For companies dealing with non-resident company or sources, the term of Withholding Tax may ring a bell, isn’t it?
Withholding tax is a tax levied on income earned by non-residents from sources within Singapore. It is deducted at source by the payer (also known as the withholding agent) before making payments to the non-resident. The tax is then remitted to the Inland Revenue Authority of Singapore (IRAS) on behalf of the non-resident recipient. Withholding tax applies to a range of payments such as interest, royalties, rental income, technical service fees, and director's fees, among others. For a detailed list of payments that attract withholding tax, you may seek assistance from your tax consultants or alternatively, a comprehensive set of information can be found in IRAS’s website.
In essence, the withholding tax mechanism ensures that taxes are collected at the point of payment, making it easier for the tax authorities to monitor and collect tax from non-residents, who may not be as easily accessible or taxable in Singapore. This streamline the whole process of tax collection since tax is pre-collected even prior to payment. The concept of withholding tax also stems from the principle of enforceability considering that local tax jurisdiction will face numerous hurdles to impose tax regulations on non-residents.
Why Does Withholding Tax Exist?
Withholding tax exists to ensure that Singapore can collect taxes on income earned by non-residents from activities or services rendered within its borders. It simplifies the process of collecting taxes, especially when dealing with foreign individuals or entities, who may not have a permanent presence or tax obligations in Singapore.
This system prevents tax avoidance by making it mandatory for businesses in Singapore to withhold a portion of the payment made to non-residents, ensuring that income earned in Singapore is taxed at the appropriate rate. Additionally, withholding tax provides a means of ensuring compliance with international tax treaties that Singapore has with other countries, which might set reduced tax rates or exemptions for certain types of income. Do note that the withholding tax concept is fairly common in most countries although the items that are subjected to withholding tax and tax rates might differ depending on location.
What Attracts Withholding Tax?
In Singapore, withholding tax is applicable to a variety of payments made to non-residents. For the purpose of discussion, we had identified common payments and the following list is not exhaustive:
Interest: Payments made to non-resident lenders for interest on loans.
Royalties: Payments made for the use of intellectual property such as patents, trademarks, copyrights, etc.
Technical Service Fees: Payments made for technical or consultancy services provided by non-residents.
Management Fees: Certain management or administration fees paid to non-resident entities.
Rent: Payments for the use of real property located in Singapore.
Director's Fees: Fees paid to non-resident directors for their services rendered to Singapore-based companies.
Other Income: Payments to non-residents related to contracts for services or other business-related income.
Each type of income has its own prescribed withholding tax rates, definition and conditions. They may vary depending on the nature of the payment and any applicable tax treaties between Singapore and the recipient's country of residence.
When Do I Need to File and Pay Withholding Tax?
The obligation to file and pay withholding tax arises whenever a payment subject to withholding tax is made to a non-resident. In Singapore, businesses must ensure that withholding tax is filed and paid to the IRAS within a specific timeframe.
Filing: Withholding tax must be filed electronically via the IRAS myTax portal. The tax return must be submitted before the 15th of the second month in which the date of payment occur to the non-resident. There is a strict definition of date of payment according to IRAS. Date of payment is established to be:
For all payments except director’s fees, it should be earliest of:
a) 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).
b) When payment is credited to the account of the non-resident or any other account(s) designated by the non-resident
c) The date of actual payment
For director’s fees, earliest of the following:
a) When the payment is due and payable under the following scenarios:
i) Director's fees approved in arrears
For director's fees approved in arrears, the director has already rendered the requisite services for the accounting year concerned. However, the director's fees must be disclosed to and approved by members of the company before they can be paid to him. Hence, the earliest date on which the director is entitled to the director's fees, is the date the fees are voted and approved at the company's AGM.
ii) Director's fees approved in advance
For director's fees approved in advance, the director may not have rendered the requisite services for the accounting year concerned when the fees are approved at the company's AGM. Hence, the earliest date on which the director can be entitled to the director's fees, is as and when he renders his services.
b) When payment is credited to the account of the non-resident or any other account(s) designated by the non-resident
c) The date of actual payment
2. Payment: Withholding tax payment due date are the same as per filing due date. For tax payers using GIRO, the deduction will occur on the 25th of the month which payment is due.
