The Main Factors of the Singaporean Tax System - Assignment Example

Chapter 2 What and who are non-resident individual and company The expression ‘Resident in Singapore’ and in line with tax as per Income Tax Act Cap 134, is defined in Section 2. A resident individual is the person who in the year before the assessment year was residing in Singapore with the exception to temporary absence in the country that maybe termed reasonable as well as not inconsistent in regards with the claim made by such a person to have been resident in the country. It includes persons who are present physically or the ones exercising employment (with the exception of a company’s director) in the country for at least 183 days in the year before the assessment year. A resident company refers to that company which is controlled or managed with regards to business operations in this nation of Singapore. Therefore, any individual who does not lie in the definition given or a company in that case is definitely a non-resident. (statutes.agc.gov.sg, 2007) The main difference between resident and non-resident individuals and companies comes in when tax is subjected to them. This is as is explained. Individuals who are non-resident are liable to pay tax upon the entire income that is sourced from Singapore but for situations where the income in question is exempted from taxation. Exempted income may include interest income that is gained from amounts deposited in a Singapore approved bank as stipulated in Section 13(1)(t). Any income derived from foreign by a non-resident individual in Singapore is not subject to tax as per Section 13(7A)(a). Non-resident individuals were charged tax on all income derived from Singapore at 20% in year 2008. (Tan, 2009 p348) The taxation basis for resident and non-resident companies alike is the same from a generic point of view. The only difference is that some benefits are enjoyable by resident companies only like the benefits that arise through Double Taxation Agreements by Singapore and other nations. The partial exemptions of tax like lower effective rates of tax that are usually capped at the rate of 8.5% upon the first SOK of the profits that are subject to tax per annum of tax assessment. Tax exempt dividends as well as Goods and Services Tax are other tax exempt incomes that Singaporean Companies enjoy unlike non-resident companies. (urbanaohio.org, 2009) Types of payment subjects to and exempted from withholding tax Withholding tax is a kind of tax where tax is deducted at source and it only applies to specific income types to both non-resident companies and individuals. The income in question should have been derived from Singapore and it must have been by non-resident persons either for work done or services provided in this nation. In the transaction case where a Singapore individual or company pays services to a non-resident, a portion of that payment has to be withheld and later handed over to IRAS- Inland Revenue Authority of Singapore. This withheld amount is known as withholding tax. This tax type does not, however, apply in any way to resident companies or individuals. Specific payment types are subject to withholding tax for companies that are non-resident. These are; firstly, fee, commission and interest with regards to any indebtedness or loan. Here where a resident company/individual is liable to pay interest on unpaid trade accounts or on credit terms to a non-resident person who has supplied such or even a loan, here withholding tax is applicable. These kinds of payment attract withholding tax at 15% rate. Secondly, payments like royalty for the right or actual use of any type of movable property are subject to withholding tax. This is also applicable for the exploitation of scientific, commercial, industrial or technical knowledge for operations of business. The rate of withholding tax is 10%. Thirdly, management fee is another type of income to non-resident companies subject to withholding tax. This is regardless of whether the payments to a foreign company are affected by such factors as DTA. The rate of withholding tax applicable under such is the corporate rate of tax that is prevailing. Fourthly, rent that is paid to a non-resident company, which leases movable type of property in Singapore. Such is also subject to withholding tax at the rate of 15%. Fifth, services rendered by a non-resident company like technical support, equipment installation, training among others. These call for taxation at source by a resident company and at the corporate rate of tax that is prevailing. Non-resident professionals have income derived from Singapore that is also liable to withholding tax like fee on services, consultancy or any other work that is done at a certain fee in the territory of Singapore. Such individuals that are considered non-resident are public entertainers, queen’s counsels, consultants, coaches, trainers, foreign speakers in workshops or seminars and other foreign professionals. The