Singapore forms an ideal base for expanding your business overseas. However, with the promise that a new market brings, comes additional compliance issues and taxation considerations.
On a worldwide stage Singapore has a relatively simple system for tax compliance, with low tax rates, concessions, and other benefits. This will mean that an expansion overseas may introduce your business to a wide range of new, and higher taxes than you are familiar with. It is therefore important to get advice from a tax expert in the country you are expanding into.
In addition, you will need to deal with international taxation considerations and navigate the impact of your overseas income in your Singapore based business. It is essential that you have the right global tax expert to ensure you understand and prepare for this impact.
Four key points you need to consider include:
- The type of presence you establish overseas
- The tax impact of earning income overseas
- Employment considerations with your overseas expansion
- Tax implications for you or other owners who relocate overseas to operate the overseas business
Your Overseas Presence
When you expand your business overseas you have various options for establishing your presence there.
This includes:
- Selling directly without a taxable presence overseas
- A branch office
- A subsidiary or associated company
- A distribution arrangement
The type of presence you set up overseas will have a significant impact on the tax and compliance implications with your Singaporean operations. Singapore foreign income concessions may apply in the case of a branch office – however this will mean that you are paying income tax in the jurisdiction of the branch.
If you have a taxable presence overseas it will be important to engage a local advisor to ensure local compliance is met. Regardless of the type of presence you establish you will need to engage an expert in foreign taxation to help you manage your compliance obligations in Singapore.
Selling Directly Without A Taxable Presence Overseas
If your local Singapore business sells overseas, without establishing an overseas presence, that income will be subject to Singapore taxes. This may be done through an online presence for overseas distribution.
There may be withholding taxes imposed by the foreign jurisdiction and a domestic and federal level. While generally claimable as a foreign tax credit, state taxes (e.g. sales tax in the state of California) are not.
Branch Office
Setting up a branch office entails establishing a legal presence in the foreign market without creating a separate legal entity. Foreign income earned through a branch office is typically subject to corporate income tax in your Singaporean company and the jurisdiction in which you have the branch.
You should discuss the following considerations with your tax planner when considering setting up a branch overseas:
- Corporate Income Tax – Profits generated by your branch may be subject to income tax in both the foreign jurisdiction and in Singapore. Some countries also tax branch profits at higher rates than subsidiaries.
- Withholding Taxes – Transactions between your company and its branch office may trigger withholding tax obligations in the foreign jurisdiction.
A Subsidiary Or Associated Company
This option involves setting up a separate legal entity to operate in the foreign market. This entity is owned by you or your company, depending on the structure you determine to be the most suitable. Foreign income earned by your foreign company is unlikely to be taxed in your Singapore company, unless it is remitted to your Singapore business.
Your foreign company may be a foreign company for tax purposes, however you may still have reporting obligations or be subject to withholding taxes on transactions with the foreign entity.
Proper structuring and adequate understanding of local tax laws will help mitigate your risks and manage your compliance costs both overseas and in Singapore.
A key consideration when setting up a subsidiary is also the corporate residency laws of Singapore and how they apply. For Singapore purposes, a foreign company is a tax resident of Singapore if the board of directors physically sits and meets in Singapore. This opens up the potential for double taxation.
In addition to the considerations listed for a branch operation, you should consider:
- Dividends – Repatriating profits from the subsidiary to Singapore may trigger withholding taxes in the foreign jurisdiction. Singaporean tax rules on foreign dividends received may also affect the taxation of dividends remitted to the parent company.
- Thin Capitalisation Rules – Some tax jurisdictions have thin capitalisation rules that limit the deductibility of interest expenses on intra-group loans. It is essential to comply with these rules to avoid adverse tax consequences.
- Transfer Pricing– Transfer pricing regulations govern the pricing of transactions between related entities, including between your Singaporean company and your related foreign company. It is important to ensure transactions are arms-length to avoid transfer pricing adjustments.
