Like many tax jurisdictions around the world, Singapore has a number of Double Tax Agreements in place to ensure the amount of effective tax that taxpayers pay on their worldwide income is limited to one jurisdiction only.

Double Tax Agreements are the legal framework outlining which tax jurisdiction has taxation rights over tax residents and income sourced in their jurisdiction. In practice, this typically ensures that the maximum tax a taxpayer pays is the tax payable in the jurisdiction with the higher tax rate.

Why Double Tax Agreements are Necessary

Double Tax Agreements are necessary to ensure that the income of a resident of one jurisdiction, that may be sourced in another jurisdiction, is not taxed twice. Without Double Tax Agreements, it would be possible for gross income to be taxed twice – once in the jurisdiction in which the taxpayer is a resident, and again in the jurisdiction in which the income was sourced. 

A Double Tax Agreement provides rules over whether the source country has taxation rights and limits tax rates for certain types of income. This can provide tax relief or limit the total tax payable in a higher taxing jurisdiction. The key benefit of Double Tax Agreements is that any foreign tax paid is treated as a tax credit against any tax assessment that the local country may assess.

Example of Taxation with Foreign Tax Credits

For example, imagine a corporate Singapore resident taxpayer earns $10,000 in Australia.

Let’s assume Australia taxes this at 30%, meaning the resident pays $3,000 in taxes.

Let’s assume Singapore also taxes this income at 17%, meaning the resident pays $1,700 in taxes.

This would leave the corporate taxpayer only $5,300 of their income after taxes.

A Double Tax Agreement helps prioritise who has taxing rights over this $10,000 income. In this example let’s say Australia, as the source country, has taxation rights. This means that the corporate taxpayer is still taxed the $3,000 in Australia. Singapore can still tax the taxpayer, however they allow a credit for the tax already paid in Australia. Since the Australian tax paid exceeds the tax payable in Singapore, they do not pay any additional taxes.

If the scenario was flipped and the company was an Australian resident corporation earning income in Singapore, Singapore would have initial taxation rights. The taxpayer would then pay $1,700 in Singapore taxes. The income could then be taxed in Australia, but the $1,700 already paid would be credited as tax already paid. This means the corporate taxpayer would only have to pay $1,300 in Australian tax so that they have paid a net total of $3,000, meeting Australia’s tax rate.

Tax Treaty with Australia

The Australia-Singapore Double Tax Agreement (DTA) gives tax relief to Australian and Singapore tax residents.

For Australian residents, the DTA covers income tax and petroleum resource rent tax relating to offshore profits.

For Singapore residents, the DTA covers income tax.

Under the DTA the foreign country is only able to tax interest income at 10%. This means that if a Singapore resident earns $1,000 interest income in Australia they will be taxed at the flat rate of 10% and pay $100 in tax. This is much lower than Australia’s usual foreign tax rate. In a similar vein, royalties and dividends have capped, flat rates of tax applied to them.

The DTA limits profits of a business enterprise so that they can only be taxed in the country where the business operations are carried out, unless there is a permanent establishment in the other country. This ensures that incidental sales made in the other country are only taxed in the resident country.

An additional provision in the DTA recognises that Singapore authorities may reduce tax payable by a non-resident on interest and royalties to NIL. To ensure the non-resident receives the benefit of this provision, Australia still credits the taxpayer as if they had paid the agreed flat tax rate in Singapore.

Example of where certain income types are taxed

Tax Treaty with USA

Singapore does not have a Tax Treaty with the USA.

This means that taxpayers who are a resident in one of these countries and earn income in the other could be taxed in both countries.

Both the US and Singapore have unilateral exclusions or foreign tax credit policies in place which help ensure that double taxation is reduced or eliminated.

Tax Treaty with the UK

The Singapore-UK DTA ensures that a foreign resident of either country is allowed tax credits against any tax paid against income derived from the other country.

For UK residents the taxes covered are income tax, corporation tax, and capital gains tax.

For Singapore residents the taxes covered are income taxes.

Example of where certain income types are taxed

The Impact of Singapore’s Double Tax Agreements

Double Tax Agreements can vary country to country. This means it is important to look for the specific provisions of the relevant countries in relation to any income earned from the foreign country.

The primary relief offered by DTAs is the provision for foreign tax paid to be deemed a tax credit against any tax assessment in the country of residence.

Additional relief can be found through limits on taxation rates on the foreign source income, exemptions from taxation in the foreign country, tiebreaker rules on determining residency, and other concessions.

