The Singapore-China Double Tax Agreement

This article will highlight key areas of cooperation between Singapore and China and the main provisions of the Singapore-China DTA that has played and continues to play a significant role in fostering economic and diplomatic relations between the two countries.

Introduction

T

he Singapore-China relationship is unique, and multifaceted. A common cultural heritage and close geographic proximity has nurtured strong and enduring connections between the two countries, that span partnerships between individuals, companies, and institutions. As recently highlighted by the Singapore Ministry of Foreign Affairs, the two countries have established an all-round cooperative partnership that has progressed with the times. China is Singapore’s largest trade partner, with bilateral trade totaling to S$137.3 billion in 2019. It is also the top destination for foreign investment originating in Singapore.

Introduction and Background: Singapore-China Cooperation

Singapore and China have extensive and well-developed economic collaboration projects, including the four government-to-government initiatives in Suzhou, Tianjin, Guangzhou, and Chongqing. These are briefly described below.

The Suzhou Industrial Park

The Suzhou Industrial Park (SIP) was launched in 1994 as a project between Chinese and Singaporean governments. The project aims to encourage entrepreneurship and attract high-tech industries — especially software-focused information technology and biotechnology firms. The Suzhou Industrial Park has a variety of facilities including housing, retirement village, schools, recreational, and senior care amenities.

Currently, the SIP accommodates more than 156 projects initiated by Fortune Global 500 enterprises, such as Samsung, UPS, and Motorola. Approximately 30 world-class educational and research institutions operate jointly with foreign universities within SIP. It is regarded as the second-best industrial park in China and regularly tops various international rankings for developmental projects.

The Sino-Singapore Tianjin Eco-city

The Sino-Singapore Tianjin Eco-city is the second flagship government-to-government project between Singapore and China; it was launched in April 2007. The project was developed against the backdrop of rapid urbanization. The Sino-Singapore Tianjin Eco-city strives to be a model for sustainable development, focusing on environmentally-friendly and resource-efficient practices.

At present, Singapore and China plan to replicate the Eco-city’s development model in other Chinese cities, as well as in the rest of the world.

The Chongqing Connectivity Initiative

The China-Singapore Chongqing Connectivity Initiative (CCI) is another intergovernmental cooperation project between China and Singapore that focuses on financial services, aviation, transportation logistics, and communication. It was launched in 2015 to support China's less-developed western region through better transport, financing, and data connectivity between Singapore and Chongqing. For this joint project, International Enterprise Singapore and the Chongqing Municipality Government signed a memorandum of understanding to implement two commercial projects that will improve Chongqing's transport links to South-east Asia and Central Asia. According to the official data, as of September 30, 2019, a total of 199 projects have been signed under this initiative with a total value of about USD 27 billion.

The Guangzhou Knowledge City (GKC)

The Guangzhou Knowledge City (GKC) project was launched in July 2010. Its primary goal is to attract high-tech industries and creative talent in order to boost Guangzhou's economic development. It is positioned as a unique, vibrant, and sustainable city highly attractive to talent and knowledge-based industries.

Since its establishment, the GKC has registered more than 1,000 companies due to its business-friendly policies that favor talent development, industry promotion, technology, and finance.

The project has achieved significant progress in other areas too. With the completion of basic infrastructure works in the Start-Up Area and the opening of two new subway lines, accessibility and connectivity in the area have improved enormously. Another salient achievement is the development of an integrated business park that includes business and commercial space, high-end residential, and lifestyle facilities.

Singapore’s position on China-US tensions

The recent trade tensions between China and US are an opportunity and a challenge for Singapore since it has good relations with both powers. Apart from being a close strategic partner of the United States in Southeast Asia, Singapore also strives to maintain warm relationships with China. Therefore, as the power competition intensifies between the United States and China, Singapore has to avoid choosing sides and find ways to deepen cooperation with both parties.

The discord has led to a general slowdown of trade between China and the US. Singapore, as a city-state heavily dependent on trade, is trying to maintain a neutral position and persuade the US and China to reach a trade deal.

Singapore’s position was well articulated in a speech of the Prime Minister of Singapore: “Being small, Singapore is naturally disadvantaged in bilateral negotiations. More fundamentally, confining ourselves to a bilateral approach means forgoing win-win opportunities which come from countries working together with more partners ”.

Overall, deteriorating US-China relations are detrimental for the world economy, and a negative for Singapore. These tensions can significantly hurt the Singapore economy. So far, Singapore has pursued a balanced foreign policy, seeking to avoid getting caught in the crossfire of the geopolitical competition between the two countries. However, if the rift between the two powers intensifies, it is likely that Singapore’s ties with China will deepen at the expense of those with the US.

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Singapore's Bilateral Agreements With China

To promote economic cooperation and trade, Singapore and China have concluded numerous important agreements. Among the most influential are the Free Trade Agreement, the Double Tax Avoidance Agreement, and the Mutual Recognition Arrangement. These are covered below.

