TAKEAWAYS
Hybrid work arrangements, or remote working, are now commonly adopted by employers worldwide, including in Singapore, due to work-from-home arrangements put in place during the COVID-19 pandemic.
This article explores the Singapore and foreign tax implications that may arise from cross-border remote work arrangements.
Singapore tax implications
Source of employment income
Under Singapore’s territorial tax system, income from any employment that is exercised in Singapore is deemed to be sourced in Singapore. Thus, where an employee performs his services in Singapore, his employment income is treated as having a source in Singapore and is therefore subject to tax regardless of where it is received or where the employer is located.
Conversely, where an employee is contracted to be based overseas and his services are performed outside Singapore, his employment income has a foreign source. If the income is kept offshore, it is outside the scope of Singapore tax, and if it is received in Singapore, it is exempt from tax in the hands of the employee.
Applying the source rule, an employee who works remotely outside Singapore for an employer based in Singapore would be earning foreign employment income, not subject to Singapore income tax.
Business trips to Singapore
If the remote employee makes business trips to Singapore, he would be considered as exercising employment in Singapore during the period of the trip. Consequently, his remuneration attributable to the days of employment in Singapore is treated as sourced in Singapore and thus subject to tax in Singapore, unless exempt from tax.
Tax exemption is available under section 13(6) of the Income Tax Act 1947 (the ‘Act’) if the employee is a non-resident exercising employment1 in Singapore for not more than 60 days in the calendar year. This is known as the tax exemption for short-term visiting employees.
Two tests – the qualitative test and quantitative test – are applied to determine the residency status of individuals on a year-by-year basis.
In practice, the quantitative test is applicable for a foreign employee. If the remote employee is a foreigner, he should be treated as a non-resident as it is expected that he would not be physically present or exercise employment in Singapore for 183 days or more during a calendar year.
However, if the remote employee is a Singapore citizen or permanent resident, the qualitative test should be applicable for ascertaining his residency status. To be considered a resident, the individual is required to reside in Singapore during the calendar year except for such temporary absences from Singapore as may be reasonable and not inconsistent with his claim to be resident in Singapore.
Applying the qualitative test, if the Singapore citizen/permanent resident’s absences from Singapore are temporary, he will be treated as resident in Singapore, in which case, the tax exemption under section 13(6) will not be available. However, if he had left Singapore with the intention to establish residence overseas, he should be treated as a non-resident and therefore should not be precluded from availing of section 13(6).
Foreign tax implications
As the remote employee would be based in a foreign tax jurisdiction to perform his services, he should expect that his remuneration would be treated as sourced in that jurisdiction and subject to tax. Compared with other tax jurisdictions, the Singapore personal tax regime is relatively straightforward. As such, Singaporean employees who decide to relocate overseas to take up remote employment should understand and comply with the foreign tax rules and avoid any tax surprises.
Singapore tax implications
Tax deduction on employees’ remuneration
Where the employee’s services are performed in relation to the production of the employer’s income chargeable to Singapore income tax, the costs of his remuneration should be deductible for the employer, unless they are specifically disallowed under the Act.
One of the specific disallowances under the Act relates to an employer’s contributions to an employee’s Central Provident Fund (CPF) that are not statutorily required. Under the CPF Act 1953, CPF contributions are not statutorily required for Singapore citizen and permanent resident employees based outside Singapore. An employer who makes CPF contributions2 for a remote employee who is a Singapore citizen or permanent resident should therefore not claim deduction on the contributions.
Foreign tax implications
Employer’s obligations
The Singapore-based employer should be mindful of whether the foreign tax jurisdiction imposes any employer’s obligations relating to the reporting and payment of any income tax for the employee who is working remotely in that jurisdiction. Depending on the jurisdiction, there may also be obligations for payroll tax and social security contributions.
Permanent establishment concerns
The Singapore-based employer should also take care not to create a permanent establishment in a foreign tax jurisdiction through the presence or activities of remote employees in the jurisdiction.
If a double taxation agreement (DTA) between Singapore and the foreign jurisdiction is applicable, it would define a permanent establishment to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. According to the OECD Model Treaty Commentary, a fixed place of business that constitutes a permanent establishment is one that is considered at the disposal of the enterprise. The commentary adds that an individual’s home office may be considered at the disposal of the enterprise if it is used on a continuous basis for carrying on the enterprise’s business and the enterprise has required the individual to use the home office to carry on its business.
In a typical remote working arrangement, although the employer may not require the employee to work from his home office, the employee would nonetheless be using the home office on a continuous basis for performing services for his employer. That being the case, a home office may be considered at the disposal of the employer for carrying on its business, and therefore be found to constitute a permanent establishment, unless the employee is engaged in activities that are preparatory or auxiliary in nature.
Apart from the above, if a DTA between Singapore and the foreign jurisdiction is applicable, it may also deem a permanent establishment to be created through the existence or extent of certain activities in the foreign jurisdiction. Such activities may include the furnishing of services by an enterprise through its remote employees that continue for more than a specified period.
If the Singapore-based employer has a permanent establishment in the foreign jurisdiction, generally, it will be required to file corporate tax returns for the purposes of ascertaining the foreign tax payable on the business profits attributable to the permanent establishment.
Back in Singapore, the foreign tax paid would generally be taken into consideration for the purposes of allowing foreign tax relief in arriving at the tax payable on the business profits. Alternatively, the Singapore-based employer may claim foreign-sourced income exemption on the business profits of the permanent establishment, subject to qualifying conditions.
Under Singapore’s territorial system of taxation, a remote employee who works overseas for a Singapore-based employer should not be subject to tax on his remuneration. This includes his remuneration attributable to business trips made to Singapore not exceeding 60 days in the calendar year, provided he is treated as a non-resident.
As for the employer, remuneration paid to remote employees is generally a deductible expense except for employer’s CPF contributions made for the employee. Finally, in planning for cross-border remote work arrangements, employers should seek to understand and address potential issues relating to permanent establishments in the foreign jurisdiction.
Edwin Leow is Director, Head of Tax, CLA Global TS Tax Services Pte Ltd (formerly Nexia TS), and Koy Su Hiang is Associate Director, Business & International Tax Lead, CLA Global TS Tax Services Pte Ltd (formerly Nexia TS).
1 Although directors are treated as employees under the Act, the tax exemption under section 13(6) does not apply to directors.
2 An exception applies to an employer’s contributions made to the Medisave account of a Singapore citizen/permanent resident employee that is maintained under the CPF Act. Tax deduction is specifically allowed to the employer on such contributions subject to a cap per employee per year.
© 2024 Institute of Singapore Chartered Accountants
