Agreement Between Singapore and Malaysia to Avoid Double Taxation
Singapore and Malaysia came to an agreement in 1968 to avoid double taxation. Another agreement was signed in 1973, which was placed into the text of the original treatment. The cooperation between the two countries aims to prevent two main things:
- Double taxation
- Fiscal evasion of taxes on income
The agreement between the Government of Malaysia and the Government of the Republic of Singapore applies to, in accordance to Article 1:
- Persons who reside in one of the Contracting states
- Persons who reside in both of the Contracting states
Residents of one or both of the states, in this case Singapore and Malaysia, have the taxes covered in the agreement outlined as follows:
- Income derived by a contracting state
- Malaysian income tax
- Malaysian petroleum income tax
- Singapore income tax
Any income derived from the activities above will be subject to the rules of the agreement which helps residents avoid financial losses caused by double taxation.
What's important to note is that, under Article 2 of the agreement, taxes on income that are similar or identical will also count under the agreement. There's room for interpretation of income taxes under this section of the agreement.
Agreement Definitions to Consider for Double Taxation
A complete set of definitions are laid out, but the most important points are:
- “Malaysia,” means all of the territory of the Federation of Malaysia. Malaysia may also mean any area in which Malaysia has sovereign rights.
- “Singapore,” means the territory of the Republic of Singapore.
The definitions of the “contracting state” refers to Malaysia or Singapore in this context. A “person” can be any person, or company, that is treated as a person for tax purposes.
Any “person” under the agreement, who is a resident of either contracting state, is an individual whom resides in one of the two contracting states for tax purposes. “Person” may also fall under the respective contracting state’s tax laws imposed by a statutory body, local authority or political subdivision.
When a person is a resident of both contracting states, the status of the person must be determined as is explained in Article 4. This determination follows these main points:
- The State in which the person has a permanent home. In the event that the individual has a permanent home in both states, the state in which the person’s personal and economic relations are closer will be determined to be the individual’s state for taxation purposes.
- When a permanent home is unavailable and the individual's interests cannot be determined, residency of a state will be determined by habitual abode. Habitual abode is the state in which the person spends most of their time.
- A habitual abode in both states will require the residency to be based on the state in which the person is a national.
- In the event that the person is a resident of both states or neither state, the question of residency will fall under the guidance of the contracting states.
If all of the above points are considered, the person’s state will then be the place where management is located.
Income Governed Under the Agreement for Taxation Purposes
Once the definitions are considered, it’s time to understand what is considered income under the agreement. Income is categorized into multiple categories to allow for proper legal definitions to be met.
We'll be attempting to succinctly define what income will be considered income.
Immovable Property Income
Income that is gained in one of the states from immovable property may be taxed. The definition of “immovable property” falls under the contracting state, and this income may include income from:
- Agriculture activities
- Forestry activities
- Direct use of the property
- Letting of the property
Income from an immovable property from an enterprise or independent services provider will also fall under immovable property income.
Business Profit Income
Business profits that are derived in the state through a permanent residence will be taxed under the corresponding state’s laws. When a permanent establishment exists in both states, the profits of each will be taxed by each state as if the business was distinct and separate from the establishment.
- Business A is established in Malaysia
- Business B is established in Singapore
Profits from each business, as if it were a separate entity, will be treated as if the business, even if it were under one company, was separate. Therefore, each location, Business A and B, would pay taxes in the state where the income was derived.
Double taxation does not exist in this case.
Deductions of expenses are allowed for general and executive expenses, which are available as if the enterprise were independent in the respective state.
States will determine the proper taxation of profits if competent authorities cannot determine profit attribution properly. Authorities will then take it upon themselves, in application of any law that exists, to make an estimation of the profits from each state.
Taxation of the business will be determined using the same methods as outlined in the agreement year-by-year unless there is reason to determine taxation otherwise.
Transport income is also taxed, and this can be income derived from:
- Air transport
- Road transport
- Boat transport
Profits from ships or aircraft, operating internationally, are only taxable in the enterprise’s contracting state. The definition of profits, in this instance, may include income that’s derived from:
- Rental container use
- Rental of aircraft
- Rental of boats
When profits are derived through a joint business or pool, the state in which the enterprises residency exists will tax the enterprise accordingly. Ground vehicle profits, when earned through international traffic, will be taxable only in the contracting state.
Dividend income may be taxable if paid by one company to the resident of the other contracting state. Taxes on dividends may also be imposed when the contracting state is different from the owner of the dividend’s respecting state. The tax, in this case, will be:
- 10% of ground dividend amounts
- 5% of gross dividends if the owner holds less than a 25% stake in the enterprise
Taxation of profits will not be affected due to dividend income. If neither state imposes taxes on dividends, then dividends will be exempt under the first-mentioned state. When one or both states impose taxes, they will fall under the above amounts.
Taxation on interest will be required if the interest occurs in a contracting state and is paid to a resident of another contracting state. If the owner of the interest is a resident of the other state, taxation cannot exceed 10% of the gross interest paid.
Interest paid on an approved loan may be exempt from Malaysian tax.
The government of a contracting state will be exempt from taxation in the event that the interest is from the Government of the other state.
Royalties may be taxed up to 8% of the gross amount when the owner of the royalties is a resident of the other state. Taxes for royalties in the state that they are derived will also need to be paid.
Royalties in another state, which are earned through a permanent establishment in the state, will be considered as derived from the contracting state.
Technical fee taxes cannot exceed 5% of gross technical fees. Fees, derived by a resident of one contracting state, earned in the opposing state, cannot exceed 5%. Technical fees are fees that are provided in consideration for consultancy, technical duties or managerial work.
When the fees arise from the permanent establishment, wherein the fees are derived from the connection to the establishment, taxation may revert to taxation on independent personal services or business services.
Independent Personal Services Income
Independent personal service income, from a person that conducts a professional service, will be taxed in the state where a fixed base exists. In the event that a base has been established in both states, tax is imposed in each respective state on income attributable to the state.
Professional services can include many professions, including accountants, dentists, doctors and other professional workers.
Dependent Personal Services Income
Income that’s derived from wages or salary shall be taxed only in the contracting state unless the remuneration is from the other state. Exceptions to the rule do exist, and these include:
- Work paid for by an employer that is not a resident of the other state.
- Renumeration is not earned by a permanent establishment or resident of an employer that is in the other state.
Income from residency in another contracting state may be taxed by the other state.
Fees paid to a director of a company that resides in one contracting state yet is a resident of the opposing state due to the conditions of being a member of the company’s board of directors. In this case, the other contracting state may tax the director fees.
Taxation, as per Malaysian and Singapore laws, is setup to avoid double taxation. The agreement makes an effort to remove the risk of double taxation.
Double taxation laws and agreement between Malaysia and Singapore are best considered by a certified accountant.