A Distributor
A third option is to outsource the foreign operations by engaging a foreign distributor. This means the foreign business will be engaged to distribute your products and services.
Although this may appear to be a more simple option, you should still consider:
- Permanent Establishment – Depending on the level of involvement and activities conducted by the distributor, your business may create a permanent establishment for the Singaporean company in the foreign jurisdiction.
- Withholding Taxes – Payments made to the distributor may be subject to withholding taxes in the foreign jurisdiction. Understanding these obligations is crucial to avoid penalties and disputes.
The Tax Impact On Your Overseas Income
Expanding overseas comes with a range of tax implications. It is important to assess these considerations thoroughly so you can make informed decisions and be prepared to manage the foreign and local tax implications.
Foreign Taxes
This includes:
- Foreign Sales Taxes – Overseas sales may include sales taxes, value-added tax (VAT) or goods and services tax (GST) in the foreign market. Proper pricing and structuring of transactions should consider the impact of their taxes on overall profitability of the business.
- Capital Gains Taxes – Overseas assets may attract capital gains taxes in the foreign tax jurisdiction.
- Withholding Taxes – Depending on the type of transactions being paid there may be withholding taxes applicable on the transactions between your company and your foreign business.
Consider any Double Tax Agreements (DTA) that apply between Singapore and the foreign country that you are expanding into. The DTA typically helps mitigate the risk of double taxation by limiting taxes, prioritising which jurisdiction has taxing rights, and covering concessions and tax credits.
Local Taxes
Depending on the way your foreign business is setup, you may be subject to Singaporean corporate income tax on the profits derived from your foreign sales unless specific exemptions or incentives apply.
Under Singapore’s territorial tax system, foreign-sourced income is generally not taxable, except for certain types of income such as income generated through a Singapore branch.
If you setup your foreign business as a separate legal entity you will not typically need to consider any Singaporean taxes on this income, within the foreign entity assuming you have managed the corporate tax residency laws noted above. However, when the profits are distributed to your Singaporean business or directly to you, there may be taxation implications in Singapore and/or withholding tax obligations depending on the nature of the distribution.
If your foreign entity pays dividends, royalties, or interest to your Singaporean company, it typically only needs to pay taxes on that foreign-sourced income when that income is received in Singapore. If the income distribution is taxable in Singapore your company may be able to claim tax credits for any foreign taxes that have been paid or withheld.
Employment Considerations
When hiring or relocating employees to work in your overseas entity you must assess their tax obligations both in Singapore and the host country.
Singapore tax residents may be required to pay tax on overseas income under certain circumstances including:
- Payment for work in Singapore for a foreign employer
- Overseas employment that is related to employment in Singapore
- Working in Singapore as a foreign employer
This means that any employees working overseas may continue to have tax obligations back home in Singapore depending on both their employment situation with your business and how the foreign business is set up overseas.
Singapore does offer tax reliefs and exemptions for income earned abroad, which can help to mitigate double taxation.
For employees residing in Singapore who frequently travel overseas for work, the nature and duration of their overseas trips may trigger tax implications.
Understanding these complexities helps ensure compliance and avoids unexpected tax liabilities.
Moving Overseas
If you are planning to move overseas to manage the new market you will need to consider:
- Whether you retain your residency status in Singapore or become a tax resident of the foreign jurisdiction
- Withholding taxes from income earned overseas
- Foreign tax obligations
- Singapore tax obligations where the income is taxed in Singapore
- Double taxation provisions between Singapore and the country your move to
Singapore taxes residents on a territorial basis. This means that overseas income is not typically taxed unless it’s derived from a Singaporean trade, business or profession. However, maintaining tax residency in Singapore while living abroad may still entail tax obligations.
It is important to be aware of the tax consequences of your movements so you can make appropriate plans and optimise your tax obligations.
Summary
Navigating the compliance requirements and tax obligations of your overseas expansion can be complicated. Not only do you have to consider the compliance requirements and tax obligations in the foreign jurisdiction, but you may also have to consider compliance and taxation in Singapore.