In this blog post, Sayli Petiwale, a BA LLB (Hons.) student from Baroda School of Legal Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the implications of the Indo-Singaporean Tax Treaty on Indian Companies operating in Singapore.
The development of international trade corporations has made the issue of taxation of utmost importance. An entrepreneur looking for expansion of his business beyond the realms of his own country, naturally would be concerned about how his enterprise may be taxed, especially if he might have to pay taxes twice in the his own as well as the host country. Understandably the entrepreneur would devise his operations in such a manner as to simplify and minimize the tax liabilities and would want to obtain benefits of the deductions and exemptions available under the respective tax laws of each country.
Now, here is where the Tax Treaties come in action. Various countries sign tax treaties with each other in order to avoid double taxation for the residents of both the countries that are operating in each other’s countries.
India and Singapore had signed an agreement on the avoidance of double taxation (DTA) and prevention of fiscal evasion with respect to taxes on income on 24 January 1994. Later, a second protocol amending the said agreement came into force from 1 September 2011. This treaty is termed as the “Agreement for double taxation and prevention of fiscal evasion with Singapore”. The treaty aims to prevent double taxation on income earned in one jurisdiction by resident in another jurisdiction.
How are corporations taxed in India and Singapore independently?
Without the existence of a tax treaty the corporations in existence in either of the countries are governed by their respective laws of taxation and taxed accordingly.
In India, the law governing any persons, individuals as well as companies is the Income Tax Act, 1961. In India taxability of an income depends on where the income was received or where it was earned. This would help in determining its taxability. For the purpose of understanding the act classifies the incomes as Income earned/accrued in India as Indian Income and outside India as Foreign Income. With respect to corporations, income can be received mostly in the form of business income, capital gains income, house property income and sometimes as income from salary.
Now under Section 2(17) of this Act,
the term “company” means:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company:
Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;]
Now, institutions falling under the above definition are taxed under the Income Tax Act in India on the basis of their income. Under the Singapore laws, The Income Tax Act of Singapore is the governing statute regarding corporate and individual taxation matters.
Any income that is accrued in Singapore by a person or business is subject to income tax. What it means is that if a customer pays you for your product or service in Singapore, or if you receive money in Singapore from your overseas sales, the money is subject to tax. Taxable income includes: income from your business, salary from employment, interest earned on your deposits and rental income.
Taxation under the DTA Treaty
Double non-payment of taxes in relation to DTA implies an entity is not paying taxes in both countries i.e. the host as well as the source country. Under the taxation treaty signed between India and Singapore, a company is defined as an entity which is taxable under the laws of both the countries. The main objective of the treaty is to avoid double taxation. In case of an Indian Company operating in Singapore, because it is an Indian Company, it would be taxed under the Income Tax Laws of India.
Now, when two countries sign treaties with respect to taxation, there are exemptions which can be enjoyed with if one person has already paid taxes in another country. For that purpose, the treaty specifically defines what a permanent establishment is. It means a fixed place of business through which the business of the enterprise is wholly or partly carried on. It especially includes:
- A place of management
- A branch
- An office
- A factory
- A workshop
- A mine, an oil or gas well, a quarry or any other place of extraction for natural resources
- A warehouse in relation to a person providing storage facilities for others
- A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on
- premises used as a sales outlet or for soliciting and receiving orders
- an installation or structure used for the exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any fiscal year
According to the Double Taxation Agreement (DTA), the profits of an enterprise are taxable only in the state where the business operations are carried out. If an Indian-based business has a permanent establishment in Singapore, the profits attributable to the permanent establishment will be taxed only in Singapore.
In case Singapore and India did not have a DTA in force, the profits of the business could be taxed in Singapore as well as in India. The profits generated by the permanent establishment would bear the tax burden twice in such a case. This emphasizes the importance of the DTA and how it avoids double taxation of business profits.
Now if an Indian Company is operating or carrying on its business in Singapore, how will it be taxed? Will it enjoy any deductions under the Tax laws of Singapore or India? Under the DTAA, for the purpose of corporations, taxation under the following categories is applicable:
Taxation of Business Profits
Business income or profits of an enterprise are taxable in the country in which the enterprise is resident. Yet, if the enterprise carries out business in the other contracting country through a permanent establishment situated in that contracting country, then the profits or income derived from that permanent establishment alone will be liable to tax in the other contracting country.
