Double Tax Treaties Guide

If you are doing international business and have paid taxes in a foreign country, Singapore will not double tax your income. Singapore’s tax framework is built on the premise that double taxation hinders international business by unfairly penalizing companies engaged in cross-border trade. To prevent such double taxation, Singapore has entered into Avoidance of Double Tax Agreements (or DTAs) with an extensive network of such countries.

A
voidance of Double Tax Agreements are designed to remove this unfair penalty and encourage cross-border trade. If you are doing business with (or from) Singapore from (or with) a DTA country, you are unlikely to face double taxation. Furthermore, Singapore also provides Unilateral Tax Credits (UTC) to its tax resident entities to avoid double taxation by countries where Singapore does not have a DTA. Therefore, a Singapore resident company is unlikely to ever face double taxation. The following topics are covered:

What is a Double Taxation Agreement (DTA)?

A Double Taxation Agreement (DTA) is an agreement between two countries that seeks to prevent double taxation of taxpayer’s income that may flow between the two countries.

To understand how a DTA works, we first have to learn what can cause double taxation in the first place. Double taxation arises because tax rule can differ across countries:

  1. Some countries (such as Singapore) use a territorial system for taxation while others (such as Australia and USA) use a worldwide basis for taxation. As a result, income flowing from Singapore to Australia can get taxed twice in the absence of a DTA.
  2. Countries can differ in how they determine the “source rules” for income. Some consider the place where income arises to be the “source” while others consider the place where the income is received to be the “source”.
  3. Rules for determining the tax residence of an individual or a company can be different. For illustration, assume that country A considers a person to be a resident of that country if the person resides there for 100 days in a year. If country B also has a similar rule then it is possible for a person to be considered a resident of both countries for a given year if he or she spends at least 100 days in each country. As a result, the person may be subject to double tax on his income for that year by country A and B.

A DTA works by clarifying the rules for these and similar other situations where double taxation can result because tax rules of the two countries are in conflict or are ambiguous. The DTA defines the taxing rights of each country and provides specific provisions for tax credit, relief or exemption so that double taxation does not occur for income arising from economic activities between the two countries. In fact, a DTA can go well beyond this and in some situations (for example when the two treaty countries want to promote trade between them and provide for Tax Sparing Credits) it can result in lower net tax than that imposed by either country; the recently amended DTA between India and Singapore is a good example.

DTA’s also establish the protocols for exchange of tax-related information between the two countries so that they can accurately monitor income flows between them and enforce their tax rules.

Do you qualify for any incentives?

Singapore's government offers many incentives for companies in the form of grants, tax incentives, equity participation, loans, etc. You shouldn't leave this money on the table.

Try MatchME™ Match with incentives you qualify for

Discover Singapore government incentives that are available to your company — matchME™ is free to use, there is no catch. It knows the latest incentive programs and their requirements. It will find the ones that are suitable for your company and then our team can help you apply for them.

Singapore’s Double Tax Treaties (DTAs)

Singapore's extensive network of DTAs (concluded with more then 100 countries) ensures that a company doing business with or from Singapore will not face double taxation.

RESIDENCY REQUIREMENTS

In order to avail the benefits of a Singapore DTA with another country, you must be a resident of Singapore or the other country. A Singapore resident is defined under Section 2 of the Singapore Income Tax Act as:

An individual: A person who, in the year preceding the year of assessment, resides in Singapore except for such temporary absences therefrom as may be reasonable and not inconsistent with a claim by such person to be resident in Singapore, and includes a person who is physically present or who exercises an employment (other than as a director of a company) in Singapore for 183 days or more during the year preceding the year of assessment; and

A company or body of persons: A company or body of persons the control and management of whose business is exercised in Singapore.

Thus, if you or your company fulfills the above residency requirement, you can use the provisions of any Singapore DTA with Singapore as your Resident State. Note that even if a DTA does not exist between Singapore and another country with which you are doing business, you may still be able to avoid double taxation by taking advantage of Singapore’s Unilateral Tax Credits for Singapore residents.

TYPES OF TAX RELIEF

In order to obtain relief under a tax treaty, the taxpayer submits a Certificate of Residence to the non-resident country i.e. the country in which the taxpayer does not reside. If you are a Singapore resident, the proof of your Singapore tax residency should be submitted to the other treaty country. If on the other hand, you are a tax resident of a treaty country, you will submit to the Inland Revenue Authority of Singapore, a completed Certificate of Residence from Non-Residents certified by the tax authority of the treaty country in order to obtain relief from Singapore Income Tax under the DTA.

The relief available under a DTA from a treaty country differs from one DTA to another. In most cases, the Residence State will either give credit to its residents for taxes paid to a non-Resident State or exempt income from taxes if taxes have already been paid to a non-Resident State on that income.

The specific methods of tax relief available in Singapore are the following:

  1. Full Exemption: The income that has been subject to taxation by the non-Resident State is left out altogether from any calculation of taxes by the Resident State. Thus, the relevant income is not included while determining the rate of progressive tax that is to be imposed on the rest of the income.
  2. Exemption With Progression: Under this method, the income in question is not taxed by the Residence State but it is taken into account for the purpose of determining the progressive tax rate that is to be applied on the rest of the income.
  3. Ordinary Credit: Under this method, the Resident State provides a credit equal to its own tax on the income in question. If the tax paid to the other country is higher than the tax in the Resident State, the taxpayer would not receive full relief.
  4. Full Credit: The full amount of tax paid to the other country is available as a credit while calculating the taxes in the Resident State. If the foreign country charges a higher tax rate that the Resident state, the Resident State gives up some of its own tax under this method.
  5. Tax Sparing Credit: In most circumstances, a tax credit is given by the Residence State only if the income has been actually taxed in the other country. Tax sparing credit is a special form of credit whereby Residence State agrees to give a credit of the tax which “would have been paid” in the country of source but was not, i.e., it was “spared”. Tax Sparing Credits are extremely useful and can reduce the effective tax rate to be lower than that charged by either of the two treaty participants.

DTA’S CONCLUDED BY SINGAPORE

Singapore has executed an extensive network of DTA’s or other similar tax agreement with most of the important economies of the world. These can be of the following types (note that in the case of some countries – e.g. United Arab Emirates – Singapore has more than one type of agreement):

  1. Avoidance of Double Tax Agreement (DTA): These agreements are designed to prevent double taxation of income resulting from transactions between the two signatory countries.
  2. Non-Ratified DTA’s: These are DTA’s that have been signed by the two countries but that have not yet been ratified by their respective legislative authorities. Non-Ratified DTA’s do not yet have the force of the law but are likely to made effective retroactively in the future.
  3. Limited Treaties: These agreements are not as extensive as a DTA but address similar issues. Typically, they only cover shipping and/or air transport income.
  4. Exchange of Information Arrangements (EOI Arrangements): EOI Arrangements only include provisions for the exchange of information for tax purposes. Treaty partners may request information under an EOI Arrangements from the Comptroller of Income Tax. Note that a DTA will include EOI Arrangements.

See below the list of Singapore’s tax agreements to find out if your country has a tax agreement with Singapore and to learn the specific provisions of that DTA.