Singapore has a highly developed market economy and attracts a large amount of foreign investment, including foreign skilled workforce. The Covid-19 pandemic has created unprecedented shock to the global economy and the disruption caused to businesses in Singapore and their employees bring a raft of complex tax issues.
Businesses are being confronted with a new reality—cash flow challenges, disrupted supply chains, people movement restrictions and even temporary closures arising from lockdown. The tax issues that emerge may often be overshadowed by the more immediate priorities of dealing with the financial and operational impact of the Covid-19 pandemic.
This article delves into three important tax issues and highlights the key considerations that businesses and their employees should take note of.
Corporate - Determining Tax Residency Status of a Company
The tax residency status of a company is typically determined by the location where strategic decisions are made, a company would need to assess whether the inability of key executives and directors to physically attend Board of Directors meetings, during which strategic decisions of the company are made, may lead to a potential change in its “place of effective management”. This, in turn, can change its tax residency status under the relevant domestic laws and affect the country where it is regarded as a resident for tax treaty purposes.
Where a company is not able to hold its Board of Directors (BOD) meeting in Singapore due to the travel restriction imposed relating to COVID-19, the IRAS has clarified that it is prepared to consider the company as a Singapore tax resident for YA 2021, if it meets all the following conditions:
A) The company is a Singapore tax resident for YA 2020;
B) There are no other changes to the economic circumstances of the company; and
C) The BOD meetings need to be held outside Singapore or via electronic means due to the directors being temporarily restricted in their travel as a consequence of COVID-19.
Conversely, a foreign company that is not a Singapore tax resident for YA 2020 but has to hold its Board of Directors meeting in Singapore due to travel restrictions relating to Covid-19 will continue to be considered as a non-resident for YA 2021, provided that there are no other changes to the company’s economic circumstances.
Corporate - Singapore Permanent Establishment (PE) exposure for foreign companies
Broadly, the concept of PE is used to determine the right of a jurisdiction to levy tax on the profits of a foreign enterprise. If a foreign enterprise has a PE in Singapore based on the Singapore Income Tax Act, and the PE has income accruing in or derived from Singapore or any foreign income received in Singapore, the foreign enterprise will be, subject to any exceptions, liable to tax in Singapore under Singapore’s tax laws.
If the foreign enterprise engaging in cross-border transaction is a resident of a jurisdiction with which Singapore has concluded an Agreement for the Avoidance of Double Taxation (DTA), the relevant DTA will take precedence over Singapore’s tax laws and determine the taxing rights on the foreign enterprise’s profits.
A PE generally refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on (for example, a branch or an office). Depending on the terms of the relevant DTA, certain activities carried out in a jurisdiction may also constitute a PE, notwithstanding that there is no fixed place of business established in that jurisdiction. Such activities may include services furnished by a company through its employees that continue for more than a specified period, or the presence of a dependent agent who has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of the enterprise.
Where employees of a foreign company have unplanned presence in Singapore (and thereby create potential Singapore income tax exposures for the foreign company) due to travel restrictions imposed relating to COVID-19, the IRAS has clarified that such unplanned presence should not result in the creation of PE in Singapore, provided that it meets all the following conditions:
A) The foreign company does not have a PE in Singapore for YA 2020;
B) There are no other changes to the economic circumstances of the foreign company;
C) The unplanned presence of employees in Singapore is due to travel restrictions relating to COVID-19 and their physical presence in Singapore is temporary (not more than 183 days in year 2020 from the date of their first arrival in Singapore); and
D) The activities performed by the employees during the unplanned presence would not have been performed in Singapore if not for the travel restrictions imposed.
The IRAS would expect relevant supporting documentation and records to be maintained by the companies, in support of the above upon the IRAS’ request.
Individual - Foreign employees working in Singapore due to COVID-19
In Singapore, an individual will be treated as a tax resident for a particular YA if he is a Singapore Citizen or Singapore Permanent Resident who resides in Singapore (except for temporary absences), or a foreigner who has stayed or worked in Singapore (excluding a director of a company) for 183 days or more in the year preceding the YA. A non-resident who has exercised employment in Singapore for no more than 60 days in a year would be exempt from tax on his short-term employment income.
For individuals having temporary or extended work days in Singapore due to COVID-19:
A) For Singapore citizens and Singapore Permanent Residents who have been working overseas, the income relating to their temporary stay in Singapore due to COVID-19 would be exempted from tax from the date of their return till 30 September 2020, subject to review due to evolving situation and meeting relevant conditions; and
B) For non-resident foreign employees who were on short term business assignment and are stranded in Singapore due to COVID-19, the IRAS is prepared to regard the extended stay (not more than 60 days) as non-Singapore work days provided that the work done in Singapore during the extended period is not related to the Singapore business assignment and would have been performed overseas if not for COVID-19.
If, during a business trip in Singapore, an employee is being served the SHN or a quarantine order (QO) resulting in his inability to work, the period during which he is not able to carry out his duties will not be considered as business days in Singapore.
The IRAS would expect relevant supporting documentation and records to be maintained, in support of the above upon the IRAS’ request.
Conclusion
With countries gradually easing restrictions to restart their economies, governments and businesses alike are moving into uncharted territories and discovering what constitutes the new normal. The unfolding of the COVID-19 crisis highlights the importance of having carefully considered business continuity plans in place.
While this article has highlighted some income tax issues to be aware of due to the pandemic, it must also be noted that there are tax issues pertaining to other forms of taxes, such as obtaining Certificate of Residency (COR), property tax and GST, that might have implications to businesses.
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