Income deemed to be derived from Singapore
Under Section 12(7)(c), payment for the management or assistance in the management of any trade, business or profession that are:
- Borne by a person resident or with permanent establishment in Singapore; OR
- Which are deductible against any income accruing in or derived from Singapore.
- Have no statutory definition of management or assistance in the management of any trade, business or profession.
According to a press statement, sales and purchasing commissions paid to non-residents are usually not considered under Section 12(7)(C).
From the 29th of December 2009:
- A Management fee is not deemed to be derived from Singapore if the management services are rendered outside Singapore by a non-resident who:
- Is not incorporated, formed or registered in Singapore,
- Does not carry on a business in Singapore, and
- Does not have a permanent establishment in Singapore.
- If the non-resident who is rendering the management services conducts a business or has a permanent establishment in Singapore,
- The management fee will not be deemed derived in Singapore, or the service is not performed through that business carried out in Singapore, or with permanent establishment in Singapore. This is provided the non-resident is not incorporated or registered in Singapore.
Tax Rate: Concession
The IRAS allows companies to apply withholding tax on the gross profit or margin derived by a non-resident from the provision of services in Singapore.
The concession applies only if the following three conditions are met:
1. The services provided to the related parties are also not provided to an unrelated party.
2. The services must be routine support services with a mark-up of at least 5%. (e.g. accounting, administrative), and
3. Disallowable expenses are not incurred in the provision of the services.
If the above conditions are not satisfied, an application can be made to IRAS to withhold tax based on a lower withholding tax rate. IRAS will make considerations on a subjective basis.
According to IRAS clarifications, withholding tax does not apply to the reimbursement or allocation of management fees under the cost pooling method between head office and branches. In the IRAS website, it is stated that cost reimbursement under a cost pooling arrangement between related companies can also qualify for exemption.
Withholding tax on services
Section 12(7)(b) deals with payments for the use or the right to use scientific, technical, industrial, or commercial knowledge or for the rendering of assistance and services in connection with the application or use of such knowledge or information that are:
i. Borne, directly or indirectly, by a Singapore resident or permanent establishment in Singapore except in respect of any business conducted outside Singapore through a permanent establishment outside Singapore; or
ii. Deductible against any income accruing in or derived from Singapore.
The first part of Section 12(7) (b) relates to loyalty (10% rates apply) and the second part relates to services:
- Rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information.
Income not deemed to be derived from Singapore
The fees paid for technical assistance or services are not deemed to be derived from Singapore if such technical assistance and services are rendered outside Singapore by a non-resident who:
i. Is not incorporated, formed or registered in Singapore;
ii. Does not carry on a business in Singapore, and
iii. Does not have a permanent establishment in Singapore.
If the non-resident conducts a business in Singapore, or has a permanent establishment in Singapore, the fees paid are not considered to be derived from Singapore if the rendering of the assistance or service is not performed through that business carried out in Singapore or that permanent establishment in Singapore.
According to the IRAS Website, Reimbursement of accommodation, meals, and transportation expenses to a non-resident company is not subject to withholding tax if these expenses are reimbursed to a non-resident company at the actual cost incurred.
Withholding tax rate
Tax rates applicable are either:
- Tax rates under the Double Tax Agreement; or
- A prevailing corporate tax rate (this is not a final tax).
An example of a reduced tax rate under this tax treaty is the Singapore-India tax treaty model which operates at a reduced rate of 10%.
It is possible to be exempt from tax under certain Double Tax Agreements. (Not all treaties are produced for a lower rate scheme).
Withholding tax: concession
As an administrative concession, the IRAS will allow companies to apply the withholding tax on the gross profit or margin derived by a non-resident, from the provision of services in Singapore.
The concession applies only if the following three conditions are met:
1. The services provided by the non-resident company to its related parties are not also provided to an unrelated entity.
2. The services must be routine support services with a mark-up of at least 5%; and
3. No disallowable expenses are included in the costs incurred by the non-resident company in the provisions of the services.
If the conditions are not met, an application can be made to withhold tax at a lower rate on gross payments made to non-residents.
Royalty, services or rental
- Payments for web hosting services are considered as payments for technical or know-how related assistance, as held under Section 12(7)(b) of the Income Tax Act. The payer only needs to withhold tax on payments to non-residents if the web hosting service is rendered in Singapore. For example, payment for leased software (e.g software as a service) will be classified as payment made for services, or payment made for the use of bandwidth.
- Payment for the leasing of as server is not technical service but payment for rental comes under Section 12(7) (d) of the Income Tax Act.
- Provision of technical training, where there is no Intellectual Property and no rights to use the Intellectual Property is classed as a payment made for service.
- Provision of a customer list, (dependant on whether it is customer based and intangible) can be classed as payment made for service.
- Payment for use of a logo on the website is classed as payment for royalty.
- A company contracting a foreign recording artist to produce a special jingle to market its restaurants in Singapore. If the company pay the artist $20,000 for the recording, a payment would be made for royalty.
Royalty or services
Categorising of income is crucial. It is important to distinguish palpably if the payment is a royalty or a technical fee.
When know-how is being supplied, very little services are performed. Regarding the supply of services, the supplier has to spend time and money, and has to apply skills and expertise in the performance of the work being completed, but will not entail a transfer of such skills and knowledge. It is also advisable to split the contracts for work completed in and outside Singapore.
To understand what creates a permanent establishment in Singapore under the relevant tax treaty and take proactive steps to avoid a permanent establishment so as to mitigate the withholding tax.