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3.4 Over the years, the Government has received
repeated requests to exempt from tax foreign income
remitted into Singapore. Until now, we have resisted
this proposal. We already have a comprehensive
network of double taxation agreements and unilateral
tax credits, under which we give credit for taxes
paid on foreign income. We may also exempt taxes
on foreign income from specific overseas projects
under section 13(8) of the Income Tax Act. In
practice, foreign income which has been taxed
elsewhere usually does not get taxed again in
Singapore.
3.5 We were also concerned that this exemption
would create a loophole, which could seriously
erode our tax base. Individuals and companies
could avoid tax on their Singapore income by round-tripping
and transfer-pricing. This is difficult to detect.
3.6 Notwithstanding the Government's view that
this was not a problem, we have continued to receive
feedback from the business community, and now
from the ERC, that taxation of foreign income
indeed poses difficulties to companies. Companies
find the existing tax credit system more cumbersome
than an exemption system. As more companies globalise
and earn a larger share of their income from overseas
operations, this will be an increasing problem.
Simplifying and improving the tax treatment of
foreign income will make us a more attractive
business hub and boost our services exports. Moreover,
other countries, for example, Germany, the Netherlands
and Malaysia, have shifted from the tax credit
system, to exempting specific categories of foreign
income from tax.
3.7 I have therefore decided to exempt from tax
all foreign income in the form of dividends, branch
profits and services income from 1 June 2003 onwards.
This will mean that about 90% of all remitted
foreign income will be tax exempt. The exemption
will be available to all taxpayers, whether individuals
or companies, but it will apply only to income
earned from jurisdictions with headline tax rates
of at least 15%. All other foreign income will
continue to be subject to the existing tax credit
system. This will curb round-tripping and transfer-pricing
while keeping our system simple. An alternative
would be to impose anti-avoidance rules, but that
would be complex to administer and burdensome
to businesses. The IRAS will release more details
by May 2003.
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