AN INTRODUCTION
There is a huge amount of jurisprudence that has built up over the years on the subject of the Double Taxation Agreement (DTA), also called the Double Tax Treaty (DTT). The governments of the Republic of Singapore and Malaysia signed a Double Tax Treaty in 1968 and subsequently another agreement was signed in 1973 which was incorporated into the original treatment. The agreement was modified in 2004 and came into force in 2006 for both countries.
The Double Tax Treaty is essentially an agreement between two governments to avoid double taxation. Double taxation arises because incomes are taxed in different ways. Some countries tax on the source basis, some on a residence basis, while some countries mix the two.
So, what happens if there is no double tax agreement? Or more specifically, what if the Singapore-Malaysia Double Tax Treaty were to be removed? A very quick and simple answer to this question would be that in the absence of a double tax agreement or in other words, without the arrangements to reduce double taxation, it could be very costly indeed to earn a return. It will end up with someone driving income from either country and subject to tax on the income in that country and again subject to tax in their home country when bringing back that income.
Understandably, this simple answer will barely do the topic justice, considering as mentioned earlier, there’s been a huge built-up of jurisprudence on the arrangements to reduce double taxation. Rather than giving a direct answer as to what happens if the Singapore-Malaysia double tax treaty were to be removed, perhaps it might be easier to answer this question from a directly opposing angle; what are the aims of the Singapore-Malaysia Double Tax Agreement and what does it do? Who benefits from it or rather, why bother having it? These questions are addressed in the following subheaders:
THE OBJECTIVES OF THE SINGAPORE-MALAYSIA DOUBLE TAX TREATY
A double taxation agreement has 3 objectives:
Achieves Relief from Double Taxation
The Singapore-Malaysia double tax treaty removes double taxation by ensuring tax relief in one or both countries. In Malaysia, the Singapore tax paid will be allowed as a credit tax against any similar local Malaysian tax and vice versa in Singapore, for Malaysian tax paid.
Sets Out Taxing Rights of Countries
The way the double taxation agreement goes about achieving its objective of removing double taxation is by sorting out or allocating taxing rights between countries.
Prevents Tax Evasion and Avoidance
Without needing further explanation, tax evasion is undeniably illegal. Double Taxation Agreement combats the evasion of tax typically through the Exchange of Information Article that allows governments to pass across information about taxpayers.
KEY PROVISIONS OF THE SINGAPORE-MALAYSIA DOUBLE TAXATION AGREEMENT
For all residents of one or both of the contracting states, Singapore and Malaysia, the types of taxes covered by the Singapore-Malaysia double tax treaty are:
Income & Corporate Taxes in Singapore
Income & Petroleum Taxes in Malaysia
Upon fulfilling agreed requirements, these taxes can be deduced, reduced, or exempt. Some key double taxation agreement concepts include those which are related to the residency status of the taxpayer applying for the relief of double taxation, permanent establishment, business profits, dividends, interests, royalties, technical fees, and other incomes.
Residency Status
For the purpose of the double tax agreement between Singapore and Malaysia, taxation in both jurisdictions of the Singapore-Malaysia double tax treaty is made based on the entity’s place of residence. An individual is deemed a resident of Singapore if he/ she pays his/ her taxes in Singapore and similarly, an individual is deemed a resident of Malaysia if he/ she pays his/ her income taxes in Malaysia. Residency is also determined by the jurisdiction of the location where the individual has a permanent home. Where an individual is a resident of both countries, then it will be the country in which he/ she has his/her centre of vital interests. When an individual’s permanent home is unavailable and interests undetermined, the residency will be determined by the habitual abode where the individual spends most of his/ her time. In the case of companies, the country in which they have their management places is where the residency will be deemed.
Permanent Establishment
A permanent establishment is defined as ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. A permanent establishment is considered a branch, an office from which various activities are completed, a factory or workshop, a building or construction site, a place of extraction of natural resources, or an otherwise different place of management located in the territory of the treaty partner country for over 6 months.
