Provisions Of Withholding Taxation In Singapore: Purpose, Applicability, And Impact

Withholding Tax Purpose

1. The operations of S45 of SITA, its rationale for implementation and other relevant sections pursuant to withholding tax?

2. The tax treatments of any 3 payments such as interest, royalties or technical assistance fees?

3. The consequences of defaulting withholding tax payments?

4.  Exemptions if any?

5. Provide evidence of any press release of real cases of withholding tax in Singapore and to what extent it is effective?

6.  Proper referencing is essential. Otherwise marks will be penalised?

In this report, an attempt is made to discuss the provisions of withholding taxes of Singapore. The report aims to discuss the purpose, application, exemption and critical evaluation of the withholding taxation system. The Singapore Income Tax Act provides the relevant provisions that governs the application of the withholding tax. The main aim of this report is to gain an understanding of the withholding tax system as applicable in Singapore.

In Singapore, a board under Ministry of Finance known as the Internal Revenue Authority of Singapore (IRAS) is responsible for collection of personal tax, corporate tax, goods and services tax etc. There are various tax laws that are applicable in Singapore that includes Stamp duties Act, Income Tax Act, Property Tax Act, Goods and Services Tax Act. The amount of tax payable by a taxpayer is dependent on the residential status of the payer. Therefore, the Singapore Master Tax guide (34^th Edition) states that it is necessary to determine the residential status for calculating the liability of the taxpayer. It provides that an individual is regarded as resident if any of the three criteria’s are satisfied by the taxpayer (Hasegawa & Kiyota, 2015). The first criteria states that if an individual resides in Singapore then such individual is regarded as a resident taxpayer. The second criteria states that if an individual is physically present in Singapore for 183 days or more then such individual is regarded as resident for the purpose of tax. The third criteria states that if an individual is employed in Singapore then such individual will be regarded as resident for the purpose of tax. In case of companies if the management and control of the company is in Singapore, then such companies are regarded as resident. In case of resident taxpayer they are taxed using a progressive basis whereas the nonresidents are taxed using a flat rate (Teck & Oei, 2016).

Payment Subject to Withholding Tax

The system of withholding is applied on payments made to nonresident employees, partners or business. The companies are bound by law to deduct from payments made to nonresidents a certain percentage of income under Part XII of Tax deducted at source. This deducted amount from the income is known as withholding tax and it is required to be deposited with IRAS (Haberly & Wójcik, 2014). The system of withholding tax is an effective way of collecting tax from the nonresidents. In the withholding tax system, the burden of tax falls on the nonresidents whereas the reporting and payment responsibility is shifted to the resident taxpayer. The system of withholding tax is developed in a manner to ensure that nonresident is unable to avoid their due taxes. Based on the above discussion it can be said that the main purpose of withholding tax is to collect taxes from the nonresidents in a timely and effective manner so that the revenue of the government is safeguarded (Hussain & Manaf, 2016).

In Singapore, there are certain types of payments that are made by the residents to the nonresidents that are subject to withholding taxes.  The discussion of this payments including the applicability, tax rates and an example is provided in this section of the report.

The withholding tax are deducted from payments made under section 45 of the SITA relating to the interest, fees and commission. The withholding tax rate of 15% is applied only if the relevant transaction is assumed to be conducted in Singapore. It can be explained with the help of an example if an entity in Singapore obtains loan from an international institution and the interest is paid on that loan. Then in such case, the resident entity is required to deduct withholding tax at the time of making the payment of interest (Ting et al., 2016).

The management fees are the payments made for the management or providing assistance in management of business or business as per section 12(7)(c ) of the SITA. The withholding taxes are applicable for management fees that are paid to nonresident. In case of management fees, the withholding tax rate is taken as the 17% or the prevailing corporate tax rate. It should be noted that the withholding tax should be computed after considering the provisions relating to the double taxation agreements. This could be explained with the help of an example if an entity in Singapore hires a management consultant from abroad then at the time of making payments the withholding taxes are deducted (Brauner & Baez Moreno, 2015).

Withholding Tax Exemption

The rent that are paid to nonresident for providing movable property are subject to withholding taxes. In this case, the withholding tax rate of 15% is applied on the payments made as rent to nonresidents. For example, an entity in Singapore may movable property from nonresident providers. Then in such case the rent that have been paid for the movable property to resident taxpayer are subject to withholding taxes (Dyreng et al., 2015). 

The withholding tax are applied to payments that have been made to nonresidents. However, there are certain types of payments that are exempted from the withholding taxes the details of which are provided in this section of the report. 

The payments that are made for software are regarded as the royalty payments. The withholding tax of 10% is deducted from the payments made to nonresidents (She & Li, 2017). It should be noted that there are certain software’s that are exempted from withholding taxes like software that are bundled with the hardware, shrink wrap, software that are downloaded and used by the end users etc.

