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19 January 2018 Singapore-Sri Lanka revised income tax treaty enters into force The revised tax treaty and protocol between Singapore and Sri Lanka (Revised Treaty) entered into force on 31 December 2017, replacing the tax treaty signed on 29 May 1979 (Old Treaty). The provisions of the Revised Treaty will become effective as follows:
1 The term "year of assessment" (YA) refers to the year in which income tax is assessed on the company. The basis period for a particular YA for a company is the financial year ending in the year preceding that YA. Under Article 25 (Exchange of Information), it is effective for requests for information made on or after 31 December 2017. Highlights of the Revised Treaty include the update of the permanent establishment provisions, reduction of the withholding tax rate on dividends and royalties, the introduction of a capital gains article, and removal of the limitation of relief clause. With the removal of the limitation of relief clause, there is no longer a requirement for a Singapore tax resident to remit its foreign income to Singapore for relief under the Revised Treaty to apply. Under the Revised Treaty, it is clarified that the 183-day threshold for a PE in relation to a building site, construction or assembly project applies to any 12-month period. The Revised Treaty has also expanded the scope of "construction PE" to include an installation project, a drilling rig or ship used for exploration or development of natural resources and supervisory activities in connection therewith. The Revised Treaty has an added "service PE" provision in which the furnishing of services, including consultancy services, by an enterprise of a Contracting State through employees or other personnel engaged by the enterprise for such purpose, would create a PE only if activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days within any 12-month period. Other changes to Article 5 include updates to the specific activity exemptions, a new PE provision specific to an insurance enterprise, and clarification in respect of the definition of a dependent agent. The Revised Treaty adopts the language provided in Article 9 of the Organisation for Economic Co-operation and Development Model Tax Convention. However, it contains an added provision that the corresponding adjustments as provided in the Revised Treaty will not apply where judicial proceedings have resulted in a final decision that by actions giving rise to an adjustment of profits, one of the enterprises concerned is liable to penalty with respect to fraud. The Revised Treaty provides a reduced withholding tax rate on dividends of 7.5% (previously 15%) if the recipient is a resident of the other Contracting State, the beneficial owner of the income and a company which holds directly at least 25% of the capital of the company paying the dividends. In other cases, a reduced withholding tax rate of 10% will apply. Under the Revised Treaty, a reduced withholding tax rate of10% (previously 15%) will apply if the recipient is the beneficial owner of the royalties and resident of the other Contracting State. It is also specifically provides that payments for computer software are royalties only if such payments are made for the right to use and exploit the copyright in the program. The Revised Treaty provides capital gains tax exemption on gains derived by a resident of a Contracting State from the alienation of shares, except in respect of shares (other than shares traded on a recognized stock exchange) deriving more than 50% of their value from immovable property situated in the other Contracting State. The Revised Treaty provides that where a resident of Singapore owns directly or indirectly not less than 10% (previously 25%) of the share capital of a dividend paying company which is a resident of Sri Lanka, the credit shall take into account the underlying tax paid in Sri Lanka. The Revised Treaty includes a three-year time limit from the first notification of an action resulting in taxation not in accordance with the treaty provisions for a resident of a Contracting State to seek resolution under MAP.
Document ID: 2018-5168 | |||||||||
