There is a huge amount of jurisprudence that has built up over the years on the subject of Double Taxation Agreement (DTA), also called 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.

Overview of Double Tax Treaty

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.

What if Singapore and Malaysia remove the double tax treaty

So, what happens if there is no double tax agreement? Or more specifically, what if the Singapore-Malaysia Double Tax Treaty 2021 were to be removed? A very quick and simple answer to this question would be that 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.

Want to Start business in Singapore
Want to Start business in Singapore

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 in 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 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 orf 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 center of vital interests. When an individual’s permanent home is unavailable and interests undetermined, the residency will be determined by 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, building or construction site, 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 dividend is a resident of shall not exceed:

  • 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;
  • 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 double taxation agreement at a rate of 5%.

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Why bother with the Singapore-Malaysia Double Taxation Agreement?

  • Deepens Economic Ties

Singapore and Malaysia, the two neighboring 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 Penalizing Taxpayers

Since each different country is subject to its own tax laws, the income of taxpayers that flow 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 penalized through the 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 for 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, counter fiscal evasion with respect to 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, taxpayers will be penalized 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.

What if Singapore and Malaysia remove the Double Tax Treaty?  FAQs

Are Malaysia and Singapore members of the OECD and do they use the OECD Double Tax Agreement model?2021-01-06T13:15:03+08:00

The OrganisationOrganization for Economic Co-operation and Development, OECD is an intergovernmental economic organisation with 37 member countries, founded in 1961 to stimulate economic progress and world trade. OECD has come up with a Double Tax Agreement model and in many cases, it is this model that forms the basis of double tax treaties that is adopted by relevant countries. It has undergone various reforms over the years. Singapore and Malaysia, although not strictly members of the OECD, have followed the OECD model for treaty purposes. The basic way in which the OECD model works is to allocate taxing rights in that the country of residence of the taxpayer is required to either grant a credit or an exemption. The other side of the coin is for the country of source to either reduce the scope of its taxes or to cut or reduce the rate of its withholding tax.

What is a ‘beneficial owner’ for tax purposes? 2021-06-07T21:20:48+08:00

A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over the company or its management. One who ultimately enjoys the income on the asset and also controls such income receipts and the assets itself. E.g.For example, aAccording 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.

Under the Double Taxation Agreement, is there a limit to the credit tax granted against similar local tax?2021-01-06T13:12:49+08:00

The credit provided shall not exceed the local country’s tax as computed before the credit is given. Simply put, 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.

Can a Double Taxation Agreement or Double Tax Treaty impose tax? 2021-01-06T13:12:17+08:00

No, a Double Taxation Avoidance Agreement, DTA (also called a Double Tax Treaty, DTT) cannot impose tax, and therefore if you are looking at whether relief is due or not, the starting point should always be to refer to domestic law. If there is no tax liability under domestic law, then the Double Tax Treaty cannot impose tax liability. 

The Double Tax Treaty is an avoidance of double taxation agreement between whom and what is its purpose?2021-06-07T21:21:31+08:00

Double Tax Treaty is an agreement between governments and not states or counties or provinces with the purpose of avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income.

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