Singapore: Tax update September 2010September 30, 2010
What is new in the deemed sources of income?
The Singapore law has provisions to deem specified income to be derived from a source in Singapore. Tax on such deemed source of income is collected by way of ithholding tax. The law provides that under certain specified circumstances, the following income would be deemed to be derived by a non-resident person from Singapore:
- Interest, commission, fees and any other payments in connection with any loan or indebtedness or any arrangement, management, guarantee, or service relating to any loan or indebtedness
- Royalty or other lump sum payments for the use of or the right to use any movable property
- Payment for the use of or right to use scientific, technical, industrial or commercial knowledge or information or the rendering of assistance or service in connection with the application or use of such knowledge or information
- Payment for the management or assistance in the management of any trade, business or profession
- Rent or other payments under any agreement or arrangement for the use of any movable property
Notwithstanding the above, payments for specified services performed outside Singapore are not subject to Singapore withholding tax. These payments were covered in a press statement issued by the Ministry of Finance on 21 December 1977.
The above excluded payments are now codified in the Income Tax Act (Act). In addition, certain changes have been introduced.
1. Management services
One of the notable amendments concerns payments for management services which do not attract Singapore withholding tax.
Prior to the amendment, only payment for management services which represents a pure cost reimbursement incurred outside Singapore by a non-resident related company is not subject to Singapore withholding tax. However, in reality, the foreign related company is normally required to charge a management fee with an arm’s length mark-up to meet the transfer pricing requirements in its home country.
In this situation, if a treaty relief is not available, Singapore withholding tax would arise.
The Act now provides that any payment (i.e. includes fee charged with an arm’s length mark-up) for management services performed outside Singapore by a specified non-resident person (see below) is not subject to Singapore withholding tax. The change in law is definitely a welcome move and it aligns it with the arm’s length principle for related party transactions. This change also brings it in line with the tax treatment for fees paid for technical services performed outside Singapore. These also do not attract withholding tax in Singapore.
2. Guarantee services
The Act provides that payment for any guarantee relating to any loan or indebtedness paid to a non-resident will not be subject to withholding tax if the guarantor is a specified non-resident person [see below]. It is generally difficult to ascertain the source of the guarantee fee. This difficulty is now overcome in the Act here the guarantee fee will not be subject to withholding tax as long as the guarantor is a specified non-resident person.
3. Specified non-resident person
In order for the specified fees not to be subject to withholding tax under the amendments, the non-resident recipient must:
(i) not be an individual and who is not incorporated in Singapore; and
(ii) not carry on a business in Singapore by himself or in association with others. [In the event that he carries on a business in Singapore (by himself or in association with others) or has a permanent establishment (PE) in Singapore, the specified services must not be performed through that business carried on in Singapore or that PE in Singapore.]
New administrative concession for services performed in Singapore
As a further enhancement, in response to feedback received, the Inland Revenue Authority of Singapore (IRAS) has on 6 August 2010, announced an administrative concession for technical services and management services rendered in Singapore. Currently for such services performed in Singapore, the payer will have to withhold tax at the prevailing corporate income tax rate on the gross amount of fees payable to the non-resident. The tax withheld is not a final tax and the non-resident company could submit to the IRAS a claim for expenses incurred in earning the income. Any excess tax withheld would be refunded to the non-resident company.
As an administrative concession, the IRAS will now allow companies to apply a lower withholding tax rate on the gross fees payable to the non-resident company. No prior approval from the IRAS is required if the following conditions are met:
- The services provided to its related parties are not also provided to an unrelated party
- The services must be routine support services with a mark-up of at least 5%
- No disallowable expenses are included in the costs incurred by the non-resident company in the provision of the services.
For example, if a non resident company charges a 5% mark-up on the $100 costs for routine support services to a Singapore tax payer, the payer can apply a lower withholding tax rate of 0.81% [i.e. Mark up $5 * 17%/Gross fee $105] on the gross payment of $105 provided all the conditions are met.
To enjoy the concession, the payer is required to complete and submit the Section 45 Withholding Tax Return (Form IR37) and a confirmation letter that there are no is allowable expenses included in the cost incurred for the provision of routine support services by the non-resident related company.
Where the conditions under the administrative concession cannot be met, the payer could submit an application to the IRAS for consideration on a case-by-case basis. In the submission, the payer will be required to provide the following information:
- The nature of services provided by the related party
- The name and address of the related party and nature of relationship
- The percentage of mark-up, whether it is at arm’s length and basis for claiming that it is at arm’s length
- The detailed profit and loss accounts with supporting schedules showing the breakdown of expenses and highlighting any non-deductible expenses
Upon obtaining approval from the IRAS, the local payer can apply a lower withholding tax on payment for services to the non-resident company. For purposes of calculating the lower withholding tax, non deductible expenses must be added back to the mark-up. Using the same example above with an add-on of a depreciation of $1, the lower withholding tax rate is 0.97% [i.e. Adjusted profit $6 (mark up $5 + depreciation $1) * 17%/Gross fee $105] to be applied to the gross payment of $105.
Other implications of applying the lower withholding tax rate
The payer must inform the IRAS if there is any change in the circumstances, for example, a change in the mark-up or there are other disallowable expenses.
IRAS will recover any additional tax payable as a result of non-allowable expenses not being added back previously and impose late payment penalties accordingly.
Companies which choose to go for an upfront lower withholding tax rate would not be able to request for a review of their tax payable to take into account any tax reliefs available for the relevant year of assessment. Accordingly, there will not be any refund of tax withheld based on the lower withholding tax rate.
With the legislative amendment and the transfer pricing development, companies may wish to review their cross-border management charges where such charges are reimbursed at cost by foreign related companies for Singapore tax purposes.
In addition, companies may wish to consider applying for a lower withholding tax rate upfront if they are paying technical and management charges for services performed in Singapore by their related parties and where treaty relief is not available. However, the administrative concession of lower withholding tax rate does not apply to services provided by non-related companies. These non-related companies will still need to file a tax computation if they wish to seek a refund of the excess tax withheld by making a claim for allowable expenses against their taxable income.
To be noted
Please refer to the IRAS’ supplementary e-Tax Guide on “Transfer Pricing Guidelines for Related Party Loans and Related Party Services” issued on 23 February 2009 for details on routine support services.
A confirmation letter from the non-resident company is only required if this is the first time that the company is coming under the administrative concession.
Contact details regarding the Singapore Tax Update September 2010 can be accessed using the link below: