Q. > Please Help: Tax credit

96 views • Question added Jun 04, 2013 • Income Tax • By CA Bishwanath , CA , KolkataM.C.

Query on Singapore Tax Laws

Facts

X Ltd (Indian Company),being a tax resident of India, has entered into an agreement with a Bank in Singapore, being a tax resident of Singapore,for the purpose of taking loan from the aforesaid Bank in order to arrange fund for carrying out its business in India.

As per the terms of the aforesaid agreement, X Ltd agreed to pay the interest on loan net of tax i.e. the income tax deducted at source (hereinafter referred to as ‘TDS’) from such interest would be borne by X Ltd. The TDS is 10 percent as per the Double Taxation Avoidance Agreement (hereinafter referred to as the ‘DTAA’) between India and Singapore. In the instant case, since X Ltd has to bear the TDS, the interest has to be grossed up before deduction of tax at source. Thus, tax deduction at source on INR 100 interest is INR 11.

Since the tax deductible from interest on loan is being borne by X Ltd, the total cost of taking loan in the hands of X Ltd is increasing and consequently, X Ltd is contemplating to reduce the cost of the aforesaid loan so as to make the business cost effective.

In the background of the above facts, X Ltd is searching for a solution that would benefit both X Ltd as well as the Singapore Bank without violating any of the provisions of tax laws in Singapore as well as in India.

The probable outcome of the aforesaid situation is explained in detail by way of an illustration both under current scenario as well as under proposed scenario.

Illustration under Current Scenario

• X Ltd, a tax resident of India, has taken a loan from Singapore Bank.

• Now X Ltd pays INR 100 interest (net of Tax) to Singapore Bank and also pays INR 11 to government of India as Tax Deducted at Source (TDS) under the provisions of the tax laws of India read with the Double Taxation Avoidance Agreement entered into between India and Singapore. X Ltd is not issuing TDS Certificate to Singapore Bank.


• Singapore Bank will book INR 100 as its income and pay tax to Singapore Government on INR 100 i.e. INR 17 (tax rate being 17 percent in Singapore).

Illustration under Proposed Scenario

• Now if X Ltd issues TDS certificate of INR 11 to Singapore Bank after deducting tax at source on the understanding that the Singapore Bank will gross up the interest and disclose gross interest amounting to INR 111 as income in the return of income to be filed before Singapore Tax Authority instead of INR 100 which it was disclosing previously (i.e. under current scenario as mentioned hereinabove).

• Since X Ltd issues TDS certificate to the Singapore Bank, the latter can claim Foreign Tax Credit as per Section 49 and 50 of Singapore Income Tax Act.

• Since Singapore tax rate is 17% and the tax is deducted at source @ 10% in India, tax credit will be allowed on lower of the aforesaid rates as per section 50 of Singapore Income Tax Act.

• Thus, under the proposed scenario, Singapore Bank will have to pay tax as follows:

Particulars INR
Tax on gross income 17% of 111 18.87
Less: Tax Credit 11.00
Tax Payable 7.87

• The tax liability of Singapore Bank will increase by 1.87 i.e. (18.87 – 17) i.e. the difference between the current scenario and the proposed scenario as enumerated hereinabove.

• Now both Singapore Bank and X Ltd can negotiate on win-win situations i.e. Singapore Bank may, after deducting the extra amount tax of INR 1.87 and some extra percentage say (INR 2), send back the balance amount of INR 7.13 (INR 11 -1.87 - 2 ) to X Ltd as refund.


• Since the Singapore Bank is paying tax on full interest and does not claim any deduction for the amount of refund to be made to X Ltd, the Singapore Tax Authority would not create any problem.

• In the event it is not possible to refund the aforesaid amount to X Ltd for any reason, then the Singapore bank may going forward reduce the interest on loan payable by X Ltd in order to adjust the aforesaid amount of refund by entering into a fresh supplementary agreement.


Our Query

In the background of the above, we would be highly obliged if you kindly let us know which of the options as stated hereinbelow is feasible from the perspective of Singapore Tax Laws:

• Option 1:Singapore Bank may, after deducting a sum of INR 1.87 and some extra percentage say (INR 2), send back the balance amount of INR 7.13 (INR 11 -1.87 - 2 ) to X Ltd as refund.

• Option 2:In the event it is not possible to refund the aforesaid amount to X Ltd for any reason, then the Singapore bank may going forward reduce the interest on loan payable by X Ltd in order to adjust the aforesaid amount of refund by entering into a fresh supplementary agreement.

