CHAPTER 7 WITHHOLDING TAX AND TAXATION OF NON-RESIDENTS by Poh Bee Tin (5-Pages Preview)
CHAPTER 7 WITHHOLDING TAX AND TAXATION OF NON-RESIDENTS by Poh Bee Tin 1 A INTRODUCTION The Charging Section and the Deeming Provisions [7.1] Under Singapore tax laws, income is liable to income tax if it is sourced in Singapore or, if it is not sourced in Singapore, it is received in Singapore from outside Singapore. 2 Income is considered received in Singapore from outside Singapore, 3 whether or not the source has ceased, if it is: (i) (ii) (iii) remitted to, transmitted or brought into Singapore; applied in or towards satisfaction of any debt incurred for a trade or business carried on in Singapore; and applied to purchase any movable property which is brought into Singapore. [7.2] The Singapore tax laws also contain various deemed Singapore source income provisions. 4 These provisions have the effect of creating a source of income in Singapore in circumstances where none would otherwise have existed under the general charging provision. [7.3] The deemed Singapore source income provisions are primarily directed at non-residents receiving payments from Singapore. These provisions 5 are normally ineffective unless associated provisions are also legislated to allow the collection of the income tax payable on the income deemed to be sourced in Singapore. Invariably these tax collection provisions 6 impose a statutory obligation on the payers to collect the tax due for and on behalf of the Inland Revenue Authority of Singapore ( IRAS ). The tax collected in this way is known as the withholding tax. Methods of Tax Collection [7.4] Withholding tax is only part of the overall tax collection machinery. It is one of the three methods of tax collection. The three methods are outlined below: 1 The author is thankful to Teh Swee Thiam and Hong Shan er, both her colleagues in Ernst & Young Solutions LLP, for their help in this chapter, as well as her other colleagues for their support and views. 2 Section 10(1) of the Income Tax Act (Chapter 134, 2008 Rev Ed) (hereinafter referred to as ITA ; unless the context requires, all references to section numbers in this chapter are in relation to section numbers in the ITA). 3 Section 10(25) of the ITA. 4 Sections 12(1) (9) of the ITA. See later paragraphs for more details. 5 For example, section 12(6) of the ITA which deems interest and other payments in connection with loan or indebtedness to be derived from Singapore. 6 For example, section 45 of the ITA which requires the payer to withhold tax at the appropriate rate from interest payments made to persons not known to be resident in Singapore. 361
Withholding Tax and Taxation of Non-Residents (i) (ii) (iii) Direct assessment Under the direct assessment method, the IRAS relies on the information provided by the taxpayers in the income tax returns which they are required to file under the ITA. After the review and verification of the information received, the IRAS issues notices of assessment to the taxpayers and collects the tax directly from the taxpayers. Notwithstanding any objection or appeal lodged against the notices of assessment, the taxpayers are required to pay the tax within one month from the date of service 7 of the notices of assessment. Penalties are imposed if the taxpayers do not pay the tax within the stated timeframe. The tax assessed, if unpaid, becomes a debt due to the Government and the IRAS is entitled to institute legal proceedings to recover the tax. Appointment of agent Where the taxpayer is not resident in Singapore but is deriving a Singapore sourced income, the IRAS is empowered to appoint any person as an agent of the non-resident person. 8 Such an appointment invariably includes a directive to the person appointed to settle the non-resident person s Singapore tax liability out of any moneys, including pensions, salary, wages or any other remuneration which may be held by him for or due by him to the non-resident person. Withholding tax Where certain payments 9 are made to non-resident persons or persons not known to be resident in Singapore, the payer has a legal obligation 10 to withhold tax at the appropriate rate. If the payer fails to withhold tax and to account to the IRAS the tax withheld within the specified time, penalty is imposed. This tax collection method is the focus of this chapter. [7.5] As withholding tax is primarily related to the deemed Singapore source income provisions, an appropriate start point of any analysis should be the legal effect of the word deemed. B MEANING OF DEEMED [7.6] To appreciate the effect of the deemed Singapore source income provisions, it is important to understand the meaning of the word deemed. 7 The notice of assessment may be served on a person by hand, by post, or through the electronic service with consent of the taxpayer. Where the service is by post, section 8(2) of the ITA deems the notice to have been served on the day succeeding the day on which the notice would have been received in the ordinary course of post if the notice is addressed to the: (a) registered office in the case of a company incorporated in Singapore; (b) registered office or the address of an authorised individual in the case of a company incorporated outside Singapore; (c) last known business or private address in the case of an individual or a body of persons. Section 8(3) further deems the notice to have been served on the date on which a person is informed of a registered letter containing the notice is awaiting him at a post office. Where the service is through electronic service, section 8(4) deems the notice to have been served at the time when an electronic record of the notice enters the person s account with the electronic service. 8 Sections 53 and 57 of the ITA. See paras [7.246] [7.261] for more details. 9 For example, payments falling within sections 12(6) and 12(7) of the ITA, director s remuneration, and distributions by unit trust and real estate investment trust. 10 Under sections 45, 45A H of the ITA also see para [7.123]. 362
