Discuss about the Section 45 Withholding of Tax.
Section 45, dealing with the withholding tax, of the Singapore Income Tax Act (SITA) is concerned with withholding tax rules in Singapore. It is an efficient mechanism of collecting tax on various sources of income payable to people other than the residents of the country (Taxand’s, 2012). In layman language, when a non-resident earns an income from a source, which is in Singapore, then the person from whom he is getting the payment shall deduct a certain amount from the amount payable, which is termed as withholding tax payable by the payee.
The person who earns the income is liable to pay the tax on such income. In this situation as well, the liability of the tax to be paid lies with the non-resident as he is the one who is earning the income, unless specifically mentioned otherwise in the contract. Along with it, the duty to collect such tax resides with the payer and therefore, it is mandatory for him to deduct the amount of tax before paying the non-resident. The tax so withheld shall be deposited with the Inland Revenue Authority of Singapore (IRAS) in the given time frame, failure of which may result in penalties. The tax status of the recipient should be ascertained because the obligation of withholding tax does not apply to the residents. However, this is not a final tax as exemptions can be claimed by filing a return with IRAS (Taxation and Investment in Singapore, 2016, p. 17)
The primary motive of this section is to provide an effective mechanism of tax collection from the non-residents of Singapore. The non-residents have no legal obligations towards the source country and as a result, the tax is withheld at source before making certain payments to them. The residents act as an agent of the government who has been given the responsibility to collect tax from non-residents on behalf of government and later, deposit the same with the revenue authorities.
An individual is considered to be a non-resident when he is not a citizen of Singapore and has worked for a period which is lesser than 183 days in a calendar year, in Singapore, prior to the assessment year (Zutphen, Mims, Chanda, Diagana, Tucker, Benner, & Angresh, 2016). Similarly, a company is known to be non-resident when the company’s control and management of its operations are carried outside Singapore. However, if the person is providing consultancy virtually, i.e., without being present in the country, then the person will be not be considered as a non-resident.
The purview of Section 45 is wide enough to cover payments ranging from commission, royalties and management fees to Real Estate Investment Trust (REIT). According to the book Foreign Tax and Trade Briefs - International Withholding Tax Treaty Guide by Diamond, W. H., & Diamond, D. (2011), following are certain payments on which withholding tax is applicable:
Commission, fee, interest for a loan or any indebtness: In the cases where the company has taken any loan or debt, then withholding tax is applicable. The tax rate is 15%, when the business has been deemed to be taken place in Singapore. For example, a person has to withhold tax from the non-resident person when he makes any payment on the interest charges on late payment, overdue trade account or credit terms interest from trade purchases. This tax applies because the interest income is deemed to be sourced in Singapore and treated as part of trade income.
Rent: Where a non-resident company leases a property that is movable in Singapore, then a tax of 15% on the total amount of rent is to be withheld. Example- if any non-resident is deriving income from renting of a house in Singapore, then the same will not be covered under withholding taxes as immovable property are provided concessions by IRAS (“Withholding Tax in Singapore”, 2015, p. 11). However, if the same was for any kind of movable property like a car, then tax has to be withheld.
Royalties: An amount equivalent to 10% of the royalty is charged as tax on a non-resident individual in respect of usage of any movable property in the country. The service can range from using a commercial property or hiring a foreign expert. If a resident is using certain software created by non-resident and paying him royalty, then such royalty comes under the virtue of Section 45 and tax will be applicable.
Consequences of defaulting withholding tax payments
The due date of depositing the withholding tax with the government body, IRAS (Inland Revenue Authority of Singapore), is 15th date of the second month from which the amount is paid to the payee (Crowe Horwath International & CCH Australia Limited, p. 1652, 2009). The date of payment needs to be determined as per the date mentioned in the contract. In case there is no contract, then, date of invoice is to be considered. Apart from these, the date of actual payment made or the date on which the amount gets credited to the account of payee, can be treated as the date on which payment is being made to a person, other than resident.
In case of any default, a penalty of 5% shall be levied on the unpaid amount of tax. Along with this, an additional penalty of 1% is applicable if the tax is deposited within 30 days of the due date. However, if amount remains unpaid for a period exceeding 30 days, then penalty of 1% will be levied for every 30 days, with a maximum of 15% of the value of tax remaining unpaid to the government authorities.
In case the outstanding amount remains unpaid by the resident, the IRAS have the authority to instruct the bank in which the resident holds the account to pay deposit the amount with the government. Similarly, any other source or any other party who has any amount due towards the resident can be asked to pay the same to IRAS. Apart from this, they have the authority to sue the person liable in the court for the amount of tax outstanding.
Although withholding tax may apply to generally all the payments but there are a few incomes which has been refrained from the withholding tax. These incomes have been mentioned as below (Understanding withholding tax rules in Singapore, 2011, p. 6-7):
Software payments of specified nature: Payments regarding the software are generally considered as royalty payments, from taxation point of view. These payments are taxable at the rate of 10%, until they have been exempted as per the treaty of tax. The exempted software payments include software for shrink wrap; software that are downloadable by end user, licenses of the sites, and many others.
