Comprehensive Analysis of Section 45 of the SITA, Singapore

This report provides a detailed analysis of Section 45 of the Singapore Income Tax Act (SITA), focusing on withholding tax. It begins with an overview of withholding tax principles, referencing relevant literature, and then delves into the specifics of Section 45. The report examines the tax treatment of various payments, including interest, royalties, and management fees, along with the consequences of non-compliance and available exemptions. A key element is the analysis of the tax implications for Delta Enterprise, a Singaporean company with an Austrian chef, applying the Double Tax Agreement between Singapore and Austria. The report also discusses the role of the Inland Revenue Authority of Singapore (IRAS) and the importance of double tax agreements. The report concludes with recommendations for improving the efficiency of the current tax collection system, especially in a globalized and digitalized world.

Running head: ANALYSIS OF SECTION 45 OF SITA
ANALYSIS OF SECTION 45 OF SITA
Name of the Student
Name of the University
Author Note

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ANALYSIS OF SECTION 45 OF SITA
Executive Summary
This report aims to analyse the provisions of section 45 of the Singapore Income Tax Act
(SITA). This analysis is done by initially understanding the concept of withholding tax in general
by referring to different sources of literature available. The knowledge acquired through such
literature is then applied in the context of withholding tax in Singapore and the provisions related
to it. Various parts of the provisions like percentage of withholding tax on various payments,
their treatment by the IRAS, consequences of withholding or non-payment of taxes and
exemptions available under this section are all researched thoroughly. This knowledge, along
with relevant case laws are applied in the case of Delta Enterprise restaurant to guide them about
the situation in which a royalty payment has to be made to their Austrian chef. The report
concludes with an overview of the information gathered from the sources of literature and a
suggestion of the possible steps that should be taken to improve the efficiency of the provisions
in place.

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ANALYSIS OF SECTION 45 OF SITA
Table of Contents
Introduction..................................................................................................................................3
Overview of the provisions of Section 45....................................................................................3
Tax treatment of various payments..............................................................................................4
Consequences of Defaulting Withholding tax payments.............................................................5
Exemptions...................................................................................................................................6
Analysis of Tax implications of Delta Enterprise........................................................................6
Conclusion...................................................................................................................................6
References....................................................................................................................................7

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ANALYSIS OF SECTION 45 OF SITA
Introduction
Withholding tax is a practice in which the tax is deducted at source, eliminating the need
for filing separate returns at the end of the year. It is usually levied on payments made by a
taxable individual to a person residing outside the country. This tax serves act as a credit against
the taxes payable in the future for the taxpayer (Govan, 2014). With respect to the government, it
avoids the risk of default in tax payments while also enjoying the benefits of collecting tax at an
early date (Asher, 2017). Section 45 of SITA (Singapore Income Tax Act) deals with the
withholding of tax with regard to interest paid to non-resident persons. The percentage of tax to
be withheld differs for various payments like dividends, interest, management fees and charter
fees. There are deadlines before which the withholding tax should be paid to the IRAS (Inland
Revenue Authority of Singapore). The IRAS plays a very important role in taking the financial
decisions related to the country (Tan, 2018). There are classifications with respect to the
categories of resident and non-resident for the purpose of taxation. The major advantage of
having this tax in place is similar to that of an incentive provided by a government to the
outsiders as this process is hassle free and effective (Curran, 2015).
Overview of the provisions of Section 45
According to Section 45 of SITA, with regards to interest, when a person who is taxable
under SITA makes a payment to another person who is not a resident of Singapore, then the
resident shall deduct tax in the following manner:
a) In case of a payment to an individual or HJF, the tax is charged @22%.
b) Tax is chargeable @17% for payments made to any other person.
A notice should be given to the tax comptroller immediately after making such deductions and
payment of taxes is to be made accordingly ("Income Tax Act - Singapore Statutes Online",
2019). In cases where a double tax agreement is applicable, tax is charged according to the rates
in the specified countries. The section is divided into other subsections which deal with its
application in different situations. 45A deals with its application in case of royalties and
management fees. 45B deals with payment of remuneration by a company to its non-resident
director. 45C deals with distribution by a unit trust to its members. Other relevant sections