Where no Double Tax Agreement exists, Singapore typically applies a unilateral foreign tax credit towards foreign tax that has been paid on any foreign income that is assessable in Singapore. 

Understanding and applying the relevant provisions will help ensure there are limits on the total tax you pay on foreign income.

In addition to being assessed for Singapore taxes on foreign sourced income that is incidental to their Singapore based operations, a Singapore resident company is also required to pay Singapore taxes on any foreign sourced income that is remitted into Singapore.

When is Foreign Income Taxable to a Singapore Company?

Foreign income is taxable to a Singapore Company when it:

1. is received through a Singapore partnership
2. is incidental income to the trade or business carried out by your company. This would mean that any online orders from foreign clients, being incidental to your primary operation in Singapore, would be included in your Singapore tax assessment.
3. is remitted into Singapore.

It is important to understand the difference between operating your business in Singapore and operating your business overseas. If your business is carried on in Singapore then all income relating to this business is taxable in Singapore, even if you make sales overseas and don’t bring that money into Singapore. Conversely, income that is generated from a business located and run in a foreign country will only be taxed in Singapore if it is remitted into Singapore.

The rule regarding remittance of foreign sourced business income applies to both resident and non-resident companies.

Mitigating the Tax Impact on Taxable Foreign income

Double tax agreements or unilateral tax credits in respect of foreign tax that has been paid, will mitigate, or even eliminate the impact of being taxed in multiple tax jurisdictions. This means that if the foreign tax paid is higher than Singapore taxes, there is unlikely to be any additional tax impact on foreign income that is also taxed in Singapore.

In addition, where certain conditions are met, foreign dividends, foreign branch profits, and foreign service fees remitted into Singapore may remain exempt from Singapore tax. 

Foreign sourced dividends, branch profits, and services income is exempt from Singaporean tax if not remitted into Singapore.

Foreign Investment Income Remitted into Singapore

Specified foreign investment income (foreign sourced dividends, foreign branch profits and foreign sourced service income) that is remitted into Singapore is exempt from tax in Singapore. For the exemption to be granted all 3 of the following conditions must be met:

1. The foreign income must have been subject to tax in the foreign jurisdiction.
2.  The foreign tax in the country of origin must be at least 15% at the time the foreign income is received in Singapore
3. The Comptroller of Income Tax must be satisfied that the tax exemption is beneficial to the Singapore tax resident company.

If all conditions are met, then this income will not be taxed in Singapore.

By excluding such specified foreign investment income from assessment in Singapore, your company may benefit from a reduction in compliance regulations and potentially complex tax calculations.

Singapore Business Income that is Remitted Overseas

If your Singapore resident company remits Singapore sourced income to an overseas bank, business branch, subsidiary, or other recipient, the tax laws of that tax jurisdiction will determine if taxes are also assessed at that location.

So far as Singapore taxes are concerned, income earned under Singapore’s tax jurisdiction will be taxed in Singapore. Any double tax agreements between the foreign jurisdiction and Singapore, will likely ensure that your company is not excessively taxed on such income.

Summary of Corporate Tax Obligations in Singapore

In summary, a Singapore resident corporation will be assessed on any locally earned income, any incidental business income earned overseas, and any foreign income that is remitted into Singapore.

This does leave open an opportunity for a Singapore based business to operate branches that are set up and run in an overseas location, without having to be concerned with Singapore taxes.

However, it should be noted that Singapore has one of the lowest tax rates in the world. As long as there is a double tax agreement in place or a unilateral tax credit applied in relation to foreign taxes paid, then remitting the foreign income into Singapore may not result in additional tax obligations.

Setting up your business overseas is one of the most exciting things that many of us will do in our business career.

Not only are we, as business Founders or C Suite executives, moving with the business – but the idea that we are taking our business proposition to a new foreign market is a thrill and a bit daunting in many respects.

Establishing my business in Singapore in March 2004 was a completely foreign experience in so many respects. There were many logistical challenges to deal with including adjusting to a new business environment, a new regulatory regime and building a totally new market for our product and services.

For most of you setting up or moving a business you will be pre-occupied with establishing revenue earning operations.

This means that often tax and other planning is left until you arrive.

This, of course, is way too late.

This article covers some issues to address ahead of time.

