Singapore withholding tax
5 minute read
If you are curious about finding out more about withholding tax, you have come to the right place.
Briefly stated, Singapore withholding tax refers to the tax withheld in this country and paid to the Inland Revenue Authority of Singapore (IRAS).
When a non-resident company or individual acquires an income from a Singaporean source for services provided or work done in Singapore, a certain amount has to be paid to IRAS.
For instance, if a Singaporean company pays a third party (non-resident) for services performed in Singapore, a certain percentage of that payment has to be withheld and paid to IRAS. Hence the term withholding tax.
According to the official website of IRAS and the Singapore Income Tax Act (Cap. 34):
‘Under Singapore law, a person (known as the Payer) who makes payment(s) of a specified nature to a non-resident company or individual (known as Payee) is required to withhold a percentage of that payment and pay the amount withheld to IRAS.’
How does withholding tax work?
This kind of tax is not as common in other countries. Certain governments have laws that stipulate that taxes must be paid before the money can be spent for any other purpose.
This system ensures that taxes are paid first and on time, rather than risk the possibility that the tax-payer might default at the time when a tax falls due in arrears.
Withholding is usually done by the employer of someone else, taking the tax payment funds out of the employee or contractor’s salary or wages.
The withheld taxes are then paid by the employer to the government body that requires payment, and applied to the account of the employee, if applicable. The employee may also be required by a governing body to file a tax return self-assessing their tax and reporting withheld payments.
What is the purpose of withholding tax?
There are two major reasons why withholding tax exists.
Firstly, withholding tax prevents individuals from being blindsided by huge tax bills. Also, when remitting a little out of each paycheck, governing bodies ensure steady cash flow throughout the year and thus reduce the risk that taxpayers will be unable to pay their taxes.
An individual’s tax liability may still be more or less than what they pay in withholding taxes in a year. Should that happen, the taxpayer may have to pay more money after the first quarter of the year, but they will receive a refund.
Withholding tax rates
In order to understand how withholding tax rates work and what they are, it is first necessary to learn more about a non-resident professional.
According to the Singapore Income Tax Act, a non-resident professional (NRP) refers to someone who has spent fewer than 183 days a year in Singapore during the course of providing services in the country.
NRPs are required to pay the tax to the Singaporean authority for any type of income that they earn for services rendered in Singapore.
What is the withholding tax rate?
The general withholding tax rate for NRPs is a flat 15% of gross income except in the following cases:
How to calculate withholding tax Singapore
To best understand how to calculate withholding tax in Singapore, take a look at the example below.
If a foreigner or Singapore Permanent Resident (SPR) has $300,000 in his SRS account by the retirement age of 62 and decides to withdraw the whole amount, he will be taxed on half of the amount withdrawn.
SRS Withdrawn: $300,000
Amount Subject to Tax: 50% x $300,000 = $150,000
Withholding Tax At 22%*: 22% x $150,000 = $33,000
Actual Amount Received: $300,000 – $33,000 = $267,000
*Effective as of 1 July 2014, the concessionary withholding tax rate of 15% applies if the following conditions are met:
When does withholding tax apply?
Singapore withholding tax is applicable only to non-resident companies or individuals when:
It is worth noting that according to Singapore tax law, income includes wages or allowances as well as accommodation, airfare, and other expenses incurred on top of actual service fees.
What are the examples of withholding tax?
In order for you to better understand how this kind of tax works, see the example below.
Let’s say that Peter earns $48,000 annually. So, he earns $4,000 a month but brings home about $3,600 since his employer takes $400 out of the paycheck and remits it to the state on his behalf.
This money goes towards Peter’s liabilities and taxes. Of course, the amount withheld depends on what Peter puts on his IR37B form. He provides this form to the employer and indicates how many dependents he has and what his marital status is, among other things.
A copy of this document goes straight to the country’s tax service. In general, the more allowances the employee claims, the lower the withholding tax.
What payments are subjected to withholding tax?
Withholding tax Singapore is chargeable for the payment types listed below.
1. Interest payments
When an individual pays a interest or fees on loan (for instance, interest on late payments), a withholding tax of 15% is chargeable on the payment.
However, this tax is not valid in the situations below:
2. Payments for the use of movable property
When an individual pays rent or makes other payments on movable property, a withholding tax of 15% is chargeable on the payment.
However, in order to support businesses with expansion into overseas markets, this withholding tax does not apply in cases where the movable property was paid for or rented for:
3. Payment for the use of knowledge or information
When an individual makes a payment for the purpose or rights to use knowledge, information or other digital goods (e.g. software subscription), a withholding tax of 10% is chargeable on this payment if there is a partial or total transfer of intellectual property rights.
For instance, the withholding tax would apply where the payer is allowed to commercially exploit the information. In this case, it would be a distribution act for-profit or a preparation of derivative works based on it.
On the contrary, there is no transfer of intellectual property rights where the payer merely buys software for use in his business operations or for personal use. Withholding tax would thus not be chargeable on transactions of that kind.
4. Payment for services rendered by a company
When an individual makes a payment to a non-resident company for technical or management services rendered in Singapore, a withholding tax at the prevailing corporate tax rate of 17% is chargeable on that payment.
