How to Navigate the Foreign Tax Credit System in Singapore

‍Understanding Foreign Tax Credit

Singapore offers two types of foreign tax credits to mitigate the potential double taxation situation. These are Double Tax Relief (DTR) and Unilateral Tax Credit (UTC). As a Singapore tax resident, DTR enables you to claim a tax credit for the tax paid in a foreign jurisdiction. This means that you can offset the tax you paid abroad against your Singapore tax liability. On the other hand, UTC is granted for foreign-sourced income received from countries with no Double Tax Agreements (DTAs) with Singapore. This ensures that you don't face double taxation even if there is no DTA in place.

1. Double Tax Relief (DTR): This relief, provided under an Avoidance of Double Taxation Agreement (DTA), comes in the form of a tax credit. It allows the Singapore tax resident to claim a credit for the tax amount paid in the foreign jurisdiction against the Singapore tax payable on that same income. The DTR is capped at the lower of the foreign tax paid or the Singapore tax that would have been payable on that income.
2. Unilateral Tax Credit (UTC): This credit is granted to Singapore tax residents for foreign-sourced income received from countries that don't have DTAs with Singapore.

Qualifying for Foreign Tax Credit

To claim the foreign tax credit, a company must:

• Be a tax resident of Singapore for the relevant year.
• Have paid or will pay tax on the same income in the foreign jurisdiction.
• Have the income subject to taxation in Singapore.

Calculating Foreign Tax Credit

The credit you can claim is determined by the lesser of the actual foreign tax paid or the Singapore tax attributable to the foreign income (after deducting expenses). If you are claiming DTR, the specific terms and conditions specified in the DTA with the respective country will apply. It's important to note that you can only claim the foreign tax credit up to the amount of Singapore tax payable on the foreign income.

Claiming Foreign Tax Credit

When filing your Corporate Income Tax Return (Form C), ensure to claim for the foreign tax credit. There's no need to immediately provide supporting documents, but keep them handy for future reference if requested by the Inland Revenue Authority of Singapore (IRAS). It's crucial to accurately report your foreign income and the foreign tax paid to avoid any potential penalties or complications.

Use Foreign Tax Credit Pooling System for better flexibility

This system eases your foreign tax credit claims and potentially reduces Singapore taxes payable on remitted foreign income. The foreign tax credit under this system is the lower of the actual pooled foreign tax paid or the total Singapore tax attributable to the pooled foreign income (after deducting expenses). By pooling the foreign tax paid across multiple countries, you have the flexibility to offset it against the Singapore tax payable on the pooled foreign income.

Conditions for the Pooling System

To qualify, a company must:

• Have paid foreign income tax in the foreign jurisdiction.
• Ensure the highest Corporate Income Tax rate of the foreign jurisdiction is at least 15% when the foreign income is received in Singapore.
• Have Singapore tax payable on the income.
• Be entitled to claim foreign tax credit under the Income Tax Act 1947.

Conclusion

Navigating the foreign tax credit system in Singapore may seem daunting, but understanding it can prove advantageous for your business. By applying these steps, you minimize the risk of double taxation and maximize your company's fiscal efficiency. Knowledge truly is power when it comes to mastering foreign tax credits in Singapore. With the proper understanding, you can confidently navigate the complexities of the foreign tax credit system and ensure that your business remains compliant while reducing your tax burden.