Companies that have paid taxes to a foreign jurisdiction can claim FTC (Foreign Tax Credit) from the Inland Revenue Authority of Singapore (IRAS) for the same against the Singapore tax that is payable for the same income.
When a Singapore company earns foreign income, it may be subjected to double taxation - once under the foreign jurisdiction and another time when the same income is remitted on the island.
There are two ways through which companies in Singapore can avoid being taxed twice:
- Double Tax Relief (DTR)
- Unilateral Tax Credit (UTC)
Double Tax Relief (DTR)
This relief is provided under the “Avoidance of Double Taxation Agreement (DTA)”. A DTA is an agreement entered into by Singapore and a treaty partner (from another jurisdiction). Under this agreement, double taxation of income is relieved on the income earned under a jurisdiction by a resident of another jurisdiction.
A DTA contains taxing rights between Singapore and its treaty partner on various types of income derived from cross-border economic activities. Under DTA, a Singapore company can get a reduction or an exemption of tax under different types of income. Singapore tax residents and the tax residents of the treaty partner will benefit from DTA.
Double Tax Deduction for Internalisation Scheme
This scheme was introduced to encourage and promote internalisation in businesses. Businesses can claim Double Tax Deduction (DTD) up to S$100,000 of their qualifying expenses starting from 1 April 2012 until 31 March 2020. This provision has been made under Sections 14B and 14K, Income Tax Act.
Qualifying Activities for DTD:
Businesses in Singapore can claim up to S$100,000 as automatic DTD under the following qualifying activities:
- Overseas business development missions or trips.
- Overseas investment study missions or trips.
- Overseas trade fair participation.
- Approved local trade fair participation.
Claims under the aforementioned activities do not require approval from IE (International Enterprise) Singapore or Singapore Tourism Board (STB).
However, if claims exceed S$100,000, approval from IE Singapore or STB will be required.
Claiming benefits under DTA
Singapore Tax Residents:
You can claim DTA benefits when your business earns foreign income from a treaty partner. Under DTA, you either do not have to pay tax or have to pay a reduced tax amount to the foreign jurisdiction.
Certificate of Residence or COR:
You will be required to submit a COR as proof to the foreign jurisdiction that your business is a tax resident in Singapore.
Double Tax Relief:
Under DTA, if your business does not get an exemption of tax and instead gets a reduction on the payable tax amount, your businesses will still pay tax twice. Hence, DTA provides such businesses a Double Tax Relief wherein you can claim a credit for the tax you have paid in the foreign jurisdiction for the same income.
Tax Residents of Treaty Partners
Treaty partners of Singapore will also enjoy benefits under Double Taxation Agreement for the income they get from Singapore. To claim this benefit, the said treaty partner will have to provide the IRAS with a “Certificate of Residence from Non-Residents” which must be certified duly from the tax authority of their respective residing country. This will help claim relief from “Singapore Income Tax Avoidance of Double Taxation Agreement”.
Unilateral Tax Credit (UTC)
If the foreign jurisdiction from which you derive your income does not have a DTA with Singapore, a UTC will be granted. This has been in effect since the Year of Assessment 2009.
Claiming Foreign Tax Credit (FTC)
Your business must satisfy the below-mentioned conditions to claim DTR or UTC:
- Your business must be a Singapore tax resident for the respective basis year.
- You have paid the tax or it is payable for the same income source in the foreign jurisdiction.
- The income will be taxable in Singapore.
Note: You cannot claim FTC if your business is in a loss position.
Businesses with Permanent Establishments (PE) Overseas:
If your company is permanently established under a foreign jurisdiction and you derive your income from that permanent establishment, then your income will usually be taxed overseas as well. You will only be granted FTC in Singapore if the same income is also taxed here by the IRAS.
Businesses deriving passive income:
If your business is deriving passive income overseas such as dividend or interest, the tax on such income will usually be applicable in the foreign jurisdiction in the year of receipt. The same income will be taxed in Singapore only when the income is remitted here. For such income, FTC will be granted by the IRAS when the income is taxed here.
For businesses that are claiming DTR, FTC will be calculated as the lower amount of the following:
- The actual foreign tax amount you have paid or
- The Singapore tax amount that is attributable to the said foreign source of income (expenses net).
Calculating Singapore tax that is attributable to foreign income:
The FTC amount that a business will be granted is calculated on a “source-by-source and country-by-country” basis. But, businesses have the option to elect the FTC Pooling System under which foreign income that is derived from various sources can be pooled together and do not have to be calculated on the above-mentioned basis.
How to claim FTC
You can claim for FTC when you file the Income Tax Return for your company with the IRAS. Note, that if you are claiming FTC, you will have to file Form C and not Form C-S.
You may be requested to submit any of the following information and/or documents pertaining to your FTC claim:
- Jurisdiction under which you paid your foreign tax.
- Nature of the derived income.
- Description of services you have rendered and mention if the income was derived from a PE under the foreign jurisdiction. You may also be requested to provide the basis for your claim.
- The payer’s name.
- The date of withholding tax voucher or receipt.
- Your gross income amount, the tax amount that was withheld in a foreign currency and the withholding tax rate (you must also mention the corresponding amount in Singapore Dollar).
- If you wish to claim a double tax relief, you may be requested to include the Article of DTA which is relevant to your claim wherein the tax was withheld.
- The withholding tax voucher or receipt.
Foreign Tax Credit (FTC) Pooling System
Budget 2011 introduced the Foreign Tax Credit pooling system to offer more flexibility to businesses making FTC claims. This system will help businesses reduce the amount of Singapore tax they have to pay plus simplify tax compliance.
With effect from the Year of Assessment (YA) 2012, tax residents of Singapore have the option to elect this pooling system when they claim FTC on income they have already paid foreign tax on.
FTC Pooling System Conditions:
All of the following conditions should be satisfied for a business to qualify for the FTC pooling system:
- Foreign income tax has been paid for income derived under a foreign jurisdiction.
- The headline tax rate or the highest corporate tax rate under the foreign jurisdiction where the business derived the income should be a minimum of 15% when the foreign income is remitted to Singapore.
- The business is eligible to claim FTC under the purview of the Income Tax Act and the derived income is chargeable for Singapore tax.
FTC calculations under the pooling system:
FTC will be granted for the lower of the following:
- The Singapore tax amount that is attributable to the income derived from a foreign jurisdiction under pooling or
- The pooled foreign tax amount paid on the pooled income to a foreign jurisdiction.