Singapore Tax Policy on Foreign-Sourced Income
If you run a Singapore company, you must know the local tax policy on foreign-sourced income to secure your tax compliance. You should start by understanding “What is foreign-sourced income? and “Whether or not you should pay corporate income tax on it?”
What is Foreign-Sourced Income in Singapore?
If you are starting a new Singaporean company, you must know it has adopted a territorial single-tier corporate income tax system. So, you only have to pay tax on income earned in Singapore. As per the tax policy on foreign-sourced income, such income is not taxed unless received or deemed remitted in Singapore. Let us see what foreign-sourced income means.
According to Singapore tax policy, foreign-sourced income is the money deposited by an overseas entity into your Singaporean company’s bank account. It could be in the form of dividends or other monetary form. Cash, cheques, or money orders physically carried into Singapore and handed over to you are also treated as foreign-sourced income.
You must ask a couple of questions to know whether or not this income is taxed.
- Is it really foreign-sourced income?
- Did you receive foreign-sourced income in Singapore?
- Was this income taxed overseas?
Is It Really a Foreign-Sourced Income?
As per Singapore tax policy, you have to pay corporate income tax if you,
- Trade, practice a profession, or have business activities in Singapore
- You earn profits, and
- It is sourced in Singapore, or
- It is earned overseas but received in Singapore
Whether the profits originated in Singapore or not depends on the type of transactions and subsequent profits. You need to use the principles listed below to fix the locale of such income.
- Determine what the taxpayer did. Identify the operations or actions you took, the place you took them, and the resultant profits.
- Your business is located in Singapore and has no overseas presence, its profits are largly treated as originated in Singapore.
- If you trade in goods and commodities to fix the locality of profits, you can use the place where the contract for purchase and sale is initiated, negotiated, concluded, and legally executed.
- How to determine the locality of income, if you earn commissions for finding buyers for a product or supplies for your customers? Here, you are not a part of any transactions but you facilitate the transactions between buyers and sellers. Therefore, you must use the place where you took actions to facilitate these transactions.Your commissions will be sourced in Singapore.
Did You Receive Foreign Sourced Income in Singapore?
Here is what the Inland Revenue Authority of Singapore (IRAS) thinks about the term ‘foreign-sourced income received in Singapore’ and how it impacts your tax amounts. Refer to IRAS section 10(25)(a), IRAS section 10(25)(b) and IRAS section 10(25)(c) for tax policy on foreign-sourced income.
Funds Transmitted to Singapore
Income or money derived abroad and transmitted, delivered, brought, or remitted, or paid into a Singapore-based bank account of Singapore registered company is considered as ‘received’ in Singapore.
This income can be money, dividends, cash, cheques, money orders, or monetary payments deposited in bank account or brought into and received by company in Singapore. And most importantly, this money should be earned by the company through its sales activities, service fees, or consultation work and a part of its revenue or profits.
Debt Payments
Here is IRAS’ tax policy on foreign-sourced income for debt payments. It is any income sourced from outside Singapore which are paid in or towards mitigation of any debts incurred against trade or transactions executed in Singapore.
Here you owe money in Singapore to a vendor, supplier, bank, or because of a legal suit. And if you bring in income earned abroad to pay the debt in Singapore in part or full, it is considered as ‘income received in Singapore’. The point to remember is that the debt is not paid overseas.
Goods and Movable Property
The income or money earned outside Singapore and used to purchase any movables or movable properties which are transferred or shifted to Singapore is considered as ‘income received in Singapore’.
Movable properties are things that you can move or shift from a place to another place. The money used to purchase of unmovable or fixed properties, like real estates or lands are not covered here.
If you, as an individual, own movables they belong to you personally. However, a company can purchase or own movables in the form of equipment, goods, or raw materials that are related to your business activities. Money earned overseas used for purchases of these items, which are then moved to Singapore are termed as ‘income received in Singapore.’
Here, you should focus on how to calculate tax on movables that may have depreciated in value. As per IRAS, you should use the amount you paid to purchase the movable property to calculate the tax amount. You should not use the book value or net worth at any given date for this purpose.
IRAS has clarified various concerns as follows:
- You pay tax on your foreign-sourced income only if you are Singapore-based company. The tax dosen’t apply to a foreign-based company having no office in Singapore. It can still use Singapore based banks.
- You are free to use overseas income to purchase additional assets. They are not taxed if you keep them outside Singapore. You cannot use them to claim tax deductions.
- Your non-income funds are exempt provided you can show the proof that they are not derived from business income. You have to submit income, non-income and dates of transmitting of non-income to Singapore.
- You must prove that the amount you transmitted to Singapore is less than capital minus your losses. You are also allowed to set off any losses incurred overseas against income earned overseas and received in Singapore.
Was Your Overseas Income Taxed by the Source Country?
Singapore tax on the foreign-sourced income received in Singapore by your company depends on whether it was taxed or not overseas. You will not have to pay tax on it if you fulfil the following criterion.
- The foreign country which is the source of your overseas income has been taxed it, and
- The headline tax rate in this country is equal to or more than 15%
If the overseas income received by your company in Singapore does not fulfil the above criterion, you have to pay the tax. If it was taxed in the country where it was earned, IRAS provides you with a tax credit in the absence of a double taxation agreement with the source country.
Tax is your liability. You have to discharge it as per the prevelant policy. Keeping an eye on tax policy on foreign-sourced income can also help you tax compliant. If you have any queries about it, contact us at info@sbsgroup.com.sg or +65-6536 0036, to ask our experts for solutions.
Also Read: How Can a Foreigner Start a Business in Singapore
