Withholding Taxes

Withholding Tax in Singapore

Withholding is a system for efficiently collecting income tax from non-residents. Unless otherwise specified in the contract, non-residents are income earners and therefore have a tax liability or burden. However, the withholding tax burden shifts from the non-resident to the payer. This is because payers report and remit taxes to the IRAS (Susila & Pope, 2014).

Under such a system, payers are legally required to withhold tax before making payments to non-resident entrepreneurs whose sources of income are in Singapore. Withholding tax is a fixed percentage of a non-resident's gross income. The payer collects it on behalf of the government and thus has a legal duty to report to the Comptroller and remit it to the Internal Revenue Authority of Singapore (IRAS). Withholding tax does not apply to the residents of Singapore and therefore, it is important to ascertain the tax status of the recipient.

Section 45 of the Singapore Income Tax Act (SITA)

Section 45 of SITA provides that where the payer is liable to make any taxable amounts to a non-resident, he or she should deduct tax using the appropriate rate and should as well give notification of the deduction in writing to the Comptroller of Income Tax (CIT). If the payments are not made directly to the non-resident but reinvested, accumulated or capitalized on his or her behalf, sec 45(8)(b) of SITA considers such payment to have been made to the non-resident on the date it was reinvested (Susila & Pope, 2014). Besides, the withholding tax should be accounted for when the liability to pay the income arises based on what is agreed upon in the contract, when the income is credited to the non-resident account, reinvested, or capitalised, or when the actual payment of income takes place whichever comes first.

Payments That Are Subject to Withholding Tax

A payer has to withhold tax if he makes any of the following payments to a non-resident. The only income that has been earned in Singapore is subject to withholding tax. Firstly, any interest, commission, fees or any other payment that is connected to a loan or indebtedness are subject to withholding tax. Secondly, royalty or any other payment to the non-resident for allowing the use or right to use movable property is subject to withholding tax. Thirdly, payments to a non-resident for allowing the use of educational materials and information is subject to withholding tax (Diamond & Diamond, 2013). Finally, rent and other payments for the use of any movable property, payments for the purchase of real property from a non-resident property trader, and distribution of real estate investment trust constitute payments that are subject to withholding tax pursuant to section 45 of SITA.

The deadline in which the payer should pay the withholding tax

The deadline in which the payer should pay the withholding tax is the 15th day of the following month after the date of payment to the non-resident. Therefore, if the non-resident received the payment on January 10, 2017, the payer should pay the withholding tax to the IRAS any day between January 11, 2017, to February 15, 2017. If the payer makes multiple payments to the non-resident under one engagement contract, he is allowed to consolidate the payments and remit the withholding tax to the IRAS. The remittance should be made by the 15 days of the following month as long as the interval between the first payment to the last payment to the non-resident professional is less than 60 days (Wiedemann & Finke, 2015). That means that all payments done within 60 days from the first payment to the same non-resident professional in relation to the same engagement contract can be consolidated. However, any payments made subsequent to 60 days’ period after the first payment to the same non-resident, the withholding tax should be accounted for and remitted to the IRAS separately.

Withholding Tax Rate

The amount of the withholding tax the payer pays depends on the type of payment being made and on the person receiving the payment. If the payment is a management fee, technical or other service fees that are paid to a non-resident company, the rate of the withholding tax is the same as the corporation rate which is 18% but if the payment is to a non-resident individual, the rate of withholding tax is 22% of the gross payment. The payment of time charter fees, voyage charter fees or bareboat charter fees are subject to a withholding tax rate of 1% to 3%. Any other form of payment, the applicable withholding tax is either 10% or 15%. In case of a situation where double tax agreement is applicable, the rate of the withholding tax is the specified rate in the agreements of the respective country.

