Philippines-Singapore Double Tax Treaty
Singapore and the Philippines are close geographic neighbors; they have enjoyed strong bilateral economic ties since diplomatic relations were formally established between the countries in 1969. A significant milestone to create deeper economic cooperation was established in 1998, when the two countries signed the Memorandum of Understanding on the Philippines-Singapore Action Plan. As a result of the implementation of the Action Plan, Singapore has become the Philippines’ fifth largest export market worldwide and the first within ASEAN. The Lion City is the seventh largest import supplier of the Philippines. It is also the Philippines’ top international investor, with investment commitments totaling US$3.48 billion, or 45.2% of total foreign pledges in 2019. As these figures demonstrate, the bilateral economic ties between the countries are deep and enduring.
This deep economic integration between the two countries is a result of the bilateral agreements that were designed to enhance and simply business transactions between the two markets. This article will describe one such important Singapore-Philippines agreement — the Avoidance of Double Taxation Agreement (DTA) — which reduces the tax burden for parties conducting business that spans both countries. If you are planning to incorporate a Singapore company and do business with Philippines, this guide will help you understand the tax treatment of various sources of Philippines-related income for your company.
This article includes the following topics:
Overview of Singapore's Bilateral Agreements With the Philippines
The following are some of the important bilateral agreements that currently exist between Singapore and Philippines.
Free Trade Agreement (FTA)
Singapore and the Philippines are members of ASEAN Free Trade Area (AFTA), which reduces intra-regional tariffs through the Common Effective Preferential Tariff (CEPT) scheme. CEPT reduces intra-regional tariffs between member states to between zero and 5%.
ASEAN Trade in Goods Agreement (ATIGA)
ATIGA seeks to establish a single market and production based on free flow of goods in the ASEAN region. Today, the Philippines and Singapore have eliminated intra-ASEAN import duties on 99.56% of their tariff lines.
Singapore Chinese Chamber of Commerce and Industry (SCCCI) Memorandum of Agreement
In the first half of 2019, the SCCCI signed a Memorandum of Agreement with the Makati Business Club during the chamber’s delegation visit to the market. The agreement aims to foster closer business ties between Singapore and Philippines businesses.
Double Tax Avoidance Agreement
Singapore and the Philippines signed a DA in 1977. The agreement stipulates provisions for avoiding double taxation on the same source of income. Without a DTA, income is liable to be double taxed — i.e., two countries levy their own taxes on the same income. To address this problem and to reduce the overall burden of a taxpayer, Singapore and the Philippines concluded a DTA that ensures that any income normally taxable in both countries will be taxed in only one of them. The provisions of this DTA are reviewed in more detail below.
Scope of the Philippines-Singapore Double Tax Treaty
Entities and Individuals Covered
The Philippines-Singapore DTA is applicable to legal entities and individuals who are residents of one or both of the signing states; i.e., the Philippines and Singapore.
Types of taxes covered
Taxes covered by the agreement include corporate and individual income tax in both countries (the Philippine tax and the Singapore tax).
Key Provisions of the DTA
Residency Based Taxation
The main goal of a DTA is to determine in which state a person must pay taxes. The basic principle for this determination in the Philippines–Singapore DTA is that residency determines tax jurisdiction. Companies and individuals are taxable in the country where they reside. The question of whether a person is a resident of a state is normally settled by the national laws of each country. The DTA, however, provides rules to determine residency in a case where a person may be resident in both of the signatory states.
- An individual is resident in the state where he or she has a permanent home;
- If such person has a permanent home in both countries, he or she is a resident of the country with which his or her personal and economic relations are closer (where the person has a “centre of vital interests");
- If the above cannot be determined, a person is a resident of the state where he or she has a habitual abode;
- If he or she has a habitual abode in both states or in neither, the tax authorities of two countries will settle the question by mutual agreement.
For corporate entities:
- An entity is a resident of the country where it has the place of “effective management”. In most cases, this is determined by the place where the Board of Directors meets.
- If its place of effective management cannot be determined, the tax authorities of the two countries will settle the question by mutual agreement.
Income From Immovable Property
Income from immovable property, including income from agriculture or forestry, is taxed in the state in which the property is situated. Such income includes funds derived from the direct use, letting, or use in any other form of immovable property and the profits from selling such property.
The term “immovable property” should be defined in accordance with the law of the state in which the property is situated.
The profits of an enterprise are taxable only in the state in which such enterprise is resident, unless this enterprise carries on business in the other state through a Permanent Establishment (PE).
If the enterprise carries on business in the other state through a PE, the profits of the enterprise may be taxed in that other state, but only the portion that is attributable to that PE. The PE should be considered a separate enterprise for this purpose.
