November 2008:

Foreign sourced income tax exemption in Singapore

Singapore has been slowly but surely making it more attractive for multinationals and entrepreneurs to set up their operations, and to use Singapore as a spring board to go regional and global.  Recently, our fund and wealth management industry got a boost when the Government further liberalized the rules on taxation of foreign sourced income.  Countries like Hong Kong and Malaysia already provides exemption from taxation of foreign sourced income.  To remain competitive and become the hub for fund and wealth management services, the Government announced rules to exempt foreign sourced income from tax in Singapore. 

In this paper we explore the evolution in the taxation rules on the changes in the taxation of foreign sourced income in Singapore.

Section 10(1) of the Singapore Income Tax Act (“Act”) provides that income accrued in or derived from Singapore or received in Singapore from outside Singapore is chargeable to tax. 

The second limb of the charging provision of the Act stipulates that income earned outside Singapore, in other words, foreign sourced income if received in Singapore is subject to tax in Singapore.

To clear away any doubts as to what constitutes “received in Singapore” section 10(25) of the Act was introduced in 1995.  Section 10(25) of the Act clarifies that foreign income is received in Singapore, if such income–

To encourage foreign funds to flow into Singapore to promote and boost its fund and wealth management industries as well as sustain its competitiveness as a preferred location to incorporate new business or establish international and regional headquarters, from 2003 onwards the Singapore Government has started liberalizing the taxation rules to exempt foreign sourced income from being subject to any further tax in Singapore. 

Singapore resident individuals

Singapore resident individuals are now free to bring back any of their income from sources outside Singapore without any further Singapore tax on such income.  This treatment takes effect from 1 January 2004 as provided in section 13(7A) of the Act:  

“There shall be exempt from tax any income arising from sources outside Singapore and received in Singapore; and on or after 1 January 2004 by any individual who is resident in Singapore if the Comptroller is satisfied that the tax exemption would be beneficial to the individual, but excludes such income received by him through a partnership in Singapore.”

Singapore tax resident companies

As for Singapore resident companies, since 1 June 2003, foreign sourced dividends, foreign branch profits and foreign sourced service income, received in Singapore is tax exempt provided the following conditions are met as stipulated in section 13(8) of the Act:

1. In the year the income is received in Singapore, the headline (highest) corporate tax rate of the relevant foreign jurisdiction is at least 15%; and
2. The specified foreign income received in Singapore must have been subject to tax in the foreign jurisdiction (either paid or payable).
3. The IRAS is satisfied that the tax exemption would be beneficial to the Singapore company.

Of the three groups of foreign sourced income that qualify for the tax exemption, the foreign sourced service income poses the most challenge to prove that they are indeed foreign sourced income as it has to be substantiated that the service income is earned through a fixed place of operation in a foreign jurisdiction.  This is notwithstanding that such service income could be derived from services rendered outside Singapore; and in accordance with the provisions of a double taxation agreement with the foreign jurisdiction, tax is payable in that foreign jurisdiction.

A fixed place of operation inter alia includes a place of management, an office, or a certain amount of floor space at the disposal of a person, and such a place must also have features of permanence.  If the taxpayer cannot prove that the service income is earned through such a fixed place of operation in the foreign country, then it is unlikely that the service income would be treated as foreign-sourced service income that would qualify for the tax exemption.

The foreign sourced income tax exemption will also not apply if these conditions are not met:

1. the foreign income is not subject to tax in the foreign jurisdiction except where there is a formal tax incentive; and
2. after paying income tax on the foreign income in the foreign jurisdiction where the income was sourced, the foreign income was moved to or invested in another foreign jurisdiction that does not levy any income tax before the income is remitted back to Singapore.

However, the Comptroller of Income Tax has clarified that under certain scenarios, the foreign income remitted into Singapore by companies which are not able to satisfy the above conditions, but are able to satisfy the following qualifying criteria should be exempt from tax in Singapore:

1. The taxpayer must be able to track the source of income.
2. There is no round tripping of locally-sourced income via the overseas investment.
3. The taxpayer in Singapore receiving the specified foreign income cannot be a shell company.

Singapore resident companies which do not meet the conditions for the tax exemption on its foreign sourced income as provided under section 13(8) of the Act, should seek a ruling and confirmation of the tax exempt status from the Comptroller of Income before remitting their foreign sourced income.  Ultimately, the onus is on the taxpayer to prove that such income are foreign sourced and that there is no round tripping of Singapore sourced income and this has to be proved to the satisfaction of the Comptroller.