Taxation of Dividend Income
Dividends paid by a company that is a resident of one contracting country to a resident of the other contracting country may be taxed in that other country. However, such dividends may also be taxed in the source country as:
- 15% of the gross amount of the dividends. Note however, that if the recipient is a company that owns at least 25% of the shares of the company paying the dividends then a reduced tax rate of 10% of the gross amount of the dividends will apply.
- Since there is no dividend tax in Singapore, Indian-resident shareholders who derive dividends from a Singapore-resident company or a Malaysian-resident company that has a source of profit in Singapore, are exempt from Singapore tax on the dividend income.
Taxation of Directors’ Fees
Directors’ fees or other similar payments received by the resident of one contracting country in his capacity as a director of a company that is resident in the other contracting country will be taxed in that other contracting country.
Taxation on Dividends
Dividends distributed by the Indian Subsidiary to the Singapore Holding is not subjected to withholding tax in India. But India does levy a dividend distribution tax at 16.22%. If qualifying conditions are met, the dividend received from the Indian Subsidiary can be exempted from tax under Singapore’s foreign-sourced income exemption scheme. This exemption apply only when the headline corporate tax rate in the foreign country from which the income (which is India in this case) is received is at least 15%, and the income had already been subjected to tax in that particular country.
What are the reliefs available and how they are granted by the respective governments?
India offers its residents double taxation relief by deduction i.e. domestic tax is applied on the income after deducting Singapore tax suffered. Singapore offers its residents tax credit relief for double taxation of income. Thus, Indian tax paid in respect of income from sources within India shall be allowed as a credit against Singapore tax payable in respect of that income.
If India sourced income of a Singapore company is subjected to taxation twice (once in India and then again in Singapore on remittance), then the Singapore company can claim relief under the Foreign Tax Credit (FTC) scheme, which allows the company to claim a credit for the tax paid in India against the Singapore tax that is payable on the same income. The claim is called Double Tax Relief (DTR).
Now mainly there are two main methods by which Singapore and India can enjoy relief from double taxation under the DTAA Treaty:
The Credit Method
Under the credit method, Singapore will typically grant a foreign tax credit (FTC) to an entity that has paid taxes on business profits derived in the source state. The entity can then offset that FTC against its tax liability in Singapore. Singapore’s laws provide that an FTC can only be offset against the tax liability arising from that same income in Singapore, and not against the entity’s other income. Accordingly, if the source country’s tax rate is higher than Singapore’s, the entity will bear the source state’s higher tax rate.
The Exemption Method
Under the exemption method, business profits that have already been taxed in the source state will typically be exempted from taxation in Singapore altogether. If the source state’s tax rate is lower than Singapore’s, the exemption method would be preferable to the credit method as a lower overall tax liability would result.
Singapore’s domestic laws also exempt foreign-sourced dividends, branch profits, and service income remitted into Singapore from further taxation, provided that they have already been taxed in the source country and the highest corporate tax rate (also known as the “headline” tax rate) is at least 15 percent, even if that income has not been taxed at the headline rate.
Signing of this treaty has relaxed many rigorous issues related to tax on corporations. Corporations can freely establish as well as run companies in the two signatory countries of the treaty. Again of course it relates to only residents of both the countries. Indian entrepreneurs are finding it attractive to start a business in Singapore where funding and mentorship is readily available, and when the prototype is successful, take their product and services to the Indian mass market. While some entrepreneurs such as Go! Places have incubated their ventures in the city-state; others have secured funding from either private venture capitalists or the Singapore Government itself. Flipkart is also based in Singapore despite being an Indian Corporation
In the fields of Information Technology, gaming, social media and mobile applications, Singapore is proving to be an ideal test-bed for Indian companies due to its more tech-savvy population. Practo, an online medical appointment scheduler provider, relocated to Singapore recently.
Thus, the treaty has had several positive implications on the Indian Companies already operating in Singapore as well as has expounded the scope for doing business in both the countries. And from the angle of tax exemptions which are available to the corporates, it has proven to be even more beneficial. It has also facilitated trade relations and business in both the countries.
- Agreement for avoidance of double taxation and prevention of fiscal evasion with Singapore: DTTA from the Income Department of India