What is double taxation?
Foreign income earned by a Singapore resident individual in Singapore may be subject to taxation twice - once in the foreign country, and a second time when the foreign income is remitted into Singapore.
Foreign tax credit (FTC) is granted by allowing the Singapore resident individual to claim a credit for the tax paid in the foreign country against the Singapore tax that is payable on the same income.
What are the qualifying conditions for claiming foreign tax credit (FTC)?
The individual must satisfy all of the following conditions in order to qualify for a claim for FTC:
- The individual is a tax resident in Singapore for the relevant basis year;
- Tax has been paid or is payable on the same income in the foreign country; and
- The income is subject to taxation in Singapore.
How to calculate foreign tax credit (FTC)?
The amount of FTC is dependent on the nature of income and subject to the specific terms and conditions as specified in the DTA with the relevant treaty country.
FTC = lower of
- the actual amount of foreign tax paid; or
- the amount of Singapore tax attributable to the foreign income (net of expenses)
For trade income
If the business has a Permanent Establishment (PE) overseas and the income is derived through that PE, the income would generally be taxed overseas. A FTC would be granted only if the income is also taxed in Singapore.
For passive income (e.g. interest, dividend etc)
Passive income derived from outside Singapore will be taxed in Singapore in the year of remittance.
How to claim foreign tax credit (FTC)?
The claim for FTC should be made when you file your annual income tax return (Form B for sole-proprietors or Form P for partnerships). The FTC claim should be shown in the sole-proprietorship’s or partnership’s tax computation. You will need to forward documentary proof (e.g. withholding tax receipts, letter from the foreign tax authority, or dividend vouchers) to show that the remitted income has been subject to tax in the foreign country before FTC claims can be considered.
When making a FTC claim on foreign-sourced service income, please provide:
- the type of services rendered by the business;
- the country in which the services were rendered;
- whether the services were rendered through a permanent establishment in the foreign country. If so, state the location and function of the office in the said country;
- the amount of gross foreign income received for the year and how it was reflected in the profit & loss account;
- relevant documents to show that tax had been paid in the foreign country.
Foreign tax credit (FTC) pooling system New!
The FTC pooling system was introduced in the Singapore Budget 2011 to give businesses greater flexibility in their claim of FTCs, reduce their Singapore taxes payable on remitted foreign income, as well as to simplify tax compliance.
With effect from YA 2012, Singapore tax residents may elect for the FTC pooling system when claiming FTC on income for which they have paid foreign tax.
What are the qualifying conditions to qualify for the FTC pooling system?
The foreign income that is received by the individual or business must satisfy all of the following conditions:
- Foreign income tax has been paid on the income in the foreign country;
- The highest corporate tax rate (headline tax rate) of the foreign country from which the income is received is at least 15% at the time the foreign income is received in Singapore; and
- The income is subject to tax in Singapore and the individual or business is entitled to claim for FTC under the Income Tax Act.
Where the above conditions are not met, or where the individual or business choose not to elect for FTC pooling system, the current FTC rules will apply.
How to calculate foreign tax credit (FTC) under the FTC pooling system?
FTC = lower of
- the amount of Singapore tax attributable to the foreign income under pooling (net of expenses); or
- the actual amount of pooled foreign tax paid on the same pool of foreign income.
Comparison: FTC before 2011 Budget change and FTC under the new FTC Pooling System
Before 2011 Budget Change
|
After 2011 Budget Change:
New FTC pooling system
|
FTC is allowed:
- on a source-by-source and country-by-country basis
- based on an amount that is the lower of:
- foreign tax paid; and
- Singapore tax payable on that foreign income
|
With effect from YA 2012, FTC is allowed:
- by pooling all foreign taxes paid on qualifying foreign income
- based on an amount that is the lower of:
i. pooled foreign taxes paid on qualifying foreign income; and
ii. total Singapore tax payable on qualifying foreign income
|
An example of the FTC pooling system:
|
Foreign Country A
(S$)
|
Foreign Country B
(S$)
|
Total
(S$)
|
Foreign income remitted
|
10,000
|
20,000
|
30,000
|
Foreign income tax paid
|
500
|
5,000
|
5,500
|
Under the method of FTC computation before YA 2012:
|
Foreign Country A (S$)
|
Foreign Country B (S$)
|
Total
(S$)
|
Foreign income tax paid
|
500
|
5,000
|
5,500
|
Singapore tax payable on the foreign income (based on prevailing corporate tax rate of 17% )
|
1,700
|
3,400
|
5,100
|
FTC allowed
(the lower of foreign tax paid and Singapore tax payable on each FI)
|
500
|
3,400
|
3,900
|
Net Singapore tax payable on the foreign income after offsetting FTC ($5,100 – $3,900)
|
|
|
1,200
|
Under new FTC pooling system with effect from YA 2012:
|
Total (S$)
|
Total foreign income taxes paid in Countries A and B
|
5,500
|
Total Singapore tax payable on foreign income from Countries A and B
|
5,100
|
FTC allowed (lower of total foreign taxes and total Singapore tax payable on foreign income from Countries A and B)
|
5,100
|
Net Singapore tax payable on the foreign income after offsetting FTC
($5,100 – $5,100)
|
0
|
|
|
Tax savings on applying FTC pooling
($5,100 – $3,900)
|
1,200
|
For details, please refer to the e-Tax Guide, Foreign Tax Credit Pooling (180kb)