Check 1: Does the income qualify as foreign-sourced income?
Under the Singapore Tax Ordinance, an entity is chargeable to Profits Tax under the following conditions:
1. the entity carries on a trade, profession or business in Singapore;
2. the trade, profession or business derives profits; and
3. the profits are sourced in Singapore; or
4. the profits are sourced overseas but “received” in Singapore (certain exemptions apply as we will see later)
The first two conditions are straightforward; however the concept of locality of the source of income can be complex and contentious. No universal rule can apply to every scenario. Whether profits arise in or are derived from Singapore depends on the nature of the profits and of the transactions which give rise to such profits. Among other things, the following broad principles play an important role when determining the locality of source of income:
1. The guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In other words, the proper approach is to identify the operations which produced the relevant profits and ascertain where those operations took place.
2. Often where the principal place of business is located in Singapore and there is no business presence overseas, profits earned by that business are likely to be treated as sourced in Singapore.
3. One of the factors that determines the locality of profits from trading in goods and commodities is the place where the contracts for purchase and sale are effected. “Effected” does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.
4. When a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such activities are performed in Singapore, the income will be treated as sourced in Singapore.
In considering the relevant facts, the nature and quality of the activities matter more than their quantity. It is the cause and effect of such activities on the profits that is the deciding factor.
Check 2: Was the foreign-sourced income “received” in Singapore?
Assuming certain income qualifies as foreign-sourced income, if such income is not received in Singapore, it’s tax exempt. There has been considerable debate on what constitutes the term foreign-sourced income “received in Singapore”. In order to avoid confusing taxpayers, the Inland Revenue Authority of Singapore (IRAS) has made efforts to clarify the meaning and how it affects a company’s tax liabilities. As per IRAS clarifications, the term foreign-sourced income “received in Singapore” implies the following:
Funds Coming Into Singapore
This is under the IRAS section 10(25)(a) clarification, which says: “any amount from any income derived from outside Singapore which is remitted to, transmitted or brought into Singapore”. It refers to money, dividends or other forms of monetary payment being paid into a Singapore-based bank account belonging to a Singapore-based company from an overseas source. It could also be cash, cheques and other types of money orders being physically brought into Singapore and received by the company. This money that the company receives should be the result of the company’s business activities, such as sales, service fees, consultation etc and contributing to its revenue or profit.
Section 10(25)(b) of the IRAS clarification states: “any amount from any income derived from outside Singapore which is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore”.
If your company owes money in Singapore, whether it is to a supplier, a bank or as a result of legal proceedings, and you use overseas-acquired earnings to pay all or part of it, the money used is considered “income received in Singapore”. The money could have been residing in an overseas-based bank account for a long time. However, once you use it to settle a debt in Singapore, it is counted as “received in Singapore”. The key point here is that the debt is being paid off inside Singapore, not overseas. For this to happen, the money must somehow be brought into Singapore.
Goods and Movable Property
Section 10(25)(c) states: “any amount from any income derived from outside Singapore which is applied to purchase any movable property which is brought into Singapore”. Movable property, also known as movables, refers to items that can be moved from one place to another. As opposed to real estate, land or other types of fixed property which cannot be moved.
For an individual, movable property is his or her personal belongings. For your company, it may refer to goods, raw materials, equipment and other movables that are directly connected to your business. If you use your foreign-sourced funds that have been kept overseas, to buy equipment overseas and then you ship those items into Singapore, then the money used for those purchases becomes “income received in Singapore”.
One concern is how much tax the IRAS can charge for goods that may have depreciated in value. IRAS has clarified that the taxation will be based on how much was originally paid for the movable property and not its book value or net worth at any given date.
IRAS has also issued the following clarifications to address various concerns raised:
• Based in Singapore – foreign sourced income is only taxable if it applies to a company that is based in Singapore. Foreign-based companies with no Singapore office are able to use Singapore-based banks and fund management institutions without fear of being taxed.
• Overseas investment – you can use your foreign-acquired income to invest in additional assets as long as they stay out of Singapore. However, your company cannot use those investments or expenses as a basis to claim for tax deductions in Singapore.
• Non-income funds – IRAS is willing to exempt non-income funds from taxation if you are able to provide proof that the money has nothing to do with business-related income. To do this, you should specify income and non-income and provide dates from when the non-income money was remitted to Singapore. You must show proof that the income amounts were not touched.
• You can show that the money sent to Singapore is not more than the capital minus any losses incurred. IRAS will also allow you to set off any overseas losses against foreign sourced income received in Singapore.
Check 3: Was the foreign-sourced income “received” in Singapore subject to taxation overseas?
Assuming the foreign-sourced income earned by your company is considered as “received in Singapore” as per Check 2 above, whether or not this income is subject to taxation in Singapore depends on if it was subject to taxation overseas. Foreign sourced income that is received in Singapore can be tax exempt if the following conditions are met:
• the headline tax rate of the foreign jurisdiction from which the income is received is at least 15%; and
• the specified foreign income has been subjected to tax in the foreign jurisdiction from which it was received.
If you overseas income received in Singapore does not meet the above conditions, the said income is liable to taxation in Singapore. However, IRAS will give you a tax credit on whatever tax you did pay overseas even if there is no double-taxation agreement in place. Singapore wants to make sure that your corporate income is not subject to double-taxation.
It is apparent from the above elaboration that it may not always be easy to determine with certainty the locality of the source of the income of a business. If your objective is to avoid paying taxes all together for your company income, it may be a bit challenging to achieve it through a Singapore company.