rate of withholding tax applicable to individuals is a flat rate of 15% on the gross amount of income with the exception of royalty income, which has a rate of 20%, non-resident public entertainers whose income is subject to 10% withholding tax and payments to directors of non-resident companies at the rate of 20%. Some income to non-residents earned from Singapore is not liable to withholding tax. Such income is with the inclusion of; some non-resident banks in Singapore which have been granted waiver from complying with sections 45A and/or section 45 of Income Tax Act Cap 134 by IRAS. Some other categories are, payments for satellite capacity, usage of or the right granted to use digitized goods and information, specific software, and international sub-marine cable capacity usage. Such exemption does not, however, apply to such payment that is deemed income earned in trade done by a person who is non-resident in Singapore or with an effective connection to a permanent establishment in this nation. (iras.gov.sg, 2011) Concept of Permanent Establishment The expression ‘permanent establishment’ is defined under the Income Tax Act Cap 134 of Singapore and it refers to a fixed place where operations of business are either wholly or partly done with the inclusion of: an office, a branch, a management place, a warehouse, a factory, a workshop, a plantation or farm, an oil well, mine, quarry or any given place of natural resources extraction, a work site, building or construction, assembly project or installation. Also, without discriminating the aforementioned, any person shall be taken to be having a permanent establishment if- that person has a certain other person who acts on their behalf like having and exercises authority in contracts, maintains goods inventory or any other merchandise for the delivery of the first person, or habitually makes orders for the enterprises belonging to the first person, and also if that person does supervisory activities in a building’s connection or work site’s or even an installation, assembly project or a construction. (agc.gov.sg, 2011) Singapore as a nation uses the OECD model of tax convention, where, from a general point of view a non-resident company would be subject to tax in the borders of Singapore if it happens to have a permanent establishment within its boundaries. The permanent establishment, for it to be liable for tax, must have income accrued from Singapore or in the same line, some income from foreign but received in the nation of Singapore. (thaichamber.org, 20) Deemed source of income Under the tax law of Singapore, there are provisions that deem specified income type to have been derived from a Singapore source. Tax on this deemed source of income is usually collected by way of withholding tax. Taxation law in Singapore provides that under these particular situations, the income mentioned below is deemed to have been derived from Singapore by a non-resident person; royalty, payment for the usage or right of usage, commission, interest, fees and similar payments. Royalty category includes other lump sum kind of payments for the payment of the usage or right of usage of any movable property. Payment for the usage of or the right of usage of technical, industrial, scientific or any commercial knowledge also includes usage of information, rendering a service and assistance in connection with the application of the aforementioned in this paragraph. The interest, fees, commission and other types of payments in this category are for the purpose of loans or any other type of indebtedness or even an arrangement, guarantee, management or services in relation to indebtedness or loan. There is also withholding tax on other deemed sources of income like payment for the assistance and/or management of any type of business, trade or profession and rent or any other kinds of payments that are reached in arrangement or agreement for usage of movable type of property. Apart from the deemed sources of income, such payments made for particular services that are performed beyond the boundaries of Singapore are not taken by the taxation law of Singapore to be liable to the withholding tax of Singapore. These payment types were contained in the press statement that was issued by the Ministry of Finance in year 1977. These payments that were excluded are in contained in the current Income Tax Act Cap 134. Also in addition to the abovementioned, there are specific changes that were introduced in the tax law of Singapore and in line with deemed sources of income. Guarantee services; under this the Income Tax Act provides that any payment for a guarantee in relation to any indebtedness or loan paid to non-resident persons will not be liable to any withholding tax in the case where the guarantor is specified to have been non-resident. Normally, it is very difficult to determine with certainty the origin of the guarantee fee. The predicament is curbed by the Act in the scenarios where