Double Tax Treaties Guide

What is a Double Taxation Agreement (DTA)?

A Double Taxation Agreement (DTA) is an agreement between two countries that seeks to prevent double taxation of taxpayer’s income that may flow between the two countries.

To understand how a DTA works, we first have to learn what can cause double taxation in the first place. Double taxation arises because tax rule can differ across countries:

1. Some countries (such as Singapore) use a territorial system for taxation while others (such as Australia and USA) use a worldwide basis for taxation. As a result, income flowing from Singapore to Australia can get taxed twice in the absence of a DTA.
2. Countries can differ in how they determine the “source rules” for income. Some consider the place where income arises to be the “source” while others consider the place where the income is received to be the “source”.
3. Rules for determining the tax residence of an individual or a company can be different. For illustration, assume that country A considers a person to be a resident of that country if the person resides there for 100 days in a year. If country B also has a similar rule then it is possible for a person to be considered a resident of both countries for a given year if he or she spends at least 100 days in each country. As a result, the person may be subject to double tax on his income for that year by country A and B.

A DTA works by clarifying the rules for these and similar other situations where double taxation can result because tax rules of the two countries are in conflict or are ambiguous. Now, let's explore in detail the key advantages of DTAs for businesses and individuals involved in cross-border transactions.

Benefits of Double Taxation Agreements

1. Prevention of Double Taxation:
   DTAs ensure that income is not taxed twice — once in the country where it is earned (the source country) and again in the country where the taxpayer resides. DTAs achieve this by clearly defining the taxing rights of each country and offering specific provisions for tax credits, relief, or exemptions to avoid double taxation. This is especially important for companies and individuals earning income across multiple jurisdictions, as it helps prevent excessive tax burdens.
2. Lower Withholding Tax Rates:
   Many DTAs reduce withholding tax rates on dividends, interest, and royalties. For instance, under the Singapore-India DTA, Indian companies distributing dividends to Singapore holding companies face a reduced withholding tax rate of 10%, instead of the standard 20%. This allows businesses to retain more of their earnings.
3. Certainty in Taxation:
   DTAs provide clear rules and definitions for issues like tax residency, Permanent Establishments, and types of income that can be taxed in each country. This clarity reduces the risk of tax disputes and ensures that businesses and individuals can plan their business operations with greater certainty.
4. Promoting International Trade and Investment:
   DTAs eliminate tax barriers, encouraging businesses to expand internationally. By reducing the risk of double taxation and clarifying tax obligations, DTAs make cross-border trade and investment more attractive, especially for multinational companies.
5. Exchange of Information:
   Many DTA’s also establish the protocols for exchange of tax-related information between the two countries so that they can accurately monitor income flows between them and enforce their tax rules.

How It Works: A Case Study

Routing Investments through Singapore – A U.S. Investor in Cambodia

To demonstrate the benefits of Singapore DTAs, let's consider a U.S. investor earning profits in Cambodia and routing them through a Singapore company to reduce the impact of double taxation.

If the investor were to remit profits directly from Cambodia to the U.S., they would face a Corporate Income Tax (CIT) rate of 20% in Cambodia, along with a 14% withholding tax on dividends. Since the U.S. and Cambodia do not have a DTA, the investor's realized profit would be reduced to 68,8% of the total income after taxes.

However, by routing the same investment through Singapore, the investor could take advantage of Singapore’s DTA with Cambodia. The DTA reduces the withholding tax on dividends between Cambodia and Singapore to 10%. Moreover, even though the U.S. and Singapore do not have a DTA, Singapore does not impose additional withholding taxes on dividends remitted from Singapore to the U.S. As a result, the realized profit would be 72% that is 3,2% higher compared to a direct remittance.

Route 1: Direct Remittance from Thailand to the U.S.

• Cambodia: Post-tax profits of (100 - 20% CIT) = 80%.
• Withholding Tax: 14% dividend withholding tax on remittance to the U.S.
• Final Realized Profit: 68,8% of gross total income.

Route 2: Routing through Singapore

• Cambodia: Post-tax profits of (100 - 20% CIT) = 80%.
• Singapore: Dividend withholding tax is reduced to 10% under the Thailand-Singapore DTA, resulting in a Singapore realized profit of 72%.
• U.S.: Since there is no additional withholding tax between Singapore and the U.S., the final remittance from Singapore to the U.S. does not face further deductions.
• Final Realized Profit: 72% of gross total income.

