Administrative Concession on Services Rendered under Section 12(7)(b) and Section 12(7)(c) of the Income Tax Act

Due to low adoption, IRAS has withdrawn the administrative concession to allow local payers to apply a lower withholding tax rate on related party services performed in Singapore that fall within Section 12(7)(b) and (c) with effect from 1 Apr 2018.

Services Rendered Under Section 12(7)(b) and (c)

With the enactment of Section 12(7A) of Income Tax Act (ITA) which takes effect from 29 December 2009, management services performed by non-residents outside Singapore are generally excluded from the scope of Section 12(7)(c). This includes payments made to related parties provided they meet the arm's length requirement*. With the change, the tax treatment for such services performed outside Singapore will be aligned with the technical services described in Section 12(7)(b) performed outside Singapore.

For services performed in Singapore, withholding tax is to be imposed at the prevailing corporate tax rate on the gross payment and paid to IRAS. This tax is not a final tax. Currently, if the non-resident company has incurred expenses in earning the service income, it can forward 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.

*With reference to the e-Tax Guide on "Transfer Pricing Guidelines" (1.46MB) Revised!, IRAS is prepared to accept the 5% mark-up commonly adopted for certain routine support activities (refer to Annex C) as a reasonable arm's length charge for such services.

Withdrawal of Administrative Concession for Section 12(7)(b) and (c) Services

New! With effect from 1 Apr 2018, local payers will need to withhold tax at the prevailing corporate tax rate of 17% for payments made on related party services performed in Singapore that fall within Section 12(7)(b) and (c) if the date of payment falls on or after 1 Apr 2018. The administrative concession which allows payers to apply a lower withholding tax rate on such payments has been withdrawn due to low adoption.

The date of payment is defined as the earliest of the following dates:

  1. When the payment is due and payable based on the agreement or contract, or the date of the invoice in the absence of any agreement or contract (credit terms should not be taken into consideration). Please refer to examples of when payment is due and payable.
  2. When payment is credited to the account of the non-resident or any other account(s) designated by the non-resident
  3. The date of actual payment

This is not the final tax. If the non-resident company wishes to claim for the expenses incurred, it may submit a tax return together with 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.

If the company is a resident of a tax treaty partner, the Avoidance of Double Taxation Agreements (DTAs) may provide for relief from double taxation, depending on the provision of the DTA.

Administrative Concession on Payments Made for Related Party Services (ceased wef 1 Apr 2018)

The administrative concession allowed companies to apply a lower withholding tax rate on gross payment made for related party services performed in Singapore that fall under Section 12(7)(b) and (c) without the need to seek prior approval from IRAS if the following conditions are met:

  1. The services provided by the non-resident company to its related parties are not also provided to an unrelated party
  2. The services must be routine support services* with a mark-up of at least 5% and
  3. No disallowable expenses (e.g. fixed assets) are included in the costs incurred by the non-resident company in the provision of the services.

* Examples of such services include accounting, payroll and certain other management or administrative functions. Please refer to Annex C of the e-Tax Guide on " Transfer Pricing Guidelines (1.46MB)" Revised! for more details.

This concession has been withdrawn for Section 12(7)(b) and (c) payments where the date of payment falls on or after 1 Apr 2018. Please refer to information on determining date of payment for withholding tax purposes.


Where the date of payment falls before 1 Apr 2018, the local payer can continue to apply a lower withholding tax under the administrative concession by:

  1. completing the Form IR37 and accounting for the withholding tax at the lower tax rate; and
  2. providing a confirmation letter* that there are no disallowable expenses included in the costs incurred by the non-resident related company to provide the routine support services.

*Confirmation letter from the non-resident related company is required if this is the first time you are making payment to that company under the administrative concession.

The following table summarises the withholding tax treatment:

Date  of Payments*Withholding Tax Rate for Related Party Services Performed in Singapore 
Before 1 Apr 2018
  • Apply a lower withholding tax rate on gross payments made under the administrative concession
  • Final tax
On or after 1 Apr 2018 
  • Administrative concession removed
  • Apply withholding tax rate at prevailing corporate tax rate of 17% on gross payments
  • Not the final tax 

*Please refer to information on determining date of payment for withholding tax purposes.

Overseas company A provides routine support services to its related company B in Singapore.

Company A charges a mark-up of 5% on the cost incurred. The date of payment1 is on 1 Feb 2018.