Penalties on Withholding Tax

Penalties are imposed on the payer if he fails to withhold tax, to notify the comptroller regarding the tax withheld and late payment of the withheld tax. Section 45(1) of the SITA provides that the amount deducted from the income of an individual is a debt to the government and should be remitted to the IRAS pursuant to section 89 of the SITA (Wiedemann & Finke, 2015). Section 45(3) states that if a payer fails to deduct the amount of tax as required by section 45(1), the amount is recovered from him. On the other hand, if the payer has deducted a withholding tax from the income of a non-resident and fails to submit form IR37 that requires him to declare and remit the deducted tax to the IRAS, then payer is liable for a criminal offence and when found guilty of the offence, he pays a penalty three times the amount of the withholding tax. Besides, the payer is liable to a fine that is not more $10,000 or imprisonment for a term that is less than three years or both. Finally, the penalties imposed on the payer if he fails to pay the withholding tax by the 15th day of the following month after the payment was made includes a maximum of 20% of the withholding tax that is due (Kwan, Bali & Asher, 2016). The 20% includes an immediate 5% for failing to pay the deducted tax on the due date and 1% of every month that pass and the payment are made up to a maximum of 15%.

Exemptions from The Withholding Tax

Certain payments to the non-resident are exempted from the withholding tax. They include specified software payments. Section 45 states that software payments are subject to a withholding tax of 10% or 15% if it relates to a period before January 5, 2005, unless it has been exempted by a particular treaty. Such software payments include a software that can be downloaded by an end user, shrink-wrap software, software that is bundled with a computer, use of educational information and site licenses (Kwan, Bali & Asher, 2016). Secondly, payments made to a non-resident in relation to renting a space satellite in the period between July 1, 1997, to July 10, 2012, is exempt from the withholding tax of 5% which is final. Finally, payments to the non-resident for the use of submarine cable capacity are subject to a withholding tax of 15% or a reduced rate depending on the applicable treaty (Sharkey, 2015).

Examples of Cases Relating to Withholding Tax

ACC v Comptroller of Income Tax [2010] SGHC 316 is a case in which the applicant a company incorporated in Singapore, required an order by the Comptroller regarding withholding tax paid by the company to its foreign subsidiaries to be quashed. The company deals with aircraft leasing and so do its subsidiaries and most of them are considered to be special purpose companies (SPC). It was held that the payment to the SPC did not qualify to be subjected to withholding tax pursuant to Section 45 since such payments were not connected to any loan or indebtedness borne by the resident company to the non-resident SPC (“ACC v Comptroller of Income Tax” n.d.).

Conclusion

Many companies and individuals tend to overlook the issue of the withholding tax. Considering the heavy penalties which are imposed on the payer, legal entities operating their business in Singapore should take the issue seriously and deduct the withholding tax pursuant to section 45 of the SITI. On the other hand, the non-residents should be familiar with the exemptions of the withholding tax since the tax burden lies on them. In cases where the withholding tax is inevitable, the non-resident should consider filing tax returns so that the income can be assessed on a net basis if the withholding rate is the corporation tax rate. That way, the non-resident will be in a position to minimise tax and optimise cash flows.

References

ACC v Comptroller of Income Tax. (n.d.). Retrieved from http://www.singaporelaw.sg/sglaw/laws-of-singapore/case-law/free-law/high-court-judgments/14344-acc-v-comptroller-of-income-tax-2010-sghc-316

Diamond, W. H., & Diamond, D. (2013). Foreign Tax and Trade Briefs-International Withholding Tax Treaty Guide. LexisNexis.

Kwan, C. Y., Bali, A. S., & Asher, M. G. (2016). Organization and Reporting of Public Financial Accounts: Insights and Policy Implications from the Singapore Budget. Australian Journal of Public Administration, 75(4), 409-423.

Sharkey, N. (2015). Coming to Australia: Cross border and Australian income tax complexities with a focus on dual residence and DTAs and those from China, Singapore and Hong Kong-Part 1. Brief, 42(10), 10.

Susila, B., & Pope, J. (2014). Why the tax compliance costs of large companies in Indonesia are low compared to other countries: empirical evidence. Austl. Tax F., 29, 59.

Wiedemann, V., & Finke, K. (2015). Taxing investments in the Asia-Pacific region: The importance of cross-border taxation and tax incentives. ZEW-Centre for European Economic Research Discussion Paper, (15-014).