Expecting The Unexpected

Make sure you really examine how to manage a number of common risks as you expand into your new markets including:

• The real financial cost of expansion (it will take longer and cost a lot more to break even)

• The cultural divide between domestic and foreign markets (get a copy of the book The Culture Map by Erin Meyer) which is to say that the way people understand communication and make decisions is often a major reason why the business will not succeed in the new location

• Regulatory differentials between domestic and foreign markets (expect the approach of the regulator in your new country to be vastly different from your home country)

• Download a copy of my book ‘Expatland’ from our Expatland website 

Setting Up Business

Planning your overseas expansion generally requires you working with your accountants in both countries for between six and twelve months before you head overseas.

One of the key things to understand is that if a subsidiary or a branch pays tax overseas there is some form of tax credit when profits are remitted to the parent company.

Sometimes the best country to pay tax in is where the majority of shareholders live. 

This is so that shareholders might be able to get a credit for tax paid by the company.

Foreign tax paid at the company level is generally not something that shareholders in another country get a tax credit for.

You need to spend some time thinking about the best form of business structure also. 

In my experience, while the main forms of business entities can vary from country to country, those countries with English common law regimes, generally have similar types of structures.

Many countries have structures that provide limited liability to owners but are treated as ‘flow-through’ vehicles for tax purposes, so only the owners are taxed. A classic example is a US LLC (limited liability company).

Other Tax Issues To Consider

Your focus should be on the key issues to consider on departure such as:

Issue 1: How does the foreign country tax system work?

In a number of countries, the US being a prime example, there can often be three levels of tax. For example, in New York, there is federal tax, state tax and city tax to contend with. In other countries like Hong Kong, foreign income is exempt from tax.

Issue 2: Transfer pricing issues

What transfer-pricing issues will you have to deal with. Having prices above or below market value for transactions between related companies is a major tax risk in the present global environment.

As an example, recently a prospective client in the global travel business told us that they had a ‘back office’ for their IT department in San Francisco. 

They then told us that their previous accountant had told them they did not have to worry about filing a US tax return – because the branch was not charging any expenses back to Australia and they were just covering their direct costs!

Great news, they thought, until we had to tell them that it was totally incorrect.

Upon a review of the facts of the case, it actually turned out that they had a ‘permanent establishment’ in the US. This gave them a US tax filing obligation.

The previous accountant also completely missed that transfer pricing rules demand that a market price be charged by the San Francisco office to the head office for the services being provided to head office.

Our client had no idea about these issues.

This is one of the challenges we regularly face when dealing with clients coming to us from domestic-only focused firms.

Firms that focus only on single country tax systems with little or no expertise in international tax, nonetheless, often seek to advise clients going overseas. 

Rather than admitting ‘they don’t know what they don’t know’ and looking to work with a specialist firm to get some outside help, they try to do it in-house.

Usually, this leads to expensive mistakes.

Issue 3: Using debt or equity to fund the foreign expansion

In using capital to start your foreign business, one of the key issues to consider is how to get money into your foreign business operation and then how to get profits out.

Many people are tempted to take the view that lending money into the foreign business is easier because it can be ‘repaid’ with little or no complexity. 

The general thinking being that money that goes in as a loan can come out as a loan, right? 

Well, it is not always that simple.

Many foreign countries have rules that require the payment of interest on inter-company loans.

Issue 4: How to send profits to the home country

Having considered how to fund your foreign business and make it profitable, the next question to think about is how profits can be remitted to your home country.

There are a number of techniques that can be used to send profits home. These include dividends, interest, or royalty payments. 

Other techniques include management fees and head office recharge. 

One of the issues to consider here, includes the likely imposition of a foreign withholding tax on payments out of the country. 

Planning profit repatriation is a key issue to consider.

Issue 5: Review your intercompany pricing model don’t assume

Many businesses – especially large American businesses adopt a ‘one size fits all’ approach.

Rather than take a country-by-country approach to looking at how to price transactions between group companies, larger businesses just assume they can apply a Group Policy across the board.

That is not acceptable in most advanced tax regimes.

Consider the real-life case study that I dealt with recently.

CabinetMaker Inc (not their real name)

‘We don’t do things that way’ was what the US-based CFO told me when I suggested they get an arm’s-length review of their ‘global transfer pricing model’ by an Australian transfer pricing specialist.

‘CabinetMaker Inc’, was supplying IT products and services from the US to Australia.

They decided that the Australian company would, ‘just like all other overseas subsidiaries’, receive an 8 per cent payment from the US office for the services it provided the US office from Australia.

A couple of months before, the CFO had called me following a referral from a US client.