Company B, the payer, can apply a lower withholding tax rate on gross payment made on routine support services performed in Singapore as follows:

 

 

$
Fees Charged At Cost Plus Mark-Up

105,000

Total Expenditure Incurred (All Allowable)

(100,000)

Mark-Up/Profit

    5,000

Tax Payable On Mark-Up @ 17%

850.00

Lower Withholding Tax Rate

(850/105,000 x 100)
0.81%2

1 Please refer to information on determining date of payment for withholding tax purpose.
2 Round up to nearest 2 decimal places when completing Form IR 37

Applying the lower WHT on gross payment made, the tax payable is $850.50 (0.81% x $105,000).

Overseas company A provides routine support services to its related company B in Singapore.

Company A charges a mark-up of 5% on the cost incurred. The date of payment1 is on 31 Jul 2018.

Company B, the payer, will need to withhold tax at the prevailing corporate tax rate of 17% on gross payment made on routine support services performed in Singapore as follows:

 

 

$
Fees Charged At Cost Plus Mark-Up

105,000

Tax Payable on Gross Payment @ 17%

                   

17,8502

(105,000 x 17%)

1 Please refer to information on determining date of payment for withholding tax purpose.
2 This is not the final tax. If the non-resident company wishes to claim for the expenses incurred, it may submit a tax return together with the certified accounts and tax computation for IRAS' examination.       

Applying for Approval For Lower Withholding Tax Rate

Notwithstanding the withdrawal of the administrative concession, the local payer may submit an application to IRAS for case-by-case consideration to withhold tax at a lower withholding tax rate on gross payments made for related party services performed in Singapore that fall under Section 12(7)(b) and (c). To facilitate our review, the local payer is required to provide the following information:

  • The nature of services provided by the related party;
  • The name and address of the related party and nature of relationship;
  • The percentage of mark-up, whether it is at arm's length and basis for claiming that it is at arm's length;
  • Reason for not being able to comply and withhold tax at the prevailing corporate tax rate; and
  • The detailed profit and loss accounts with supporting schedules showing the breakdown of expenses and highlighting the non-deductible items (if any). Otherwise, a confirmation letter from the non-resident related company that there are no disallowable items included in the costs incurred.

Upon obtaining approval from IRAS, the local payer would be able to account for the withholding tax at a lower withholding tax rate on gross payment made.

Making Adjustment to Non-deductible Expenses

If there are non-deductible expenses included in the costs, the payer will need to make the adjustments by adding back non-deductible expenses to arrive at the adjusted amount for the purpose of calculating the lower tax to be withheld.

Scenario:

In the computation shown below, depreciation, a non-deductible expense, is included in the amount charged by the related company. Depreciation has to be added back to the mark-up to arrive at the lower withholding tax as follows:

 

$

 

Fees charged at cost plus mark-up

165,000

 

Total expenditure incurred (including depreciation of $1,000)

(150,000)

 

Mark-up/profit

15,000

 

Adjustments made

 

 

Mark-up/profit

15,000

 

Add: Depreciation

1,000

 

Adjusted profit

16,000

 

Tax payable on mark-up @ 17%

2,720

(16,000 x 17%)

Lower withholding tax rate

1.65%

*(2,720/165,000 x 100%)

* round up to nearest 2 decimal places when completing Form IR 37

Applying the lower WHT on gross payment made, the tax payable is $2,722.50 (1.65% x $165,000)

Implications of Applying Lower Withholding Tax Rate on The Gross Payment Made

The local payer should take note of the following tax implications when applying the lower withholding tax rate on the gross payment whether for cases where case-by-case approval is obtained from IRAS or in applying the administrative concession where the date of payment* falls prior to 1 Apr 2018:

  • Should the circumstances change, for example a change in the mark-up or additional disallowable expense incurred, the local payer needs to inform IRAS in writing to request approval based on the new information.
  • If non-allowable expenses have been incurred and these have not been added back to the mark-up previously, IRAS will recover the tax from the local payer; late payment penalties may apply.
  • Where the date of payment* is before 1 Apr 2018 and if the administrative concession has been applied, the non-resident company cannot request a review of its tax to take into account tax reliefs available for the relevant YA, i.e. there will be no refund of tax withheld. The non-resident companies should therefore make an informed decision on whether to go for an upfront lower withholding tax rate on gross payment made.

*Please refer to information on determining date of payment for withholding tax purpose.

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