It's important to note that even if the payment to the non-resident is made in installments or as part of a contract, withholding tax still applies to each payment made, and the filing and payment deadlines remain the same for each individual payment.
How Do I File Withholding Tax?
Filing withholding tax is an electronic process through the IRAS myTax portal. Follow these steps:
Log in: Access the IRAS myTax portal using your SingPass or CorpPass (for businesses).
Select Withholding Tax: From the main dashboard, navigate to the 'Withholding Tax' section and choose the relevant form for your payment type.
Provide Payment Details: Fill in the necessary details regarding the payment made to the non-resident, including the recipient’s information, payment amount, and type of income.
Submit the Tax Return: Once you have filled in all the details, submit the tax return electronically.
Payment: After submission, you will be prompted to make the payment to IRAS for the withholding tax due.
Considering that these are payments to non-residents, it could well be denoted in foreign currencies. Based on our experience, it is advisable to maintain an in-house working paper to keep track of exchange rates used and other critical information in the course of computation. It is essential to ensure that the information is accurate and submitted on time to avoid any issues with tax compliance.
What Are the Consequences of Not Paying Withholding Tax or Being Late in Filing or Payment?
Failure to pay withholding tax or delay in filing or payment can lead to significant consequences for businesses in Singapore. These include:
Penalties: If the withholding tax is not paid on time, IRAS can impose a 5% penalties for late payment. An additional 1% per annum may be imposed for every completed month
Reputational Damage: Non-compliance with withholding tax obligations could harm your company’s reputation with both local tax authorities and international business partners. More often than not, non-compliance in one area may suggest flaws and weaknesses of general internal controls, prompting more checks and audits.
Appointment of Agents: IRAS may appoint agents such as banks, tenants or lawyer to recover overdue taxes.
Legal Action: In severe cases, continued failure to comply with withholding tax requirements could lead to legal actions or other enforcement measures by IRAS.
For businesses that fail to file or make the required payments on time, the consequences can include financial penalties, additional audits, and difficulties with future tax compliance. Companies with very good reason regarding late filing or failure of payment can attempt communicate with IRAS directly or through your tax consultants.
How Do I Ensure Withholding Tax Compliance for My Company?
To ensure your company remains compliant with withholding tax regulations in Singapore, consider implementing the following measures:
Understand Your Obligations: Familiarize yourself with the types of payments that attract withholding tax and the applicable rates for each.
Maintain Accurate Records: Keep detailed records of all payments made to non-residents, including invoices, contracts, and payment confirmations. This ensures that you have the necessary documentation when filing withholding tax.
File on Time: Set reminders to file and pay withholding tax within the 30-day deadline from the payment date. Filing and paying on time will help avoid penalties and interest charges.
Seek Professional Help from Tax Consultants: Given the complexity of withholding tax regulations, consider engaging an experienced accounting or tax services firm in Singapore to handle your compliance. Professional tax advisors can help you navigate the tax laws and ensure accurate and timely submissions.
Monitor Tax Treaties: Stay informed about any tax treaties between Singapore and other countries that may affect the withholding tax rates or exemptions applicable to your business transactions.
Ensuring withholding tax compliance is a vital aspect of your business’s tax obligations in Singapore. By staying proactive, business should always ensure that they are well verse with tax rules and regulations. In an event of doubt, it is better to seek professional advice from Tax Consultants. On the other hand, you may also seek help from tax consultants to provide consultancy service to ensure that your in-house team has a strong internal process.
In conclusion, withholding tax is a critical tax mechanism in Singapore for managing tax compliance on non-resident income. Understanding your obligations, adhering to filing deadlines, and ensuring timely payment are essential steps to avoiding penalties and maintaining good standing with tax authorities. By implementing robust systems and seeking professional assistance when needed, you can ensure that your business remains compliant with Singapore’s withholding tax requirements.
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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.
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