What does the term “foreign-sourced income” mean and how does it impact your Singapore company’s taxation?

Learn more about what income from foreign sources is and why it is or is Not Taxable.

According to Singapore’s Income Tax Act, the Corporate Tax is levied on income that is

• Earned in Singapore

• From outside Singapore, received in Singapore (subject to certain exemptions)

The topic of income with a Singaporean origin is covered in the first section. Income with a source outside of Singapore but received or perceived received in Singapore is the second section

The following inquiries must be addressed in order to determine whether an income is liable to taxation in Singapore:

• Does the revenue meet the requirements to be considered income from a foreign source?

• Was the revenue from foreign sources “received” in Singapore?

• Was Singapore’s “received” foreign revenue subject to foreign taxation?

Check 1: Does the revenue meet the definition of income from foreign sources?

The following circumstances require a corporation to pay corporate tax in accordance with the Singapore Tax Ordinance:

• The entity operates a company, profession, or trade in Singapore;

• The business, profession, or trade generates profits; and

• Singapore is the source of the profits; or

• Although being sourced outside, the revenues are “received” in Singapore (certain exemptions apply which will be discussed later)

The first two requirements are simple. However, the idea of where one’s income comes from might be debatable and complicated. There isn’t a general rule that works in every situation. Whether profits are generated in Singapore or are derived there depends on the type of gains and the transactions that generate them. When deciding where to find a source of income, among other things, the following general criteria are crucial:

• The guiding premise is to determine the taxpayer’s methods and locations for generating the income in question. In other words, the correct strategy is to pinpoint the operations that generated the pertinent earnings and determine the locations of those operations.

• Profits made by a business are frequently viewed as coming from Singapore when the primary location of business is in Singapore and there is no business presence abroad.

• The location of the contracts for purchase and sale is one of the elements that determines where earnings from trading in goods and commodities are effected. “Effected” refers to more than just the contracts being properly executed. It also includes the discussion, agreement, and implementation of the contract provisions.

• The action that results in the commission income is the arranging of the business to be conducted between the principals when a business earns commission by finding purchasers for products or by finding suppliers of products needed by customers. The location where the commission agent’s duties are carried out is the source of income. The money will be regarded as having its source in Singapore if such operations are carried out there.

The nature and quality of the actions matter more when taking into account the relevant facts than their quantity. The deciding aspect is how these actions affect earnings and what causes them.

Check 2. Was the income from abroad “received” in Singapore?

If some income falls under the definition of foreign-sourced income and is not received in Singapore, it is not subject to taxation. What is meant by the term “foreign-sourced income” “received in Singapore” has been the subject of much discussion. The Inland Revenue Authority of Singapore (IRAS) has worked to make the meaning and how it affects a company’s tax liabilities more clear in order to prevent taxpayer confusion.

According to IRAS explanations, the phrase “received in Singapore” denotes the following:

Money Entering Singapore

This falls under the definition of “any sum from any revenue derived from outside Singapore which is sent to, communicated, or brought into Singapore” under IRAS section 10(25) (a). It describes the deposit of funds, dividends, or other types of payment from an external source into a Singaporean bank account held by a Singapore-based business. Cash, checks, and other money orders could also be physically brought into Singapore and received by the business. The corporation should have earned this money through its commercial operations, such as sales, service fees, consultations, etc., and it should have gone toward its revenue or profit.

Payment of Debt

“Any sum from any revenue generated from outside Singapore which is utilised in or towards satisfaction of any debt incurred in relation of a trade or business carried on in Singapore,” according to Section 10(25) (b) of the IRAS explanation.

If your business uses gains from overseas transactions to settle all or a portion of a debt it has in Singapore—to a customer, a bank, or as a result of legal action—that debt is regarded as “income received in Singapore.” The funds might have been kept in a foreign bank account for a very long time. However, it counts as “received in Singapore” after you utilize money to settle a debt there. The fact that the debt is being repaid in Singapore rather than elsewhere is crucial in this situation. The cash needs to be brought into Singapore in some way for this to happen.

Movable property and goods

Any sum from “any revenue received from outside Singapore which is applied to the purchase of any movable property which is brought into Singapore,” according to Section 10(25) (c). Items that can be transported between locations are referred to as movable property or movables. as opposed to real estate, land, or other immovable forms of fixed property.

Movable property refers to a person’s personal belongings. It could apply to products, raw materials, equipment, and other movables owned by your company and directly related to your line of work. The money utilized for those purchases counts as “income received in Singapore” if you use your foreign-sourced funds that have been stored abroad to acquire equipment abroad and subsequently import those products into Singapore.

How much tax the IRAS can impose on products whose value may have declined is one area of concern. The taxation will be determined by the original purchase price of the movable item, not by its book value or net worth at any given time, according to IRAS’s clarification.

To address a number of issues identified, IRAS has additionally provided the following clarifications:

• Based in Singapore – Foreign-sourced revenue is only subject to taxation if it pertains to a business with a Singaporean base of operations. Using banks and investment management organizations in Singapore is risk-free for foreign-based businesses without a Singapore office.

• Investment abroad – as long as the assets remain outside of Singapore, you are permitted to use your income earned abroad to invest in additional assets. However, your business cannot utilize such expenditures or investments as the foundation for a Singapore tax deduction claim.

• Non-income funds – If you can show that the money has nothing to do with business income, IRAS will agree to exempt non-income funds from taxation. To do this, you must be specific about income and non-income as well as the dates when the non-income funds were transferred to Singapore. You need to provide evidence that the income figures were not altered.

• It is possible to demonstrate that the amount sent to Singapore does not exceed the capital less any losses incurred. You are also permitted by IRAS to offset any foreign-sourced income that you received in Singapore with any overseas losses.

Check 3: Was the foreign-sourced income “received” in Singapore subject to foreign taxation?

If your company’s foreign-sourced earnings are assumed to have been “received in Singapore” as described in “Check 2” above, whether or not this income is liable to taxation in Singapore depends on whether it was taxed elsewhere. If the following criteria are satisfied, foreign-sourced income received in Singapore may be exempt from taxation:

• The foreign country where the revenue is received has a headline tax rate of at least 15%; and

• The foreign country from whence the indicated foreign income was obtained has imposed tax on it.

Your foreign income earned in Singapore is subject to taxation if it does not meet the aforementioned requirements.

However, even if there isn’t a double-taxation agreement in existence, IRAS will offer you a tax credit on whatever taxes you did pay abroad. Singapore is concerned to prevent double taxes on your corporate income.