What Foreign-Sourced Income is considered taxable?
What Foreign-Sourced Income is considered taxable?
The Inland Revenue Authority of Singapore (IRAS) generally defines foreign-source income as profits that arise from a trade or business carried on outside of Singapore.
This is accomplished through
a) tax exemptions on qualifying foreign-sourced income; and
b) an extensive network of double-tax avoidance treaties.
This includes profits derived from investments (such as dividends) from holding shares in foreign based companies, interest income or rental income–as well as income earned from royalties, premiums and other profits from foreign property.
To be considers taxable, foreign-sourced income must be ‘received in Singapore’.
‘Received in Singapore’ explained
According to Singapore law, foreign-sourced income will be considered received in Singapore if it meets any of the following conditions:
- The income is remitted, transmitted or brought into Singapore: This refers to funds transferred to a Singapore bank account or brought into Singapore as a cheque, money order or in cash.
- The income is used to pay off any debt incurred in Singapore: This refers to money held overseas that is used to pay down or settle a debt in Singapore, including debt to suppliers, banks or as a result of legal proceedings.
- The income is used to purchase any moveable property brought into Singapore: This refers to overseas funds used to buy equipment or raw materials connected to the business in Singapore.
What are the Tax exempted on taxable foreign-sourced income?
Under Singapore tax law, the following types of foreign-sourced income are tax exempt when received in Singapore:
- Foreign-sourced dividends: According to Singapore tax law, dividends are considered foreign sourced if they are paid by a company incorporated in a jurisdiction outside of Singapore.
- Foreign branch profits: In order for profits to be considered foreign-sourced the foreign branch of a Singapore company must be located outside of Singapore.
- Foreign-sourced service income: Service income is considered foreign sourced if the services are provided through a “fixed place of operation” in a foreign country. To be considered a fixed place of operation, the location must meet the following conditions:
- The location should have features of permanence. For example, a permanent staff that uses the location for on-going business activities is considered a feature of permanence.
- The location should be used on an on-going basis i.e. the location cannot be solely used on a temporary basis.
- The location should be used for primary business activities i.e. the location cannot be used solely for auxiliary or preparatory activities.
- The location should be at the disposal of the taxpayer on an on-going basis. In general, if a taxpayer merely visits a location, then the location will not be considered at the taxpayer’s disposal. For example, Apple Pte. Ltd. is a Singapore based company that travels to a major client’s office in Hongkong to provide consulting services. In this case, the client’s office in Hongkong would not be considered at the disposal of Apple Pte. Ltd. because the company is only visiting. Therefore, the client’s office would not be considered a fixed place of operation.
Conditions for tax exemption
Foreign-sourced income must meet the following conditions to be exempt from taxation:
- The headline tax rate of the foreign jurisdiction should be at least 15% at the time the foreign income is received in Singapore.
- The Singapore government is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
- The foreign income was “subject to tax” in the foreign jurisdiction. In this case, the rate at which the foreign income was taxed can be different from the headline tax rate. The actual tax rate paid on the foreign income can be zero or can even be negative.
IRAS will consider the income “subject to tax” even if the income is exempt from tax in the foreign jurisdiction (e.g. income that qualifies for tax incentives in the foreign jurisdiction). Therefore, the actual tax paid in the foreign jurisdiction may be zero (or even negative) yet it will be considered subjected to tax and qualify for tax exemption in Singapore.
IRAS will requires companies to include the following information on their income tax return (Form C and Form C/S):
- The nature and amount of income received from a foreign jurisdiction
- The jurisdiction from which the income is received
- The headline tax rate of the foreign jurisdiction
- Confirmation that tax has been paid in the foreign jurisdiction
- Confirmation that the income is subject to tax in the foreign jurisdiction if no tax was paid
In order to take advantage of the “subject to tax” condition, a company does not have to submit any supporting documents with its income tax return. However, the following documents should be retained in the company’s records:
- A declaration that the specified foreign income is exempt from tax in the foreign jurisdiction due to tax incentives.
- A copy of the tax incentive certificate or approval letter issued by the foreign jurisdiction
- For foreign-sourced dividends, companies should keep a dividend voucher (when available) stating that the dividend is exempt from tax in the foreign jurisdiction due to tax incentives.
Understanding Double taxation relief on foreign income
To prevent double taxation on foreign income, Singapore has signed numerous Avoidance of Double Taxation Agreements (DTAs) with an extensive network of countries under IE Singapore.
Furthermore, if a foreign jurisdiction is not covered by a DTA, Singapore provides a Unilateral Tax Credit (UTC) for income sourced from such jurisdictions.
Under a DTA or UTC, companies can claim a tax credit on income that was taxed in a foreign jurisdiction, therefore, reducing or eliminating the taxes paid on such income in Singapore.
The company must satisfy all of the following conditions in order to claim FTC:
- The company is a tax resident in Singapore for the relevant basis year;
- Tax has been paid or is payable on the same income in the foreign jurisdiction; and
- The income is subject to taxation in Singapore.
Companies in loss position
No FTC will be given to a company in a loss position.
Companies with permanent establishments overseas
When a company has a permanent establishment (PE) overseas and the income is derived through that PE, the income will generally be taxed overseas. A FTC would be granted only if the income is also taxed in Singapore.
Companies deriving passive income
Passive income (e.g. interest, dividend) derived from outside Singapore will generally be taxed overseas in the year of receipt. Such income will be taxed in Singapore in the year of remittance; a FTC will be given when the income is taxed in Singapore.
For companies claiming DTR, the amount of FTC to be claimed is subject to the specific terms and conditions as specified in the DTA with the relevant treaty partner.
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).
Computing Singapore tax attributable to the foreign income
The amount of the FTC granted should be computed on a “source-by-source and country-by-country” basis.
With effect from YA 2012, a company may elect for the FTC pooling system whereby FTC on various foreign income may be pooled together and need not be computed on the above basis.
Worked Example (85KB) on computation of FTC on a “source-by-source and country-by-country” basis.
The claim for FTC should be made when you file your Income Tax Return, Form C. Companies claiming FTC cannot use Form C-S.
Documents supporting your claim for FTC need not be submitted with your Form C. However, the following information/ documents must be prepared and retained:
- Jurisdiction in which foreign tax was paid;
- Nature of the income;
- Description of the services rendered, and whether the income was derived through a permanent establishment in the foreign jurisdiction and your basis for this claim, if applicable;
- Name of the payer;
- Date of withholding tax receipt/ voucher;
- Gross amount of income, withholding tax rate and amount of tax withheld in foreign currency (include the corresponding S$ amount);
- For a claim of double tax relief, the relevant Article of the Double Taxation Agreement under which the tax was withheld; and
- Withholding tax receipt/ voucher*.