Overview of withholding tax
Some guidelines for withholding tax
Overview of withholding tax
The rate or withholding tax depends on the nature of payment. A person has to withhold tax when he makes payments of the following nature to a non-resident person:
- Interest, commission, fee in connection with any loan or indebtedness;
- Royalty or other payments for the use of or the right to use any movable property;
- Payment for the use of or the right to use scientific, technical, industrial or commercial knowledge or information or for the rendering of assistance or service in connection with the application or use of such knowledge or information;
- Management fee;
- Distribution of real estate investment trust (REIT);
- Rent or other payments for the use of any movable property;
- Payment for the purchase of real property from a non-resident property trader.
Most of these payments are also covered under Section 12(6) and Section 12(7) of the Income Tax Act. For an overview of the withholding tax implications for such payment, you may refer to the flowchart on General Overview of Withholding tax on income deemed to be sourced in Singapore under Section 12(6) and 12(7) of the Income Tax (57KB).
It should be noted that if the withholding tax is imposed at the prevailing corporate tax rate on the gross payment, the tax is not a final tax. If the company wishes to claim for the expenses incurred in the process of earning the income, it can forward the certified accounts and tax computation for IRAS’ examination. The following information should also be given together with your tax computation:
(a) Full name of the payer;
(b) Tax reference number of the payer;
(c) Nature of the payment;
(d) Date of payment to the non-resident;
(e) Period for which the payment cover;
(f) Gross amount of payment; and
(g) Amount of tax deducted and accounted to IRAS.
When the net income and tax have been determined, any tax withheld in excess of the tax on the net income will be refunded.
Some guidelines for withholding tax:
- Withholding tax is applicable to interest on overdue trade accounts and interest on credit terms paid to a non-resident supplier. This is the case even if the interest charged on late payment of the sale of goods is treated as part of the seller's trade income.
Examples where withholding tax is not applicable:
Payments in respect of interest rate/ currency swap arrangements or structured products
Examples where withholding tax is applicable are:
- Where there is a close nexus between the swap payments and the financing arrangements such as the swap arrangement is directly connected with a financing arrangement and the counter parties for the two arrangements are the same. The swap payments and interest payments together give the true economic effect of a financing arrangement.
- Where there is a close nexus between the swap payments and the financing arrangements such as the documentation shows explicitly that the swap arrangement is entered into to hedge a borrowing by the payer of the swap payments or the interest liabilities on such borrowing
- Where the economic substance of a swap arrangement is that of a loan or a financing arrangement.
- Payments in respect of any structured products (other than payments which qualify for tax exemption under section 13(1)(zj) of the Income Tax Act).
An example where withholding tax is not applicable:
- The swap arrangement is not entered into in relation to any borrowing by the payer of the swap payments, unless such arrangement is in substance a loan or financing arrangement of the payer of swap payments. This treatment will be effective for any swap payments due and payable on or after 26 November 2010.
Payments in respect of non-financial derivatives
Withholding tax is not applicable to payments exchanged or made in respect of non-financial derivative whereby:
- the derivative does not effectively give rise to the creation of any loan or indebtedness;
- the payment is not or is not effectively a return for the use of money or provision of credit; and
- the payment made is at arm’s length.
Non-financial derivatives means derivatives the payoffs of which are linked in whole to the payoffs or performance of the underlying non-financial assets. Such derivatives take the form of forward, futures, swap or options. Examples of non-financial derivatives are commodity, emission and freight derivatives.
Software payments and payments for the use of or the right to use information and digitised goods
Recognising that the delivery models and licensing arrangements for software, information and digitised goods have evolved over time and that the payments by end-users for such items are for the copyrighted articles and the transactions do not involve the transfer of rights to exploit the copyrights embedded in the software or goods, IRAS has done a review on such payments.
With effect from 28 Feb 2013, the rights-based approach will be adopted to characterise the following payments for tax purposes:
(a) payments for software; and
(b) payments for the use of or the right to use information and digitised goods.
Payments for software include payments for downloadable software, software bundled with hardware, software licence (site, enterprise or network), limited duration licensed software and software product with online elements.
Payments for information include subscriptions to Bloomberg, Reuters, Lexis-Nexis and other similar subscriptions. They exclude payments for the use or the right to use patents, trademarks, registered design, geographical indications, layout design of integrated circuit, plant variety and trade secret.
Payments for digitised goods include payments for online or downloadable ring tones, music videos, books, and other similar goods.
The rights-based approach characterises a payment based on the nature of the rights transferred in consideration for the payment. It draws a distinction between the transfer of a “copyright right” and the transfer of a “copyrighted article” from the owner to the payer.