Income Types Covered Under a DTA

The income types covered by each Singapore Double Taxation Agreement may vary slightly depending on the specific treaty between Singapore and the respective country. However, DTAs generally cover the following common categories of income to prevent double taxation:

• Dividends
• Interest
• Royalties
• Capital gains
• Income from immovable property
• Profits from business
• Profits from shipping and air transport
• Professional services
• Salaries and wages
• Directors’ fees
• Income of artists and sportspersons
• Pensions
• Government payments
• Payments to students and trainees
• Permanent establishment profits

Singapore’s Double Tax Treaties (DTAs)

Singapore's extensive network of DTAs (concluded with more then 100 countries) ensures that a company doing business with or from Singapore will not face double taxation.

RESIDENCY REQUIREMENTS

In order to avail the benefits of a Singapore DTA with another country, you must be a resident of Singapore or the other country. A Singapore resident is defined under Section 2 of the Singapore Income Tax Act as:

An individual: A person who, in the year preceding the year of assessment, resides in Singapore except for such temporary absences therefrom as may be reasonable and not inconsistent with a claim by such person to be resident in Singapore, and includes a person who is physically present or who exercises an employment (other than as a director of a company) in Singapore for 183 days or more during the year preceding the year of assessment; and

A company or body of persons: A company or body of persons the control and management of whose business is exercised in Singapore.

Thus, if you or your company fulfills the above residency requirement, you can use the provisions of any Singapore DTA with Singapore as your Resident State. Note that even if a DTA does not exist between Singapore and another country with which you are doing business, you may still be able to avoid double taxation by taking advantage of Singapore’s Unilateral Tax Credits for Singapore residents.

TYPES OF TAX RELIEF

In order to obtain relief under a tax treaty, the taxpayer submits a Certificate of Residence to the non-resident country i.e. the country in which the taxpayer does not reside. If you are a Singapore resident, the proof of your Singapore tax residency should be submitted to the other treaty country. If on the other hand, you are a tax resident of a treaty country, you will submit to the Inland Revenue Authority of Singapore, a completed Certificate of Residence from Non-Residents certified by the tax authority of the treaty country in order to obtain relief from Singapore Income Tax under the DTA.

The relief available under a DTA from a treaty country differs from one DTA to another. In most cases, the Residence State will either give credit to its residents for taxes paid to a non-Resident State or exempt income from taxes if taxes have already been paid to a non-Resident State on that income.

The specific methods of tax relief available in Singapore are the following:

1. Full Exemption: The income that has been subject to taxation by the non-Resident State is left out altogether from any calculation of taxes by the Resident State. Thus, the relevant income is not included while determining the rate of progressive tax that is to be imposed on the rest of the income.
2. Exemption With Progression: Under this method, the income in question is not taxed by the Residence State but it is taken into account for the purpose of determining the progressive tax rate that is to be applied on the rest of the income.
3. Ordinary Credit: Under this method, the Resident State provides a credit equal to its own tax on the income in question. If the tax paid to the other country is higher than the tax in the Resident State, the taxpayer would not receive full relief.
4. Full Credit: The full amount of tax paid to the other country is available as a credit while calculating the taxes in the Resident State. If the foreign country charges a higher tax rate that the Resident state, the Resident State gives up some of its own tax under this method.
5. Tax Sparing Credit: In most circumstances, a tax credit is given by the Residence State only if the income has been actually taxed in the other country. Tax sparing credit is a special form of credit whereby Residence State agrees to give a credit of the tax which “would have been paid” in the country of source but was not, i.e., it was “spared”. Tax Sparing Credits are extremely useful and can reduce the effective tax rate to be lower than that charged by either of the two treaty participants.

DTA’S CONCLUDED BY SINGAPORE

Singapore has executed an extensive network of DTA’s or other similar tax agreement with most of the important economies of the world. These can be of the following types (note that in the case of some countries – e.g. United Arab Emirates – Singapore has more than one type of agreement):

1. Avoidance of Double Tax Agreement (DTA): These agreements are designed to prevent double taxation of income resulting from transactions between the two signatory countries.
2. Non-Ratified DTA’s: These are DTA’s that have been signed by the two countries but that have not yet been ratified by their respective legislative authorities. Non-Ratified DTA’s do not yet have the force of the law but are likely to made effective retroactively in the future.
3. Limited Treaties: These agreements are not as extensive as a DTA but address similar issues. Typically, they only cover shipping and/or air transport income.
4. Exchange of Information Arrangements (EOI Arrangements): EOI Arrangements only include provisions for the exchange of information for tax purposes. Treaty partners may request information under an EOI Arrangements from the Comptroller of Income Tax. Note that a DTA will include EOI Arrangements.

