Gurdeep Singh Randhay
Director
CNP Tax and Advisory Pte Ltd
Effective 1 January 2024, Section 10L of the Income Tax Act 1946 is a fundamental change to Singapore’s existing tax regime. Mr Singh of CNP Tax and Advisory Pte Ltd explains its significance and impact.
Singapore tightened the avenues for avoiding capital gains tax overseas through the remittance of proceeds to Singapore with the introduction of Section 10L of the Income Tax Act 1947 from 1 January 2024.
This development followed the Ministry of Finance’s announcement on 6 June 2023, which unveiled a proposal to amend Singapore’s tax regime relating to foreign-sourced income. This amendment, through the introduction of Section 10L into the Income Tax Act of 1947, imposes taxes on the profits garnered from the sale of assets located outside Singapore, provided these profits are repatriated to Singapore by companies that do not maintain substantial economic activities within the country.
Putting things in context
The backdrop to Singapore’s policy shift is deeply rooted in international efforts led by bodies like the European Union’s Code of Conduct Group (COCG), which has been keenly observing tax regimes across the world to prevent what is often termed as a “race to the bottom” in tax practices. This phrase encapsulates a situation where jurisdictions competitively lower their tax rates or offer increasingly generous tax exemptions to attract multinational corporations, potentially eroding their tax bases and those of other countries.
Singapore, renowned for its business-friendly tax regime, found itself under the COCG’s microscope alongside 14 other jurisdictions. The examination was aimed at identifying elements within these jurisdictions’ tax policies that could potentially foster harmful tax practices. Notably, Singapore’s foreign-sourced income exemption (FSIE) regime was evaluated but eventually found to be compliant with the COCG’s standards.
Significance of Section 10L
The proposed Section 10L represents a nuanced approach to taxing capital gains derived from the sale of assets located outside Singapore. Under this section, such gains will be considered taxable income when they are remitted to Singapore, used to settle businessrelated debts within the country, or used to purchase movable property that is brought into Singapore. It marks a departure from Singapore’s historically cautious stance on the taxation of capital gains, reflecting a broader global trend towards ensuring that tax policies are not only competitive but also equitable and aligned with international norms.
The definition of “foreign assets” and “relevant entities” under Section 10L is particularly noteworthy. It delineates the scope of assets and entities that the new tax measures will apply to, essentially focusing on multinational entities with operations that span beyond Singapore’s borders.
Exemptions and economic substance
A pivotal aspect of Section 10L is its provisions for exemptions, which are carefully crafted to ensure that the new tax measures do not indiscriminately impact all entities with foreign-sourced capital gains. Exemptions are provided for financial institutions, entities that benefit from specific tax incentives under Singapore’s Income Tax Act, and those whose income is already exempt or subject to a concessionary tax rate under the Economic Expansion Incentives (Relief from Income Tax) Act of 1967.
The concept of “economic substance” is central to the implementation of Section 10L. It necessitates that entities demonstrate a significant economic presence in Singapore to qualify for exemptions from the new tax measures.
Global Implications and Outlook
The amendment to Singapore’s tax regime, as embodied in the proposed Section 10L, is reflective of a global shift towards greater transparency, accountability, and fairness in tax matters. By aligning its tax policies with international standards, Singapore is reinforcing its reputation as a responsible member of the global financial community, committed to combating tax avoidance, and ensuring that it supports sustainable and substantive economic activities.
The introduction of Section 10L is a significant step in Singapore’s ongoing efforts to refine its tax regime in response to evolving global standards and challenges. The implications of this policy shift are far-reaching, not only for entities operating within Singapore’s borders but also for the global business community, as it signals a move towards greater coherence and equity in taxation.
This article was first published in our newsletter, The Custodian Issue 29. Click here to access our latest newsletter