It is to be mentioned here that X Ltd prefers Option 1 to Option 2 in case the same is feasible.

Query on Singapore Tax Laws

Facts

X Ltd (Indian Company),being a tax resident of India, has entered into an agreement with a Bank in Singapore, being a tax resident of Singapore,for the purpose of taking loan from the aforesaid Bank in order to arrange fund for carrying out its business in India.

As per the terms of the aforesaid agreement, X Ltd agreed to pay the interest on loan net of tax i.e. the income tax deducted at source (hereinafter referred to as ‘TDS’) from such interest would be borne by X Ltd. The TDS is 10 percent as per the Double Taxation Avoidance Agreement (hereinafter referred to as the ‘DTAA’) between India and Singapore. In the instant case, since X Ltd has to bear the TDS, the interest has to be grossed up before deduction of tax at source. Thus, tax deduction at source on INR 100 interest is INR 11.

Since the tax deductible from interest on loan is being borne by X Ltd, the total cost of taking loan in the hands of X Ltd is increasing and consequently, X Ltd is contemplating to reduce the cost of the aforesaid loan so as to make the business cost effective.

In the background of the above facts, X Ltd is searching for a solution that would benefit both X Ltd as well as the Singapore Bank without violating any of the provisions of tax laws in Singapore as well as in India.

The probable outcome of the aforesaid situation is explained in detail by way of an illustration both under current scenario as well as under proposed scenario.

Illustration under Current Scenario

• X Ltd, a tax resident of India, has taken a loan from Singapore Bank.

• Now X Ltd pays INR 100 interest (net of Tax) to Singapore Bank and also pays INR 11 to government of India as Tax Deducted at Source (TDS) under the provisions of the tax laws of India read with the Double Taxation Avoidance Agreement entered into between India and Singapore. X Ltd is not issuing TDS Certificate to Singapore Bank.


• Singapore Bank will book INR 100 as its income and pay tax to Singapore Government on INR 100 i.e. INR 17 (tax rate being 17 percent in Singapore).

Illustration under Proposed Scenario

• Now if X Ltd issues TDS certificate of INR 11 to Singapore Bank after deducting tax at source on the understanding that the Singapore Bank will gross up the interest and disclose gross interest amounting to INR 111 as income in the return of income to be filed before Singapore Tax Authority instead of INR 100 which it was disclosing previously (i.e. under current scenario as mentioned hereinabove).

• Since X Ltd issues TDS certificate to the Singapore Bank, the latter can claim Foreign Tax Credit as per Section 49 and 50 of Singapore Income Tax Act.

• Since Singapore tax rate is 17% and the tax is deducted at source @ 10% in India, tax credit will be allowed on lower of the aforesaid rates as per section 50 of Singapore Income Tax Act.

• Thus, under the proposed scenario, Singapore Bank will have to pay tax as follows:

Particulars INR
Tax on gross income 17% of 111 18.87
Less: Tax Credit 11.00
Tax Payable 7.87

• The tax liability of Singapore Bank will increase by 1.87 i.e. (18.87 – 17) i.e. the difference between the current scenario and the proposed scenario as enumerated hereinabove.

• Now both Singapore Bank and X Ltd can negotiate on win-win situations i.e. Singapore Bank may, after deducting the extra amount tax of INR 1.87 and some extra percentage say (INR 2), send back the balance amount of INR 7.13 (INR 11 -1.87 - 2 ) to X Ltd as refund.


• Since the Singapore Bank is paying tax on full interest and does not claim any deduction for the amount of refund to be made to X Ltd, the Singapore Tax Authority would not create any problem.

• In the event it is not possible to refund the aforesaid amount to X Ltd for any reason, then the Singapore bank may going forward reduce the interest on loan payable by X Ltd in order to adjust the aforesaid amount of refund by entering into a fresh supplementary agreement.


Our Query

In the background of the above, we would be highly obliged if you kindly let us know which of the options as stated hereinbelow is feasible from the perspective of Singapore Tax Laws:

• Option 1:Singapore Bank may, after deducting a sum of INR 1.87 and some extra percentage say (INR 2), send back the balance amount of INR 7.13 (INR 11 -1.87 - 2 ) to X Ltd as refund.

• Option 2:In the event it is not possible to refund the aforesaid amount to X Ltd for any reason, then the Singapore bank may going forward reduce the interest on loan payable by X Ltd in order to adjust the aforesaid amount of refund by entering into a fresh supplementary agreement.

It is to be mentioned here that X Ltd prefers Option 1 to Option 2 in case the same is feasible.