Taxes are a major concern for businesses big and small. When an individual or business generates income outside its residence state, that income could be subjected to double taxation – at the source state (where the income was generated) and the residence state (where the income is received).
To avoid such double taxation, Singapore has entered into 74 comprehensive Avoidance of Double Taxation Agreements (DTAs). Some of these DTA partners follow a worldwide taxation system, unlike the territorial taxation system followed by Singapore.
In this article, we will take a closer look at double taxation, Singapore’s DTAs and how they can be advantageous to an individual or business residing in Singapore.
What is Double Taxation?
Double taxation is a term used to define two separate taxes subjected on the income generated by an individual or business in two separate jurisdictions. Double taxation arises when the source state and the residence state both impose taxes on the income generated. Countries such as the United States of America and Australia follow a worldwide taxation system.
According to this system, an individual or business based in the United States must pay tax on all of its income, irrespective of where that income was generated. This kind of tax system leads to double taxation. However, Singapore, along with many other countries follows the territorial taxation system, where tax needs to be paid only on the income generated within the country. This protects individuals and businesses based in Singapore from double taxation.
A DTA is a treaty between two jurisdictions trying to prevent double taxation. A DTA clearly defines the tax authority of each jurisdiction. It also clearly defines when and how tax is imposed by the source state and the residence state. However, one of the most important things defined in the DTA are the provisions for one of the jurisdictions to provide tax credit or tax exemption.
There are three ways in which a DTA can prevent double taxation:
- By allowing full taxation rights to one jurisdiction and exempting the other;
- By allowing limited taxation rights to the source state and the residence state providing a credit for the taxes paid in the source state;
- By allowing full taxation rights to both jurisdictions and the residence state providing a credit for the taxes paid in the source state. This way a DTA agreement tries to alleviate the problem of double taxation, while at the same time defending the taxation rights of both jurisdictions.
What are Types of DTA
There are two main types of DTAs signed by Singapore. There’s the comprehensive and the limited DTA. Comprehensive DTAs cover all types of income and allows the exchange of information for tax purposes. Limited DTAs only cover income generated from shipping and air transport. Singapore has signed comprehensive DTA agreements with G6 participant nations such as France, Germany, Italy, Japan and the United Kingdom. In all, Singapore has signed 74 comprehensive DTA agreements and 8 limited DTA agreements.
What are the Advantages of DTA
Due to the DTAs signed by Singapore, the businesses based here are protected from double taxation. This allows them to compete with foreign businesses on an even playing field, making it easier for a Singapore based company to branch out globally as opposed to anywhere else in the world. The DTA also allows an entrepreneur the freedom to base his business in Singapore and receive the profits of that business in his home country. The money you save in taxes can be used to further expand your business. What more do you want?
It is evident that Singapore’s network of Avoidance of Double Taxation Agreements is one of the reasons why entrepreneurs choose to set up their businesses in the country. If you’re an entrepreneur looking for a place to start your business, then you should consider Singapore as an option. Basing your headquarters here could be beneficial to your operation.
Related link: Singapore taxation overview »
Benjamin has over 20 years of tax experience, spending more than 13 years working for the Big 4 accounting firms and being an in-house tax advisor. Benjamin has also worked with SMEs, multinational corporations, and publicly-listed companies from diverse industries, offering tax advisory and planning, corporate restructuring, M&A, business model optimization, tax ruling requests, tax incentives application, tax risk mitigation, and tax reporting services on complex projects.