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.
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.
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 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.
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.
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 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%.