Background

The Protocol amending the Agreement signed on 28 June 2004 between the Republic of Singapore and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital (“Protocol”) which was signed on 9 December 2019, entered into force on 29 March 2021.

The key changes in the Protocol are as follow:

1. Permanent establishment threshold for construction-related activities (i.e. building site, construction, installation or assembly projects) has been extended from six months to 12 months.
   
2. No change to the 5% withholding tax (“WHT”) rate on dividend if the beneficial owner of the dividend income holds at least 10% of the capital of the company paying the dividend. In all other cases (except for dividend from a real estate investment company or trust), the dividend WHT rate has been reduced from 15% to 10% in the Protocol.
   
3. Interest WHT rate reduced from 8% to 0%.
   
4. Royalties WHT rate reduced from 8% to 5%.“Payments of any kind received as a consideration for the use of, or the right to use, industrial, commercial or scientific equipment”has been removed from the scope of royalties article.
   
5. Gains derived from the alienation of shares, participations, or other rights representing more than 50 per cent of the vote, value or capital stock in a company, may now be taxed in the state where the company is a resident, if the alienator had held directly or indirectly such shares, participations, or other rights for a period of less than 12 months preceding such alienation.
   
6. Arbitration provisions included to provide for a mechanism whereby a taxpayer may request for arbitration of eligible Mutual Agreement Procedure cases that have not been resolved for three years.

To do

The Protocol aims to enhance cross-border trade and investment between Singapore and Germany. Multinationals with holding companies or operations in Singapore and Germany, should take note of the changes for effective group tax planning.

In determining the arm’s length interest to be charged on related party loans, taxpayers may apply the indicative margin on each related party loan not exceeding S$15 million. If taxpayers choose to apply the indicative margin, they will apply the indicative margin on the appropriate base reference rate (e.g., SGD Singapore Inter Bank Offered Rate or SGD/USD swap rate) selected for the related party loan. The interest rate shall be equal to the indicative margin plus the appropriate base rate.

The Inland Revenue Authority of Singapore updates the indicative margin at the beginning of each calendar year. The indicative margin for 2021 (related party loan not exceeding S$15 million obtained or provided during the period from 1 January 2021 to 31 December 2021) is +275 bps (2.75%).

If taxpayers choose not to apply the indicative margin or if it is not applicable to them, they will have to apply an interest rate in line with the arm’s length principle and maintain contemporaneous transfer pricing documentation.

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Source: Inland Revenue Authority of Singapore

Several existing measures were enhanced or extended in the Singapore Budget Statement for the Financial Year 2021 (“Emerging Stronger Together” Budget) to provide continued support to businesses and workers to mitigate the effects of the COVID-19 pandemic. 
 
To learn more about these measures and other tax changes announced in this year’s Budget, read Crowe Singapore’s Budget 2021 Newsletter that provides a summary of select key measures and tax changes announced in this year’s Budget.

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In a strong response to the adverse impact on the Singapore economy due to the COVID-19 outbreak, a $4 billion relief package was unveiled in the Budget announced on 18 February 2020.

Dubbed as the “Stabilisation and Support Package”, the relief package includes measures targeted at specific sectors hit by the COVID-19 and broad-based support for businesses to retain their employees and alleviate their cash flow problems.

A quick summary of some of the broad-based measures under the relief package is provided below:

1. Companies will receive a 25% corporate tax rebate for the year of assessment 2020. The rebate will be capped at $15,000.
2. Companies that file their estimated chargeable income (ECI) from 19 February 2020 to 31 December 2020 and companies that have filed their ECI before 19 February 2020 and have ongoing instalment payments to be made in March 2020 will be automatically granted an additional two months of interest-free instalments if they are paying their corporate income tax via GIRO.
3. The existing carry-back relief scheme will be enhanced for the year of assessment 2020. Under the enhanced scheme, unabsorbed capital allowances and trade losses for the year of assessment 2020, subject to conditions, may be carried back up to three immediate preceding years of assessment. Businesses will be allowed to carry back an estimated amount of qualifying deductions available for the year of assessment 2020 before the actual filing of their income tax returns. The amount of carry-back allowed will be capped at $100,000.
4. Qualifying capital expenditure incurred on the acquisition of plant and machinery in the financial year 2020 (i.e. year of assessment 2021) will qualify for accelerated write-off over two years.
5. Currently, under Section 14Q of the Income Tax Act, a tax deduction can be claimed over three consecutive years of assessment on qualifying expenditure incurred by a taxpayer on renovation and refurbishment (R&R) for the purposes of its trade, profession or business. This will be temporarily enhanced to allow qualifying R&R expenses incurred in the financial year 2020 (i.e. year of assessment 2021) to be claimed over one year of assessment.
6. The Wage Credit Scheme (WCS), that was first introduced in Budget 2013, encourages employers to share productivity gains with workers by co-funding wage increases of at least $50 given by the employers to Singapore citizen employees who earned a gross monthly wage of up to $4,000. The WCS has been enhanced in 2 ways in this year’s Budget. Firstly, the wage ceiling for co-funding will be raised from $4,000 to $5,000 for the years 2019 and 2020. Secondly, the co-funding ratios will be increased from 15% to 20% for the year 2019 and from 10% to 15% for 2020.
7. A new jobs support scheme will offset 8% of the gross monthly wages of every employee who is a Singapore citizen or permanent resident. The grant will be subject to a monthly wage cap of $3,600 per worker. This is extended to all employers with the exception of Government organisations and representative offices. This is a one-off scheme for 2020 only.
8. The enterprise financing scheme which is available to SME’s across all industries will be enhanced for one year to help SMEs with their working capital needs. The government will raise the maximum loan quantum from $300,000 to $600,000 and enhance the Government’s risk share to up to 80% (from the current 50% to 70%) for SMEs borrowing from Participating Financial Institutions under the scheme.

In addition to the broad-based measures under the relief package, some of the key schemes under the Singapore tax regime that are due to lapse have been extended. This includes the Double Tax Deduction for Internationalisation scheme, Mergers & Acquisitions scheme, Upfront Certainty of Non-Taxation of Companies’ Gains on Disposal of Ordinary Shares and the Global Trader Programme.

To learn more about the key tax changes announced in this year’s Budget, read Crowe Singapore’s Budget 2020 Newsletter available here.

The Inland Revenue Authority of Singapore (IRAS) has recently updated its website, providing guidance on determining the country of source for dividend income if a foreign dividend-paying company is listed on the stock exchange in one jurisdiction but is a tax resident in another.  

Exemption of Foreign Sourced Dividends 

Foreign sourced dividends may be exempted from tax in Singapore under Section 13(8) of the Income Tax Act. One of the three mandatory qualifying conditions for tax exemption under Section 13(9) is that the highest corporate tax rate, or ‘headline tax rate’, of the foreign jurisdiction from which the income is received, must be at least 15% at the time the foreign income is received in Singapore.  

Source of Dividends 

Generally, dividend is considered to be sourced in the jurisdiction in which the dividend-paying company is tax resident. Therefore, if the dividend-paying company is a tax resident in Singapore, dividend is considered sourced in Singapore. Conversely, a dividend is foreign sourced if it is paid by a non-Singapore tax resident company.  

Possible Scenario 

Foreign sourced dividend may be paid by a company that is listed on the stock exchange in one jurisdiction but is a tax resident in another.

In the above–mentioned scenario, the IRAS has indicated that it cannot be presumed that the jurisdiction of listing of the dividend-paying company is where the dividend is sourced.

Where a dividend-paying company is incorporated outside the jurisdiction where it is listed, the Comptroller may treat the dividends as not sourced in the jurisdiction of listing unless there are facts to show otherwise. In such a circumstance, the “headline tax rate condition” will be considered as not met if the jurisdiction in which the dividend-paying company is incorporated has a headline tax rate of less than 15%.