What is Withholding Tax and How Does It Work?
Understand withholding tax in Singapore, its meaning, applicable rates, and how to pay withholding tax correctly to stay compliant with IRAS.
What is Withholding Tax and How Does It Work?
To understand the intricacies of the Singapore tax regime, it is essential to decode basic terms, one of which is withholding tax. Withholding tax is a crucial concept in Singapore’s tax system, ensuring that non-resident individuals and entities pay taxes on income generated within the country. The primary purpose of withholding tax is to collect taxes efficiently and prevent tax evasion. Understanding the rules and rates associated with withholding tax is crucial for businesses to maintain compliance and avoid penalties. In this article, we’ll break down the key aspects of withholding tax in Singapore and guide how companies can stay compliant.Understanding Withholding Tax
Withholding tax is deducted at the source of income before payment is made to the recipient. It applies to certain types of payments to non-residents, including:- Interests
- Royalties
- Service fees
- Income from Real Estate Investment Trusts (REITs)
Purpose of Withholding Tax
The purpose of withholding tax is to ensure correct collection by deducting tax at the time of payment. By withholding a portion of income and paying it to tax authorities, the system can avoid tax evasion and ensure that the government receives its dues to spend on overall economic welfare. It is precisely for cases where payments are made to non-residents who may or may not be subject to direct tax reporting in Singapore. Paying withholding tax strengthens tax compliance and supports the country’s revenue generation.
Who Needs to Pay Withholding Tax?
To understand withholding tax meaning better, let us discuss who needs to pay withholding tax. Singapore withholding tax applies primarily to payments made to non-residents. Examples include the following:- Foreign companies providing services in Singapore
- Non-resident professionals and service providers such as consultants, trainers, and speakers
- Non-resident/foreign landlords earning rental income from Singaporean properties
- Overseas businesses receiving royalties, interests, or commissions from Singaporean entities
Withholding Tax Rates in Singapore
Having understood what withholding tax is, it is time to examine the withholding tax rate in Singapore. The withholding tax rate in Singapore varies depending on the type of payment. The following are the withholding tax rates applicable to non-resident entities and individuals, based on the kind of payment made to them:| Type of Payment | Singapore Withholding Tax Rate |
|---|---|
| Interest, commissions, fees, or other payments in connection with any loan or indebtedness | 15% |
| Royalties or other lump sum payments for the use of movable properties | 10% |
| Payments for the use of or the right to use scientific, technical, industrial, or commercial knowledge or information | 10% |
| Rent or other payments for the use of movable properties | 15% |
| Technical assistance, service fees, and management fees | 17% |
| Proceeds from the sale of any real property by a non-resident property trader | 15% |
| Distribution of taxable income made by a Real Estate Investment Trust (REIT) | 10% |
| Payment to non-resident director | 24% |
| Payment to non-resident professional | 15% or the prevailing non-resident individual rate on net income |
| Payment to non-resident public entertainer | 15% |
How is Withholding Tax Calculated?
The calculation of withholding tax is straightforward to understand. It depends on the gross payment made to the non-resident. The tax is applied as a percentage of the total payment, with no deductions allowed. Hence, the formula for calculating withholding tax is: Withholding Tax = Gross Payment x Applicable Withholding Tax Rate
For example, if a Singaporean company pays SGD 20,000 in royalty fees to a foreign company, the calculation of withholding tax would be:
S$20,000 x 10% = SGD 2,000
The company must withhold SGD 2,000 and remit it to the IRAS while paying only SGD 18,000 to the recipient.
As discussed above, businesses should carefully check beforehand any tax relief or exemptions applicable under Singapore’s double taxation agreements, or exemptions applicable otherwise, as they may reduce the withholding tax burden.
How to Pay Withholding Tax in Singapore?
Entities must follow a series of logical steps, described below, to navigate the complexities of Singapore’s tax regime and file withholding taxes successfully.How to pay withholding tax: Steps to File Withholding Tax with IRAS
- First of all, check if withholding tax applies – Keeping in mind the nature of the transaction, check if the payment to the non-resident entity qualifies for withholding tax. Payments like dividends, payments for the charter of goods by sea, inter-branch transactions, payments to Singapore branches of non-resident entities, etc., do not qualify for withholding tax.
- Calculate the withholding tax amount – Use the applicable withholding tax rate in Singapore for the specific type of payment (whether to a non-resident entity or individual).
- File withholding tax return via IRAS myTax Portal – Log in using a CorpPass account, which is a digital identity for businesses in Singapore. This account allows businesses to access a range of government e-services, including the IRAS portal. Once logged in, electronically submit details of the withholding tax return.
- Make payment – Follow the prompts on the IRAS portal and pay the required tax amount using internet banking or other approved payment methods.
- Receive acknowledgment – Upon successful submission, IRAS will issue an acknowledgment receipt.
Deadlines & Penalties for Late Payment
Companies must submit withholding tax dues by the 15th of the second month following the payment date. For example, if payment was made in May, the withholding tax must be paid by 15th July. Failure to meet deadlines results in penalties:- 5% late payment penalty – Imposed on the unpaid tax amount
- 1% additional penalty per month – If the tax remains unpaid 30 days after the due date, an additional 1% penalty per month may be imposed, capped at 15% of the unpaid tax.