Given we have a US–Australia tax specialisation, they called us to see if we would prepare their Australian income tax return for their sole Australian company.

The company in Australia had a ‘representative office’ function.

Its purpose was to source leads in the Australian market and then refer those leads to the US office to complete the sales process and the forming of the business relationship.

The US company was being very careful that what it did in Australia did not give it a ‘taxable presence’.

All reasonably standard stuff they thought.

When I asked how they arrived at the 8 per cent, they mentioned that they had a pricing model in Chicago.

They said that the ‘Chicago model’ was used globally to justify how 8 per cent was ‘payment enough’ for sourcing sales in Australia.

I persisted with a few questions, as follows:

So, with three questions, I could see that CabinetMaker Inc. was relying on a home country pricing model developed with no understanding of the Australian market.

A fatal mistake to make when you are a new company expanding abroad.

I attempted to acquaint them with the realities of doing business away from the US.

They were in another country now and they had to adapt to the differences in the market.

Needless to say, when the CFO hit me with the comment, ‘I will take it to the Board of Directors and come back to you’, I heard nothing more from them.

The aftermath to the above is that recently a story broke in the Australian media that the company, a subsidiary of a US tech company, was being audited by the Australian Taxation Office.

The media reports noted that their transfer pricing practices were suspect.

The global giant failed to adapt its pricing model between group companies and did not want to listen to advice.

They did not want to unlearn what they thought they knew.

They persisted in trying to apply an overseas model without adapting to their new surroundings. 

As a result, their business practices were found wanting in Australia and abroad.

The above mistake is reasonably common; that is, companies expanding abroad believe they can bring their own way of doing business with them. 

Nine times out of ten that is incorrect.

When companies expand to a new country, it pays to go back to first principles, get proper advice and assume nothing. 

Adapting to your new surroundings is essential.

We understand that business owners and entrepreneurs require specific advice from experienced professional advisers in multiple jurisdictions and that a migration tax plan has to be prepared for a company – just as it does for an individual.

Examples Of Unintended Arrival

Example 1 

A foreign company establishes a branch in the arrival country.

This occurs when senior directors of a foreign company remain directors of the foreign company and they change their personal tax residence.

As is commonly the case, the directors continue to ‘run the foreign company’ from their new location. They often do this without realising that they have unwittingly brought the foreign company into the purview of their arrival country.

This triggers tax filing and other reporting obligations.

Example 2

Shareholders leave their home country to live abroad, and while they may not be directors of the foreign company, they remain nonetheless individual shareholders.

In this instance, many tax regimes will demand that tax be paid on the earnings of the foreign company as the profit belongs to the shareholders now living in their new country.

This tax exposure would arise by the ‘controlled foreign corporation’ legislation that many countries have.

If one or both of these unintended actions has occurred, then there is a need to value the assets of the company and understand the value of the shares in any foreign company.

Often, the ‘starting cost base’ of the company assets is relevant because that is the basis upon which future capital gains are calculated. 

Most clients miss this step unless properly advised.

Companies that ‘arrive’ on an unintentional basis now have two tax returns to do one in their home country and one in their arrival country!

Planned Arrivals

When we have an opportunity to work with clients ahead of their departure, we can plan how best to ‘move the company’.

Taking your business abroad is an exciting time for most people. Full of challenges and new opportunities, it is often a make-or-break time for a corporate group.

My view is that if you undertake a proper tax planning exercise covering some or all of the above issues before you leave, then the thrill of setting up your business overseas will not be overshadowed by unintended tax and business issues.

Goods and Services Tax (GST) is a broad tax levied on the consumption of most goods and services that are sold in Singapore. Many countries have a similar, or even identical, tax as Singapore’s GST, although it may be known as a Value-Added Tax (VAT) in some countries. The Inland Revenue Authority of Singapore (IRAS) governs the application of GST and requires all GST registered businesses to file GST returns with them.

GST is only levied on goods and services that are sold within Singapore. This includes imported goods. However, exported supplies and services provided overseas do not attract GST.

The Rate of GST

The current GST rate (in 2023) is 8%. This is being increased to 9% from January 2024.

In simple terms this means if the cost of a product is $100 then the consumer would actually pay $108 including GST.

What Goods and Services GST Applies to

GST applies to most goods and services sold in Singapore, however there are some exemptions.

The exemptions include most financial services, the sale and lease of residential property, and the importation and local supply of investment-orientated precious metals.

