IRAS has revised its guidance on the withholding tax treatment of payments for technical and management services, clarifying when payments to non-resident companies are taxable, how relief under Singapore's Avoidance of Double Tax Agreements (DTAs) applies, and the rules governing services performed in Singapore, overseas electronic services, and cost reimbursement arrangements.
The Inland Revenue Authority of Singapore (IRAS) has updated its guidance on the withholding tax treatment of payments for technical and management services under Section 12(7)(b) and Section 12(7)(c) of the Income Tax Act 1947, providing greater clarity on when payments to non-resident companies are subject to withholding tax.
The guidance outlines the tax treatment for services performed in Singapore, explains the application of relief under Singapore’s Avoidance of Double Tax Agreements (DTAs), and reiterates the rules for cost reimbursement arrangements and services delivered from overseas.
Payments for services rendered
The following rules apply to payments for services rendered:
- Where payment is made to a non-resident company for the installation of equipment, technical support services, training, consultancy or other services provided by the non-resident company in connection with the application or use of scientific, technical, industrial or commercial knowledge or information, withholding tax is applicable on the service fees attributable to the work done in Singapore.
- Similarly, where payment is made to a non-resident company for the management or assistance in the management of any trade, business or profession, withholding tax is applicable on the management fees attributable to the work done in Singapore.
- If the payer pays for the monthly allowances of the non-resident company’s employees who are sent to Singapore to perform the services, withholding tax is applicable on the allowances as the monthly allowances are considered additional service fees paid to the non-resident company.
- However, if the non-resident company provides the services via electronic means from overseas (e.g. internet presentation, email and telephone) without sending staff to Singapore, the services are rendered outside Singapore and withholding tax is not applicable.
- Where cost reimbursement payment is made on or before 31 Oct 2022 to a non-resident related party for services rendered in Singapore under a cost-pooling arrangement, and the cost-pooling conditions stated in the e-Tax Guide on Transfer Pricing Guidelines have been satisfied, withholding tax is not applicable on such payment.
With effect from 1 Nov 2022, this administrative concession will be withdrawn. Withholding tax will be applicable to any cost reimbursement payment liable to be made on or after 1 Nov 2022 to a non-resident related party, even if the payment is made under a cost-pooling arrangement.
For services performed in Singapore, withholding tax is to be imposed at the prevailing Corporate Income Tax rate of 17% on the gross service fees. This is not the final tax. If the non-resident company wishes to claim deduction for the expenses incurred in deriving the service income, it must submit the certified accounts and tax computation for IRAS’ examination. When the net income and tax have been determined, any tax withheld in excess of the tax on the net income will be refunded.
Include the following information with your tax computation:
- Full name of payer
- Tax reference number of the payer
- Nature of payment
- Date of payment to non-resident
- Period the payment covers
- Gross amount of payment
- Amount of tax deducted and accounted to IRAS
If the company is a resident of a jurisdiction with which Singapore has an Avoidance of Double Tax Agreement (DTA), the DTA may provide for relief from double taxation, depending on the provision of the DTA.
Relief from Double Taxation under the DTA
Whether the DTA provides relief from double taxation of payments for technical services depends on the tax treatment of such services as provided for in the DTA. Generally, the payments are subject to withholding tax if the non-resident company has a permanent establishment in Singapore. The concept of permanent establishment is used in a DTA between 2 Contracting States to determine whether a person resident in a Contracting State has a taxable/ business presence in another Contracting State. Each DTA has its own definition of permanent establishment.
Example
Under Article 7 of the Singapore-United Kingdom (UK) DTA, the profit of a UK resident company is not subject to tax in Singapore if it does not carry on business in Singapore through a permanent establishment in Singapore. Article 5 of the Singapore-UK DTA provides the definition of permanent establishment in respect of this particular DTA. For example, if the non-resident company has a fixed place of business in Singapore, it is regarded as having a permanent establishment in Singapore.
- If the UK Company has a permanent establishment in Singapore, tax has to be withheld at the prevailing Corporate Income Tax rate (i.e. 17%) on the gross fees attributable to the work done in Singapore. The withholding tax at 17% is not the final tax. If the UK company wishes to claim deduction for the expenses incurred, it must submit the certified financial accounts and tax computation for IRAS’ examination. When the net income and tax have been determined, any tax withheld in excess of the tax on the net income will be refunded.
- If the UK Company does not have a permanent establishment in Singapore, the income is not subject to tax in Singapore and withholding tax does not apply. In this case, the UK company is required to submit the Certificate of Residence (COR) to the local payer (i.e. its Singapore customer) for onward submission to IRAS to substantiate that it is a tax resident of UK and qualifies for the DTA benefits. The local payer is still required to submit the withholding tax form (Form IR37) to IRAS even though withholding tax is not applicable.
In some of our DTAs (specifically those with Australia, Pakistan, Republic of Korea, Sweden and Taiwan), specific payments, such as payments for labour or personal services, are excluded from the Business Profits Article because the definition of ‘profits of an enterprise’ does not include such payments. In such cases, the fees attributable to the services performed in Singapore are subject to withholding tax regardless of whether the non-resident has a permanent establishment in Singapore.
For DTAs which contain a separate Article on Technical Services (e.g. the Singapore-Malaysia DTA), the tax to be withheld depends on the tax rate stated in this Article. However, if the non-resident company has a permanent establishment in Singapore, the provisions of the Business Profits Article apply instead.
Example
A company resident in Malaysia performing technical services in Singapore is subject to a withholding tax rate of 5% on the gross fees relating to services rendered in Singapore as provided for under the Technical Services Article of the DTA. The 5% rate applies only if the Malaysian company does not have a permanent establishment in Singapore.
If the Malaysian company has a permanent establishment in Singapore, the Business Profit Article applies and the withholding tax rate is 17% of the gross fees relating to the services rendered in Singapore. The withholding tax at 17% is not the final tax. If the Malaysian company wishes to claim deduction for the expenses incurred, it must submit the certified financial accounts and tax computation for IRAS’ examination. When the net income and tax have been determined, any tax withheld in excess of the tax on the net income will be refunded.
With effect from 1 May 2018, the income derived by a non-individual (e.g. company) tax resident in Australia from the provision of services in Singapore through employees or other personnel engaged by the non-individual is considered profits of an enterprise. Articles 4 and 5 are the applicable articles. Consequently, the service income is only subject to tax in Singapore if the provision of services constitutes a permanent establishment in Singapore under the provisions of Article 4 of the Singapore-Australia DTA. This means that no withholding tax is applicable on the service income if there is no permanent establishment in Singapore. Read footnote 1 of Article 2 of the DTA for documentation of the mutual agreement reached by the competent authorities of Singapore and Australia.
This refers to the DTA with the Republic of Korea (ROK) signed 6 Nov 1979. There is a revised DTA with ROK signed on 13 May 2019 and effective from 1 Jan 2020. Under the revised DTA, profits derived by an enterprise from the performance of professional services and other activities of an independent character fall under the Business Profits Article.
This means that the service income is subject to tax in Singapore only if the services are performed through a permanent establishment in Singapore.