Some of the key provisions for various types of income include:
Dividends
Dividends are traditionally taxed in the country of recipient’s residency although, in some situations, they may also be taxed in the country of residency of the company paying the dividends. If the company is a resident of one state and the recipient is a resident of the treaty partner state and is a beneficial owner, the dividend tax charged by the state in which the company paying the dividend is a resident shall not exceed:
Ø 5% of the gross dividend amounts if the company receiving the dividends holds at least 25% of the capital in the company making the payment;
Ø 10% of the gross dividend amounts in all other cases.
However, the reduced dividend payment tax will not be applicable if the recipient has a permanent establishment in the source country of the dividends 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.
Interests
The approach of the double taxation treaty on interest income is similar to that of dividend income described above. Under the double taxation treaty, the withholding tax rate for interest in Singapore and Malaysia is only 10% while normally without the treaty it would be 15% in both countries.
Royalties
Under the double taxation treaty, the withholding tax on royalties is 8% while normally without the treaty, it would be 10%. However, if the royalty recipient has a permanent establishment in the country in which the payer resides and this royalty is attributed to that permanent establishment, such royalty income will be treated as business profits or independent personal services income and subject to tax treatment in that country.
Technical Fees
Technical fees are fees that are provided in consideration for consultancy, technical duties, or managerial work. They are taxed under the avoidance of a double taxation agreement at a rate of 5%.
WHY BOTHER WITH THE SINGAPORE-MALAYSIA DOUBLE TAXATION AGREEMENT?
Deepens Economic Ties
Singapore and Malaysia, the two neighbouring territories with shared political and cultural histories and even resources, enjoy close bilateral relations despite several diplomatic issues that have arisen. Singapore is one of the top sources of foreign direct investments into Iskandar Malaysia, an economic corridor spanning much of southern Johor while some 400,000 Malaysians transit to Singapore on daily basis either for work or studies. By adding one another to their double tax avoidance list, individuals and entities avoid the burden of having their same income being taxed in both countries. The Singapore-Malaysia double tax treaty eases the cross-flow of trade, investment, and technical know-how between them.
Avoids Penalising Taxpayers
Since each different country is subject to its own tax laws, the income of taxpayers that flows between two countries can become subject to taxation in both countries. The double tax treaty addresses this predicament by avoiding financial losses from double taxation through essentially allocating taxation rights for each country when income flows between them. This ensures that while there is no evasion of tax, taxpayers are not penalised through double payment of tax.
Encourages Trade between Countries
In encouraging trade between the two countries, the double tax treaty often provides for reduced net taxation and has significantly contributed to the improvement of Singapore-Malaysia trade and investment by addressing income from various types of sources such as personal income, business profits, shipping, transportation, etc. Foreign investors from Singapore in Malaysia and vice versa benefit from the Singapore-Malaysia double taxation treaty provisions as it allocates special treaty rates for the applicable withholding taxes.
IN A NUTSHELL
The double taxation treaty between the Government of the Republic of Singapore and the Government of Malaysia is a double taxation avoidance agreement that benefits individuals and companies from facing financial loss due to double taxation while at the same time, countering fiscal evasion concerning taxes on income.
Without this treaty to remove double taxation, it will be very costly indeed for income to flow between Singapore-Malaysia and as both direct and indirect consequences, the benefits enjoyed by entities residing in either or both territories and any other desirable outcomes thereafter would not have been possible. Foreign investors from either country would face a major deterrent as their special treaty rates for applicable withholding taxes will no longer apply, and taxpayers will be penalised for being sandwiched between two countries with no bridge to connect their own individual tax laws and trades between countries in an attempt to foster economic ties would become more challenging than ever.
*IMPORTANT NOTICE: This article was written solely in and for the personal interest of the writer. While there's been research done at the time of drafting, the writer is not responsible for the usage of any outdated/ inaccurate information contained herein.
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