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ANALYSIS OF SECTION 45 OF SITA
include 45D which deals with the gains from real property transactions, 45EA which refers to the
investment from SRS (Supplementary Retirement Scheme) account of a non-citizen, 45F deals
with income from profession or vocation earned by a non-resident and 45G which deals with
distribution from any real estate investment trust (Ooi, Aw & Yap, 2018). With regards to the tax
payer, it has been suggested that he is more than a tax payer. As held in the case of Comptroller
of Income Tax v ACC (2010), he has the right to contest withholding tax disputes with IRAS. In
the same case, it was suggested that the tax payer is never free of his liability to pay the
withholding tax even if he disputes the amount of tax levied by the comptroller. Percentage of
withholding tax on a few items is mentioned below:
Nature of Transaction Percentage of Withholding tax
Interest 15%
Company director’s remuneration 22%
Technical assistance and service fees 17%
Charter fees for ship or aircraft 0-2%
Despite all the care taken by the financial authorities, there is always a chance of the occurrence
of double taxation (Keller & Schanz, 2015). An important aspect of withholding tax in Singapore
is treaties which was signed to overcome the problem of double taxation. Some of the treaties are
signed for the purpose of information exchange while some other treaties cover aspects like
shipping and air transport activities (Johanssen & Zucman, 2014). Some of the treaties signed by
Singapore include those signed with Bermuda, Chile, Brazil, Hong Kong and the United States
of America.
Tax treatment of various payments
In Singapore, public financial management has become an element of due importance
over the years (Asher, Bali, & Kwan, 2015).With respect to withholding taxes, Singapore has a
set of guidelines which are referred to at the time of determining the amount of tax. One of them
is the treaty and non-treaty rates. The treaty rates refer to those rates applicable on countries with
which Singapore has an agreement on the tax charged. Some of these items include:

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ANALYSIS OF SECTION 45 OF SITA
1. Royalties: Royalties on artistic and literary copyrights are taxed at the non-treaty rates. In
respect of industrial, scientific or commercial equipment, tax is levied at the lower rate of
the treaty and non-treaty rates (Singapore Corporate - Withholding taxes, 2018).
Excluding computer software, royalties on works related to literature, art and scientific
work including film royalties are exempted from tax.
2. Interest: With respect to interest, exemption is available if it is paid to or by the
government, approved pension fund, for any debt instrument listed on a recognised stock
exchange and if paid in respect of a loan, credit or a debt claim or any form of credit that
is guaranteed or insured by the government. In respect of payments made by an
industrial undertaking, the lower rate of tax is charged on the amount.
3. With respect to technical assistance and management fees paid to non-residents, the
withholding taxes are charged at the prevailing corporate tax rate (17% as of 2019).
Consequences of Defaulting Withholding tax payments
One of the problems that has become significant in the modern day business environment
is the problem of non-payment or avoiding of taxes. This has been especially highlighted in the
case of non-residents carrying on business in a country (Brauner & Moreno, 2015). Section 45(3)
suggests that when a person fails to deduct the amount that he is liable to pay, then the
government can recover the whole amount from him. In case of non-payment of the tax deducted
–
a) Within 15 days or of the month following the month in which interest is paid or any
additional time allowed, then an amount of 5% on such tax shall be payable; and
b) Within 30 days or so, a penalty of 1% for every additional month up to 15% of the
amount of tax payable.
If the person fails to give notice to the comptroller about the amount of deduction made by
him within the stipulated time, then he shall pay an amount up to 3 times of the tax liability
deducted and face an imprisonment of 3 years along with a fine of $10,000.
Exemptions
There are certain exemptions available for the payments covered under section 45. These
include payments for shrink-wrap software, payments for satellite capacity (subject to

