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[ TAX FILE ] TAX EXEMPTION FOR SPECIFIED FOREIGN INCOME In the 2003 Budget, the Singapore Government announced that "Singapore shall exempt all foreign income in the form of dividend, branch profits and services income (the specified foreign income) received on or after 1 June 2003, from Income Tax. The tax exemption is available to all taxpayers, including individuals and companies. It shall only apply to income earned from jurisdictions with headline tax rates of at least 15%." Prior to the change, the "specified foreign income" is not taxed until it is received in Singapore. Foreign income tax paid on the specified foreign income may be used as a tax credit to set off against Singapore tax, in accordance with the Singapore Income Tax Act. Several questions were raised subsequent to the announcement, to which the Inland Revenue of Singapore (IRAS) issued a circular to address them. This article seeks to help clarify the issues raised and highlight the situations under which taxpayers may benefit. Issues & Clarifications Q: What is the "specified foreign income" that will enjoy the tax exemption? A: This includes: a) Foreign dividend - a dividend has a
foreign source if it is paid by a company that is not a tax resident
in Singapore. A Singapore resident company is one that exercises
the control and management of its business in Singapore. In general,
dividends paid out by any company incorporated outside Singapore
will be considered foreign dividends. The taxpayer does not need
to meet any shareholding threshold condition to be eligible for
the tax exemption. Qualifying conditions Q: What are "headline tax rates"? Certain specified foreign income may be exempt from tax in foreign jurisdictions that have headline tax rates of 15% or more. Will the Singapore tax exemption apply in this situation? Must the specified foreign income be subject to tax in the foreign jurisdiction before it is eligible for tax exemption? A: There are 2 conditions that must be satisfied to qualify for the tax exemption: income earned from jurisdictions with headline tax rates of 15% and higher, AND the "income has been subjected to tax". Headline tax rate is the highest corporate tax rate of the foreign jurisdiction. The actual rate of tax that the specified foreign income has been subjected to can be lower than the headline tax rate. "Income has been subjected to tax" The income is not considered as subjected to tax and are not qualified for tax exemption if: a) income tax is paid in a jurisdiction other
than the one from which the income is received; or For foreign dividend, the tax paid or payable in the foreign jurisdiction from which the dividend is earned includes: a) income tax in the foreign jurisdiction incurred
by the Singapore taxpayer on the dividend income; or Q: The exemption shall take effect from 1 June 2003. Does it refer to specified foreign income earned from 1 June 2003 or does it include those income earned before 1 June 2003 but were remitted to Singapore on or after 1 June 2003? A: The effective date of 1 June 2003 refers to the point in time when the specified foreign income is received in Singapore. Therefore, any specified foreign income earned before 1 June 2003 and received in Singapore on or after 1 June 2003 will qualify for the tax exemption. Q: The current tax credit system is only applicable to Singapore tax residents. Does the term "all taxpayers" include those who are not tax residents in Singapore? A: The exemption will only be granted to persons who are tax-resident(1) in Singapore. While there may be an impact on the taxation of foreign income received in Singapore by a company that is not tax-resident in Singapore, the tax position of an individual who is not a tax-resident in Singapore remains unchanged. This is because foreign income received in Singapore by him is currently not taxable anyway. Applications The following explains the situations where a taxpayer's tax position remains unchanged and situations where a taxpayer will benefit from the tax exemption change. No change in tax position Where the specified foreign income is from a jurisdiction with corporate tax rate of 22% or more, the position of the Singapore taxpayer remains unchanged after the implementation of the tax exemption system. This is because even without the tax exemption, he would not have additional tax payable in Singapore due to his ability to fully offset the foreign tax paid against Singapore income tax, under the tax credit system. In this situation, the tax exemption serves to simplify the tax treatment of specified foreign income. Favourable change: real tax savings Where the specified foreign income is from a jurisdiction
with corporate tax rate of 15% to 22%, the tax exemption will result
in real tax savings to the Singapore taxpayer. An example is the
receipt of specified foreign income from Hong Kong where the corporate
tax rate is 17.5%. In this case, there is no Singapore tax on the
specified foreign income received from Hong Kong. However, the tax
exemption will not apply if a dividend is paid out of Hong Kong
profits that had not been taxed in Hong Kong. These are illustrated
in Examples 1 & 2. Therefore, to enjoy the tax savings, proper planning
is needed to ensure that only qualifying specified foreign income
is received in Singapore. Example 1
a) Singapore company with tax losses Where a company has Singapore tax losses, the receipt of foreign dividend in Singapore under the tax credit system had the effect of reducing the amount of tax loss available for offset against future taxable income. Under the tax exemption system, a foreign dividend can be received in Singapore without depleting the amount of Singapore tax losses. This is one situation where the tax exemption would benefit a taxpayer more than the tax credit system. The difference is illustrated below. Example 3
Both the tax exemption and the unilateral tax credit system do not apply to foreign interest and royalty. However, to encourage ownership of intellectual property rights in Singapore, the 2003 Budget extended the unilateral tax credit to royalties received from year of assessment (YA) 2004 onwards. See Example 4. On the other hand, withholding tax on interest received from countries that do not have Double Tax Agreements (DTA) with Singapore continues to be unavailable as a tax credit for set-off against Singapore tax on the same income. Proper planning could be considered to take advantage of the tax exemption to mitigate the impact of double taxation. See Example 5. Example 4
The tax exemption system enhances the value of using Singapore companies for holding foreign investments. Under the unilateral tax credit system, the foreign tax paid on the underlying profits of a company is only available to a Singapore company for tax credit provided it holds not less than 25% of the shares of the dividend-paying company. DTA may provide for a lower shareholding threshold requirement. The tax exemption system recognises the underlying tax paid without a shareholding threshold requirement, hence, it should encourage the use of Singapore companies for investment holding. See Example 6. Example 6
Summary The following situations will benefit from tax exemption on the specified foreign income:
For enquiries you may contact the following staff from our tax department: Ms Nancy Lau, Tax Director Ms Koh Puay Hoon, Tax Manager Ms Wang Chai Hong, Assistant Tax Manager |
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