For those of you who have to file your tax returns this year, this is the definitive read on when you will be taxed. Income v Capital.

In Singapore, income tax is levied on income under s 10 of the Singapore Income Tax Act (Cap 134) (‘SITA’). Singapore adopts the territorial basis of taxation. This means that income tax is imposed on all income ‘accruing in or derived from Singapore or received in Singapore from outside Singapore’.

Prior to 1995, there were no specific provisions in the SITA on what constitutes income ‘received in Singapore from outside Singapore’. The view generally held by tax practitioners then was that the Indian ‘doctrine of first receipt’ established by the Privy Council in CIT v Mathias 7 ITR 48 was applicable to Singapore. Under this doctrine, the receipt of income refers to the first occasion on which the taxpayer gets the money under his control and only this first receipt is chargeable to tax. Any subsequent dealing, such as remittance, would not be chargeable to tax because it is no longer regarded as a receipt of income. If this doctrine were applicable in Singapore, taxpayers would not be taxed on income received outside Singapore and subsequently remitted back to Singapore. In addition, there was also confusion on whether a receipt would be a receipt of income from outside Singapore, if the source of the income had ceased.

History of Section 10(19) SITA

Section 10(19) (then s 10(13)) was enacted by Parliament in 1995 with the intention ‘to clarify the meaning of “income received in Singapore from outside Singapore”, making clear the circumstances under which foreign-sourced income falls within the meaning of “received in Singapore”, giving certainty and assisting taxpayers in complying with the law.’¹

The scope and ambit of the application of s 10(19) has not been tested judicially in the courts of Singapore. As such, it would be useful to refer to English cases which have interpreted English statutory provisions with words similar (but not identical) to s 10(19). Section 10(19) is as follows:

It is hereby declared for the avoidance of doubt that the amounts described in the following paragraphs shall be income received in Singapore from outside Singapore whether or not the source from which the income is derived has ceased:

(a) any amount from any income derived from outside Singapore which is remitted to, transmitted or brought into, Singapore;

(b) any amount from any income derived from outside Singapore which is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; and

(c) any amount from any income derived from outside Singapore which is applied to purchase any movable property which is brought into Singapore.

Subsection 10(19)(a)

On the plain words of sub-s 10(19)(a), there would be income from outside Singapore remitted into Singapore if an amount from income outside Singapore is remitted into, received in or transmitted into Singapore. There are two important factors to be satisfied before this section would come into play. Firstly, the sum in question must be in the nature of income, and secondly, it must be ‘remitted’ into Singapore within the meaning of sub-s 10(19)(a).

Income v capital

It is clear that the amount remitted into, received in or transmitted into Singapore must be in the nature of income and not capital. Section 10(19) is a clarification provision which clarifies what is deemed to be ‘received’ in Singapore for tax purposes. It is not a deeming provision which deems capital receipts to be income under sub-s 10(1)(g). Thus, as stated in s 10(19) itself, a sum has to be an income before it can fall under that section. A capital receipt such as a loan from a foreign bank brought into Singapore would not fall under sub-s 10(19)(a). It is interesting to note that this is so even if the loan was secured on foreign income.

In Hall v Marians 19 TC 582, a case decided in the English Court of Appeal, the taxpayer’s wife had earned business profits in Colombo, invested these profits in bonds through the Colombo branch of a UK bank and then from time to time borrowed money from the London branch of the UK bank on the security of the bonds. Romer LJ was of the view that even though the loan was secured on bonds bought with foreign income, no tax was payable because the loan was a capital advance. However, if the bank had lent her money on account or in advance or in respect of sums of money that it was expecting to receive in future from the Colombo branch, representing income from her foreign possessions, the matter would have been different.

Remitted into Singapore

The taxpayer’s wife in Hall v Marians later transferred her overdraft from the London branch to the Colombo branch by way of book entries. She then instructed the Colombo branch to sell the bonds and use the proceeds to discharge the overdraft and interest accrued. It was decided on two grounds that the transaction did not give rise to tax consequences. Lord Hanworth MR took the view that there was no remittance to the UK in this case since the loan was transferred out to Colombo and dealt with there. Romer LJ and Maugham LJ felt that a new loan was created in Colombo and this loan was used to repay the London loan. This meant that a capital loan was remitted into UK. If the taxpayer’s wife had used the bonds to pay off the London loan, there would then be remittance of income.