The dividend payments that are paid to nonresidents are not subject to withholding taxes. The payments made to nonresidents for submarine cable capacity are exempted from the withholding taxes (Caruana-Galizia & Caruana-Galizia, 2016).

The withholding taxes are applied based on the provisions of the relevant laws. If there is a failure to deduct withholding taxes from payments made to nonresidents then a penalty is imposed for such failures. The withholding taxes that are deducted are the debt to the government as per section 45(1) of the SITA. The section 45(3) of the SITA states that if a resident fails to deduct withholding taxes from payments made to nonresidents as per section 45(1). Then in such cases, the taxes that are due from the nonresidents are recovered from the resident taxpayers (Johannesen & Zucman, 2014).

The resident taxpayer is required to submit a form 137 to IRS after withholding taxes from the nonresident. It is considered as a crime if the resident taxpayer fails to submit the form or remit the amount that are deducted from the nonresidents. In this case, the penalty is imposed as three times of the amount of withholding taxes. The taxpayer is also required to pay a fine of $10000.00 or is subject to imprisonment of maximum three years. The withholding taxes deducted should deposited with the IRS within the due dates in case of any failure a penalty of maximum 20% of tax is imposed (Issa & Stull, 2014). 

Consequences for Default

In Singapore, the significant case related to withholding taxes is ACC V Comptroller of Income Tax (2010). This is a significant case because it was the first case to test the assertion of the comptroller that “no taxpayer can challenge withholding tax”. It was argued by the comptroller that the withholding tax is a mechanism for collecting taxes from the nonresidents and the taxpayer is only required to act as a collecting agent for the revenue department. In income tax, there is an opportunity to appeal against the assessment. However, as the withholding tax is a collecting mechanism so comptroller argued that no opportunity is provided for making an appeal (Kwan et al., 2016).

In this case, the observation made by the court is that an agreement for interest swap does not give rise to the payment of interest. It was held by the court that the letter of demand issued by the court is an opinion and does not have any legal affects. The court further held that the responsibility of commissioner is the assessment and collection of taxes as per the income tax acts. It was concluded that the commissioner does not have the authority to make a provision of the law binding to the taxpayer (Braun & Weichenrieder, 2014).

The entities and individuals constantly overlook the area of withholding taxes. This can be seen from the mistakes that have been made in the application of the withholding taxes. There is significant penalty that is imposed on noncompliance of the provisions of the withholding taxes. It is therefore necessary that an individual should be aware of the provisions of the withholding taxes so that any unnecessary costs can be avoided. The nonresidents mainly pay the withholding taxes so proper steps should be taken so that that awareness of the provisions can be spread among the nonresidents. The critical evaluation of the withholding tax system provides that it has helped the government to collect taxes from the nonresidents in an effective manner. The revenue loss of the government has reduced, as the residents are required to pay the taxes if the nonresident avoid paying the taxes (Lai et al., 2016).

Based on the above discussion it can be said that the withholding tax system has been applied in an effective manner thereby improving the collection of taxes. However, the government should respond appropriately to ensure that nonresidents accurately complete the Form C. In order to avoid noncompliance it is suggested that assistance should be provided for marinating appropriate records. It is recommended that the tax liability of a resident taxpayer should be reduced if the resident taxpayer has pay the withholding tax (Koenig, 2014).

Relevant Case Law

Conclusion

The discussion of the above report highlights that withholding taxes has helped the Singapore government to increase revenue. It is advised that the government should take more steps to spread the awareness relating to the various provisions of the withholding taxes.

Reference

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Dyreng, S. D., Lindsey, B. P., Markle, K. S., & Shackelford, D. A. (2015). The effect of tax and nontax country characteristics on the global equity supply chains of US multinationals. Journal of Accounting and Economics, 59(2), 182-202.

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Hussain, H., & Manaf, N. A. A. (2016). Revisiting the Public Ruling Relating to Withholding Tax for Better Compliance.

Issa, N., & Stull, J. (2014). Saudi Arabia: Steady Growth amidst New Regulations. The Islamic Finance Handbook: A Practitioner’s Guide to the Global Markets, 421-432.

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Lai, T. K., Ng, T., & Tsang, K. P. (2016). Global Effects of US Dividend Income Tax.

She, J., & Li, X. (2017). A Survey of Electronic Commerce Tax Collection and Management. In Proceedings of the Fourth International Forum on Decision Sciences (pp. 497-506). Springer, Singapore.

Teck, T. and Oei, J., (2016). Singapore Master Tax Guide Handbook 2015/2016. 34th ed. Singapore: CCH Singapore.

Ting, A., Faccio, T., & Kadet, J. M. (2016). Effects of Australia’s MAAL and DPT on Internet-Based Businesses.

Weichenrieder, A. J., & Hebous, S. (2014). What Do We Know About the Tax Planning of German?Based Multinational Firms?.

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