Types of Foreign Tax Credit
Foreign income earned by a Singapore company may be subject to taxation twice - once in the foreign jurisdiction, and a second time when the foreign income is remitted into Singapore. There are two ways Singapore companies may avoid double taxation.
Double Tax Relief (DTR)
A DTR is the relief provided for under an Avoidance of Double Taxation Agreement (DTA) to reduce double taxation, in the form of a tax credit. It allows the Singapore tax residents to claim a credit for the amount of tax paid in the foreign jurisdiction against the Singapore tax that is payable on the same income. A DTR will be granted if the foreign tax was paid in accordance with the DTA provisions and is capped at the lower of the foreign tax paid and the Singapore tax that would have been payable on the same income.
A company is a tax resident of Singapore if the control and management of its business is exercised in Singapore.
Unilateral Tax Credit (UTC)
Effective Year of Assessment (YA) 2009, a UTC will be granted on all foreign-sourced income received in Singapore by Singapore tax residents from jurisdictions that do not have DTAs with Singapore.
Conditions for Claiming FTC
The company must satisfy all of the following conditions in order to claim FTC:
- The company 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 jurisdiction; and
- The income is subject to taxation in Singapore.
Companies in loss positon
No FTC will be given to a company in a loss position.
Companies with permanent establishments overseas
When a company has a permanent establishment (PE) overseas and the income is derived through that PE, the income will generally be taxed overseas. A FTC would be granted only if the income is also taxed in Singapore.
Companies deriving passive income
Passive income (e.g. interest, dividend) derived from outside Singapore will generally be taxed overseas in the year of receipt. Such income will be taxed in Singapore in the year of remittance; a FTC will be given when the income is taxed in Singapore.
Calculating FTC
For companies claiming DTR, the amount of FTC to be claimed is subject to the specific terms and conditions as specified in the DTA with the relevant treaty partner.
FTC is the lower of:
- The actual amount of foreign tax paid; or
- The amount of Singapore tax attributable to the foreign income (net of expenses).
Computing Singapore tax attributable to the foreign income
The amount of the FTC granted should be computed on a "source-by-source and country-by-country" basis. With effect from YA 2012, a company may elect for the FTC pooling system whereby FTC on various foreign income may be pooled together and need not be computed on the above basis.
Worked Example (85KB) on computation of FTC on a "source-by-source and country-by-country" basis.
Claiming FTC
The claim for FTC should be made when you file your Income Tax Return, Form C. Companies claiming FTC cannot use Form C-S.
Documents supporting your claim for FTC need not be submitted with your Form C. However, the following information/ documents must be prepared and retained#:
- Jurisdiction in which foreign tax was paid;
- Nature of the income;
- Description of the services rendered, and whether the income was derived through a permanent establishment in the foreign jurisdiction and your basis for this claim, if applicable;
- Name of the payer;
- Date of withholding tax receipt/ voucher;
- Gross amount of income, withholding tax rate and amount of tax withheld in foreign currency (include the corresponding S$ amount);
- For a claim of double tax relief, the relevant Article of the Double Taxation Agreement under which the tax was withheld; and
- Withholding tax receipt/ voucher*.
A Singapore tax resident company can enjoy tax exemption on its specified foreign income that is remitted into Singapore on or after 1st Jun 2003. Click here to find out more.
FTC Pooling System
The FTC pooling system was introduced in Budget 2011 to give businesses greater flexibility FTC claims, to reduce their Singapore taxes payable on remitted foreign income, as well as to simplify tax compliance.
Effective YA 2012 , Singapore tax residents may elect for the FTC pooling system when claiming FTC on income for which they have paid foreign tax.
Qualifying Conditions for FTC Pooling System
The company must satisfy all of the following conditions to qualify for FTC pooling system:
- Foreign income tax is paid on the income in the foreign jurisdiction from which the income is derived;
- The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is derived is at least 15% at the time the foreign income is received in Singapore; and
- The company is entitled to claim for FTC under the Income Tax Act and there is Singapore tax payable on the income.
Where the above conditions are not met, or where companies choose not to elect for FTC pooling system, the current FTC rules will apply.
Calculating FTC under the Pooling System
FTC under the Pooling System is the 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.
For details, please refer to Foreign Tax Credit Pooling (e-Tax guide, 152KB).
Worked Example (86KB) on computation of FTC under the FTC Pooling System.