapore Income Tax Act clearly states that only residents can benefit from DTA. A resident is defined as:

An individual who is a natural person residing in Singapore for at least the previous year of assessment. It means that the person must be physically present in the country and have some sort of employment in Singapore, except being the director of a company for 183 days or more in the previous year of assessment.
A company OR a body of persons excising control and management for its business in Singapore.

Therefore, if the aforementioned are generating foreign income from a treaty country, they can claim double taxation relief under a relevant tax treaty.

A Certificate of Residence has to be submitted to a foreign country for this purpose.

Moreover, if the business owner is already paying the tax in a treaty country, the supporting documents will need to be submitted upon request by IRAS. Such documents typically include a Certificate of Residence from Non-Residents properly certified by the treaty country.

Generally, there are four types of DTAs in Singapore:

Avoidance of DTA involves the prevention of double taxation of the income being generated between two countries.
Non-Ratified DTA includes the DTAs that are signed between two countries but not yet ratified by the taxation and legislative authorities.
Limited treaties are the agreements that are not as comprehensive as a DTA but cover core issues of taxation.
EOI arrangements include limited provisions for exchanging information related to taxation.

Tax Exemption

If your foreign income is exempt from domestic tax, then double taxation can easily be avoided. However, the extent of the double tax exemption can greatly vary from company to company, as it can be given on the entire or part of the income.

According to Section 13 of the Singapore Income Tax Act, a Singapore tax resident company can get tax exemption on its foreign branch profits, dividends, and foreign-sourced service income that is coming into Singapore in the following conditions:

The corporate tax rate of the foreign country is at least 15%.
The foreign income was subjected to taxation as per the laws in a foreign country. The rate of the tax in a country can highly affect the way in which you get a double tax exemption in Singapore.
The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.

In a Nutshell

The Singapore tax incentives also include tax exemption to all foreign-sourced income by the residents and resident partners in Singapore.

The documents that you have to submit to get tax relief are also dependent on the type of tax treaty you are applying for.

Generally, companies that hire an accounting and audit firm in Singapore find it much easier to deal with different aspects of tax and availing tax incentives.

For more information, feel free to get in touch with us.