Singapore companies have the option to claim the foreign tax credit ("FTC") for an amount of tax paid to a foreign authority against Singapore tax due on the corresponding income.
A Singapore company that received a foreign income may be subject to tax twice. Firstly, based on the foreign authority and secondly, when this income is received in Singapore.
Below are the options to avoid double taxation in Singapore:
1. Double Tax Relief
Double tax relief (DTR) is offered under the Avoidance of Double Taxation Agreement (DTA) to minimise cases of being taxed twice. This is provided in the form of a tax credit. A Singapore tax resident can use the DTR to claim credit for the total sum of tax paid to a foreign authority. DTR is capped at the lower amount of the Singapore tax payable and the foreign tax paid.
A company is deemed to be a Singapore tax resident if the management and control of the business take place in Singapore.
2. Unilateral Tax Credit (UTC)
The unilateral tax credit came into force in Year of Assessment 2009 and is applied to all foreign-based income that is received in Singapore by a local tax resident, and from a jurisdiction that does not have a DTA with Singapore.
Conditions to claim FTC
To claim FTC, a company must comply with all below conditions:
a) The company is considered a Singapore tax resident for the relevant year of assessment;
b) Tax is payable or paid on the same foreign income to the foreign tax authority; and
c) The foreign income is subject to Singapore tax.
Please note that FTC is not applicable to a loss making company.
Any company with a permanent establishment (PE) overseas and the foreign earnings are sourced through that PE, the income is usually taxable overseas. The FTC is only applicable when the foreign earnings are also taxed in Singapore.
Passive income (dividends or interest) sourced outside Singapore is likely to be taxed in the foreign country in the relevant year of receipt. These passive income is subject to Singapore tax in the year of remitting back to Singapore. FTC is given when the passive income is taxed in Singapore.
How to compute FTC
FTC is the lower amount of the Singapore tax related to the net foreign earnings OR the actual amount of foreign tax paid to the foreign tax authority.
How to claim FTC
The company can claim FTC in Form C Income Tax Return.
The company must maintain evidential documentation to support the FTC claim:
a) Tax authority in which a foreign tax was paid
b) Description of the foreign income
c) Full details of services provided; also whether the earnings relate to a permanent establishment in the foreign country and the basis for making the claim
d) Details of the foreign company making the payment
e) A copy of the withholding tax voucher and relevant details
f) Gross income, amount withheld and withholding tax rate (in foreign currency and SGD equivalent)
g) The relevant DTA for the FTC claim
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