UK-Singapore Avoidance of Double Taxation
The Avoidance of Double Taxation Agreement (DTA) between Singapore and United Kingdom (UK) came into force in 1998 for income and corporate taxes; and in 1999 for capital gains taxes. Certain amendments were made to the treaty in 2009 for the exchange of tax information, and in 2012 for capital gains and corporate tax rates related provision.
The UK-Singapore DTA eliminates double taxation in both countries by providing tax relief to residents of Singapore and UK. This article will discuss the key provisions of the DTA between Singapore and UK. It will highlight the scope of the agreement, the advantages of the DTA and where specific income arising in Singapore and UK will be taxed according to this DTA.
Scope of the Agreement
The UK-Singapore DTA is applicable to all residents of either one or both of the contracting states of the agreement (Singapore and UK).
The agreement covers the following taxes:
- Income tax, corporate tax and capital gains tax (in case of United Kingdom), and
- Income tax (in case of Singapore).
For example, in the case of a person who resides in UK and receives interest from Singapore, the tax on the interest is levied according to the rates in the treaty and is usually lower than the tax that would be applicable in the absence of the DTA. This tax rate is applicable only to residents of UK and Singapore. These rates will not be applicable to a person residing in another country.
Advantages of the DTA
Double Taxation Elimination
The DTA provides tax relief to residents of countries that enter into an agreement with each other. The tax relief arises in circumstances where income would otherwise be subject to tax in both the contracting states.
Any tax payable according to the laws of Singapore on the profits, income or gain a person derives from sources within Singapore is allowed as a credit against the tax that UK may levy on the same profit, income or gain. Similarly, the tax payable in UK on such profits, income or gains will also be allowed as a credit against the Singapore tax that Singapore levies on the same profit, income or gain.
Here is an example of claiming the tax credit relief in UK:
Sally receives £100 as foreign interest from a Singapore-based bank. The tax deducted on the interest is £15. In UK, the tax on the foreign interest is £20. The amount of Foreign Tax Credit Relief (FTCR) that a person can claim is £15. In UK, when a person claims FTCR, the amount a person can claim will be the lesser of the following:
- The foreign tax amount or tax rate according to the treaty and
- The amount of tax according to the UK tax laws.
In the same situation, if there was no DTA between Singapore and UK, the tax amount that Sally would have to pay on the foreign interest would be £15+ £20 = £35.
Thus, the DTA is beneficial as it avoids the double taxation of the same income that arises in both the contracting states. In the absence of a DTA, the tax-payer would end up paying tax twice – once in Singapore and once in UK. Not only does a DTA eliminate this double taxation, but often the DTA’s provide for reduced tax rates in order to promote trade and commerce between the contracting countries.
The two main aspects of the DTA is the taxability of
- Business profits and
- Income from sources such as interest, royalties, dividend etc.
In the case of businesses, the DTA provides tax relief on circumstances where the enterprise is taxed on the business profits arising in both the contracting states. With respect to the other common types of income such as interest, royalty, dividend etc, the DTA provides a reduced tax rate in comparison to the prevailing tax rates in the contracting state.
Taxability of Business Profits
The profits of an enterprise are taxable in the state where it carries on the business. However, if the enterprise carries on the business through a permanent establishment in the other contracting state, the income attributable to the permanent establishment will be taxed in that state. If a Singapore-based enterprise carries on business through a permanent establishment in UK, the portion of profits attributable to the permanent establishment in UK will be taxable according to the tax rates in UK. In such a situation, since the entire profits of the enterprise will be taxable in Singapore, the profits that the enterprise generates in UK through its permanent establishment will be taxable twice. This will give rise to double taxation. Since Singapore and UK have a DTA in force, the agreement will provide tax relief in respect of the income that is subject to tax in both the contracting states.
In circumstances where two contracting states do not have any such agreement in force, their companies will be liable to bear the tax that both the countries levy.
Interest, Royalty, Dividends etc
The DTA has specific provisions pertaining to income arising from interest, royalty, and dividends; it also specifies the tax rates for these sources of income. Usually, the DTA provides for lesser tax rates in the treaty than the prevailing tax rates in both the countries (Singapore and UK).
For instance, in the case of royalties, UK levies a withholding tax of 20% on the payment of royalties to non-residents. However according to the DTA treaty, the tax rate is 10%. If UK has to make a payment of royalty to a non-resident residing in Singapore, the withholding tax rate on this payment will be 10% (according to treaty rules) instead of the prevailing 20% rate in the UK.
Thus, the DTA helps in reducing the tax burden on such non-residents. To understand the importance of DTA, you can compare the withholding tax rates that the countries individually levy on certain payments with the rates as specified in the DTA.
In which contracting state is the income taxed?
The DTA specifically states where the different types of income of a resident of either Singapore or UK will be subject to tax. The following table states the types of income or payments made and the contracting state where the income is taxed. This is important, since the place of taxation will determine the rate of tax applicable to that type of income under the DTA.
|Types of Income/Payments||Where is the income taxed?|
|Income from immovable property||Taxed in the contracting state where the property is located.|
|Profits from Business||Taxed in the contracting state where the enterprise carries out its business.|
|Profits from Shipping and Air Transport||Taxed in in the contracting state where the enterprise carries out the operations.|
|Dividends||Taxed in the recipients contracting state|
|Interest||Taxed in the recipients contracting state.|
|Royalty||Taxed in the recipients contracting state.|
|Capital Gains||Taxed in the country where the property is located.
Note: Singapore does not levy any capital gains tax
|Independent Personal Services Income||Taxed in the contracting state where the recipient resides.|
|Dependent Personal Services Income||The salary, wage, remuneration is taxed in the contracting state where the person resides unless the employment is carried out in the other contracting state.|
|Directors’ Fees||Taxed in the contracting state of which the company is a resident|
|Income of Artistes and Sportsperson||Taxed where the artiste or sportsperson exercises the activities.|
|Pension||Taxed in the contracting state where the individual is a resident.|
|Payment for Government Services||Taxed in the state where the services are carried out.|
|Payment to Students and Trainees||Taxed in the contracting state where they reside.|
In the case of certain types of income, such as interest and royalties, the tax may be levied in the contracting state where it arises in spite of the treaty rules stating otherwise. This income will then be taxable according to the prevailing laws in the contracting state.
Double taxation avoidance agreement between UK and Singapore bestows certain tax benefits to the residents of those states. This article highlights the tax applicability on certain income, gains and profits of this DTA. However, to understand the exact tax applicable on your income or profits and to ensure that you minimize your tax burden, it is advisable to engage the services of a professional corporate service firm.