USE OF TAX TREATIES – INBOUND AND OUTBOUND

Gurbachan Singh GSM Law LLP

Singapore

Singapore Tax Framework

Generally, Singapore imposes tax on a territorial basis :

a) Any income accruing in or derived from Singapore; or

b) Any income received in Singapore from outside Singapore.

Singapore Tax Framework

However, certain foreign-sourced income is exempted :

Singapore resident company is exempted from tax in respect of foreign sourced :

▪ Dividend income

▪ Branch Profits

▪ Income from provision of professional, consultancy or other services

Even if the income is receive into Singapore, PROVIDED

Singapore Tax Framework

1) Headline tax rate of country from which income is received is at least 15%;

2) The income has been subject to tax in that foreign country *.

3) Tax exemption is beneficial to the Singapore resident taxpayer.

* Specific exemptions may also be granted on a case by case basis if condition (2) above cannot be met for bona fide reasons – e.g. Effect of relief for fiscal losses in foreign country, tax incentive schemes provided by foreign country, need for dividend to flow through exempt intermediate holding companies.

Singapore Tax Framework

These exemptions may be regarded as conditional and represent an exemption method of providing DTA relief.

Singapore Revenue believes that it does not offend the limitation of relief provisions of Article 24 of the Singapore-India DTA which deny treaty benefits in respect of Indian source dividend income that is not taxed when it is received into Singapore.

Singapore Tax Framework

Corporate tax rate : 17% (w.e.f. YA 2010)

Partial Tax Exemption available

First $10,000 @ 75% = S$ 7,500

Next $290,000 @ 50% = S$145,000

S$152,500

New Start-up Companies (for first 3 consecutive YAs)

First $100,000 @ 100% = S$100,000

Next $200,000 @ 50% = S$100,000

S$200,000

Therefore, effective tax rate is 8.9% and 6% respectively

Singapore Tax Framework

Loss carry-forward & carry-back

Losses arising from carrying on of a trade, business or profession are allowed to be carried forward.

However, w.e.f. YA 2006,

▪ Unutilised capital allowances and trade losses may be carried back for three YAs (limited to S$200,000)

▪ There must not have been substantial change in shareholding and business

Singapore Tax Framework

Group relief

▪ W.e.f. YA 2003

▪ Unabsorbed capital allowances, losses and donations may be transferred to company within a group

▪ Qualifying companies are companies in which a minimum controlling interest of 75% is held by or through a Singapore incorporated holding company.

Singapore Tax Framework

Deductibility of Expenses

Expenses incurred in the production of income are allowable as deductions in the year in which they were incurred. However, deductibility will be ringfenced against income producing investments if assets are held as investment property, and not for trade. Deductibility is more liberal if assets are held as trading stocks.

Losses from trade can be carried forward or relieved against any other statutory income.

Singapore Tax Framework

Wide treaty network –

▪ 76 comprehensive double tax agreements (including India and Mauritius)

▪ 8 limited treaties

▪ 1 Exchange of Information arrangement

▪ 9 treaties which have been signed but not ratified

Use of Treaty Provisions

Entity which is resident in Singapore will be able to avail itself of treaty provisions.

Statutory Provision - Section 2(1) of SITA

Company whose business is managed and controlled in Singapore will be regarded as resident in Singapore.

Common Law

Consolidated De Beers vs Howe [1906] AC 455. As propounded by Lord Loreburn:

“…. to proceed upon the analogy of an individual, … we ought to see where it (a company) really keeps house and does business … and the real business is carried on where central management and control actually abides.”

Use of Treaty Provisions

Significance of Company’s Residence

▪ Resident can be taxed on offshore income if remitted into Singapore, but not non-resident.

▪ Only a Singapore resident can benefit from Singapore’s tax treaty network BUT,

- meaning of resident under domestic law may be substituted by tie-break provisions in the DTA where there is conflict of laws between DTA parties.

