How are your business income taxed?
Basis of Determining if an Income Stream is Taxable
A company is liable to pay tax on income accrued in or derived from Singapore or income received in Singapore from outside Singapore in respect of:
- gains or profits from any trade or business
- income from investment such as dividends, interest and rental
- royalties, premiums and any other profits from property
- other gains of an income nature
The following instances of income are not taxable under the current Singapore tax framework
- Capital gains which include gain on disposal of assets (example: sale of property held for own use) and gain on foreign exchange differences arising from capital transactions.
- Income streams that are specifically exempt under provisions of the Singapore Income Tax Act which include exempt shipping income derived by a Shipping Company; and foreign-sourced dividends, branch profits & service income received by a resident company that satisfies the qualifying conditions.
For general businesses, it is important to take note of the following streams of income which may be applicable for you:
|Government Grants||Generally, if government grants are given to supplement trading profits or defray operating expenses, the grant given will be considered TAXBLE income.
If the government grants are given for the company to acquire capital assets, it is capital in nature and thus NOT subjected to tax.
|Special Employment Credit||The SEC is granted to defray operating costs, it is revenue in nature and thus TAXABLE|
|PIC 60% Cash Payout||The Cash Payout is granted is NOT Taxable.|
|PIC Bonus Payout||The PIC Bonus Payout is TAXABLE|
|SME Cash Grant||SME Cash Grant given by IRAS are specifically EXEMPT from tax by the Income Tax Act.|
Foreign Sourced Income Exemption
A Singapore tax resident company may enjoy tax exemption on its specified foreign income that is remitted into Singapore on or after 1st Jun 2003, subject to the meeting of qualifying conditions. The specified foreign income includes foreign sourced Dividends, foreign branch profits and foreign sourced service income.
The qualifying conditions include:
- The highest corporate tax rate (also called the headline tax rate) of the foreign country from which the income is received is at least 15% at the time the foreign income is received in Singapore;
- The foreign income had been subjected to tax in the foreign country from which they were received (The income need not be taxed at the headline rate).
- The Comptroller of Income Tax in Singapore is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
What if the Foreign Sourced Income is Not Tax Exempt?
Foreign Income, which is not tax exempt in Singapore, may be subjected to taxes twice, once in the source country and another time when the money is remitted into Singapore. Foreign tax credit (FTC) is granted by allowing the Singapore tax resident company to claim a credit for the tax paid in the foreign country against the Singapore tax that is payable on the same income. Essentially, the FTC will alleviate the business owners from paying more taxes than they should. As a general guide, the final tax amount paid will approximate or equal the taxes you pay to the country with the higher headline tax rate, after the FTC.
FTC is classified into two main types. The Double Tax Relief (DTR) and the Unilateral Tax Credit (UTC).
The DTR is granted if an Avoidance of Double Taxation Agreement (DTA) exists between Singapore and the foreign country.
A DTR is granted by allowing the Singapore tax residents to claim a credit for the amount of tax paid in the foreign country against the Singapore tax that is payable on the foreign sourced income. The determination of whether a Company is a tax resident in Singapore will depend on whether the control and management of its businesses is exercised from within Singapore.
UTC is granted on all foreign-sourced income received in Singapore by Singapore tax residents from non-DTA countries. Before you can claim for UTC, the foreign sourced income must be subjected to taxes in the foreign country, and the Company must be a Singapore tax resident.
The amount of FTC depends on the nature of the foreign sourced income and is subjected to the specific terms and conditions as specified in the DTA with the relevant treaty country.
In general the FTC is computed based on the lower of the actual amount of foreign tax paid; or the amount of Singapore tax attributable to the foreign income (net of expenses).