Free Trade Agreement (FTA)

The China-Singapore Free Trade Agreement (CSFTA) marked Singapore as the first Asian country that signed a comprehensive bilateral Free Trade Agreement with China. The agreement came into effect on 1 January 2009. It focuses on the liberalization of trade in goods. Some of the key features of the CSFTA include the following:

  • Eliminates tariffs for 95% of Singapore’s exports to China.
  • Provides preferential access for Singapore companies that invest in China’s healthcare sector.
  • Allows free movement for various kinds of professionals when working in both countries.
  • Safeguards market access and ensures a more predictable operating environment for service suppliers.

On October 16, 2019, the protocol on upgrading the China-Singapore Free Trade Agreement was enacted. It adds three new areas of collaboration — e-commerce, competition policies, and the environment — to the CSFTA. The upgraded CSFTA also expands bilateral cooperation to the service sector which is a growing and important sector for Singapore.

Double Taxation Agreement (DTA)

The Double Taxation Agreement between Singapore and China was a major milestone in the development of Singapore-China bilateral relations. The initial DTA was signed in 1986. The current version of this agreement was concluded in 2007. It serves to relieve the burden of double taxation of income that is earned in one jurisdiction by a resident of the other jurisdiction. The main provisions of the current DTA are exhaustively covered in the section below.

Mutual Recognition Arrangement (MRA)

The Singapore-China Mutual Recognition Arrangement (MRA) was signed on 30 June 2012. It aims to facilitate and secure trade between both countries. Under the MRA, both countries ensured the compatibility of their respective Authorized Economic Operator (AEO) programs – Singapore's Secure Trade Partnership (STP) program and China's Measures on Classified Management of Enterprises program. Companies that are certified as AEOs for their robust security practices under either of the two programs are recognized by both customs administrations.

The AEO companies enjoy faster customs clearance not only when exports leave their own country, but also when they arrive in the other MRA country. Therefore, such companies can better plan their cargo movements and enjoy cost and time savings.

The AEO mutual recognition provides approved enterprises with customs clearance convenience and offers them an opportunity to comprehensively review their current business and mitigate customs risks from the perspectives of customs compliance, clearance speed, and trade safety.

Scope of the Double Taxation Agreement

The Singapore-China Double Tax Agreement (DTA) applies to all residents (individuals and legal entities) of one or both countries. Therefore, if you are a resident of Singapore, China, or both, then you can avail the provisions of this DTA.

According to Article 4 of the DTA, the term "resident of a country" means any individual, company or other legal entity that, under the laws of that country, is subject to taxation in that country due to his or her domicile, residence, place of management, place of head office, or place of incorporation.

If according to the above definition, an individual taxpayer can be considered as a tax-resident of both countries then the taxpayer’s primary residency status will be determined according to the following rules in order of decreasing priority:

  • Location of taxpayer’s permanent home.
  • If an individual has a permanent home in both countries, the location of his or her vital interests (family and social relations, political and cultural activities, the place of business and occupations) are taken into account to determine residency;
  • If the above factors fail to settle the residency status, an individual will be regarded as a resident of the country in which he or she has a habitual abode. It is determined by the frequency, duration, and regularity of stay that are part of the established routine of an individual’s life;
  • If a person has a habitual abode in both countries or in neither of them, he or she will be considered as a resident of the country of which he or she is a national;
  • If none of the above rules determines residency, the competent authorities of the countries will settle the question by mutual agreement.

Type of taxes covered

China:

  • The individual income tax
  • The enterprise income tax

Singapore:

  • The income tax

Tax rates

The Singapore-China DTA specifies the tax rates applicable to different types of income that flows from one country (Country A) to the second country (Country B). For example, in the case of interest income, the specified withholding tax rate in the DTA is 7% if received by any financial institution and 10% in all other cases. This is beneficial for taxpayers of both countries since the withholding tax rate on interest in Singapore is 15% and the corresponding tax rate in China is 10%. Provisions like this are designed to encourage cross-border trade and income flows between the two countries.

The state where the income is taxed

The DTA also defines the country where the income of a resident of either Singapore or China will be subject to tax. This is important because, by default, the country where the income is taxable will determine the tax rate applicable to the taxpayer’s income if those rates are not explicitly specified in the DTA.

Key Provisions of the DTA

Dividends

Dividends are traditionally taxed in the country of a recipient's residency.

However, in some situations, they may also be taxed in the country of residency of the company that is paying the dividends. In such cases, if the company is a resident of Country A and the beneficial owner of the dividends is a resident of Country B, the dividend tax charged by Country A shall not exceed:

  • 5% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
  • 10% of the gross amount of the dividends in all other cases.