[7.7] In R v Norfolk County Council, 11 the word deemed was explained by Cave J: Meaning of Deemed Generally speaking, when you talk of a thing being deemed to be something, you do not mean to say that it is that which it is to be deemed to be. It is rather an admission that it is not what it is to be deemed to be, and that, notwithstanding it is not that particular thing, nevertheless, for the purposes of the Act, it is to be deemed to be that thing. [7.8] In St Aubyn (LM) and Others v Attorney General (No 2), 12 Lord Radcliffe explained: The word deemed is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible. [7.9] In Barclays Bank Ltd v Inland Revenue Commissioners, 13 Viscount Simonds said: In the present case I agree... that the so-called deeming provision of subsection (3) is expansive of subsection (1) and that, if a case falls naturally within subsection (1), it is unnecessary to look beyond it. I bear in mind what Lord Radcliffe said in St Aubyn s case about the word deem but nevertheless regard its primary function as to bring in something which would otherwise be excluded. [7.10] The importance of reading the word deemed in its proper context was emphasised in Coates v Holker Estates Co. 14 This case was concerned with the interpretation of section 125 of the United Kingdom Act. 15 Subsection (1) of that section provided that a person who manages woodlands on a commercial basis may elect to be assessed under Schedule D, Case 1 [the equivalent of section 10(1)(a) of the ITA]. Subsection (2) went on to say that once the election has been made, the profits or gains arising... from the occupation of the woodlands shall for all purposes be deemed to be profits or gains of a trade chargeable under [Schedule D]. In his judgement, Mr Justice Plowman made the following observation on the effect of the deeming provision: What section 125(2) is saying, in my judgement, is not that the occupation of the woodlands managed on a commercial basis and with a view to realisation of profits shall be deemed to be a trade, but that the profits or gains arising from such occupation shall for all purposes be deemed to be profits or gains of a trade. In other words, merely by deeming the offspring to be something which it is not, the section does not change the nature of the parent. Merely to deem the profits or gains arising from the occupation of the woodlands to be profits or gains of a trade is not, in my judgement, to say that occupation of woodlands is to be deemed to be a trade. [Emphasis added] [7.11] It has been said that deemed is a drafting technique commonly used to create a legal fiction; to make something into another thing. This word therefore has another self-imposed limitation: a legal fiction 11 [1891] 60 LJ QB 379 at 380. 12 [1952] AC 15 at 498. 13 [1961] AC 509 at 523. 14 40 TC 75 at 80. 15 Income Tax Act, 1952. 363
Withholding Tax and Taxation of Non-Residents is not required if the thing to be deemed exists in reality. 16 Thus, if the income is in fact derived from a source in Singapore, the deeming provision cannot be applied to deem the income to be a Singapore sourced income. 17 C DEEMED SINGAPORE SOURCE INCOME PROVISIONS [7.12] For some types of income, source can be impossible or difficult to determine. For others, source may seem to exist in more than one country. To avoid protracted disputes and to protect a country s right to tax the income, source deeming provisions are usually legislated. In Singapore, the deemed Singapore source income provisions are contained in section 12 of the ITA. 18 These are discussed in the succeeding paragraphs. [7.13] Section 12 is not a charging section. It is merely a deeming section. Its subsections deem the various specified types of income to be derived from Singapore. For the subsections to apply, the receipt must be income in nature. The subsections do not deem any receipt to be income in nature. Their deeming effect is only in respect of the source of the income. If the income is deemed to be derived from Singapore, it is chargeable to tax under section 10(1) of the ITA. Section 12(1) Trading Operations Carried on Partly in Singapore [7.14] Where a non-resident person carries on a trade or business of which only part of the operations is carried on in Singapore, the gains or profits of the trade or business is deemed to be derived from Singapore to the extent to which such gains or profits are not directly attributable to that part of the operations carried on outside Singapore. [7.15] This section applies only to a non-resident person. It applies even if the non-resident person carries on only part of its trade or business operations in Singapore. It is a question of fact whether any trade or business is in fact carried on in Singapore. 