The Singapore-Malaysia Double Tax Treaty
In international trade and investment, double taxation occurs when the same income is taxed in two different countries. This can happen when the income of a taxpayer flows between two countries. Since different countries have their own tax laws, such income flows can become subject to taxation in both countries, thereby penalizing the taxpayer. One of the most effective mechanisms to address this problem is a Treaty on the Avoidance of Double Taxation. It is essentially an agreement between two countries that specifies which country has the right to tax when income flows between the two countries. The key objective behind such an agreement is to ensure that, while there is no tax evasion, taxpayers are not penalized through double payment of tax. In fact, to encourage trade between the two countries, the DTA often provides for reduced net taxation.
This article will highlight the important provisions of the Malaysia-Singapore DTA, its tax applicability, tax rates, scope of the agreement, and other advantages of this DTA.
Singapore added Malaysia to its double taxation agreements list in 1968. The agreement was modified in 2004; these modifications came into force in 2007 for both Singapore and Malaysia. This agreement has significantly contributed to the improvement of trade and investment between Singapore and Malaysia. The DTA is a comprehensive document and addresses income from various types of sources such as business profits, personal income, shipping, air and road transport, etc.
This article includes the following topics:
Scope of the Agreement
The Malaysia-Singapore DTA applies to all residents (individuals and legal entities) of either one, or both of the countries. Thus, if you are a resident of Singapore, Malaysia, or both then you can avail the provisions of this DTA.
Furthermore, the following categories of taxpayers are addressed by the DTA:
- Individuals who are subject to taxation of their personal incomes in Malaysia and Singapore;
- Companies considered for taxation of profits and other incomes in Malaysia and Singapore;
- Legal persons, association, and partnerships subject to taxation in Singapore and Malaysia.
Type of taxes covered
- Income tax
- Petroleum income tax
- Income tax
The Singapore-Malaysia DTA specifies the tax rates applicable to various types of income when that income 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 10%. This means that if a taxpayer resides in Singapore and receives interest income from Malaysia, the withholding tax rate on the income will be 10%. This is important since the rates specified in the DTA can be different — and often are lower — than the corresponding prevailing tax rates of either country.
The state where income is taxed
The DTA also specifies the country where different types of income of a resident of either Singapore or Malaysia will be subject to tax. This is important since the country where the income is taxable will determine the tax rate applicable to the taxpayer’s income, unless the DTA specifies a different applicable tax rate.
Elimination of Double Taxation
The Singapore-Malaysia taxation treaty aims to remove double taxation. The agreement ensures this through tax reliefs in one or both countries. In Malaysia, the Singapore tax paid by the taxpayer will be allowed as a credit tax against any similar local Malaysian tax. In Singapore, the Malaysian tax paid by a taxpayer will be granted as a credit tax against similar local Singaporean tax.
However, keep in mind that the credit provided shall not exceed the local country’s tax as computed before the credit is given. In other words, the credit will not exceed the local taxes; otherwise it would result in a net negative tax in the local country. Note that for the purpose of this credit computation, the tax payable shall not take into consideration any special waiver, exemptions or grants provided by the respective jurisdictions; thus, the taxpayer will continue to enjoy these benefits in the credit computation.
Key Provisions for various Types of Income
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 dividends.
If the company is a resident of Country A and the recipient of the dividend is a beneficial owner (please see the note below for an explanation of this term) and 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.
NOTE: According to OECD, the recipient of a dividend is the “beneficial owner” of that dividend if he has the full right to use and enjoy the dividend, unconstrained by a contractual or legal obligation to pass the payment to another person.
However, 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 in respect of the shares of the permanent establishment or 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.
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 resides i.e. Country B.
However, such interest may be taxed in the country in which it arises i.e. Country A. If the recipient is the beneficial owner of the interest (i.e. the recipient has the full right to use and enjoy the dividend, and is not constrained to pass the payment received to another person), the tax so charged shall not exceed 10% of the gross amount. Without the treaty, the withholding tax rate for interest income paid to non-residents is 15% in Singapore and Malaysia. Under the DTA, the withholding tax on interest in both countries is only 10%.
Royalties include legally-binding payments made for the ongoing use of any copyright patent, trademark, design or model, plan, etc. Similar to the dividend and interest income, royalties are taxed generally in the country of the recipient's residency i.e. Country B.
If such royalties are taxed in the country where they arise i.e. Country A, and the recipient is a resident of the other country i.e. Country B, the tax so paid to Country A shall not exceed 8% of the gross amount of the royalties. Without the treaty, the general withholding tax rate on royalties paid to non-residents in Malaysia and Singapore is 10%.
These rules are not valid if the recipient of the royalty has a permanent establishment in the country in which the payer resides i.e. in Country A, and this royalty is attributable to that permanent establishment. Such income from royalties will be treated as Business Profits or Independent Personal Services Income.
Detailed Provisions of DTA
|Type of Income or Payments||Where is the income taxed?|
|Income From Immovable Property||Taxed in the country where the property is situated.|
Treatment of Associated Enterprises
|If Country A taxes a resident enterprise on profits made in Country B and such profits have already been taxed by Country B, Country A shall make appropriate adjustment to the amount of the tax charged on such profits.|
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.|
|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.|
Shipping, Air and Road Transport
|Profits derived from the operation of ships and aircraft in international traffic by an enterprise that is resident of Country A, shall be taxable only in that country.|
|Technical Fees||Taxed in the country from which the fees are derived. The tax shall not exceed 5 % of the gross amount of the technical fees.|
|Independent Personal Service||Taxed in the country where the recipient resides unless he has a fixed base
regularly available to him in the other country for the purpose of performing his or her activities.
Dependent Personal Services
|Taxed in the country where the recipient resides unless the employment is exercised in the other country. However, some exceptions are applicable 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.|
|Taxed by the government of that country unless the individual is a resident of the other country where he performs the services.|
|Pensions and other similar
remuneration (including any annuity)
|Taxed in the country where the recipient resides.|
Payment to Students and Trainees
Taxed in the country where they reside. Exempt from tax in the country of education on:
|Teachers, Professors, and Researchers||Tax-exempt in the country where the individual performs teaching or research on any remuneration for such activity which is subject to tax in the country where he resides. Applies only if such teaching or research is for a period not more than two years and not for private interest.|
NOTE: 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:
- 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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