Permanent Establishment means a fixed place of business abroad, where the business of the enterprise is wholly or partly carried on. A PE can be based on one or more of the following criteria:
- A seat of management;
- A branch;
- An office;
- A store or other sales outlet;
- A factory;
- A workshop;
- A warehouse, in relation to a person providing storage facilities for others;
- A mine, quarry, or other place of extraction of natural resources;
- A building site or construction or assembly project which exists for more than 6 months;
- The provision of services, including consultancy services, by a resident of one of the states through employees or other personnel in the other state, given that such activities continue for more than 6 months.
Shipping and Air Transport
Enterprises carrying on a ship or aircraft transport business are taxable, like others, in the country of their residency.
However, profits of companies residing in State A derived from the operation of ships or aircraft in State B may be taxed in State B. In such cases, the tax levied by State B must not exceed the lesser of the following:
- 1.5 percent of revenues derived from sources in State B; or
- The lowest rate of Philippines tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third state. In other words, Singapore is considered to be a “most favored nation” for this purpose and Philippines' tax treatment for Singapore based taxpayers can not be worse than that for any other country.
Two companies are considered to be Associated Enterprises if:
- A company of one state participates in the management, control, or capital of an enterprise abroad, or
- The same persons participate in the management, control, or capital of companies of two states, and
- The commercial relations of such companies are different from the relations of independent ones. In other words, the companies do not transact business at arm’s length.
In such a case, any profits that would not have accrued to one of the associated companies of enterprise A except due to one of the above conditions may be included in the profits of enterprise A and taxed accordingly.
The DTA says that dividends may be taxed in the country of a recipient's residency. However, such dividends may also be taxed in the country of residency of the company that is paying the dividends, as explained below. In such a case, the tax rate shall not exceed:
- 15 percent, if the recipient is a company that owns at least 15 percent of shares of the paying company; and
- 25 percent in all other cases.
How does this work?
Taking into account the current tax regulations in both jurisdictions, we have the following situation.
Dividends paid by a Singapore company to the Philippines recipient are not subject to tax in Singapore when distributed, as Singapore currently does not impose a withholding tax on dividends. With regard to the Philippines, if the recipient is the Philippines holding company, there is a 100% exemption of corporate tax on dividends received from abroad, if the holding company conducts no operations in the Philippines, otherwise a reduced corporate tax rate of 10% will be applied. If the recipient is an Individual residing in the Philippines, the dividend income is taxed at the Philippines individual income tax rates.
Dividends paid by the Philippines company to non-residents are usually subject to 30 percent withholding tax. In case of a Singapore recipient, the rate is reduced to 15 or 25 percent under the DTA provisions as mentioned above. Such dividends will likely be exempted from Singapore tax in case of a corporate beneficiary. And if the recipient is an individual, such dividends are also exempted.
The DTA says that interest may be taxed in the country of a recipient's residency. However, such interest may also be taxed in the state in which it arises, as explained below. In such a case, the tax rate should not exceed 15 percent.
How does this work?
Singapore imposes a withholding tax of 15 percent on any interest paid to non-residents. So the interest paid by a Singapore company to the Philippines beneficiary will be taxed in Singapore at 15 percent rate. If the recipient is the Philippines holding company, the tax exemption scheme is the same as in the case of dividends — if the recipient is an Individual residing in the Philippines, the dividend income is taxed at the Philippines individual income tax rates and the relevant foreign tax credit can be claimed as well.
Interest paid by the Philippines company to non-residents is usually subject to 30 percent withholding tax. In case of a Singapore recipient, the rate will be reduced to 15 percent under the DTA provisions. Such interest will not further be taxed in Singapore taking into account the foreign tax credit scheme.
Royalties may be taxed in the country of a recipient's residency. However, they may also be taxed in the state in which they arise, as explained below. In such a case:
- The tax rate should not exceed 15 percent in the case of the Philippines, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities, and also royalties in respect of cinematographic films, or broadcasting;
- In the case of Singapore, where royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties are exempt;
- In all other cases, the tax rate should not exceed 25 percent.
How does it work?
Singapore imposes a withholding tax of 10 percent on royalties paid to non-residents. So the royalties paid by a Singapore company to the Philippines recipient will be taxed in Singapore at 10 percent rate, unless exempted under the Economic Expansion Incentives Act. If the recipient is a holding company residing in the Philippines, the tax exemption scheme is the same as in the case of dividends and interest. If the recipient is an Individual residing in the Philippines, the income is taxed at the Philippines individual income tax rates and the relevant foreign tax credit can be claimed as well.
Interest paid by the Philippines company to non-residents is usually subject to 30 percent withholding tax. In case of a Singapore recipient, the rate will be reduced to 15 or 25 percent if the above DTA conditions are met. Such interest is not further taxed in Singapore, if the foreign tax credit scheme is applied.
