Withholding Tax In Singapore: Purpose, Application, Exemptions And Consequences

Purpose of Withholding tax

Discuss about the Wealth Management Centre and International Relations.

In case of Singapore, withholding tax is a mechanism that has been used by the government of Singapore to collect income tax from the nonresident corporate who are functioning in the country. In the country, it is the responsibility of the receiver to pay the amount of tax. However, as provided in the law, the payer is responsible to withhold the amount of tax on behalf of the receiver and deposit the same to the government. However, as per the tax authorities of the Singapore, the amount of tax is likely to be withholding only in the case of the nonresident. The payer is not supposed to make any deduction in relation to the payment that is being made to a resident. Thus, it is important to determine the residential status of the corporate well in advance to make any deduction in relation to withholding tax (HussainandManaf 2016).

Numerous payments are matter to withholding tax. The Section 12 (6) of Singapore Income tax act, it is stated that any amount of interest, commission and technical fees that has been paid to the non-resident by a resident of the country in relation to any loan or indebtedness or under any arrangement is subject to withholding tax. The main source of the income should lie within the country itself, the payer is expected to deduct withholding tax on the amount that has been paid in to the nonresident (Tinget al. 2016). However, if the activities such as loan or indebtedness has been carried out by the nonresident outside Singapore, then in that case, the same will not fall under the purview of section 12 (6). In this case, the payer is expected to deduct withholding tax at the rate of 15% from the amount that has been paid in to the non-resident.

As per section 12(7) of Singapore Income tax act states that any payment that has been made in relation to royalty or any other amount that has been paid in relation to acquire right to use a movable asset/property  which has been deemed to be sourced in Singapore, will be eligible for withholding tax  by the resident. In this case, the payer is expected to deduct withholding tax at the rate of 10% from the amount that has been paid in to the non-resident (BraunerandBaez Moreno 2015).

As per section 12 (7) (b) of the Singapore Income tax act, any payment that has been made by the resident in relation to any kind of technical or scientific knowhow which has been sourced in Singapore to the non-resident would be eligible for withholding tax (Dyrenget al. 2015).

The section 12(7) (c) of the Singapore Income Tax Act provides that any payments that have been paid for the management or assistance in trade, business and profession is known as management fees. If the source of the management fees is in Singapore and the payments are made to a nonresident then it is mandated that the tax should be withheld. The rules relating to payment to related parties has been clarified in the year 1977 (Gandhiet al. 2016). It is stated that if the payment is made to parties that are related as well as unrelated parties as the management fees then in this case the section 12(7) (c) will not be applicable. For this there are two conditions that must be full filled, the first condition is that the expenditure is made at the arm’s length, the service is provided outside of Singapore and it was not the intention to avoid tax in Singapore. The withholding tax in this case that is applicable is 17% (Caruana-Galiziaand and Caruana-Galizia 2016).

Application of Withholding tax

The section 12(7) (d) of the Singapore Income Tax Assessment Act stated that rent or other payments related to the use of movable property is taken to be sourced from Singapore. If the moveable property is of a resident of Singapore or the expense is deductible from the income of a taxpayer of Singapore (Johannesenand Zucman 2014). It is important to make a distinction between the rent that is received from the use of movable property and that of immovable property. The withholding tax is applied on rent received from the movable property but not immovable property.

The other expenditure that is subject to withholding tax is of different types. The payments that are made to directors that are nonresidents are subject to withholding tax. The withholding tax rate of 20% is applicable in this case. The payments that have been made for the purchase of real property to a nonresident trader of property are subject to withholding tax (Kwan et al. 2016). The payments that have been made to professionals that are nonresident are subject to withholding tax. This includes coaches, consultants, trainers and others. The payments that have been made to public entertainers that are not residents of Singapore are subject to withholding tax (Foster 2014).The real estate investment trust distribution is subject to withholding tax. The withholding tax is also applicable for the withdrawals by the nonresidents from the supplementary retirement scheme.

This application of withholding taxes can be explained with the help of examples. If an entity in Singapore obtains loan from foreign bank and the entity has to pay interest on that loan. In such a situation the withholding tax is required to be deducted at the time of making payment. The organization in Singapore some time pays royalty income then in such case the withholding tax should be deducted. There are few companies that are required to hire consultants then in such case withholding tax are required to be deducted from their income.

