Foreign-sourced disposal gains subject to tax from Jan 1

SINGAPORE – Foreign-sourced disposal gains will be subject to tax in Singapore from Jan 1, 2024, if received by entities of multinational enterprise groups that do not have economic substance here.

This comes after proposed amendments to Singapore’s income tax regime were passed in Parliament on Tuesday.

“This is to address international tax avoidance risks relating to non-taxation of disposal gains in the absence of real economic activities,” said Senior Minister of State for Finance Chee Hong Tat.

However, Mr Chee, who is also Acting Transport Minister, said the objective was not to tax capital gains in Singapore.

“Rather, we are making this move as part of our longstanding policy to align key areas of our tax regime with international norms,” he said.

The move to tax foreign-sourced disposal gains is consistent with international standards.

These include rules against harmful tax practices agreed under the Inclusive Framework on Base Erosion and Profit Shifting, of which Singapore is a member, as well as the European Union Guidance on Foreign-Sourced Income Exemption Regimes.

“We do not expect the new treatment to have adverse impact on our economy, as our focus has always been based on attracting and anchoring real economic activities in Singapore,” Mr Chee said.

“Some businesses, however, may face increased record-keeping requirements. Iras (Inland Revenue Authority of Singapore) will work closely with the industry to minimise the compliance burden arising from this new treatment.”

Several MPs, including Nominated MP Usha Chandradas, a tax lawyer by training, and Ms Nadia Ahmad Samdin (Ang Mo Kio GRC), sought clarification on the definition of economic substance.

In response, Mr Chee said the tax treatment would depend on the facts of each case. “As business practices vary across industries, it will not be possible to prescribe quantitative tests.”

Nevertheless, he said, Iras will take sector-specific circumstances into account in administering the new rule.

The authority will publish industry guidance on how it will assess what constitutes adequate economic substance by the end of 2023.

“Where possible, sector-specific circumstances and common scenarios including those raised by members of the House will be considered and addressed in the guidance,” Mr Chee said.

Tighter rules will also apply to disposal gains arising from intellectual property rights, due to the higher mobility of such assets.

On this, Mr Chee said Singapore will adopt the internationally agreed modified nexus approach, an international standard set by the Organisation for Economic Cooperation and Development.

Under the approach, jurisdictions can provide benefits to the income arising out of an intellectual property right, so long as there is a direct nexus between the income receiving benefits and the expenditures contributing to that income.

Mr Chee said: “As a small, open economy, it is in our interests for our tax rules to stand up to international scrutiny to facilitate the continued flow of trade and investments.”