Singapore Tax System Guide

Singapore is called an economic miracle due to a liberal tax system and rational national fiscal policy dedicated to the overall social and economic welfare. Hence, the government’s loyal taxation policy established upon the state’s independence has enabled it to lead the country out of the status of a low developed economy to the highly business-promising state for sustainable development. 

One of the essential reasons for the national economic appropriateness for business activities is associated with the favorable tax rates for legal entities and individuals, tax reliefs, capital gains tax-free, single-tier fiscal policy set in Singapore, and active cooperation with other countries to avoid double taxation.

Today, this Asian country with South Korea, Hong Kong, Taiwan, and China deems to be the pillar for the economic growth in the Eastern continent. As a result, its fame as a country imposing the lowest tax rates from businesses among the Asian region is well justified. Moreover, its government proceeds to decline corporate tax rates and diversify the ways for tax concessions permanently; they intend to enter into force various tax preferences to stimulate and keep the increasing global investment flows. Thus, the reduced tax rates and overall business-friendly environment are two core factors engaging thousands of transnational companies in Singapore. 

A brief review of unique economic peak factors

The strong background of this economic miracle is presented by the key driver of the national market-free trends, i.e. the effective taxation policy. The tax system contributes to developing the major Singapore economic domains – manufacturing and service ones. Despite the COVID-19 effects and severe recession of the overall service activities at the beginning of the pandemic outbreak, the proper regulatory measures could eliminate the negative challenges due to the reduction of the tax rates for vulnerable economic actors in Singapore and achieve economic growth at approximately 4% to 6% for 2021.

It should be mentioned that the advanced tax regulation policies resembling the invisible hand of free market-friendly approaches are currently directed to enhance innovation and entrepreneurship processes. The measures related to the involvement of the foreign skilled experts and the investment resources have been taken and kept on track. The tax rates proceeded to decrease; today, the national fiscal authority in Singapore is proud of the statements that the ceiling rates have constituted 17% since 2010 for companies and 20% for individuals on average. In addition, Singapore supports the fiscal initiative regarding the tax reliefs for the peer companies in order to promote R&D actions and innovation technologies.

The taxes in force could be grouped as follows:

• corporate taxes levied on company profit and the related revenues for social purposes;
• personal taxes, including direct and indirect charges to be paid by residents such as income tax, goods, and services tax, etc.;
• and other charges comprising custom duties, betting taxes, service charges, etc.

Corporate tax guide for legal entities in Singapore

The residential and nonresidential companies are subject to a single-tier territorial taxation system of corporate profit tax with a fixed rate in Singapore. This system has been valid since January 1, 2003. The tax paid by a company from its taxable revenues is a final one, and all dividends distributed to its shareholders are exempt from further taxation. 

The great benefit of Singapore is the absence of a capital gains tax. Notably, the capital gains are revenues earned from the sales of permanent assets, forex gains, capital transactions, and so on.

Corporate tax has been crucially modified for a few decades in Singapore. The initial tax value was set at a rate of 26% in 1997; however, the current rate has been reduced in 9 interest rate positions since 2010 and is equal to 17% today. The last valid tax rate is considered as an income tax for both domestic and foreign companies in Singapore.

It is crucial to realize that the general income tax rate monitored by the Singapore adequate fiscal authorities is not an effective or a realistic corporate tax rate for taxpayers. In most cases, the effective corporate tax rate is lower than the general one due to tax reliefs and preferences.

To better understand the fiscal regulations in Singapore regarding corporation taxation, you need to bear in mind the appropriate key meanings 

• tax period, which indicates the tax payment and reporting deadlines, and
• tax preferences, which could be defined as particular concessions applied under specific circumstances.

Tax period

In Singapore, the tax period is an interval of time that determines a taxation base and influences the tax amount calculated on the background figures of the previous fiscal year and fixed in the relevant accounting records. So, the tax period for any reporting period always refers to the financial year preceding the reporting period.

In 2021 you will be expected to submit the tax declaration for the reporting period covering the duration from January 1, 2020, to December 31, 2020. 

Tax preferences

Despite the preferable general income tax at a rate of 17%, Singapore fiscal authorities allow participation in various programs that contribute to lessening the taxation burden on a legal basis. 