Payment for copyright right
A transaction involves the transfer of a copyright right if the payer is allowed to commercially exploit the copyright. The term ‘commercially exploit’ means to be able to:
- reproduce, modify or adapt and distribute the software, information or digitised goods; or
- prepare derivative works based on the copyrighted software program, information or digitised goods for distribution.
Where a payment is made to a copyright owner for the transfer of partial rights in the copyright (e.g. licensing of copyright to be exploited by the payer), the payment is a royalty. Such payments to non-residents are subject to withholding tax at 10% or the reduced rate as provided in an Avoidance of Double Taxation Agreement (DTA).
If the payment is made to the copyright owner for the complete alienation of his copyright in the goods, the transaction is a sale of the copyright. In the hands of the copyright owner, any gains derived from such sale constitute either his business income or capital gains. The sales proceeds paid to a non-resident is not subject to withholding tax.
Payment for copyrighted article
Payments for software or digitised goods that do not involve the transfer of the copyright rights embedded in the goods will be considered as payments for copyrighted articles and are not subject to withholding tax.
For example, if a person purchases a software for personal use or for use within his business operations, the payment he makes is a payment for a copyrighted article. Thus, withholding tax is not applicable. Payments for additional services such as subsequent software maintenance, user training, customisation of software or information, and development of add-on applications are not within the scope of the rights-based approach. Withholding tax may apply. Please refer to payment for services rendered.
With the rights-based approach, the withholding tax exemption on software payments and payments for the use of or the right to use information and digitised goods will no longer be necessary with effect from 28 Feb 2013. Such payments that would have qualified for the withholding tax exemption will not be subject to withholding tax under the rights-based approach.
For more information, please refer to the e-Tax Guide, Rights-Based Approach for Characterising Software Payments and Payments for the Use of or the Right to Use Information and Digitised Goods .
Payments in respect of services under Section 12(7)(b) and Section 12(7)(c) of the Income Tax Act
Payment 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, withholding tax is applicable on the service fees attributable to work done in Singapore.
- If the payer pays for monthly allowance of the non-resident company's employees who are sent to Singapore to perform the services, withholding tax is applicable on the allowance because the monthly allowance is actually additional service fees paid to the non-resident company.
- However, if the non-resident company provides the services via electronic means 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.
The amount of tax withheld is based on the prevailing corporate tax rate on the gross service fees. This is not the final tax. If the non-resident company wishes to claim for the expenses incurred, they may forward the certified accounts and tax computation for IRAS's 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 company is a resident of a tax treaty country, the Avoidance of Double Taxation Agreement (DTA) may provide for relief from double taxation, depending on the provision of the DTA.
Withholding tax is not applicable to reimbursement/allocation of costs for the provision of management services between head office and branches (e.g. costs incurred in cost-pooling arrangements). For guidance on related party charges, please refer to the IRAS Supplementary e-Tax Guide on “Transfer Pricing Guidelines for Related Party Loans and Related Party Services".
Prior to 29 December 2009, any payment made to unrelated persons outside Singapore for certain management service* performed outside Singapore does not fall within the scope of section 12(7)(c) i.e. the income is not deemed to be derived from Singapore. However, any payment made to related persons outside Singapore for the same type of management services at cost plus a mark-up is deemed to be derived from Singapore, despite that the services are performed outside Singapore. Please refer to this flowchart that illustrates the applicability of withholding tax on management fees (before 29 December 2009) (18KB).
With effect from 29 December 2009, withholding tax will generally not be applicable to any payments for management services* performed by non-residents outside Singapore, whether or not the payments are made to related persons. For payments made to related parties, the arm’s length requirement must be met.
Please refer to this flowchart that illustrates the applicability of withholding tax on management fees (from 29 December 2009) (17KB).
Administrative concession on services rendered under Section 12(7)(b) and Section 12(7)(c) of the Income Tax Act
As an administrative concession, IRAS will allow the payers to apply a lower withholding tax on related party services performed in Singapore under Section 12(7)(b) & (c) if certain conditions are met.
Distribution of real estate investment trust (REIT)
Withholding tax at the reduced rate is applicable to distribution made by REIT to unitholder who is a non-resident non-individual.
A non-resident non-individual is one who is not a resident of Singapore and:
(a) who does not have a permanent establishment in Singapore; or
(b) who carries on an operation in Singapore through a permanent establishment in Singapore, where the funds used to acquire the units in REIT are not obtained from that operation.
For more information, please refer to the e-Tax Guide on "Income Tax Treatment of Real Estate Investment Trusts".
There is no need to withhold tax on dividend payments. Singapore currently does not have withholding tax on dividends even though withholding tax rates on dividends are provided under some of our tax treaties.