See below the list of Singapore’s tax agreements to find out if your country has a tax agreement with Singapore and to learn the specific provisions of that DTA.

List of Singapore’s Avoidance of Double Taxation Agreements

Agreements Which Are Signed but Not Ratified

Limited Double Taxation Agreements 

Exchange of Information Arrangements

KEY FEATURES OF A TYPICAL DTA

Every DTA is extensively negotiations between the two signatory countries. The countries have their own national objectives, policy constraints, and tax philosophies and they may make various compromises to conclude the DTA. As a result, every DTA is unique.

However, all DTA’s share certain common features. In order to understand the provisions of a specific Singapore DTA, it is helpful to review these common features. This provides a useful frame to analyze a specific DTA. A typical Singapore DTA will usually address the following provisions in its articles:

1. Who is covered by DTA? Coverage is limited to the Residents of Singapore and the treaty country.
2. DTA’s are usually limited to taxes on income. Therefore, taxes on customs, value added taxes and excise duties are not covered by the DTA.
3. How is Permanent Establishment (PE) in a country defined?
4. Taxing Rights of the two countries for different types of income are specified.
5. Method for eliminating Double Taxation is specified for each of the two countries.
6. Any special provisions are listed.

Tax Relief in Absence of DTA

A Singapore resident can avoid double taxation even in the absence of DTA with a particular country. This is due to the fact that (as explained in the sections above) Singapore’s domestic laws exempt most types of foreign-sourced income (including dividend, foreign branch profits and foreign-sourced service income) received in Singapore on or after 1st June 2003 from taxes if certain conditions are met. In summary, these conditions are:

1. The highest corporate tax rate (headline tax rate) of the foreign country from which the income is received must be at least 15% at the time the foreign income is received in Singapore.
2. The foreign income had been subject to tax in the foreign country even though the actual tax rate paid on the income can be different from the headline tax rate.

Visit IRAS website for more information on this topic.

UNILATERAL TAX CREDITS

Unilateral Tax Credits (UTC) can be used in case of countries with which Singapore does not have a DTA. A UTC is allowed for the foreign tax paid by Singapore tax residents on the following types of income derived from that foreign country if such income is repatriated to Singapore:

1. Income from any professional, consultancy and other services rendered in any territory outside Singapore (with effect from YA 2003).
2. Any royalty derived from outside Singapore (with effect from YA 2004) where the royalty is:
   • not borne, directly or indirectly, by a person resident in Singapore or a permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore); or
   • not deductible against any income accruing in or derived from Singapore.
3. Dividend income.
4. Employment income.
5. Branch profits.
6. Effective from Year of Assessment 2009, UTC are granted on all foreign-sourced income received in Singapore by Singapore tax residents from non-DTA countries.

Conclusion

The increasing integration of economies across the globe has resulted in increased income flows across borders. Due to conflicting tax policies between countries, this can result in double taxation of certain types of income. Not only does Singapore ensure that such double taxation not occur when a company is trading from or with Singapore, it goes further by explicitly exempting all foreign sourced income of a Singapore company from taxation in Singapore as long as it meets certain criteria. In most cases, it is easy to meet the qualifications for this exemption. But in the unlikely situation that your company’s foreign income does not meet them, Singapore’s double tax treaties or its Unilateral Tax Credits will ensure that you do not end up paying taxes on such income.

Avoidance of Double Tax Agreements are designed to remove this unfair penalty and encourage cross-border trade. Singapore has an extensive network of such agreements that cover about 100 countries. If you are doing business with Singapore from country that has a DTA with Singapore, you are unlikely to face double taxation. Furthermore, even if there is no treaty between a country and Singapore, a Singapore resident can take advantage of Singapore’s unilateral tax credits to avoid double taxation for transactions with that country.

Therefore, a Singapore based company is unlikely to ever suffer from double taxation. This is an important reason to consider locating your company in Singapore.

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