What Is Double Taxation, And How To Avoid It In Singapore?

Imagine how enjoyable it would be to pay tax on your income under two different tax regimes? 

Not so pleasant, for sure.

Taxes play a significant role in every business. While it can be a lot easier for those limited to inter and intrastate businesses, companies that gain revenue and income internationally pay a lot more heed in ensuring that their tax outflows do not take a toll on their businesses.

Not only do companies understand the complexities involved and the fear of paying more than you earn, Singapore’s government and many other governments in the world have a similar stance regarding taxes. It has led to the signing of tax treaties or double taxation agreements between countries acting as a reprieve.

This article discusses double taxation agreements in Singapore, how it benefits businesses, and what can you do to avoid incurring double taxation.

What is double taxation?

Double taxation is a term that denotes taxation of the same income twice. Such occurrences can either be economic or juridical. The former, i.e.economic double taxation, refers to a phenomenon whereby the earnings of an entity are taxed twice in the same country.

The latter, juridical, is more common. It refers to paying taxes twice under different tax regimes on the same income, i.e. once in the country where you earn your income and the other time in your home country. These situations lead to businesses shelling out the majority of their earned income.

What is a double taxation agreement (DTA)?

Singapore and several other countries follow a territorial tax system. It means any business earning profits within the country has to pay tax to the Singapore government. 

However, several other countries opt for a worldwide tax system where any entity based in their country will have to pay taxes on its income irrespective of the origin of earning.  

We have often seen international businesses suffering from double taxation conundrums. The income they earn is taxed in the country of origin, and when the same is repatriated back to their home country, tax is again levied on it.

It is the reason behind double taxation agreements’ existence.

A double taxation agreement (DTA) is a tax treaty amongst countries. It prevents tax regimes from charging the same income twice. In addition, it defines the way certain revenues are to be taxed by the source country and the residence country.

Scope of DTA

Here are the ways DTA can help prevent double taxation in Singapore –

• By allowing full taxation rights to one jurisdiction, enabling the other to exempt it.
• By allowing credit in the residence state for the taxes paid in the source state and limiting the rights of the source state for pertaining to taxation.
• By allowing complete tax liberty to the source and residence state and activating full credit for the tax deducted in the source state.  

Nature of DTA

In Singapore, we can find the following types of double taxation agreements –

Comprehensive DTA

Comprehensive DTAs cover all income types available to an entity. It means that if Singapore signs a comprehensive DTA with any country, the assessee will not have to worry about the kind of income they earn from any other country for being eligible for double taxation relief.

Limited DTA

Limited DTAs cover only specific income types. It means that if Singapore signs a limited DTA with any country, the assessee won’t be eligible to claim relief against all incomes generated in the source country.

Non-ratified DTAs

These are double taxation agreements signed by two counties but are pending ratification by their legislative authorities. Even though these do not come into force until signed, the governments can choose them to be retroactive, i.e., active from a backdate.

EOI (Exchange of Information) arrangements

EOI arrangements do not play a role in reducing the tax liability of an assessee but it is an arrangement that includes provisions for exchanging tax information between two countries.

Advantages of DTA

Here is why DTA is a must-have for every country –

• It makes investments in the country more lucrative. For example, when an outsider invests in a country where he can avail of double taxation relief and generates income, they will only have to pay taxes once. Whereas, if the same is missing, they will end up paying twice on the same income.
• DTA ensures that the residents of both countries’ genuine residents can benefit by investing in each other’s country.
• Often the assessee can take the benefit of concessional tax rates.
• It reduces the chances of tax evasion.

Who can benefit from double tax agreements?

In Singapore, its residents, as mentioned in Section 2, are eligible to benefit from double tax agreements.

Here are the people, as mentioned in Section 2 of the Income Tax Act, who can take advantage of double tax agreements –

• Any individual who has been a Singapore resident and has spent 183 days or more in the country in the previous year. It includes anyone unavailable because of temporary absences from the country.
• Any company entity or a body of persons carrying on business in Singapore and the business is controlled and managed in the same country.

Such assessee eligible to benefit from DTA will have to submit a Certificate of Residence to the foreign country.

In addition, any individual from a foreign land can also benefit from it if their country has a tax treaty signed with Singapore. In such cases, they will have to submit a Certificate of Residence from Non-residents to IRAS (Inland Revenue Authority of Singapore) as certified by the tax authority of the treaty country.

How to avoid double taxation?

There can be times when Singapore doesn’t have a DTA signed with another country. In such cases, here is how entities in Singapore can save themselves from double taxation –

By having a unilateral agreement

A unilateral agreement allows the Singapore government to permit all foreign income received in Singapore by local tax residents from countries that haven’t signed DTA with them without levying additional taxes on them.

By creating a pass-through taxation structure

A pass-through taxation structure allows a sole proprietor, a partnership, LLC, or any small organization to get rid of dividends and not pay double taxes on their incomes.

Introducing tax reliefs

If nothing else works, countries can always introduce relevant tax reliefs to ensure that operating in their country is favorable for businesses. As for Singapore, it offers the following reliefs –

Exemption method

Under this method, the taxpayer gets exemption from paying taxes in their resident country. It doesn’t take into account the source of income, and the taxpayer is only eligible to pay tax in the country where tax is generated. Thus, it allows entities to go international without having to worry about unnecessary tax hiccups.

Foreign tax credit (FTC)

Also known as the capital export neutral system, the foreign tax credit (FTC) is available to anyone working in a foreign country or generating investment income from a foreign land. It is a non-refundable tax credit for any tax paid on foreign earnings charged by the source country.

The Singapore government credits the entire tax amount to the account of the assessee, and they can use it to offset their tax liability in Singapore. 

Given that FTC is non-refundable, the assessee cannot carry forward the credit to the next assessment period if the current tax liability in Singapore falls short.  

Also read our article on “Singapore Business Tax: Changes Post COVID-19”

DTAs are proof of globalization

The world will soon become a global village. While this may take time, signing DTAs is a step towards making it a possibility. With taxation becoming more cohesive and free-flowing across borders, it would lead to a reduction in tax evasion. In addition, it would also enable better exchange of information across borders and ensure people do not end up overpaying.

In Singapore, the government has signed DTAs with many other economies to ensure its citizens don’t suffer unnecessarily and bear high taxation outflow for no fault of theirs. Therefore, it is especially beneficial for MNCs looking to expand their operations in Singapore.

Presently, Singapore has DTA or similar agreements with over 100 countries (with some pending ratification), which ensures any company based in Singapore is unlikely to suffer from double taxation.