Please note that the above provisions will not be applicable if the recipient has a permanent establishment in the source country of the dividends (i.e. Country A) and such dividends are paid for shares of the permanent establishment or are otherwise effectively connected with that establishment. Such dividend income will be treated as Business Profits or Independent Personal Services and subject to tax treatment in that country (i.e. Country A).

Interest

The approach for avoiding double taxation of interest income is similar to that for dividend income described above. Interest is taxed in the country where the recipient of the interest income resides (i.e. Country B).

However, in some cases, such interest may be taxed in the country in which it arises (i.e. Country A). For these situations, the DTA establishes an upper limit as follows. If the beneficial owner of the interest income is a resident of Country B, the tax charged by Country A shall not exceed:

  • 7% of the gross amount of the interest if it is received by any bank or financial institution;
  • 10% of the gross amount of the interest in all other cases.

Without the treaty, the withholding tax rate for interest income paid to non-residents is 15% in Singapore and 10% in China.

Notwithstanding the previous paragraph, the Government, the Central Bank, or any other government institution of Country B will be exempt from tax in Country A in respect of the interest income received from Country A.

Royalties

Generally, royalties are taxed in the country of the recipient's residency, i.e. Country B.

According to the DTA, royalties can also be taxed in the country where they arise i.e. Country A. If the recipient is a resident of the other country i.e. Country B, the tax so paid to Country A shall not exceed 10% of the gross amount of the royalties.

These rules are not applicable if the recipient of the royalty has a permanent establishment in the country in which the payer resides (i.e. Country A) and the royalty payment is attributable to that permanent establishment. Such income from royalties will be treated as Business Profits or Independent Personal Services Income in Country A.

Capital Gains

Capital gains derived from the sale of immovable property situated in a country are taxed in that country. Likewise, gains from selling movable property that is part of a permanent establishment which an enterprise of Country B has in Country A will be taxed in Country A.

Please note that capital gains derived by a resident of a country from the sale of ships or aircraft operated in international traffic shall be taxable only in that country.

Gains received by a resident of Country A from the sale of shares deriving more than 50% of their value directly or indirectly from immovable property situated in Country B may be taxed in Country B.

Finally, capital gains resulting from the sale of any property other than of the type described above shall be taxed in the country where the seller is a resident.

Detailed Description of the DTA

Type of Income or Payments

Where is the income taxed?

Income From Immovable Property

Taxed in the country where the property is situated.

Business Profits

Taxed in the country where the company is managed and controlled.

Permanent Establishment (PE) Income

Taxed in the country where the PE is situated and carries out its business, but only on the amount attributable to that PE.

Dividends

Taxed in the country where the recipient resides.

Interest

Taxed in the country where the recipient resides.

Royalties

Taxed in the country where the recipient resides.

Capital Gains

Taxed in the country where the property is located.

Shipping and Air Transport

Profits derived from the operation of ships and aircraft in international traffic by an enterprise that is resident of a country shall be taxable only in that country.

Independent Personal Service

Taxed in the country where the recipient resides unless he has a fixed base regularly available in the other country for the purpose of performing his or her activities, or his or her stay in the other country is for more than 183 days in any twelve-month period.

Dependent Personal Services

(salaries, wages, and other similar remuneration)

Taxed in the country where the recipient resides unless the employment is exercised in the other country. However, there are some exceptions as described in the note below this table.

Directors’ Fees

Taxed in the country where the company (paying the directors’ fees) resides.

Artists & Sportsmen

Taxed in the country where activities are performed.

Government Service

Taxed by the government of that country unless the individual is a national of the other country where he or she performs the services.

Pensions and other similar remuneration (including any annuity)

Taxed in the country where the recipient resides.

Payment to Students and Trainees

Payments that a student or trainee receives for the purpose of his or her maintenance, education or training are not taxed in the country of education (Country A) if:

  • A student or trainee is a resident of the other country (Country B)
  • A student or trainee is present in Country A solely for the purpose of his or her education or training
  • Such payments arise from sources outside of the Country A.

Other Income

Income that cannot be included in the above-mentioned categories shall be taxable only in the country in which it arises.

If the recipient of the Dependent Personal Services Income is a resident of Country B and carries out his services in Country A, the income will be taxable only in Country B if all of the following conditions are met:

  • The individual resides in Country A for a period less than an aggregate of 183 days for the year of income.
  • The remuneration is paid by, or on behalf of, an employer who is not a resident of Country A.
  • The income or profits are not attributable to any permanent establishment in Country A.

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Conclusion

The year 2020 marks the 30th anniversary of the establishment of diplomatic relations between China and Singapore. Since then, the ties between the two countries have deepened significantly. Apart from trade and investments, Singapore and China have developed close cooperation in a wide range of other areas, such as intellectual property management, education, innovation, and communications, as well as smart city development. The countries continue working on several state-level bilateral cooperation projects and maintain high-level resource exchanges.

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