22 January 2018 Tax update Revised income tax treaty between Singapore and Sri Lanka enters into force Executive summary 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: Nature of taxes Singapore Sri Lanka Taxes withheld Amounts liable to be paid, Amounts paid or at source deemed paid or paid payable on or after (whichever is the earliest) on 1 January 2018 or after 1 January 2018 Other taxes on income Tax chargeable (other than Taxes levied for and capital taxes withheld at source) for taxable year any year of assessment1 beginning on or after beginning on or after 1 January 2018 1 January 2019 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 (PE) provisions (such as adding a “Service PE” provision), reduction of the withholding tax rate on dividend and royalties, 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. This alert summarises the salient provisions of the Revised Treaty. 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. Detailed discussion It also includes a new PE provision for an insurance enterprise where an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to Taxes covered – Article 2 have a PE in the other Contracting State if it collects premiums in the territory of that other State or insures It has been clarified that the Sri Lanka tax covered includes risks situated therein through a person other than an agent the income tax based on the turnover of enterprises of an independent status. entered into agreements with the Board of Investment of Sri Lanka. Further, the Revised Treaty now provides that when the activities of an agent are devoted wholly or almost wholly on behalf of an enterprise, and conditions are made or Resident – Article 4 imposed between that enterprise and the agent in their commercial and financial relations which differ from those The tie-breaker rule of the Revised Treaty provides that a which would have been made between independent person other than an individual will be deemed to be a enterprises, such agent will not be considered an agent of resident only of the State in which its place of effective an independent status. management is situated (instead of basing it on the State in which the control and management of its business is Shipping and air transport – Article 8 exercised under the Old Treaty). In the event that the State in which its place of effective management is situated The Revised Treaty continues to provide that the taxing cannot be determined, the Revised Treaty further provides rights on profits derived by an enterprise of a Contracting that the dual residence issue will be settled by the State from the operation of aircraft in international traffic competent authorities of the Contracting States by are allocated to that Contracting State. Fifty percent of the mutual agreement. profits derived by an enterprise of a Contracting State from the operation of ships in international traffic remain taxable – Permanent establishment (PE) Article 5 in the other Contracting State. Under the Revised Treaty, it is clarified that the 183-day Under the Revised Treaty, the profits from the operation of threshold for a PE in relation to a building site, construction ships or aircraft in international traffic include profits from or assembly project applies to any 12-month period. The the participation in a pool, a joint business or an Revised Treaty has also expanded the scope of international operating agency, as well as other incidental “construction PE” to include an installation project, a income such as profits from the rental on a bareboat basis drilling rig or ship used for exploration or development of of ships or aircraft, profits from the use, maintenance or natural resources and supervisory activities in rental of containers (including trailers and related connection therewith. equipment for the transport of containers) used for the transport of goods or merchandise, and interest on funds The Revised Treaty has an added “service PE” provision in connected with and incidental to the operations of ships or which the furnishing of services, including consultancy aircraft in international traffic. services, by an enterprise of a Contracting State through employees or other personnel engaged by the enterprise Associated enterprises – Article 9 for such purpose, will create a PE only if activities of that nature continue (for the same or a connected project) The Revised Treaty adopts the language provided in within the other Contracting State for a period or periods Article 9 of the OECD Model Tax Convention. However, it aggregating more than 183 days within any contains an added provision that the corresponding 12-month period. adjustments as provided in the Revised Treaty will not apply where judicial proceedings have resulted in a final decision The Revised Treaty adds that a PE shall be deemed not to that by actions giving rise to an adjustment of profits, one include the maintenance of a fixed place of business solely of the enterprises concerned is liable to penalty with for any combination of several specified activities, provided respect to fraud. that the overall activity of the fixed place of business resulting from this combination is of a preparatory or Dividends – Article 10 auxiliary character. In the Revised Treaty, the following has been removed from The Revised Treaty provides a reduced withholding tax rate the list of specified exempt activities: on dividends of 7.5% (previously 15%) if the recipient is a resident of the other Contracting State, the beneficial “The maintenance of a fixed place of business solely for owner of the income and a company which holds directly at the purpose of advertising, for the supply of least 25% of the capital of the company paying the information, for scientific research or for similar dividends. In other cases, a reduced withholding tax rate of activities which have a preparatory or auxiliary 10% will apply. character, for the enterprise.” Interest – Article 11 If you would like to know more about EY services or the issues discussed, please contact one of Under the Revised Treaty, the reduced withholding tax rate on interest remains at 10%, and is exempt in the following or your usual EY personnel: certain circumstances. Royalties – Article 12 Chung-Sim Siew Moon Partner and Head of Tax Ernst & Young Solutions LLP Under the Revised Treaty, a reduced withholding tax rate of +65 6309 8807 10% (previously 15%) will apply if the recipient is the [email protected] beneficial owner of the royalties and resident of the other Contracting State. Chester Wee It is also specifically provided that payments for computer Partner, International Tax Services software are royalties only if such payments are made for Ernst & Young Solutions LLP the right to use and exploit the copyright in the programme. +65 6309 8230 [email protected] Capital gains – Article 13 The Revised Treaty provides capital gains tax exemption on Wong Hsin Yee gains derived by a resident of a Contracting State from the Partner, International Tax Services alienation of shares, except in respect of shares (other than Ernst & Young Solutions LLP shares traded on a recognised stock exchange) deriving +65 6309 8138 more than 50% of their value from immovable property [email protected] situated in the other Contracting State. Elimination of double taxation – Article 22 Angela Tan Partner, EY Asean Business Tax Services Leader The Revised Treaty provides that where a resident of Ernst & Young Solutions LLP Singapore owns directly or indirectly not less than 10% +65 6309 8804 (previously 25%) of the share capital of a dividend-paying [email protected] company that is a resident of Sri Lanka, the credit shall take into account the underlying tax paid in Sri Lanka. Soh Pui Ming Partner, EY Asean Global Compliance and Mutual agreement procedure (MAP) – Article 24 Reporting Leader Ernst & Young Solutions LLP The Revised Treaty includes a three-year time limit from +65 6309 8215 the first notification of an action resulting in taxation not in [email protected] accordance with the treaty provisions for a resident of a Contracting State to seek resolution under MAP. Desmond Teo Exchange of information (EOI) – Article 25 Partner, International and Financial Services Tax Ernst & Young Solutions LLP The Revised Treaty incorporates similar provision in the EOI +65 6309 6111 Article of the OECD Model Tax Convention. This includes if [email protected] information is requested by a Contracting State in accordance with the Article, the other Contracting State will use its information gathering measures to obtain the Mriganko Mukherjee requested information, even though it may not need such Partner, International and Financial Services Tax information for its own tax purposes. Ernst & Young Solutions LLP +65 6309 8013 [email protected] Russell Aubrey Partner, Business Tax Services Ernst & Young Solutions LLP +65 6309 8690 [email protected] EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services.