19 The provision does not seek to deem a trade or business to exist in Singapore. It merely seeks to deem the income of the trade or business to be derived from Singapore. [7.16] The income deemed to be derived from Singapore is based on the attribution method. The point of reference, however, is not the income attributable to the operations carried on in Singapore. It begins 16 See more detailed discussion at p 368 of Kanga, Palkhivala and Vyas, The Law and Practice of Income Tax (9th Ed, Eastern Book Company, 2004). In Hira Mills Ltd v Income Tax Officer, Cawnpore 1946 (14) ITR 417, it was decided that where the income, profits and gains were actually received in India, it was no longer necessary for the revenue authorities to have recourse to the fiction. 17 As will be seen later, this distinction is extremely important. This is especially so if the income concerned may at first glance come under the deeming provision for withholding tax purposes but is in fact a Singapore sourced income when analysed under the common law rules. A payer who fails to make this distinction may be challenged in court for wrongful withholding and therefore liable for damages to the recipient. 18 Sections 12(1) to (4) have been in the income tax legislation since 1947. Till today, the provisions have remained intact. 19 What constitutes the carrying on of a trade or business is a broad subject. See Chapter 2 on Case Law Guidance on Source of Business and Trade Income for a more detailed discussion. 364
Deemed Singapore Source Income Provisions with the whole profits of the non-resident person and excludes from the Singapore tax base only so much of the profits that are directly attributable to the business operations carried on outside Singapore. 20 Section 12(2) Non Resident Shipping and Air Transport [7.17] This section applies to a non-resident person carrying on either the business of shipowner or charterer or the business of air transport. He is deemed to have a source of income in Singapore if any ship or aircraft owned or chartered by him calls at a port, aerodrome or airport in Singapore. The income deemed to be derived from Singapore is the full profits arising from the carriage of passengers, mails, livestock or goods shipped, or loaded into an aircraft, in Singapore. [7.18] This section merely provides the basis of a charge to tax. The quantification of the income arising under this section is dealt with separately in sections 27 and 28 of the ITA. [7.19] The deeming provision, however, does not apply to passengers, mails, livestock or goods which are brought into Singapore solely for transhipment or for transfer from one aircraft to another or from an aircraft to a ship or vice versa. 21 Observation about sections 12(2) and 12(2A) in relation to section 13A for a shipping enterprise: Section 13A of the ITA exempts from tax income of a shipping enterprise derived or deemed to be derived from the operation of Singapore ships or foreign ships. Operation of Singapore ships or foreign ships is defined in the section. For foreign ships, it means the carriage of passengers, mails, livestock or goods shipped in Singapore, except where such carriage arises solely from transhipment from Singapore. It is common for a Singapore incorporated company to own both Singapore ships and foreign ships. As companies incorporated outside Singapore are not allowed to register their ships in Singapore, they usually own foreign registered ships. More likely than not, these foreign incorporated companies are non-residents of Singapore for tax purposes. Although the income derived by a non-resident person from the carriage of passengers, mails, livestock or goods shipped in Singapore is deemed derived from Singapore under section 12(2), it is exempted from tax under section 13A. The deeming provision under section 12(2) does not apply to transhipment of passengers, mails, livestock or goods. The income arising from the transhipment of passengers, mails, livestock or goods on a foreign ship is similarly excluded from the tax exemption under section 13A. The tax exemption is not relevant since such income derived by a non-resident person is not taxable in Singapore in the first instance. 20 The logic of the attribution rule in section 12(1) is the exact opposite of that for business profits found in the Business Profits Article in all the tax treaties that Singapore has concluded. In the tax treaties, the general rules are that business profits are subject to attribution only if the business was carried on wholly or partly through a permanent establishment in Singapore, and that so much of the business profits of the foreign enterprise as is attributable to the permanent establishment in Singapore may be taxed in Singapore. These rules are based on those set out in the OECD Model Tax Convention on Income and on Capital. The distinction between the two attribution rules may seem subtle. But they can potentially result in a substantially different attribution figure. 21 Section 12(2A) of the ITA. 365