How GST is Charged and Remitted

The business selling goods or services is responsible for both the collection of GST from customers and remittance of the GST to IRAS.

GST registered businesses are required to track their sales and the amount of GST they collect through their regular record keeping. This information is then reported to IRAS through the lodgement of a GST return. GST returns are lodged with IRAS on either a monthly or quarterly basis.

The GST that a business collects is known as output tax.

Conversely, the GST that a business pays in the course of making business purchases is known as input tax.

Lodgement of a GST Return

When a GST return is lodged, the business reports the total output tax collected and claims a credit for all the input tax that they have paid. The net amount of GST that the business pays is the total amount of GST that the business must remit to IRAS.

In the event that the business pays more input tax than they collect in output taxes, IRAS will owe the business a refund.

Businesses who fail to lodge their GST return on time are subject to a 5% late lodgement penalty. IRAS will also issue a demand notice for the outstanding payment. If the company fails to pay after 60 days from the date of their demand notice, future penalties of 2% each month may be applied. The maximum penalty for late GST payments is capped at 55%.

Evasion of tax payments can result in fines and imprisonment.

Who Needs to Register for GST

All businesses with an annual turnover in excess of SG$1million are required to register for GST. Any business with a lower turnover can voluntarily register.

This turnover threshold only applies to businesses who are not GST exempt. Exempt businesses are businesses that deal with goods or services that are exempt from GST. This includes businesses that provide financial services, sell or lease residential property, or import and supply investment-orientated precious metals. To be given a registration exemption from IRAS, at least 90% of the company’s total revenue must be GST exempt and the net balance of GST collected must be negative (otherwise resulting in a refund).

Once a business is registered for GST they are required to remain registered for a minimum of two years.

If a company decides to voluntarily register for GST the company director(s) must complete e-Learning courses in “Registering for GST” and “Overview of GST”. They are exempt from needing to complete these courses if they have already completed these courses within the past two years, or they have experience managing another GST registered business, or have their GST returns prepared by an individual who is an Accredited Tax Adviser (ATA) or Accredited Tax Practitioner (ATP).

IRAS can also impose additional conditions for GST registration and compliance. When a company fails to meet these requirements, IRAS may cancel the company’s GST registration.

How to Register for GST

A company can register for GST online through their myTax Portal or they can post a paper application to IRAS. Alternatively, they can engage a designated filing agent to submit the application on their behalf.

The company cannot charge GST until they have received approval from IRAS.

Once registration is approved, IRAS will send a letter that includes the company’s GST registration number and the effective date of GST registration.

The effective date of GST registration is the date that the business must commence charging and collecting GST from.

What Happens When You Fail to Register for GST on Time

To understand what happens if you fail to register for GST on time we present this real life case study. Names and specific identification have been hidden or changed for anonymity.

The case:

An Australian company incorporated a company in Singapore to act as the local contracting party for services to be provided in Singapore.

As an Australian company, they were familiar with the Australian approach to GST registration. This differs from the Singapore requirements in that, in Australia, GST registration can be backdated and it can be made on a voluntary basis without additional requirements.

The threshold for GST registration in Australia is AU$75,000 and only applies to GST taxable goods and services. In both countries GST registration is considered voluntary registration when the annual turnover is below the relevant threshold.

Unlike Australian registration, voluntary registration in Singapore needs to be approved. In some cases, approval for voluntary registration needs to be accompanied by a bank guarantee for future payments of GST to IRAS. 

The Singapore company, in our case, proceeded to provide services with GST included in the price. However, they did this without formally registering for GST in Singapore.

In Singapore this is regarded as a severe contravention of the GST laws. This is because GST registration must be approved and the commencement date confirmed, prior to the business charging GST.

The company attempted to backdate the registration, which is not permitted in Singapore.

IRAS consequently imposed fines and potential action against the directors.

Summary of GST Registration Requirements in Singapore

In summary, it is important to be aware of the requirement to register for GST.

If you intend to register on a voluntary basis, understand that this is not automatic, and you need to meet the required conditions and be approved for registration. Otherwise, you must keep an eye on your quarterly turnover and register as soon as your projected turnover will hit the required turnover threshold.

GST applies to most goods and services sold in Singapore, with exemptions for financial services, residential property and importing of investment-oriented precious metals.

Once you receive your registration letter from IRAS, you can commence charging GST from the date indicated as your registration date.

Failure to follow the requirements for GST registration can result in fines and other penalties for all Directors of the Singapore company.