When Companies Send Singaporeans Abroad: Great Timing, Poor Strategy?
by BJ Ooi and Dennis McEvoy, KPMG, Singapore
(a KPMG International member firm)
As more Singapore companies expand their presence overseas, achieving success in the global marketplace requires among other things fielding a mobile, highly talented workforce. However, in today's competitive environment, companies need to deploy their employees cost-effectively. In light of this, careful and appropriate planning takes on added importance. Failing to consider the tax implications of seconding employees could lead to unwanted headaches and unnecessary costs when doing business overseas.
Companies should look at several key tax-related factors when planning assignments out of Singapore to assist in managing their risk and enhancing the return on investment from assigning employees overseas. These factors are discussed below.
Taxation of Singaporeans Working Overseas
Generally, the Inland Revenue Authority of Singapore (IRAS) considers a Singaporean who is seconded to work overseas by his or her employer as tax resident during the overseas employment. Given the individual's intention to return to Singapore, his or her absence is regarded as being temporary in nature.
Prior to 1 January 2004, tax residents would have been subject to Singapore tax on overseas employment income if such income were received in or remitted into Singapore. The tax law has been changed to tax-exempt all foreign source income remitted into or received in Singapore on or after 1 January 2004, by tax residents, except if such income were received through a partnership.
A Singaporean who works overseas for at least six months in any calendar year may elect to be treated as a nonresident. For the long-term assignment, it may be advantageous to be treated as a nonresident while overseas so as to reap the benefits of the Not Ordinarily Resident (NOR) taxpayer scheme upon repatriation to Singapore, particularly if the individual travels overseas extensively on business.
The NOR taxpayer scheme requires, among other things, that an individual be a nonresident for at least three consecutive years of assessment immediately preceding the year he or she first qualifies for the scheme. An analysis should be prepared to determine the advantageous tax filing position while working overseas.
Host Country Tax Considerations
The domestic tax laws of a country may offer tax relief for services rendered by short-term assignees. For example, in Taiwan, if the employee spends less than 90 days in Taiwan and all costs are borne by the non-Taiwan entity, the individual would not be subject to tax. In the U.S., a nonresident alien who is physically present in the U.S. for 90 days or less, performs services for a non-U.S. employer that is not engaged in a U.S. trade or business, and earns USD 3,000 or less for such services would not be subject to U.S. tax on this income. Therefore, when planning short-term assignments for your employees, domestic tax legislation should be reviewed to assist with structuring tax-efficient secondments.
Double Taxation Agreement (DTA)
A DTA is an agreement between two countries meant to avoid double taxation of individuals and companies resulting from the application of each country's respective domestic tax laws. The DTAs define the jurisdictional authority over cross-border transactions or presence. Singapore has entered into DTAs with over 50 countries.
Many of the DTAs entered into by Singapore allow foreign tax residents an exemption from Singapore tax on employment income provided that the individual's presence in Singapore does not exceed 183 days in a calendar year and the costs are not borne by the Singapore entity. Conversely, Singaporeans working overseas may enjoy the benefits under the provisions of a DTA, if:
- Singapore has concluded an agreement with that country and
- Specific conditions are met making the individual (or company) eligible for the particular treaty benefit.
A common misconception held by employers is that their assignees will not be taxable in the host location if the assignees will be there for less than 183 days; but 'days of presence' is only one DTA requirement.
Should DTA relief be applicable, another misconception is that no action is required on the part of the employee or employer. However, in many cases the DTA claim must be made with the filing of an income tax return or other tax forms.
The application of DTAs varies across borders and should be reviewed carefully prior to the commencement of the assignment.
Payroll Reporting Considerations
For a Singaporean working overseas, he or she may be subject to income taxes in the country in which the services are performed, and the employer may be obligated to withhold income taxes and in some locations, social security taxes. In countries such as Malaysia, the United States, the People's Republic of China, Taiwan, and many others, the employee's wages and allowances may be subject to periodic income and social security tax withholding.
Many Singapore employers are not equipped to deal with the implications of the company's withholding tax obligations regarding cross-border employees. Delegating the payroll reporting and withholding obligation to a foreign affiliate or venture partner may not always provide the optimal result for the Singapore company and/or the employee. In addition to an assignment creating a withholding tax obligation on behalf of an overseas employee, in some cases, the company may be exposed to a country's corporate tax reporting obligations through the creation of a permanent establishment.
