As businesses and investors expand, cross-border taxation knowledge becomes more integral in pursuit of global financial growth. With different tax laws in every country, it is essential for businesses to understand the taxation policies to ensure compliance and avoid any legal implications.
For most investors, diversifying your portfolio across borders can yield substantial rewards. However, as you spread your financial wings, you will inevitably encounter the intricate web of cross-border taxation regulations. To successfully navigate this landscape, it is essential to understand the unique tax systems of the countries you are investing in.
In this guide, we will discuss cross-border taxation and explain the necessary information to help you navigate through the complex rules.
What is Cross-Border Taxation?
Cross-border taxation is implemented when income, goods, or services that are generated in one country and consumed in another are taxed. This can apply to individuals, businesses, or both. In general, Singaporean investors can expect to pay taxes on the following types of income from their investments in Asia Pacific and the US:
- Income from a business carried on in the country of investment
- Income from immovable property located in the country of investment
- Income from employment in the country of investment
- Passive income from the country of investment, such as interest, dividends, and royalties
However, the specific rules for taxing these types of income can vary depending on the country involved, as some countries may have a higher tax rate on certain types of income, such as dividends or royalties. Additionally, some countries may have avoidance of Double Taxation Agreements (DTAs) in place with Singapore. DTAs can help to reduce double taxation by allocating the primary right to tax certain types of income to one or both countries.
Before we proceed, here are some related references that you might find useful:
- How to start VC Funds in Singapore?
- A Comprehensive Guide on Fundraising for Your Startup
- How to build cap tables that attract foreign investors
Cross-Border Taxes across Asia Pacific and the US
For Singaporean investors planning to invest across the Asia Pacific and the US, cross-border taxes will be imposed on income generated from their investments in those countries, as well as on any dividends or profits that are repatriated to Singapore. The Inland Revenue Authority of Singapore (IRAS) website has a complete list of DTAs available.
The exact tax implications can vary depending on several factors, including the investment nature, the duration of the investment, and the specific tax agreements in place between Singapore and each of these countries.
India has a DTA with Singapore, which helps to reduce double taxation on income and capital gains. However, Singaporean investors may still be liable for Indian cross-border taxes on certain types of income, such as:
- Profits from an Indian-based firm
- Income from immovable property located in India
- Income from salary or wages earned in India
- Interest income from Indian sources
- Dividend income from Indian companies
The rates of withholding tax (WHT) on these types of income can vary depending on the specific provisions of the DTA. For example, the WHT rate on dividends paid to Singaporean residents is 10%, if the Singaporean resident holds at least 25% of the shares of the Indian company paying the dividend.
Thailand also has a DTA with Singapore. However, Singaporean investors may still be liable for Thai taxes on certain types of income, such as:
- Profits earned from a firm operated in Thailand
- Income from immovable property located in Thailand
- Income from employment in Thailand
- Income from interest, dividends, and royalties from Thai sources
The DTA can help to reduce the Thailand cross-border taxes on qualifying transactions, but it cannot eliminate them entirely. The rates of WHT can also be influenced by the DTA, but the specific rates will depend on the provisions of the DTA.
The updated DTA between Indonesia and Singapore was signed on February 4, 2020, and entered into force on July 23, 2021. The updated DTA includes several significant changes, such as the introduction of an article that provides capital gains tax protection, the reduction of WHT on royalties, and the reduction in branch profit tax (BPT). Therefore, Singaporean investors planning to invest in Indonesia may benefit from the provisions of the DTA, which can help reduce the impact of cross-border taxes on their investment income.
The DTA applies to residents of both countries and covers various taxes on income, including taxes on gains from the alienation of movable or immovable property and taxes applied to the total amount of wages or salaries that businesses pay.
Hong Kong companies are required to withhold tax on certain types of payments made to non-residents, including Singaporean investors. On the other hand, Singaporean investors who own or control Hong Kong companies may be subject to transfer pricing rules. Also, Singaporean investors who own or control Hong Kong Controlled Foreign Corporations (CFCs) may be subject to CFC rules.
In addition to these cross-border taxes, Singaporean investors who invest in Hong Kong may also be subject to other taxes, such as Hong Kong profits tax and Hong Kong stamp duty. In general, the DTA between Hong Kong and Singapore can help Singaporean investors eliminate double taxation through foreign tax credits or tax exemptions. Additionally, while both Hong Kong and Singapore have territorial tax systems, there are some differences in their tax regimes that investors should be aware of. To know more about Hong Kong’s taxes, you could read our previous article on Hong Kong tax system here.
The limited DTA between Singapore and the United States exempts from tax the gross income derived from the international operation of ships or aircraft by US citizens or residents, as well as the income derived by a Singapore resident from the operation of ships or aircraft in international traffic. However, this agreement does not cover other types of income and does not provide comprehensive provisions for the avoidance of double taxation between the two countries.
The United States and Singapore have also an Exchange of Information (EOI) Agreement, which facilitates the exchange of tax information between the two countries for the purposes of enforcing domestic tax laws and preventing tax evasion. While the DTA provides some limited tax benefits for specific types of income, the EOI Agreement helps ensure that taxpayers comply with their tax obligations in both countries by allowing for the exchange of relevant tax information. Singaporean investors should be aware of both agreements and consult with tax professionals to understand their specific implications for cross-border taxation.
Tax professionals like Lanturn could provide the needed cross-border tax advisory for leveraging the DTAs while keeping compliant with the tax laws across different countries. This would assist interested investors in pursuing wider investment opportunities. If you are interested in cross-border funds and investments, you can read this blog article.
Lanturn Tax Services
Cross-border taxation is complex, and businesses need to understand the tax law of each country. Tax evasion can lead to penalties and legal implications. Hence, businesses must analyse the regulations and exploit the opportunities for tax relief under DTA agreements. It is crucial to maintain proper documentation and evaluate the transaction to apply the correct tax code. Tax compliance is the key to global success, and businesses can seek professional assistance to navigate through the complex tax laws.
As an interested Singaporean investor having the right tax service provider will be beneficial for your career. Professionals well-versed in cross-border taxation can help you make informed decisions, optimise your tax liabilities, and ensure compliance with the tax laws of the countries where you invest. This partnership can be a valuable asset in your pursuit of international investment opportunities and financial growth.
Whether you are contemplating investments in Singapore or anywhere else in the world, it’s crucial to understand that this is not a solitary journey. Investment decisions involve a multitude of factors and complexities, particularly when it comes to cross-border taxation. Seeking the guidance and expertise of professionals like Lanturn can make all the difference, ensuring that investors achieve the best possible outcomes for their investments.
Contact us now, and let us support your journey to unlock new investment horizons.