Gains From Selling Property
Gains from selling property are treated as follows. Such gains from:
- Immovable property — are taxed in the state where the property is situated.
- Movable property forming part of the business property of a PE — are taxed in the state where the PE is situated.
- Ships and aircraft operated in international traffic, and movable property related to the operation of such ships or aircraft — are taxed only in the company’s state of residence.
- Shares of a company, the property of which consists principally of immovable property — are taxed in the state where such property is situated.
- Any property, other than mentioned above — is taxed only in the state where the seller is a resident.
Salaries, wages, and similar forms of income of a person residing in State A for personal services performed in State B are taxable only in State A if:
- Such person is present in the State B for a period of not more than 90 days per year in the case of professional services and 183 days in other cases; and
- The remuneration is paid by a company residing in State A; and
- The income is not paid by a PE which a company residing in State A has in the State B.
Professional services refers to independent scientific, literary, artistic, educational, or teaching activities, and the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.
In all other cases, income may be also taxed in that foreign state where the services are provided.
Payment for service as a member of the regular crew of a ship or aircraft operated in international traffic is taxable only in the state where the company that owns the craft is resident.
Directors' fees and similar payments received by a resident of State A as a member of the Board of Directors of a company that is a resident of State B are taxed in State B.
The fees a director receives for his or her day-to-day functions of a managerial or technical nature may be taxed as Personal Services.
Artists and Athletes
Income of public artists working in television, theatre, radio, musical performances, professional sports, etc., from personal activities is taxed in the state where these activities are performed.
Pensions and other similar remuneration for past employment are taxable only in that state where they arise.
Payments for Governmental Functions
Remuneration, including pensions, paid out of public funds of State A to its citizen, or to an individual engaged by State A to perform governmental functions in State B, is taxed in State A and exempt from tax in State B.
Students and Trainees
A student who was a resident of State A before visiting State B and is temporarily present in State B for the purpose of education is exempt from tax in State B regarding —
- Money transfers from State A for the purposes of his/her maintenance, education, or training,
- A grant, allowance, or award, and any payments for personal services delivered in State B not exceeding S$3,600 or its equivalent during the year.
A trainee who was a resident of State A before visiting State B and is temporarily present in State B for the purpose of acquiring technical, professional, or business experience, is exempt from tax in State B for up to two years regarding —
- Money transfers from State A for the purpose of the individual’s maintenance or training, and
- Any payments for personal services delivered in State B not exceeding S$12,000 or its equivalent during the year.
Teachers and Researchers
A person who is a resident of State A who, at the invitation of any university, college, or school, visits State B for up to two years for the purpose of teaching or research is exempt from tax in State B on his or her remuneration.
Avoidance of double taxation
One of the main goals of the DTA is to reduce the tax burden on individuals by ensuring their income isn’t taxed twice. The basic instrument established by the DTA for this purpose is the foreign tax credit. The DTA says that you, as a Singapore or Philippines resident, can claim a credit for taxes imposed on you by a foreign country.
For example, a Singapore company can claim double tax relief up to the limit between the lower of the Philippines tax paid and Singapore tax payable. For example, if the Singapore tax payable amounts to S$30,000 and the Philippines tax paid is S$40,000, the maximum double tax relief that can be claimed is S$30,000. If the Philippines tax paid is S$20,000, the maximum double tax relief granted would be S$20,000; in such a case, the Singapore tax resident remains liable for the balance of S$10,000 Singapore tax payable.
DTA — At A Glance
|Types of Income/Payments||Where is the income taxed?|
|Income from immovable property||Taxed in the state where the property is situated.|
|Business profits||Taxed in the state where a company is
managed and controlled — typically, the country of the company's Board of Directors meetings.
|Permanent Establishment profits||Taxed in the state where it carries on business activities, but only in the amount attributable to that PE.|
|Profits from shipping and air transport||
Taxed in the state where a company is
May also be taxed at reduced rates in the state where ships or aircraft are operated.
|Dividends||May be taxed in the state where the recipient resides and in the state where dividends arise.|
|Interest||May be taxed in the state where the recipient resides and in the state where interest arises.|
|Royalties||May be taxed in the state where the recipient resides and in the state where royalties arise.|
|Income from immovable property||Taxed in the state where the property is situated.|
|Personal services||Taxed in the worker’s state of residency.|
|Directors’ fees||Taxed in the state where the company (paying the directors’ fees) resides.|
|Income of artists and sports persons||Taxed in the state where activities are performed.|
|Pensions||Taxed in the state where they arise.|
|Taxed in the state that pays the remuneration.|
|Payment to students and trainees||Taxed in the state where they reside. May be taxed in the state of education if the payment does not fall under exemptions.|
|Payment to teachers and researchers||Taxed in the state where they reside. May be taxed in the state abroad where they work if the payment does not fall under exemptions.|
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