- Country of incorporation ⎯ irrelevant. (Relevant only for Group Relief provisions which are applicable for Singapore incorporated entities)

▪ Singapore-India DTA - place of effective management is the key.

Use of Treaty Provisions

Management and Control– where exercised?

▪ Local case (NB v CIT, 2006 MSTC 5,571) :

- Majority of Board members were non Singapore residents.

- Singapore resident Directors appointed for incorporation purposes only, performing a formal non-executive role for nominal fees.

- All Business decisions are effectively initiated by non-resident directors, whether recorded as Board Resolutions or otherwise.

Use of Treaty Provisions

Management and Control (2)

- Board meetings held in Singapore with a small quorum to endorse decisions taken by a dominant director or shareholder outside Singapore.

- A director under the Companies Act includes any person in accordance with whose directions or instructions Board members act.

- Keeping all corporate secretarial, accounting and board resolution records in Singapore.

HELD : Company not resident in Singapore

Singapore-India Treaty

Protocol amending Treaty between Singapore and India

▪ Come in force on 1 August 2005

▪ Significant changes to the Singapore-India DTA with respect to the following areas :

- Article 13 (Capital Gains) – Capital Gains derived by the resident of a contracting state (e.g. Singapore) from alienation of movable property or from shares in companies which are situate in or resident in the other state (e.g. India) ⎯ not taxable

Singapore-India Treaty

- Article 12 - Withholding tax on Fees from Technical and Income from lease of movable equipment reduced from 15% to 10%

- Article 28 - Exchange of information available on request. Information requested has to be “foreseeably relevant” to a domestic tax enquiry

- Benefit of Article 13 of Treaty not available if affairs arranged with the primary purpose of taking advantage of treaty.

Comment : Qualitative clause, highly subjective.

Singapore-India Treaty

Shell / conduit company not entitled to benefits of Article 13 of Treaty :

▪ Entity which is resident but with negligible or no business operations or no real and continuous business activities with the Contracting State

▪ Total annual expenditure on operations is less than S$200,000 or Indian Rs 50,00,000 in preceding 24 months period from date of gain arising

Singapore-India Treaty

Company deemed not a Shell/conduit company if :-

▪ It is listed on a recognised Stock Exchange of Singapore or India; or

▪ Total annual expenditure of at least S$200,000 or Indian Rs 50,00,000 in 24 months immediately preceding the date of gains

Benefit under the Singapore-India Protocol available so long as similar benefits available under India – Mauritius Treaty.

Comment :

Unusual provision; Singapore – India Protocol appears subservient to and dependent on India - Mauritius treaty which seems to set the benchmark for others.

Singapore-India Treaty

Under the Singapore-India DTA applicable tax rates on :

Interest – 15%

Royalties - 10%

Technical Service fees – 10%

Dividends – none (however dividends taxed at lower rate of 10 or

5% in India)

Structuring Investments With Intermediate Singapore Company

▪ If borrowing obtained by A to invest in Singco, no deduction for interest expense as dividend is exempt

▪ Singco’s dividend income from its investments in X is exempt from tax, provided the headline tax rate in overseas country (of X) is at least 15%

▪ No tax on distribution of dividend by Singco.

▪ Capital gain on transfer of shares of A not taxable in India and Singapore

▪ No capital gain tax in the hands of Singco on transfer of X shares

Indian Shareholder (A)

Singco

Investment in overseas country

(X)

Interest Dividend - noWHT

Dividend exempt if tax rate

> 15%

Singapore As An Offshore Jurisdiction

▪ Singapore – a location with business substance

- Already a hub for several MNCs having Global and Asian regional headquarters

- Proximity to South-East Asian countries

- Large Tax Treaty network – including favourable treaties with China and India, and South East Asian countries

- Not tainted by Tax Haven status or allegations

Singapore As An Offshore Jurisdiction

▪ Singapore is a serious contender for investments into and from India. However, tax planning should be embedded with necessary substance and commercial rationale