Taxation can often feel like a tangled web, especially when income is earned across borders. For Singaporean residents earning income abroad, the specter of double taxation—being taxed on the same income by both Singapore and another country—can loom large. However, Singapore’s tax system offers relief in the form of Foreign Tax Credits (FTC), providing a mechanism to mitigate the burden of double taxation.
Conditions for Claiming FTC
Claiming FTC in Singapore is not automatic; it requires meeting certain conditions. Firstly, individuals must be tax residents in Singapore for the relevant tax year. Secondly, they must have paid or be liable to pay tax on the same income in the foreign country. Lastly, the income in question must be taxable in Singapore.
Calculating FTC
The amount of FTC an individual can claim depends on the nature of the income and the terms outlined in the Double Taxation Agreement (DTA) with the respective country. Generally, an individual can claim the lower of the actual foreign tax paid or the Singapore tax attributable to the foreign income, net of expenses.
Trade Income
When businesses operate through permanent establishments (PE) overseas, income derived from these establishments is typically taxed abroad. In such cases, businesses can claim an FTC only if the income is also subject to tax in Singapore.
Claiming FTC
To claim FTC, individuals must include the claim when filing their annual Income Tax Return (Form B or Form P). They must provide documentary proof demonstrating that the income has been taxed abroad. For example, withholding tax receipts or letters from foreign tax authorities.
For foreign-sourced service income, individuals must provide specific details such as the type of services rendered, the country where services were provided, and documentation proving foreign tax payment.
FTC Pooling System
Introduced in Budget 2011, the FTC pooling system offers businesses greater flexibility in their FTC claims, simplifying tax compliance and reducing Singapore taxes on foreign income. The taxpayer must meet the following conditions in order to qualify for the FTC pooling system:
- Foreign income tax has been paid on the income in the foreign country;
- The highest corporate tax rate (headline tax rate) of the foreign country from which the income is derived is at least 15% at the time the foreign income is received in Singapore; and
- The income is subject to tax in Singapore and the taxpayer is entitled to claim for FTC
Calculating FTC under the Pooling System
Under the pooling system, businesses can calculate FTC as the lower of pooled foreign taxes paid on qualifying foreign income or total Singapore tax payable on the same income.
In conclusion, navigating the complexities of international taxation requires a nuanced understanding of FTC provisions. For Singapore residents earning income abroad, leveraging FTC can provide crucial relief from the burden of double taxation. This could ensuring that individuals and businesses can thrive in an increasingly globalized economy.
Disclaimer: This article is for informational purposes only and does not constitute any professional advice. Feel free to contact us to consult with our professional advisors team for personalized advice and guidance.
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