It is recommended that when secondment arrangements are drafted, they detail the components of the employee's compensation package (including base salary, bonuses, differentials, allowances, and reimbursements), assignment dates, payroll structure, and which entity (home or host) retains dominion and control over the employee being seconded. Having the employee seconded to a foreign subsidiary or limiting the employee's job description and powers may be effective tools for managing the risk of creating a permanent establishment. Jurisdiction over litigation matters, labor law, and/or corporate registration obligations must also be considered.
Singapore companies need to be aware of a host country's laws and the consequences of not being in full compliance. Besides heavy penalties and fines, the risk to the company's reputation is not negligible.
Central Provident Fund (CPF)
For a Singaporean working overseas, CPF contributions are not mandatory. If both the employer and the employee choose to continue contributing while the employee is posted overseas, the employer will have to register for a separate Employer Reference Number before making the voluntary payment. If the employer chooses not to pay CPF contributions for the employee working abroad, the employee may still choose to contribute any amount he or she wishes, subject to limitations.
For calendar year 2005, CPF contributions for Singaporeans and Singapore Permanent Residents, including voluntary contributions, are limited to the mandatory contributions or S$28,050 per year, whichever is higher.
Growing the Singapore business overseas may be an opportunity for employers to consider adopting a tax equalization policy for their international assignees this can be an effective means to administer assignments and manage costs.
When sending employees overseas, it's not uncommon for host country taxes income and social security taxes to be higher than in Singapore. This can be expensive for companies that, in some cases, will cover the employees' tax obligations; but, also, can be off-putting to the employee trying to decide whether or not to take the international assignment. The idea of a more onerous tax burden, as compared to what he or she is accustomed to in Singapore, is not attractive.
Generally, tax reimbursement policies are designed to help ensure that the individual will not suffer combined taxes, in Singapore and the overseas location, on income in excess of what they would have been paid if living in Singapore.
This is where a tax equalization plan for the expanding Singapore company could come in handy. Tax equalization plans are designed to make taxes a neutral factor in an assignee's compensation package. Underpinning such plans is the theory that all assignees should continue to incur a tax burden equal to that incurred if they were living in Singapore. This has some advantages:
- From a personnel administration standpoint, other elements of assignee compensation (cost of living and hardship allowances, education reimbursements, etc.) can be determined without regard to taxes
- Taxes should not be a factor for an employee determining whether to accept an international assignment
- Companies can better manage costs related to the assignment.
Under tax equalization, assignees pay a hypothetical tax on those compensation items which would have been received in Singapore had they not accepted the international assignment and the company would absorb all actual taxes incurred during the assignment. Overall tax savings may be achieved from such a plan since savings accruing from the tax paid on behalf of those assignees in low tax countries will offset extra costs incurred with assignees in high tax countries. Furthermore, in many countries, tax may be reduced by charging the assignee (as a reduction in monthly salary) the hypothetical tax that he or she would have paid if he or she were living in Singapore.
What to do about the assignee's tax obligations in Singapore and abroad, and how to "neutralize" the impact of taxes on an employee's decision to take an assignment, represent important (and oftentimes unsettling) considerations for the expanding Singapore company. A simple employer-employee agreement on tax equalization without any supporting details and documentation should be avoided. An assignee compensation policy that is not properly designed, communicated, and administered can have detrimental effects on the success of the assignment and achievement of the company's business goals in the overseas market. A well-designed and communicated plan can reduce the employer's tax reimbursement outlays and administrative expenses, as well as circumvent misunderstandings and disgruntlement.
Singapore has a growing number of companies venturing overseas in search of new business opportunities. This expansion into new markets creates opportunities, but also presents challenges; tax costs are but one of the challenges and should not be overlooked when the decision to "go global" is made. The consequences can include, for example, increased business costs (taxes, penalties, fees) and non-compliance with the tax laws of foreign countries, and no less negligible, the risk to a company's reputation. Therefore, establishing an overseas presence which includes seconding employees should be carefully researched and planned.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.