These programs of tax reliefs are broken down into 3 categories:

• preferences for all Singapore companies, 
• preferences for companies under 3 years, 
• industrial preferences.

The democratic income tax system for staff in Singapore

The personal taxation system in Singapore encourages progressive tax rates varying from 0% to 22%. It proves the fact that the Singapore profit tax rate is one of the lowest rates worldwide. The only aspect is that the tax rates for residents and non-residents differ inside the country. 

The residents of Singapore are native inhabitants who own the long-term residence status and permanently live in Singapore. Meanwhile, the foreigners who stay and work in Singapore for over 183 days in the current fiscal year, not including the top managers, are categorized as non-residents.

So, if you are classified as a resident of this country, you should get ready to pay your income tax from the taxable earnings according to the progressive taxation system. 

To sum up the algorithm of the country-specific taxation upon definition of your residence status, you need to realize the common meanings of the staff tax-related sources. All incomes subject to be imposed have the following classification:

• profit or any business running revenues, trade earnings, professional or individual entrepreneurship or partnership fees; 
• any business-related profits;
• dividends, interests, investment yields;
• rent payments, license payments, fees, and other incomes originated from real estate operations;
• one exception is a qualified income received abroad.

The personal taxation system for residents in Singapore regards paying their taxes levying on their taxable income according to the progressive income tax rate chart. The standard formula that helps to realize the net amount of taxes to be paid is as follows:

Taxable incomes = All incomes – expenditures – donations – individual reliefs

Withholding tax aspects in Singapore

As mentioned above, Singapore is a preferable country from the Asian region to start a successful business. So, you have got to know the common information about the corporate and personal tax regulations; however, if you intend to manage your corporation in Singapore involving non-residents, you have to deal with the withholding taxes to be paid.

Withholding tax is a specific charge applied to the foreigners who work at a Singapore company over 183 days per year.

According to Singapore Income Tax Act, the appropriate tax-based payments are divided into 3 points using the distinct progressive tax rates and subject to the places of the foreigners’ origin and their appointment positions which include

• payments of remunerations to overseas agents;
• payments of senior manager’s fees to non-resident aliens;
• and payments of professional fees to offshore business partners.

The tax monitoring authority diversifies the withholding tax rates in line with the personal income sources of all types of non-residents. So, the foreigners are entitled to pay taxes levied on their earnings at the following rates:

• 20% is set for the residence status free individuals and the corporate senior management remunerations including salaries, bonuses, accommodations, dividends, bonds, and other fees;
• 17% is applied to technical and service fees, royalties and intellectual, know-how, R&D, engineering, and other commerce-related fees paid to the non-residential agents;
• 10% to 15% rates cover the earnings that do not have a commercial origin, distinct from business, trade, professional, or vocational activities in Singapore, and not actually connected with the permanent reimbursements paid in the countries of residence.

Tax clearance for Singapore taxpayers

Tax clearance is a procedure approved by the Singapore fiscal regulation to check the status of the foreign employee who plans to terminate their work for your company inside Singapore, arrive in overseas countries, or be absent for a period of longer than 3 months. In this case, you are entitled to appeal to the relevant fiscal authority via submission of the particular Form IR21 in order to apply the tax clearance certificate preferences.

The form should contain the following data:

• personal incomes received in 2 latest years;
• company stocks or security papers owned by the employee;
• allowances fixed in the labor contract;
• and severance payments.

The tax clearance mechanism is quite simple and corresponds to the step-by-step algorithm upon detecting the stay period of the foreign employee in Singapore. So, only three tax clearance cases are available.

1. The tax clearance is not required if the employee did not work at least 60 days within the calendar year or their annual income amount did not constitute over 20,000.00 USD.
2. The tax clearance is required, and the non-resident acceptable tax rates are applied if the employee did not work for the company more than 182 days within the calendar year, or for a continuous period covering 2 calendar years or, in particular, 3 years.
3. The tax clearance is required, and the resident acceptable tax rates are applied if the employee worked for the company more than 182 days within the calendar year or for a continuous period covering 2 calendar years or, in particular, 3 years, and their annual income amounted to over 20,000.00 USD.

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