With the increasing number of individuals taking up employment abroad, and numerous companies conducting business within Singapore, the volume of international transactions is rising at an exponential pace. It makes one wonder, how is foreign income taxed. Read on to clear all your doubts about the taxation of foreign-sourced income in Singapore!

Definition of foreign-sourced income and its taxation

Foreign income is income that does not come from a trade or business conducted within the geographical boundaries of Singapore. When income from outside Singapore is received, such income is typically subject to tax. The income is considered as received under section 10(25) of the Income Tax Act 1947 when it is - 

1. Remitted to or received in Singapore.

2. Used to repay any debt incurred in connection with a trade or business conducted in Singapore; or

3. Used to purchase any movable property brought into Singapore (such as equipment, raw materials, etc.).

The taxation of foreign income received in Singapore is only applicable to a tax-resident individual or company located here, according to the Inland Revenue Authority of Singapore (IRAS). Non-resident individuals and foreign businesses that do not operate in or from the country can therefore remit their foreign income to Singapore without being taxed on it. Foreign income that is reinvested overseas without being repatriated to Singapore is not considered received within the country at the time of reinvestment. This means that foreign income is not taxed until the investment is sold and the proceeds are brought into Singapore.

In most cases, foreign income is taxed twice: once in the foreign jurisdiction and once in Singapore. However, various tax exemptions are available for Singaporean tax residents to alleviate the double taxation.

Tax Relief on Specified Foreign-Sourced Income

There are three categories of specified Foreign-sourced income - 

• Foreign-sourced dividend - Dividend earned on investments in foreign-based equities i.e if it is paid by a non-Singapore tax resident company. 

• Foreign Branch Profits - Income earned in a foreign jurisdiction due to business activities carried out in Singapore. The IRAS considers the profits earned offshore as sourced in Singapore and such profits are taxable even if the funds are not remitted to Singapore.

• Foreign-sourced service income - Salary received in a foreign jurisdiction.

Tax exemption can be granted under Section 13(9) of the Income Tax Act 1947 on specified foreign-sourced income if the below conditions are met - 

1. Subject to Tax condition - This condition is considered if the foreign-sourced income has been subjected to tax under the foreign jurisdiction where the income was received. 

• Subject to Tax condition for substantive business activities - In case of substantive business activities, the Comptroller of Income tax will regard the "subject to tax" condition as met provided that it has been granted tax relief due to tax incentive(s) for substantive business activities carried out in that jurisdiction. 

• Subject to Tax condition for foreign dividend - For foreign-sourced dividends, proofs need to be submitted that dividend tax has been levied on the dividend by the foreign jurisdiction. Also, any underlying tax has been paid, which is income tax paid by the dividend-paying company on the income out of which the dividend is paid.

2. 'Foreign Headline Tax Rate of at least 15%' Condition - The highest Corporate Income Tax rate of the foreign jurisdiction from which the income is received should be at least 15% at the time of receiving such income in Singapore

Any expenses incurred in Singapore that are attributable to that income need to be deducted before calculating the amount of tax that is payable.

3. Approval of The Comptroller of Income Tax condition - If the Comptroller of Income Tax is satisfied that the tax exemption is beneficial to the Singapore tax resident company then he may grant the same.

Avoidance of Double Tax Agreements

Singapore has signed Avoidance of Double Taxation Agreements (DTAs) with around a hundred jurisdictions that are referred to as DTA Partners. The agreement's purpose is to exempt or reduce double taxation on income sourced in one jurisdiction by a resident of the other. However, if the agreed-upon benefit is not a tax exemption but a tax rate reduction, the Singapore firm may be required to pay tax in both the foreign jurisdiction and Singapore. 

To obtain the benefits, Singapore Tax Resident Companies must demonstrate their taxation status to the DTA Partner. Tax residents of DTA Partners, on the other hand, must provide IRAS with documentation of their tax residency in their jurisdiction.

Foreign Tax Credit

If you or your company is a Singapore tax resident who has paid tax on foreign-sourced income in a foreign jurisdiction and the same amount of income is taxable in Singapore, your company may be eligible for a foreign tax credit to avoid double taxation.

The lower of the foreign tax paid and the Singapore tax that would have been payable on the same income is used to calculate the foreign tax credit. For example, if a Singapore tax resident company pays tax in a foreign jurisdiction at a rate of 15% and in Singapore at a rate of 7% on the same amount, it can claim a tax credit of a maximum of 7% of the income amount.

How to file for Tax exemption

You need to provide the below details in your Form C (Corporate Income Tax Return) to benefit from tax relief - 

• Nature and amount of income received

• Jurisdiction of foreign income

• Foreign Jurisdiction headline tax rate

• Confirmation that the income has been subjected to tax in the foreign jurisdiction

• For underlying tax, taxpayers can provide the audited accounts of the foreign dividend-paying company for the financial period

Takeaway

Through specific tax exemptions or reductions on foreign-sourced income, the Singapore Government has effectively promoted regionalization in Singapore. The government has also made it a point to encourage foreign-based companies from doing business or trading in Singapore by exempting their income from taxation.

If you or your company earns foreign-sourced income, you should be aware of the taxation rules and exemptions available, as outlined in this article. As previously stated, not all income is considered foreign-sourced, and you must follow the guidelines to benefit from the tax exemptions.

To know more about how to save your hard-earned money when it is received from a foreign source, book a free consultation with us today!