the guarantee fee is not liable to withholding tax and as long as the guarantor is specified to have been a person who is not resident. Specified non-resident person; for certain fees to be deemed not to be liable to withholding tax as per the amendments put forward, such non-resident recipient has to possess these factors- not operating any business operations in Singapore in association with others or by himself, not be a company incorporated or an individual in Singapore. Management services; this is one of the most outstanding amendments which states that management services do not attract any withholding tax in the nation of Singapore. Before this amendment, the only income that was not liable to withholding tax in relation to management services was the pure cost reimbursement that would be incurred beyond the boundaries of Singapore by a person who is non-resident in relation to a company that was not liable to withholding tax in Singapore. In reality a foreign related company is usually needed to charge a fee of management with a mark-up at arm’s length so as to meet requirements of transfer pricing of the domestic country, though. In this last scenario, in situations where there was no relief treaty, withholding tax would come about in Singapore. (ey.com, 2010) Withholding tax versus DTA As international trade develops as well as multinational corporations escalating in number, the double taxation issues become essential. As persons look beyond the borders of Singapore in regard to business opportunities, DTA- Double Taxation Treatment plays a very vital role. The DTA treaties allow persons to have access to relief that is related to double taxation. These reliefs arise either through tax exemption, tax credit, and decreased rates of tax. The decreased rates as well as exemptions differ among nations and particular income items. Double taxation may come about where two or more nations levy taxes upon the same taxpayer in regards to the same income or capital. Therefore, the same income is taxed more than once- in the nation of source as well as the residence nation. To relieve a taxpayer facing such double taxation, thus, the nations provide several kinds of reliefs under local tax laws or under tax treaties with other nations. A DTA is in this line taken to mean a bilateral type of agreement by two nations so as to avoid double taxing a taxpayer that arises where domestic tax laws are applied. Only residents of Singapore enjoy DTA as well as the residents of the country with which Singapore enters a treaty. Examples of benefits arising from such agreements include the allowing of claiming relief of taxes that have been paid overseas, prevention of international evasion of tax through the exchange of information by authorities, defining of taxing rights of each and every nation and the provision of certainty when it comes to how and when tax is to be levied in a nation where the activity producing the income has been done or payment has been made. (guidemesingapore.com, 2011) Withholding tax, on the other hand, is a type of tax that is levied on non-residents. As Loong, puts it, if a particular income is deemed to have been derived from the nation of Singapore by a non-resident and also due to the fact that non-residents are beyond the jurisdiction of Singapore in tax law, the only efficient way of ensuring collection of such tax is through a system of withholding tax. The responsibility of withholding tax is placed on the resident with whom such a non-resident entered a contract. (Loong, 2009 p351) Therefore, as seen in the findings these two taxation approaches differ. The main factor that leads to their varying in application is that one (the former) is applicable on residents while the other (the latter) is only applicable on non-residents. Treaty shopping As per 2009 there were 60 treaties of income tax that were comprehensive and in force in the nation of Singapore. Besides that, there were also 7 treaties that were limited. Those limited treaties were concerned with specific income categories only, like aircraft and shipping income in the US- Singapore treaty. There were also other four treaties that were awaiting ratification as per 2009 as well. Singapore also carries out revisions of the existing treaties whenever it is viable to do such. Subsequent to Singapore’s endorsement of the standard of OECD for the exchange of information in March of year 2009, Singapore set out in negotiating with the partners to make revisions so as to put into consideration the standard of OECD. There was a protocol to rectify the Belgium- Singapore treaty that was signed in July 2009 in connection to the rectification of treaties. There would also be amendments to put into account the standards of OECD in the Income Tax Act Cap 134 as well as other statutes applicable. (iclg.co.uk, 2010) While a DTA is done by two countries to ensure that taxations on gains arising from the two is not subjected to tax twice, most are the cases where such maybe misused to evade taxation. The utilization of DTA to illegally evade taxes is what is referred to as ‘treaty shopping’ and more specifically it is a trend witnessed by residents of a third nation where they take advantage of a treaty that has been done between two nations. An example of a tax treaty shopping is where many companies of other nations usually route investments belonging to them into the nation of India through Cyprus or Mauritius so as to take advantage of the fact that there is a tax treaty that the mentioned countries have signed with New Delhi. In both of these tax treaties (that is, India- Cyprus and India- Mauritius) they make a provision that any capital gains that may arise in the territory of India from the disposal of securities can only face taxation in Cyprus or Mauritius. Therefore, this would translate to the fact that no tax on capital gains upon investments in securities that are routed through Cyprus or Mauritius since they do not impose tax upon gains on capital. Therefore, in line with putting treaty shopping problem at bay, there was a code that was come up with in India by persons like Mr. Chidambaram. As this code was being made, at the conference of Economic Editors that happened in November of 2007 Mr. Chidambaram said that this draft code was to be made publicly applicable soon. Alongside this code, there were certain options like GAAR- General Anti Avoidance Rule, which has provisions that allow the examination of the transactions’ real nature as well as a limitation of the clause of benefits that were being examined actively. Numerous nations like Canada and Singapore usually apply GAAR in their local taxation laws so as to ensure that the benefits of the treaty are only enjoyed by the genuine investors. Singapore as a nation only lets the examination of the real transaction nature. Before this, an internal panel in the department of income tax that examined this issue of the abuse of the treaty and the methods to prevent the abuse had recommended GAAR as well as a special provision for the nature of transaction examination. (financialservicesbiz.com, 2011) Chapter 3: Case Studies Background In Singapore, Ernest and Young as a company set out its operations in year 1889 and it all started with George Derrick setting up a company by the name Derrick and Company in this nation. Subsequent to this company’s formation were a series of companies which later formed two major accounting firms which started carrying out business as one company after their becoming blue chips in Singapore in year 1989. There was the first merger of 1974 which formed Turquand, Young and company and later Ernst and Whitney in 1986 and the eventual Ernst and Young Company in 1989. Fundamentals: Residence and Income In this nation of Singapore, there are various payments to foreigners or non-residents in that call for the payment of withholding taxes. The main legal argument and in line with tax is that non-residents cannot be put under the jurisdiction of Singapore when it comes to charging tax. Therefore, non-residents that do business with a resident person have to pay tax. For them to pay tax on the income that is derived from or accrued in Singapore, then, the residents withhold the amounts of the non-residents’ income that is supposed to be remitted to the authorities and remit the same to the IRAS. One of these categories of payments is interest, fees, commissions or any type of payment for being indebted or having a loan from another person. For the effective operations of the withholding tax system it is of essence that the withholding tax payer ensures total compliance with tax liabilities and at the same time remits those withheld taxes to the relevant authorities. Lack of compliance may lead to penalties. Penalties may go up to 20% of the involved amounts of withholding tax if the set timeframe is not adhered to. It is even a bigger offence if a taxpayer deducted the appropriate withholding tax but does not pay the same to IRAS. The latter could lead to a penalty of three-fold the magnitude of the tax in question and a fine of a maximum of Singaporean Dollars 10,000 or a three-year imprisonment or both. Hustles of Claiming Back Taxes Paid While looking at the withholding tax system as a whole and considering the lack of understanding on the part of the taxpayer of the tax system and how it operates leaves taxpayers with a huge burden to carry. The resultant end is high cost outlays to the business as well as a discouragement to carry out operations of business in Singapore. Recommendations To increase the morale of businesses liable to pay withholding tax to the IRAS. They may help the tax payer reduce the scope of payments and further ease their burden of hardships in carrying out business in Singapore. The general factor to consider is reducing the overall rates of withholding tax on the income to non-residents to make Singapore more attractive to non-residents