What is Withholding Tax?
Withholding tax is a tax system to ensure and facilitate the collection of tax payable from non-resident on certain kinds of Singapore-sourced income. The employer is required to deduct withholding tax from the non-resident payment and remit it to the Inland Revenue Authority of Singapore (IRAS).
There are 3 types of Non-Residents:
(a) Non-resident Individual:
Any individual who present and employed in Singapore for period less than 183 days
(b) Non-resident Company:
The term control of management, authority for decision making, strategies and policies do not conduct in Singapore.
(c) Non-resident Professional:
Foreign professional present and work independently, and provided services under contractual terms in Singapore less than 183 days in calendar year. However, they will not liable to pay withholding tax on their income as they are not carrying out their service in Singapore.
We have stated some of common payments that are subjected to Withholding Tax. There are:
| Type of payment |
Section (ITA) Deemed-source provision |
Rate |
| Interest, commission, fee related loan | Section 12 (6) | 15% |
| Royalty | Section 12 (7) (a) | 10% |
|
Payment for the rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information |
Section 12 (7) (b) | 10% |
| Management fee | Section 12 (7) (c) | 17% (Prevailing Corporate Tax rate) |
| Rent & other payment for movable property | Section 12 (7) (d) | 15% |
| Payment for the purchase of real property from a non-resident property trader. | 15% | |
| Distribution of real estate investment trust (REIT) | Section 12 (7) (d) | 10% |
| Dividend | Exempted |
Implication and Compliance Obligation of the Payer
For payments made to non-residents, the withholding tax must be deducted and accounted to Comptroller by the 15th of the second month following the date of payment to the non-resident.
To determine the exact date of payment, the date of payment to non-resident should consider the earliest of the following:
- The payment date as mentioned in the contract.
- In the absence of a contract of agreement, the date of the invoice.
- The actual date when the income was credited to the account of the non-resident.
- Date of actual payment.
While, in the case of the date of Director fee will be following:
- The payment date or
- Date of approval of the payment voted at the Annual General Meeting of the company.
Penalties & Failure of Withholding Tax:
| Failures | Penalties |
| Penalties for failure to withhold tax | · IRAS will request the entity to recover the withholding tax amount |
| Penalties for failure to notify IRAS of tax withheld |
· Payer fine not exceeding $10,000 · Payer imprisonment for a term not exceeding three years · Or Both |
| Penalties for late payment of tax withheld |
· Immediate 5% penalty if the withholding tax is not remitted to the IRAS by the due date. · Additional 1% penalty imposed if one month remain unpaid after the 5% overdue penalty · Max plus 15% additional penalty |
Implication of Withholding Tax Obligation between Entities
Generally, when international corporate entities received payments subject to withholding tax in from Singapore entity, they might have an agreement regarding which entity obligated to bear the withholding tax. The amount received by the non-resident entity would be affected due to the agreement of withholding tax obligation between Singapore resident entity and non-resident entity, as follow:
| Type of Withholding Tax Filing | Entity obligated to bear Withholding Tax |
| Net of tax method | Foreign Company (non-resident entity) |
| Gross of tax method | Local Company (resident entity) |
For example, if the agreement stated that the foreign company (non-resident entity) will obligated to bear the withholding:
| Net of Tax | $ |
| Interest | 1,000,000 |
| Withholding tax ($1,000,000 x 15%) | (150,000) |
| Payment amount to the foreign company | 850,000 |
Based on the calculation above, the initial payment of interest to the non-resident entity should be $1,000,000. However, $150,000 will deducted from $1,000,000 as the withholding tax of interest (15%) to pay and report to IRAS since the non-resident entity agree to bear the withholding tax obligation. Therefore, their final income of interest received will be $850,000. But if the tax-resident entity fails to pay to report withholding tax amount to IRAS before they transfer the payment amount to non-resident entity, the penalties will be still imposed to the tax-resident entity, even though the withholding tax obligation is lie on non-resident entity.
On the other hand, if the agreement stated that the local entity will be obligated to bear the withholding tax as follow:
| Gross of Tax | $ |
| Interest | 1,176,470 |
| Withholding tax ($117,647 x 15%) | (176,470) |
| Payment amount to the foreign company | 1,000,000 |
According to the calculation above, the initial payment of interest to the non-resident entity is $1,000,000, while the interest payment amount will grow up to $1,176,470 because the withholding tax obligation was liable to the tax-resident entity so that an additional $176,470 required pay as Withholding tax to IRAS. Therefore, the final income of interest that the non-resident entity received will be same as the initial payment amount of interest to them, $1,000,000. While, penalty will be imposed to tax-resident entity if the tax-resident entity fails to pay and report the amount of withholding tax before they transfer the payment to the non-resident entity.
Conclusion
Withholding tax is part of the umbrella of corporate tax to be taking concerning by the entities in Singapore, otherwise there will be harsh penalties imposed for late or failure withholding tax payment and failure of notification to IRAS, which could cause a fairly high amount of unnecessary cost to the companies. It is also important for the payer to understand their compliance obligations and the rules of withholding tax in order to pay and file withholding tax in a timely manner and avoid potential penalties could be incurred.