Tax Exemptions on Foreign-Sourced Income
This article aims to teach you about the tax treatment of income sourced from abroad in Singapore. You can know the scope and limitations of the scheme that provides exemptions to foreign sourced income under the Income Tax Act. These exemptions are available through sections 13 (7A-11) of the scheme called Foreign Sourced Income Exemption (FSIE).
The tax system in Singapore is progressive in nature. It is territorial in nature in the sense that incomes of people are taxed on the basis of whether they are earned in the country or abroad. With increasing globalization taking place in the world, Singapore authorities have made provisions to provide tax exemptions to income sourced from foreign countries. These provisions that have been made effective since 2003 have made Singapore a preferred destination for businessmen and turned it into a major commercial hub. Singapore authorities have realized that it is impossible to prevent people from remitting their incomes earned abroad into the country and this is why they have provided tax exemptions to such incomes. This has led to Singapore becoming more attractive in the eyes of businessmen, particularly the industry that looks after wealth management.
You can learn how the provisions under section 13 of the FISE affect the tax treatment of income sourced from abroad in Singapore.
Features and scope of FSIE
This scheme is applicable to all companies and individuals who are resident and receive income that is earned from abroad. It was made applicable to individuals receiving foreign sourced income accruing because of their partnerships in Singapore with effect from 1st January 2004. Tax authorities pay attention to many facts to check whether the individual or the company qualifies for these provisions or not. These include the nature of activities resorted for foreign income and the proportion of activities undertaken outside Singapore to earn this income. They also check if the applicant has a permanent establishment out of Singapore or not. There are no restrictions on companies sand individuals who are not residents of Singapore as they are free to bring in all their income earned from sources abroad without fearing any taxation.
Understanding income that is foreign sourced
Any income that accrues to an individual or a company for trade related activities outside Singapore is termed as income sourced from abroad. This act clearly spells out the types of incomes that qualify for tax exemptions under FSIE. The incomes that are specified as foreign sourced in this act are as follows.
A dividend becomes foreign sourced when it is provided by a company that is non Singapore tax resident.
Profits from a foreign branch
If a Singapore company has a office in a foreign country and this branch generates profits, these profits are taken as foreign sourced income for the company.
Service income that is foreign sourced
If a resident of Singapore earns income from his employment in a foreign company through a fixed place of operation, his income is taken as a foreign sourced income.
NB- The mention of fixed place of operation in terms of foreign sourced income implies a physical place like an office or a floor that is used by the taxpayer in the foreign country. The failure to prove that the income earned is from a fixed place of operation in a foreign country makes the individual or the company pay taxes at the same rate as a resident Singaporean even if the income has in reality been earned from a foreign country.
Received in Singapore income that is foreign sourced
The income is considered as having been received in Singapore it has been sent into Singapore from abroad. Money that is sent from a foreign country into Singapore to settle a debt of a business in Singapore is taken as foreign sourced income received in Singapore. If someone purchases immovable property from income earned from abroad, the money is treated as having been received in Singapore.
NB-The dividends distributed by a foreign company are first deposited in a separate account called custodian account before they are released to individuals or companies in Singapore. Such an income has to be given within one year from the date on which it is deposited in the custodian account and the interest it earns from the bank during this time is added to the income for the consideration under FSIE.
Features that make foreign sourced income qualify for FSIE
The criteria for the income to be considered for relief under FSIE has been laid down in section 13(9) in the ITA. It is as follows.
- The income that has been received in Singapore has already been taxed in a foreign country. This is referred to as subject to tax.
- The rate of tax in the foreign country has been at least 15%.
- The tax authorities are satisfied that such a relief for the individual or the company would be beneficial for the entity.
Features of the condition called ‘Subject to Tax’
There are several tax reliefs under the condition called subject to tax. There are many countries that provide tax relief to investors who invest a huge amount of money in their country to carry out business activities. If the incomes from such business operations are not taxed in the foreign country, they are fit to be considered as subject to tax in Singapore.
Not only the underlying tax but also the dividend tax is considered when calculating tax in cases where subject to tax condition is fulfilled. The underlying tax is the tax that is levied on the income from which a company pays dividends while dividend tax is levied by the authorities on the dividends themselves. It is up to the individual or the company to prove that the condition subject to tax has been met to seek tax reliefs.
Features of the condition called headline tax
Headline tax is the highest rate of corporate tax that is levied by the foreign country on an income before it arrives in Singapore. To be eligible under FSIE, this rate of income tax must be at least 15%. Headline tax rate may be different from the actual rate of tax charged by the foreign country on the income.
Features of condition for beneficial exemption
Tax exemption is often subject to the satisfaction of the Income Tax Comptroller that it would be beneficial to the recipient. If he is of the view that such a relief is not beneficial to the recipient, the recipient can seek avoidance of double taxation. If the country from which income is being brought into Singapore does not have a double taxation duty, there is a provision in ITA called section 50A.
Requirements that are administrative
All those residents who want tax relief in their income earned abroad have to provide certain documents to get tax exemption. These include the amount and the nature of the income earned abroad, the details of the country, the headline rate of tax in this country, tax already paid in the country, tax relief enjoyed in that country, etc. The declaration that the income has not been taxed in the foreign country is also required to be submitted along with the documents.