It appears therefore that if a taxpayer takes out a loan from an overseas bank secured on foreign income and uses it to discharge a debt in Singapore, the arrangement would fall outside the ambit of sub-s 10(19)(a). The taxpayer must, however, ensure that the loan is not given on the basis that the security (representing foreign income) would be used to repay the loan. Alternatively, transferring a Singapore loan to a foreign bank to be discharged using foreign income might be a way to avoid the adverse tax consequences under sub-s 10(19)(a). The English cases of Will v King Smith 24 TC 86 and Commissioners of Inland Revenue v Gordon 33 TC 86 all stand as authority for the principle that where a loan is repaid overseas with income earned overseas, there is no remittance of any foreign income. However, it should be noted that the repayment of the foreign loan using foreign income may in certain situations constitute a remittance under sub-s 10(19)(b).

Conduit pipe principle

There is an exception to the rule above. If the foreign income is channelled through various companies and eventually reaches the taxpayer as a loan, the court may apply the ‘conduit pipe principle’ such that the loan is seen as foreign income remitted into Singapore. In the case of Harmel v Wright (1947) 28 TC 293, the taxpayer had income in South Africa. He formed two companies in South Africa, A Ltd and L Ltd. Part of his income was applied in South Africa to subscribe for shares in A Ltd. When the amount subscribed in A Ltd reached a certain amount, A Ltd lent that sum to L Ltd, which in turn lent it to the taxpayer in London. The court held that the sums received by the taxpayer from L Ltd were clearly traceable to the taxpayer’s foreign income. As such, the income came in at one end of a conduit pipe and passed through certain traceable pipes until it came out at the other end to the taxpayer.

Subsection 10(19)(b)

This section applies to ‘any amount from any income derived from outside Singapore which is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore’. The crucial elements here are: (1) the sum in question must be of an income nature; and (2) it must be applied in satisfaction of a debt incurred in respect of a trade or business carried on in Singapore.

Income v capital

Where a foreign loan is taken out to repay another loan, it is submitted that for the reasons enunciated above, there is no income received in Singapore. This is so even if the foreign loan is secured by foreign income. However, where foreign income is used to repay the foreign loan, it may in certain circumstances be deemed ‘received in Singapore’. In this case, it becomes important to ascertain if the foreign loan was a debt incurred in respect of a trade or business carried on in Singapore.

Subsection 10(19)(c)

This section provides that movable property purchased using foreign income and later brought into Singapore is treated as income received by taxpayers and hence liable to tax in Singapore. The relevant sum on which tax is imposed is the amount of foreign income which is applied to acquire the assets and not their net book value or market value.

Administrative Concessions

In order to set out the administrative practice and interpretation which it will adopt with respect to s 10(19), the Inland Revenue Authority of Singapore (the ‘IRAS’) issued a Practice Note in 1995.²   Some of the clarifications and concessions included in the Practice Note are discussed below.

The Practice Note confirms that s 10(19) will not apply to non-resident individuals and foreign businesses which are not operating in or from Singapore. Hence, these non-residents can bring their foreign income into Singapore without fear of being taxed on that income. This ensures that s 10(19) will not discourage foreigners from using Singapore’s banking and fund management facilities.

As an administrative concession, IRAS allows taxpayers with funds outside Singapore derived from both foreign income and non-income sources to remit a certain amount of the foreign funds into Singapore without attracting tax liability. To benefit from this concession, the taxpayer must prove that the amount repatriated into Singapore is not more than the capital sent out of Singapore initially, net of any losses incurred on the capital account. Alternatively, he must provide an account of the funds from both income and non-income sources before the date of repatriation, and show that after repatriation, the funds remaining outside Singapore are not less than the funds from foreign income sources.

In addition, when foreigners migrate to Singapore and subsequently receive foreign income in Singapore, they will not be taxed on this income if they can show that it was earned prior to their relocation to Singapore. This ensures that foreigners who decide to migrate here will not be disadvantaged by the operation of s 10(19).

Teoh Lian Ee
Drew & Napier
E-mail: lianee.teoh@drewnapier.com

Endnotes