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ANALYSIS OF SECTION 45 OF SITA
conditions), payments made for the usage of International Submarine Cable Capacity,
software bundled with hardware and payments made to approved Singapore branches of non-
resident companies. Other exemptions are available in payments made for the charter of
ships. Another important aspect which is exempted in the current scenario is the dividend
income due to which the investors have been found to benefit a lot (Wiedemann & Finke,
2015). However, this income may be taxable in the future as per the guidelines governing the
SITA.
Analysis of Tax implications of Delta Enterprise
According to the guidelines in place, an individual is deemed to be a non-resident if he is
not a citizen of Singapore or a foreigner who has not worked for more than 183 days in
Singapore. With respect to a corporate entity, any company whose control and management does
not exist in Singapore is deemed to be a non-resident. As held in the case of MY v Comptroller-
General of Inland Revenue (1972), there are a number of factors which are to be considered in
determining the residential status of a person. In this case, Delta Enterprise is a Singapore
company which has an Austrian chef working for it and is considered a non-resident for tax
purposes. As per the Article 12 of the Double Tax Agreement between Austria and Singapore,
which came into effect on 1 April 2019, taxes may be charged on royalties on people residing in
either of the countries. If the person is a resident in the other contracting country, then the taxes
charged shall not exceed 5 percent of the gross amount of royalties. According to section 45A of
SITA, the withholding tax is charged at a rate of 10% on royalties unless the rate is reduced or
some other exemption applies under SITA. In this case, as the chef is not a resident in Singapore,
and his royalty payments are not exempted, WHT is applicable at a rate of 5 percent on the
client’s royalties due to the DTA between Singapore and Austria.
Conclusion
The above discussion can be concluded by inferring that withholding tax is a logical
measure against the problem of non-payment of taxes by non-residents conducting business in
Singapore. The rules implemented by IRAS with regards to withholding tax are aimed at
improving the efficiency of collecting withholding taxes. It is the liability of the person residing
in Singapore to notify the Comptroller about the amount of withholding tax and its payment in
due time. Non- payment of taxes is dealt by the government in the form of heavy penalties which

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go up to time in prison. At the moment, different payments covered under this section are subject
to tax under different rates. There are also exemptions available with regards to certain
payments. The government should focus more on improving the tax collection system to
overcome the problem of tax collection in a globalised and digitalised world.
References
Asher, M. G. (2017). Some aspects of role of state in Singapore. In Singapore (pp. 3-25).
Routledge.
Asher, M. G., Bali, A. S., & Kwan, C. Y. (2015). Public financial management in Singapore: key
characteristics and prospects. The Singapore Economic Review, 60(03), 1550032.
Brauner, Y., & Baez Moreno, A. (2015). Withholding taxes in the service of BEPS action 1:
address the tax challenges of the digital economy. WU International Taxation Research
Paper Series, (2015-14).
Curran, M. (2015). Tax Incentives for Public-Private partnerships. RMIT School of Accounting
and RMIT APEC Research Centre, available at: www. apec. org. au/docs/Tax%
20Incentives% 20for% 20PPPs. pdf (accessed May 2015).
Govan, B. S. (2014). A pre–implementation analysis of the new South African withholding tax on
interest (Doctoral dissertation).
Income Tax Act - Singapore Statutes Online. (2019). Retrieved from
https://sso.agc.gov.sg/Act/ITA1947
Johannesen, N., & Zucman, G. (2014). The end of bank secrecy? An evaluation of the G20 tax
haven crackdown. American Economic Journal: Economic Policy, 6(1), 65-91.
Keller, S., & Schanz, D. (2013). Measuring tax attractiveness across countries. Quantitative
Reserach in Taxation, Discussion Paper, (143).
OOI, V., AW, I., & YAP, J. (2018). Singapore income taxation.
Singapore Corporate - Withholding taxes (2018) Singapore: PWC. Retrieved from
http://taxsummaries.pwc.com/ID/Singapore-Corporate-Withholding-taxes
Tan, E. (2018). Country Report 2018: Singapore.

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ANALYSIS OF SECTION 45 OF SITA
Wiedemann, V., & Finke, K. (2015). Taxing investments in the Asia-Pacific region: The
importance of cross-border taxation and tax incentives (No. 15-014). ZEW Discussion
Papers.