The Monetary Authority of Singapore (“MAS”) has issued a tax circular (FDD Cir 02/2011) titled “Tax Exemption on Payments Falling under Section 12(6) of the Income Tax Act Made to Non-Residents (Excluding Permanent Establishments in Singapore) by Banks, Finance Companies and Certain Approved Entities” (“Circular”).
The Circular contains details of a new broad-based tax exemption in respect of interest and other qualifying payments under section 12(6) of the Income Tax Act (“interest payments”) liable to be made by banks, finance companies and approved financial institutions (“banks”) to non-residents.
This tax exemption was announced in the 2011 Budget Statement to help banks access a wider range of funding sources. It came into effect on 1 April 2011.
Section 12(6) of the Income Tax Act (“ITA”) describes certain interest payments as income derived from Singapore for the purposes of income tax. Where such interest payments are made to a non-resident, the payer will be required to withhold tax under sections 45 and 45A of the ITA.
There are currently various exemptions and remissions available in respect of withholding tax on interest payments to non-residents. However, such exemptions only cover specific types of transactions made by certain classes of persons to certain types of qualifying non-residents. One example is the tax exemption on income derived by non-resident individuals and entities from structured products offered by financial institutions as provided in section 13(1)(zj) of the ITA.
The Circular takes a step beyond the various individual exemptions to provide a broad-based withholding tax exemption. It provides that banks making interest payments to non-residents for the purpose of the banks’ trade or business are exempted from withholding income tax.
Scope of the exemption
Banks | The paying parties who may rely on this exemption include licensed and approved banks, licensed finance companies and entities which are holders of capital markets services licences for “dealing in securities” or “advising on corporate finance”. For the holders of such capital markets services licences, they must also be involved in the underwriting of debt or equity capital market issuances and must obtain MAS approval.
For trade/business purpose | The tax exemption applies to interest payments made by the banks for the purpose of their trade or business, ie. with the object of promoting the business or its profitable capacity. However, the 2 tax exemption will not be available where the interest payments arise from transactions to which section 33 of the ITA, the general anti-avoidance provision, applies.
Non-residents | It must be noted that the tax exemption does not apply where the interest payments are received by the non-resident via its permanent establishment in Singapore. In other words, where the non-resident has a permanent establishment in Singapore (as defined in section 2 of the ITA), interest payments made to such permanent establishment will be subject to withholding tax, unless the permanent establishment concerned has obtained the necessary waiver of withholding tax from the Inland Revenue Authority of Singapore.
Interest payments | The relevant interest payments are as defined in section 12(6) of the ITA. These include any interest, commission, fee or other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee or service relating to any loan or indebtedness.
Tax exemption period For contracts which took effect before 1 April 2011, the tax exemption will apply to interest payments liable to be made by the bank to non-residents from 1 April 2011 to 31 March 2021. For contracts which take effect between 1 April 2011 and 31 March 2021 inclusive, the tax exemption will apply to interest payments liable to be made by the bank to non-residents under these contracts.
For holders of capital markets licences which need to obtain MAS approval, the tax exemption will only apply from the time the approval has been granted. The above exemption periods will therefore have to be modified accordingly.