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Withholding Tax & Singapore – Multinationals To Take Note
Withholding tax is the mechanism for collecting tax on the Singapore-source income of non-residents. Since non-residents are outside the jurisdiction of the Comptroller of Income Tax, the Revenue does not assess non-resident's income to tax in the way that it would with the income of resident taxpayers. Instead, the law obliges residents to deduct tax when paying non-residents. Taxand Singapore considers the issue of withholding tax with a look at the taxpayer's right to challenge the authority over a witholding tax dispute.
Withholding is an excellent arrangement from a Revenue point of view. Whereas income tax is, by definition, a tax on net gains or profits only, withholding involves deductions from gross payments. Therefore, to the extent that the withholding tax on a payment is a final tax, the Comptroller is free of the requirement to assess actual gains and profits, and may collect and retain tax on gross revenues. To understand what this means, consider that a 15 per cent final withholding tax implies a profit margin in excess of 88 per cent at the Singapore corporate income tax rate of 17 per cent!
The late-payment penalty associated with withholding tax starts at five per cent, then increases by one per cent for each completed month the tax remains unpaid, up to a maximum of 20 per cent.
Like a credit card company, the Revenue applies taxpayers' payments firstly towards the satisfaction of penalties and only secondly towards payment of tax proper. Once penalties arise, the Revenue does not accept the possibility of paying only the tax to keep from accumulating further penalties. In order to stop penalties from running, a taxpayer has to make full payment of both tax and penalties.
Interest, royalties, know-how and show-how payments, management fees and rents are among the payments subject to withholding tax, and the Revenue gives the definitions of these a wide interpretation.
The first ever reported decision
Not surprisingly there is ample room for differences to arise between taxpayers and the Comptroller over how much, when or even if tax must be deducted. Such disputes generally have been addressed administratively by the Revenue.
But until the High Court decision in ACC v Comptroller of Income Tax in September 2009 it was doubtful if a taxpayer had any legal right to dispute its liability to withhold tax if the Revenue required it.
This case is interesting not so much because the Comptroller interpreted the word "interest" to include payments made under interest rate swap agreements, which was only to be expected. It is important as the first judicial test of the Comptroller's assertion that a Singapore resident has no locus standi to challenge withholding tax. In a withholding tax scenario, it is not the tax liability of the Singapore party that is in issue but that of the non-resident recipient. As the Comptroller pointed out, withholding tax is merely a collection mechanism for the tax due from the non-resident; the Singapore party is merely a paying agent on behalf of the non-resident and a collecting agent for the Revenue.
There is a clear dichotomy in our income tax system between questions of liability and matters of collection. With regard to substantive questions over tax liability, the Income Tax Act provides an avenue for objection and appeal (only) against an assessment to tax. The deduction of tax, by contrast, is technically a collection mechanism that is triggered as a matter of course by the payment of income to non-residents, and there is no "assessment" against which to make an objection or bring an appeal.
As regards matters of collection, it has long been established in Singapore that a person has no defence against the Revenue suing for payment. The Income Tax Act provides that, in a suit for tax, "the production of a certificate signed by the Comptroller giving the name and address of the defendant and the amount of tax, interest or penalty due by him shall be sufficient evidence of the amount so due and sufficient authority for the court to give judgment for that amount."
Although these issues have always been in the background, they had not been put to the test until last year.
Withholding tax and interest rate swaps
The High Court judge's obiter dictum comments were also encouraging. He observed that "an interest rate swap agreement does not give rise to a payment of 'interest' from one party to another as there is no underlying loan or indebtedness between the parties. Therefore, swap payments are not interest paid in connection with any loan or indebtedness, but rather a swapping of anticipated cash flows."
In the Court of Appeal
The Court held that the letter from the Revenue to the company to demand withholding tax on the swap payments was "nothing more than an expression of the Comptroller's opinion. Regardless of whether or not that determination was final from the Comptroller's point of view, it had no actual or ostensible legal effect" and as such could not be the subject of a judicial review.
A surprising concession
The Court was led to this decision by counsel for the Comptroller who, in his anxiety to reverse the decision of the High Court, advised the Court of Appeal that the company could simply have ignored the Comptroller's demand for payment and waited for the Comptroller to bring a suit in court to recover the tax sought. If and when the Comptroller sued then the company would be able to dispute its liability for the withholding tax in court. The Comptroller's power to issue a certificate conclusive of the amount of tax would not prevent the company from denying liability to pay the tax on the ground that the Comptroller's determination was wrong in law.
As a result, the Court concluded that the Income Tax Act "merely states [that it is] the responsibility of the Comptroller to assess and collect tax." But this did not "confer any power on the Comptroller to make binding determinations of law concerning the provisions of the Income Tax Act in the discharge of his responsibility. Instead, as counsel for the Comptroller conceded, it is the court alone which can make such a determination of law if the Comptroller chooses to bring an action."
What could this mean?
What are the implications of the highest court in the land declaring that the Revenue's withholding tax determinations have no "actual or ostensible legal effect" on taxpayers?
More often than not the suit for tax is a last resort. In the vast majority of cases, companies pay whatever tax is administratively determined by the Comptroller, even if not immediately upon first demand but only after some exchange of views with the Revenue.
Where payment is not forthcoming, the Revenue may then resort to its power to appoint a third party as the taxpayer's agent to recover the tax. In most cases this will be the bank.
The outcome of the manner in which the Revenue chose to handle the ACC case may well be that it can no longer exercise the power to appoint agents to recover withholding tax. After all, if there is no liability to pay the tax until a suit for tax has been decided, on what legal basis can Enforcement appoint (or indeed threaten to appoint) a taxpayer's bank as agent to collect withholding tax beforehand?
And where previously taxpayers' legal remedy for withholding tax was uncertain it has now been declared that they may not only dispute their liability but that they no longer require leave of court to mount a challenge.
Your Taxand contact for further queries is:
Leon Kwong Wing
T. + 65 6238 3018
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