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In the wake of the development and global trade, economies are increasingly growing, leading to increased income flows between countries. If you live in Singapore, you are probably well aware of how much the country has developed economically over the last few years. However, for foreigners who moved here to earn income as a company or individual, there are some things that they should be concerned about if they want to avoid being taxed twice in Singapore.
What is Double Taxation?
Double taxation is the imposition of the same kind of tax by two or more countries on the same taxable income. It's a problem because it means taxpayers are not only paying taxes to their home country but also to another country.
What is a Double Tax Agreement (DTA) in Singapore?
Many countries offer relief through tax treaties and laws between themselves and other countries to prevent this from happening. A DTA's primary purpose is to prevent two countries from taxing the same income twice. It is a contract that comprehensively outlines both countries' taxing authority and how to stop tax avoidance by sharing information. Most importantly of all, it aids taxpayers in claiming relief for taxes paid double overseas.
The Benefit of Double Tax Agreement (DTA):
- Provide certainty regarding when and how to impose taxes in the country.
- Avoid international tax evasion by exchanging information between the tax authorities of the contracting countries.
- Reduce tax burden on foreigners.
Types of DTAs
DTAs concluded by Singapore are categorised as follows:
- Comprehensive DTA; covers all forms of income and permits the sharing of information for tax purposes.
- Limited DTA; covers shipping and air transport generated income.
Who can Apply for DTA?
Section 2 of the Singapore Income Tax Act 1947 states that DTA is exclusively for residents. A resident is;
- An individual means a person who, in the year preceding the year of assessment, resides in Singapore except for such temporary absences 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;
- A company or body of persons means a company or body of persons of control and management whose will exercise business in Singapore.
If the above categories of people generate foreign income from a treaty country, you are qualified to claim double taxation relief. You should submit a Certificate of Residence to a foreign country, proving you are of Singapore tax residency. On the other hand, if you are a tax resident of a treaty country of Singapore, you must submit to the Inland Revenue Authority of Singapore (IRAS) to get a certified Certificate of Residence from Non-Residents by the tax authority of the treaty country.
When foreign income is exempted from domestic tax, it is not subject to double taxation. The exemption rate depends on whether it will entirely give the company or part of the income.
Under Section 13(8) of the Singapore Income Tax Act, clearly outlines tax exemption laws for foreign branches of a Singapore tax resident company. If you meet the following conditions:
- The foreign income has been subject to tax in the foreign jurisdiction from which it is received (known as the "subject to tax" condition). The rate at which the foreign income will be taxed can be different from the headline tax rate;
- The highest Corporate Income Tax rate of the foreign jurisdiction from which the income will receive is at least 15% at the time the foreign income will receive in Singapore; and
- The Controller of Income Tax is satisfied that the tax exemption benefits the Singapore tax resident company.
Everyone is paying taxes regardless of their source of income and the method they use. Many individuals or companies do not understand double taxation and how it can be severe for them. Even if you are an expat who has already left your country to reside in Singapore or a foreigner who pays taxes there, double taxation can still be an issue you need to consider in your finances. In light of this, you are better off understanding how to avoid double taxation so that you will not have to pay further tax in your country of residence.
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