Satellite capacity payments: For the payments made for leasing the space of satellite, exemption can be availed from 15% withholding tax. These payments have been categorized as use of services instead of payments for movable properties because payers do not have control and possessions of the satellite and hence, are exempted.
International submarine cable capacity usage payments and the Indefeasible Rights of Use (IRUs): Subject to tax of 15% to be withheld, or any rate that has been reduced by a certain treaty of tax. From 28 Feb 2013 to 27 Feb 2018, these payments to non-residents are not covered under the purview of Section 45 SITA, as they have been categorised under services because of the possession of payer on the physical cables.
Advantages of Section 45
As per the Singapore Company Incorporation (2016), following benefits are observed from the introduction of withholding taxes:
Territorial Corporate Tax System with Remittance: Singapore’s territorial tax system is the most important attraction for foreign companies which exempt some of the incomes from tax that are arriving from foreign source, such as dividends, service incomes, etc.
Avoiding Double Taxation: Singapore government introduced a scheme of foreign tax credit (FTC), which avoids double taxation for the remittance of income of the companies of Singapore that have been registered overseas.
No Withholding Tax on Dividend Distribution: According to Singapore Income Tax Act, no tax is levied on individuals and companies earning dividend on investments in Singapore based companies.
Low Withholding Tax on Interest and Royalty: Compared to the tax slabs of other nations Singapore taxation allows considerable benefits on interest and royalties. Tax rate on interest is 10% while on royalties it is 15%.
Payments Made by Financial Institutions such as Banks and Finance Companies: Tax has been exempted for certain specified financial institutions so that more and more people are able to get the required funds at a lower rate and to strengthen their own position as a regional funding centre.
Disadvantages of Withholding Tax
There appears to be no pitfall of withholding tax to the Singapore Government or the IRAS. Revenue in terms of tax serves as an additional incentive leading to social welfare and increased standard of living in the country. The two disadvantages have been listed as below:
Hefty Penalties: On the non-compliance of their obligations towards the payment of withholding tax, sturdy penalties are levied on the payer. This calls for awareness among the individuals and entities about the compliance obligations so as to refrain from additional taxes (Understanding withholding tax rules in Singapore, 2011, p. 7).
Tax Burden: The onus of the tax falls on the businessmen and the corporate houses. Even they favor paying withholding tax because of the low tax rates and rebates on certain payments. The avoidance of double tax treaty with different countries provides a seasoned environment for corporate culture.
Other Relevant Sections to Withholding Tax
As per Singapore tax guide (2008), the relevant sections of the withholding tax have been mentioned as below:
Section 45A, 45B, 45C, 45D: These section deals with withholding taxes on interest, royalties, management fees, rent from properties that are movable, remuneration of director who are non-resident, profits from the real-property transactions
Section 45E: The purview of the section is on the withdrawals, which are being made by residents and people other than the residents, from the Supplementary Retirement Scheme (SRS).
Section 45F: The section comprises of taxation on professional service fee for non-residential professionals.
Case of withholding tax in Singapore
Singapore academy of Law (2010) recalls a case held between ACC and Comptroller of Income Tax was decided by the High Court in 2010, where the applicant was a non-resident company of Singapore, earning income by way of aircraft leasing agreements, along with its subsidiaries, which were special purpose companies. Comptroller of Income tax was of the view that since the source of income is from Singapore, withholding tax should be applicable on the same.
The company contented that the leasing was dealt by interest rate swaps payments which were outside the purview of Income Tax Act of Singapore and even if the same was covered, then also the sums being credited to the applicant account remain uncovered by the Act. Contrary to this, the respondent viewed that these amounts were covered and subject to withholding tax.
At the end, the respondent’s contention was untenable as the payments to SPC was not in regard with any particular loan or debt and hence, no tax was payable on the same. Therefore, since interest swaps are a very common hedging mechanism used by all the companies, the decision will ensure that all the major industries can rely on the same.
Overall, the section covers all the sources of income that a non-resident person can earn in the country with a dual benefit to both the host country as well as the tax payers. It helps the tax payers by giving them various opportunities to earn income and avoids double taxation of the income. On the other hand, it helps inflow of funds to Singapore government, which in turn, is utilized for maintaining the standard of living of the people (Gravelle, 2015). The government is leaving no stone unturned to take stringent steps in enforcing the section, so that no income of non-resident from the country gets unnoticed. The case laws have also shown that the purpose of government is not to extract money from individual on irrational basis and the dignity of the chargeability of tax on incomes is kept intact. Therefore, the effectiveness of Section 45 of SITA is undeniable as it is a mechanism that has provides a channel for the country to collect taxes from the non-residents.
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