Explain how Singapore's tax treaties stop the same income from being taxed twice.
Shu Ting lives in Singapore and has been offered a work posting to Jakarta. Before she meets a tax adviser, she wants to know whether she would pay tax twice if Indonesia taxed her salary and Singapore also had a claim on it. A friend who had worked in Hong Kong told her she wouldn't, "because of the treaty", but couldn't explain what the treaty does.
When two countries could both tax the same income, they can agree between themselves which one gets to tax it. That agreement is a double taxation agreement (DTA). Singapore has signed DTAs with a large number of countries. IRAS keeps the list of treaties in force on its website, with the full text of each treaty.
A treaty doesn't create new taxes, and it doesn't usually remove tax altogether. It sets rules for each kind of income. For employment income, the usual rule is that the country where the work is done can tax it. The exception is short visits that meet the treaty's conditions. For dividends, interest and royalties, a treaty often caps the tax the source country can withhold from a resident of the other country.
Some people could count as resident in both countries under each country's own laws. Most treaties have tie-breaker rules that decide which country treats such a person as resident for treaty purposes. Each treaty is different, and the details are in its articles.
Any cross-border situation starts with two questions. First, does a treaty exist between Singapore and the other country? You can check this on the IRAS list. Second, what does the treaty's article on your kind of income say? If it's unclear which country you're resident in, read the tie-breaker rules as well.
Shu Ting looks up the IRAS list and finds that Singapore has a treaty with Indonesia. She reads its article on employment income and its tie-breaker rules. Then she writes two questions for the adviser. The first is which country she would be resident in for treaty purposes during the posting. The second is whether any part of her salary could be taxed in both countries.
Not every country has a treaty with Singapore. Singapore has no general income tax treaty with the United States, so US withholding on dividends paid to Singapore investors stays at its full rate. Shu Ting has US dividend investments, and she notes that they gain nothing from any treaty because there is no US treaty. Lesson 3.1 of the course "Investing in US and global markets from Singapore", "Why 30% of a US dividend never reaches you", explains what this means for your portfolio.
A foreign tax credit lets you set foreign tax against the Singapore tax on the same income, so you don't pay full tax twice. The credit can come under a treaty. For some countries without a treaty, it can come under Singapore's own rules for unilateral tax credits.
The credit is generally the lower of two amounts: the foreign tax paid on the income, and the Singapore tax on that same income. To work it out, find the Singapore tax on the specific income, then find the foreign tax paid on that same income, and take the lower of the two as the credit. The Singapore tax you still pay is the Singapore tax minus the credit.
Say the Singapore tax on a slice of income is S$1,000 and the foreign tax already paid on the same slice is S$700 (example figures). The credit is S$700, and you pay S$300 more in Singapore tax (S$1,000 - S$700). If the foreign tax had been S$1,400 instead, the credit would be capped at S$1,000, and the extra S$400 (S$1,400 - S$1,000) would not be recovered. Foreign tax above the Singapore tax on that income is not refunded. A large foreign tax bill also can't be used to reduce Singapore tax on your other income.
To claim a credit, you need proof that the foreign tax was actually paid. A foreign tax assessment, a payment receipt, or a statement from the payer showing tax withheld can all serve as proof. IRAS explains what proof it accepts.
Lesson 6.1, "Foreign income received in Singapore", showed that foreign-sourced income received by an individual in Singapore is generally exempt here. If Singapore doesn't tax the income, there is no Singapore tax to set a credit against, and the foreign tax is simply a cost to you.
For most individuals, credits come up only in two narrower cases. The first is income received through a partnership in Singapore. The second is Singapore-sourced income that another country also taxes, such as a Singapore employee whose work trips abroad are long enough for the other country to tax that part of the salary. In either case, look at the treaty and the credit rules. A tax adviser is worth paying for if the sums are large. Shu Ting's second question for her adviser is about this kind of case.
Treaties also work in the other direction. If you're a Singapore tax resident and receive income from a treaty country, you may get a lower treaty withholding rate there. That lower rate usually requires proof of Singapore residence, and IRAS can issue a certificate of residence for that purpose.
To get the lower rate, confirm that you are a Singapore tax resident, get a certificate of residence from IRAS, and give it to the treaty country. Shu Ting's friend needed one to stop Hong Kong taxing a payment at the full rate.
For the activity, pick one country you earn from or might move to. Find out whether Singapore has a tax treaty with it, and write down what the treaty says about that income.
Pick one country you earn from or might move to. Check whether Singapore has a tax treaty with it and write down what the treaty covers.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).