If the taxpayer makes a default in making the payment of the withholding tax, then in that case he will be eligible for the penalties that will be imposed on him by virtue of section 45 of the SITA. As per section 45 (1), the amount that has been deducted by the person will be treated as debt to the government. If the person fails to make the payment of the tax amount, then in that case, the tax amount will be recovered from the person in the manner provided in section 89 of the act (Morita 2015). Further, if the payer fails to deduct the amount of withholding tax, then as per section 45 (1), the tax amount will be recovered from him. As per the income tax act, if the person fails to make the payment of the withholding tax to the government, then in that case, he would be liable to pay a penalty equivalent of three times of the amount of tax. In addition to this a fine of not exceeding $10,000 or a n imprisonment of a period not exceeding three years or even both. On the other hand, it is expected from the resident to make a timely payment of the tax amount. If the person fails to make the payment within the due date, he would be eligible for interest which may range maximum to 20% (Nooret al. 2016).

Consequences of defaulting withholding tax payments

There are certain payments that if being made in by the resident to the non-resident, no withholding tax will be deducted.

Specified software payments: As per the provision of tax laws, the software payments will be covered under the royalty section and thus will be eligible for withholding tax. However, few specified payments are being exempted from withholding taxation (Araki and Claus 2014). These expenses are software related to shrink-wrap, softwaredownloadableby end-users, softwares that are bundled with hardware and the right or use of scientist, industrial, technical knowledge and the digitized goods by the end users.

Further, any payment that has been made to the non-resident in relation to satellite of space will be exempt from the purview of withholding tax.

Any payment that has been by the non-resident by the resident for the use of international submarine cable capacity, including expenditure for Indefeasible Rights of Use withinFebruary 2003 to February 2013, will be exempt from the concept of withholding tax (Masui 2016). Any payment that has been made apart from the above specified period will be subject to withholding tax at the rate of 15%.

As per the tax laws, the person who has deducted the withholding tax on behalf of the nonresident, is required to pay off the amount by 15^th of the month after the date on that the payment has been made to the nonresident (Austin 2015).

As per the case law, the SG Co. was a company incorporated in Singapore and has overseas subsidiaries which carry out the business of leasing the aircraft. The amount of rent was fixed and thus in order to protect themselves from the interest rate fluctuations risk the company entered into IRS transactions (Wiedemannand Finke 2015). The SG Co was not deducting any tax on the IRS payments that has been made to the subsidiaries and the receipts that have been made from the bank were not in the tax bracket for the SG Co. in Singapore. The Comptroller did not accept this action of the company and he asked company to pay the withholding tax for the IRS payments. Later on, the high court decided that being the payment that has been made by the company was not in connection with any loan or indebtedness. Thus, there is no requirement of deduction of withholding tax.

Based on the above discussion, the concept of withholding tax has been a revenue generating exercise for the Singapore government. In Singapore, the outflows of overseas transactions are relatively on a higher side. In that case, the withholding tax has been provided a great platform which can be used by the government for collecting tax.In the current scenario, the withholding tax has been the area which has not been taken up seriously by the individuals as well by some of the corporate. In that the government has imposed heavy penalties in this case, as result of which the corporate and individuals operating in Singapore should be aware of the tax law obligation. Being in case of withholding tax, the entire burden falls on the nonresident, he should be very well aware of the legal obligations and the exemptions that would be applicable in this case. At times where the income is not eligible for the withholding tax, the nonresident should be aware about that and should be filling the tax return to claim refund for the amount that has been deducted in his or her name. All this process has been done with an intention to stream line the tax collection process, reduce the yearend tax burden on the nonresident, and maintain the cash flow position of the nonresident.

Exemptions on withholding tax

There are certain opportunities to make improvements in the withholding tax system in order to help nonresident tax payers and making the system more effective.The improvements can be made in the system so to ensure that the Form C is completed accurately. The system should be developed so that proper documentation can be maintained and penalties can be avoided. Further steps can be taken to reduce the tax liability of thoseresident taxpayers that have to pay withholding tax on behalf of the nonresidents in certain circumstances. The information system should be improved so that the taxpayers can have information’s about treaties so that they can reduce their tax liability. The above-mentioned improvements if implemented will increase the effectiveness of section 45 of SITA or the withholding tax system.

Conclusion

Based on the above discussion it can be concluded that the withholding tax plays an important role in the economy of Singapore. On criticalevaluation, it can be seen that the system of withholding tax has helped in increasing the revenue of the government. Therefore, it can be concluded that the information relating to withholding tax should be shared to the resident and nonresident taxpayers for proper implementation of the system.

References

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