doing business in Singapore. There is the continuity of applying the high rate of withholding tax on interest which stands at 15% and this should be brought down to for example a manageable rate like that of royalties (10%). (ey.com, 2010) A note on Treaties DTA treaties by Singapore may include that of Fiji- Singapore in 2005 (Holmes, 2007 p354), China- Singapore in year 2007, (CCH Hong Kong Limited, 2008 p175) and Australia- Singapore in 2006 (CCH Australia Limited, 2009 p221) Currently, there is no withholding tax with regards to dividends in Singapore. Therefore, there being treaties that specify withholding rate of tax upon dividends does not put into consideration non-DTA countries. Thus, countries without DTA with Singapore do not have any rate of withholding tax to pay on dividends obtained from Singapore. (iras.gov, 2011) Chapter 4: Conclusion While concluding it is of ample importance to note the main factors of the Singaporean tax system and this is to be done in the context of Withholding tax and Double Taxation Agreements. Firstly, there is the issue of residence and this is looked at in two fronts. That is, in the context of individuals and in the context of companies. There is no need to go back to these definitions, but it is vital to note that the issue of residence and non-residence is the main factor that shows the points of demarcation of Double Taxation and Withholding tax. The major need for differentiating those two definitions is to determine the taxes that are imposed on them. Also, it is good to note that a permanent establishment is taken as a resident company when it comes to taxation. In the line of withholding tax, which is one of the major taxation types that the study is inclined to, it is essential to apply the definitions aforementioned. The reason for this is that, withholding tax is said to apply to non-resident companies and individuals as seen earlier in the study. Deemed source of income applies to the income that is subject to withholding tax as the study puts. Double Taxation Agreements, which play a very important role in international relations and especially business relations, is also clearly put in the study to apply to residents only. It allows resident persons to have access to the relief associated with double taxation and this is where two or more nations levy taxes on the same income from a taxpayer and therefore, the need for the relief. Therefore, the main concept before embarking on the study has been seen to be that of residency and non-residency. Reference List: CCH Australia Limited. (2009). Australian Master Tax Guide 2009 - 44th edition. CCH Australia Limited. p221. CCH Hong Kong Limited. (2008). Tax compliance in Greater China: China, Hong Kong and Taiwan. Edition 2. CCH Hong Kong Limited. p175. ey.com. (2010). What is new in the deemed sources of income? Retrieved 11 June 2011 http://www.ey.com/SG/en/Services/Tax/Tax-update-September-2010---What-is-new- in-the-deemed-sources-of-income ey.com. (2010). You and the Taxman: Insight on Tax Issues that Matter. Retrieved 13 June 2011 http://www.ey.com/Publication/vwLUAssets/YouAndTheTaxman_2010MayJun/$FILE/ YouAndTheTaxman_2010MayJun.pdf financialservicesbiz.com. (2011). New tax code to stop treaty shopping. Retrieved 11 June 2011 http://www.financialservicesbiz.com/Appraisal-and-Valuation/New-tax-code-to- stop-treaty-shopping.html guidemesingapore.com. (2011). Singapore Double Tax Treaties Guide. Retrieved 11 June 2011 http://www.guidemesingapore.com/taxation/reports/singapore-dta-guide guidemesingapore.com. (2011). Singapore Withholding Tax Guide. Retrieved 11 June 2011 http://www.guidemesingapore.com/taxation/reports/singapore-withholding-tax-guide Holmes, Kevin. (2007). International tax policy and double tax treaties: an introduction to principles and application. IBFD. p354. iclg.co.uk. (2010). The International Comparative Legal Guide to: Corporate Tax 2010. Retrieved 11 June 2011 http://www.iclg.co.uk/khadmin/Publications/pdf/3223.pdf iras.gov.sg. (2011). Withholding tax (for payment to non-residents or non-resident companies). Retrieved 11 June 2011 http://iras.gov.sg/irasHome/page04_ektid598.aspx Loong, Sum Yee. Singapore Tax Workbook 2009/10. (12th Edition). CCH Asia Pte Ltd. p351. statutes.agc.gov.sg. (2007). Interpretation. Retrieved 11 June 2011 http://statutes.agc.gov.sg/non_version/cgi-bin/cgi_retrieve.pl?actno=REVED-134 Tan, Angela. (2010). Singapore Master Tax Guide Handbook 2009/10 (28th Edition). CCH Asia Pte Limited. p348. thaichamber.org. (2010). Taxation in Singapore. Retrieved 11 June 2011 http://webcache.googleusercontent.com/search?q=cache:ZJmRWRh0tBAJ:www.thaich amber.org/userfiles/file/SINGAPORE%2520TAX%2520SYSTEM.ppt+permanent+esta blishment+in+singapore+taxation&hl=en&gl=ke urbanaohio.org. (2009). Taxation of Resident and Non Resident Companies in Singapore. Retrieved 11 June 2011 http://www.urbanaohio.org/30-taxation-of-resident-and-non- resident-companies-in-singapore.html Read More