Services will be seen as services rendered in Singapore, where they are usually attributed to work performed within Singaporean borders.
For instance, a non-resident company that provides online services from overseas without sending staff to Singapore would not be rendering services in Singapore and would, therefore, not be subjected to withholding tax.
5. Payment for services rendered by an individual
When an individual makes a payment to a non-resident professional (for instance, a lawyer) for services rendered in Singapore, a withholding tax of 15% is chargeable on that payment.
In situations where payments are made for services executed by a public entertainer, a lower withholding tax of 10% is chargeable on the payment if such a payment is due during the period between 22 February 2010 and 31 March 2020.
In cases of remuneration of services rendered in the capacity of a board director, a higher withholding tax of 22% is chargeable on the director’s remuneration. It doesn’t matter if the director had been physically present for work in Singapore or not.
6. Payment for purchase of real property
If an individual purchases real-estate property (land or housing property) from a non-resident property trader, a withholding tax of 15% is chargeable on the purchase price of that property.
When the buyer is unsure whether the seller is considered a property trader, he may request a letter of confirmation from the seller stating that the seller (and the seller’s company) has not been treated as a property trader for Singapore income tax purposes.
The buyer, in that case, isn’t required to withhold tax on the purchase price of the real property. However, the letter must be provided to IRAS upon its request to substantiate any claim.
7. Real Estate Investment Trust (REIT) distributions
Any distributions by REIT to a non-resident unit-holder, who is not an individual, is subject to a withholding tax of 10%.
A non-individual is anyone who does not have a permanent establishment in Singapore, or if they do, whose funds used to acquire the units in REIT are not obtained from the operation carried on in the permanent establishment in Singapore.
When to pay Singapore withholding tax?
The Payer has to e-file and pay the withholding tax to IRAS by the 15th of the second month from the date of payment to the non-resident.
If you are on GIRO for withholding tax payment, the GIRO deduction date is on the 25th of the month of when the tax is due. However, if the GIRO deduction date falls on a weekend or public holidays, the deduction will be on the next working day.
Additionally, as a payer, you can refer to your acknowledgment page for payment details after you have e-filed.
How to determine the date of payment to the non-resident?
The date of payment is defined as the earliest of the following dates:
What if you miss the deadline?
Penalties will be imposed if the withholding tax is paid to IRAS after the payment due date or if the GIRO deduction is not successful.
If a person misses the deadline and pays their Singapore withholding tax after the stipulated date, IRAS will issue a Demand Note and include the late payment penalty (currently 5%).
Failing to pay the tax and penalty by the due date stipulated in the Demand Note will cost you an additional penalty of 1% for each outstanding month (subject to a maximum of 15%).
How does Singapore withholding tax apply to non-resident corporations?
In order to determine if tax withholding is applicable, the payer has to ascertain whether the payment was made to a company or an individual who is considered a non-resident in Singapore.
Non-resident companies are companies that operate outside of Singapore. The Singaporean laws stipulate that the tax residency of a company is determined by the place in which the business is controlled and managed.
It’s worth noting that the term ‘control and management’ refers to the decision-making processes. For instance, every action regarding a company’s policies or strategies falls under the given term.
A key factor, in this case, is the location of the company’s board of directors meetings during which decisions are made.
Conversely, a company is considered to be a non-resident entity when the control and management of the company is not practiced in Singapore.
However, bear in mind that the place of incorporation of a company is not necessarily indicative of the tax residence of a company.
How does Singapore withholding tax apply to non-resident individuals?
To better understand this, there has to be a clear distinguisher between the following three categories:
Foreign professionals are individuals exercising any profession of an independent nature under a contract for service.
Non-resident public entertainers are entertainers performing in Singapore. These individuals can be exercising a profession, vocation, or employment.
A board director is a member of the board of directors of a certain company.
The withholding tax rate will vary depending on the nature of the payment. For more details, refer to types of payment and the applicable withholding tax rates.
Who Is exempted?
Various categories of payments have been exempted from withholding tax and those include the following.
1. Specified software payments
In general, software payments are construed as royalty payments for tax purposes.
As such, software payments are subject to withholding tax at 10% unless reduced or exempted by an applicable tax treaty.
Software payments that are exempted from withholding tax include:
To qualify for these exemptions, the buyer has to obtain any right granted to either commercially exploit the copyright of the software or to duplicate, reverse engineer and modify the software, information or digitised goods.
2. Payment for satellite capacity
Payments made to a non-resident person for the leasing of capacity on a space satellite are exempt from the 15% final withholding tax.
3. Payments for the use of international submarine cable capacity, including payments for Indefeasible Rights of Use (IRUs)
Any payments for the use of or the right to use international submarine cable capacity (including payments for an IRU) are subject to withholding tax at 15%, or such reduced rates as provided under an applicable tax treaty.
As you can conclude from this article, withholding tax is an important feature of and has a huge influence on the company-employe relationship as well as the company’s good standing in the eyes of the law.
Therefore, every responsible individual should acquaint themselves with the relevant Singaporean laws in this regard. Making a mistake in this area is something that aspiring companies must not do.
If you are not completely sure how to manage your tax affairs, we are here to help! Find out more about our accounting services.