- 1 No Tax Treaty with Singapore & US Tax
- 2 US Taxes Passive Income
- 3 Contributions to CPF Not Deductible
- 4 CPF Taxation Growth Taxed by US Government
- 5 No Reduced Withholding (Treaty)
- 6 No Treaty Election Foreign Person
- 7 Missed Prior-Year Tax and Reporting?
- 8 Golding & Golding: About our International Tax Law Firm
No Tax Treaty with Singapore & US Tax
When the United States enters into a tax treaty with a foreign country, it impacts the ability of each country to tax citizens and residents involving income generated from one (or both) countries — and allows residents to prepare for the tax implications. For some countries, even though they may be on friendly terms with the United States — it does not mean that there is necessarily a tax treaty in place — and this impacts the US Taxation and IRS enforcement rules and protocols. One example of this is Singapore, which has become one of the largest international business hubs across the globe. Unfortunately, since the United States has not entered into an international tax treaty with Singapore, it leads to unnecessarily complex tax issues involving certain income that may be deemed tax-exempt in the country of source, but not the country of residence (at least during the accumulation phase) such as the Central Provident Fund. Here are five (5) common tax issues involving the US and Singapore which are impacted by the lack of a tax treaty.
US Taxes Passive Income
In general, the United States taxes individuals on their worldwide income. Even if there is no taxation of passive income in Singapore, that does not mean the same income is exempt in the United States. Noting, that even if there was a tax treaty in place, for the most part, it does not eliminate income tax on worldwide income, although it could otherwise minimize withholding.
Contributions to CPF Not Deductible
In some countries, when there is a tax treaty it can eliminate or exempt certain taxes such as contributions made by the employer for the employee for a pension — such as the US/UK Tax Treaty. For example, when a US person works in the United States and has a 401(k), there is no tax on the portion of the pre-tax contribution into the 401(k). Conversely, because there is no tax treaty between the United States and Singapore, for a US person working in Singapore and earning CPF contributions from their employer, those contributions are grossed up into their income for US tax purposes — even if it is exempt for foreign tax purposes.
CPF Taxation Growth Taxed by US Government
Likewise, since there is no tax treaty in place between the US and Singapore, the growth within a CPF is also taxable even though it has not been distributed and is generally tax-exempt in the growth phases under Singapore tax law. In other words, when there is a treaty country, the growth within a foreign pension is generally exempt from tax –– or at least the argument can be made for it to be exempt during the accumulation phase. But, since there is no tax treaty between the United States and Singapore, there is no basis for making a treaty argument that the growth of accumulated income that is not distributed in a pension should escape US tax.
No Reduced Withholding (Treaty)
Generally, there is a 30% withholding for non-resident aliens who are generating US-sourced income. When there is a tax treaty in place, the withholding may be reduced to 10%, 15%, or 5% — or even eliminated completely. Since there is no tax treaty between the United States and Singapore, there is no basis for reducing the withholding amount based on treaty provisions.
No Treaty Election Foreign Person
For some residents of the United States, when they reside overseas they can make a treaty election to be treated as a foreign person instead of a US person for US tax purposes — by making a treaty election and filing a Form 8833. In turn, they file a 1040-NR only to report their US-sourced income instead of a Form 1040 to report their worldwide income. Since there is no tax treaty with Singapore, there is no ability to make such an election.
Missed Prior-Year Tax and Reporting?
For taxpayers who may be out of compliance, there are various programs collectively referred to as tax amnesty or “offshore disclosure” — that taxpayers can pursue in order to safely minimize or eliminate penalties for the previous year’s non-compliance. Taxpayers should consult with a Board-Certified Tax Law Specialist before making any representations to the US government.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax and specifically, IRS offshore disclosure.
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