Why the new withholding tax rules on cost-pooling matters

Understand the recent changes in the concession for withholding tax on cost-pooling arrangements to avoid unnecessary costs.

The Inland Revenue Authority of Singapore (IRAS) withdrew the administrative concession that provided a waiver of withholding tax (WHT) on payments made to non-resident related companies for services rendered in Singapore under a cost-pooling arrangement. The withdrawal applies to payments due on or after 1 November 2022.

Previously, under an administrative concession, reimbursements made to a non-resident for services rendered in Singapore under a qualifying cost-pooling arrangement were not subject to the WHT requirements.

With the withdrawal of the concession, WHT is now applicable on payments to non-resident companies for services rendered in Singapore for such payments. While the IRAS has not publicly clarified the reasons behind the withdrawal, it is not uncommon for the IRAS to periodically review the rationale behind tax rules and administrative concessions to test their relevance for the current business environment.

In a typical cost-pooling arrangement, regional service entities in a multinational corporation (MNC) group charge the support cost to a central “pooling entity“. These costs are then aggregated and re-allocated by the “pooling entity” to the respective entities in the MNC group based on certain allocation key used as proxy for the level of services received. With the removal of this administrative concession, we consider some practical issues which may arise.

Consider this scenario whereby a Singapore company SCo, is a regional support centre. It incurs costs in relation to its services performed in Singapore, and charges such support costs to the central cost-pooling entity in the US, USCo. Such costs are aggregated by USCo and then allocated to the group entities (including SCo) under a cost-pool arrangement. As the allocation of costs to the SCo includes the costs in relation to services performed (by itself) in Singapore, the withdrawal of the WHT administrative concession would lead to the scenario whereby the SCo have to comply with Singapore WHT obligations on such payments. In addition, in the absence of robust documentation and tracking mechanisms, a 17% WHT may have to be applied on the whole sum of the payment even though only part of the payment is for services performed in Singapore. 

In view of this such unintended development, businesses should consider whether any alternative arrangements can be considered.

For instance, where the services from a Singapore company are pooled by a foreign company and charged back to other Singapore entities, it may be more effective for part of such costs incurred to be excluded from the cost-pooling arrangement and charged directly to other Singapore companies instead.

Where Singapore WHT is applicable, the Singapore WHT obligations must be complied with in an accurate and timely manner. We provide below some important points to note when dealing with such obligations.

a.     Tracking of where the services were rendered

For cost-pooling arrangements, the corporate group will need to determine what portion of the payments are for services performed in Singapore (on which Singapore WHT is applicable). The corporate group should have robust processes in place to track and record where the corresponding services were rendered. This should be properly documented in the event of any dispute with the tax authorities. It will be useful to issue separate invoices for services performed in Singapore and offshore so that the amounts are clearly delineated.

b.     WHT rate and tax exemption

The domestic WHT rate for services performed in Singapore is the prevailing corporate tax rate. However, where the payment is made to a resident of an Avoidance of Double Taxation Treaty (DTA) partner, the relevant DTA can be analysed to determine if any reduced rates or tax exemption can apply.

If tax exemption under the DTA applies, it should not be misconstrued that there are no further WHT compliance obligations on the part of the Singapore payer. Under such situations, the Singapore payer should still file the Singapore WHT forms, which can be consolidated and submitted twice a year on 15 June and 15 December.

c.     Claiming of excess WHT paid

Given that Singapore WHT is applied on the gross amount of service fees paid to the foreign payee, the payee can consider filing its certified management accounts and tax return in Singapore to claim a deduction on the relevant expenses incurred and claim a refund on the excess WHT paid. Needless to say, this should be weighed against the corresponding compliance and administrative costs required.

Conclusion

Where there are transactions involving payments to non-residents, Singapore payers should always carefully analyse whether Singapore WHT requirements are applicable and ensure that Singapore WHT requirements have been complied with. With the withdrawal of the WHT administrative concession on cost-pooling arrangements, it is important that Singapore companies ensure that their internal tax controls and processes are up-to-date and remain relevant in light of the changes in the requirements.    

The co-authors of this article are Goh Siow Hui, Partner, Tax Services from Ernst & Young Solutions LLP and Ng Zhen Liang, Manager, Tax Services from EY Corporate Advisors Pte. Ltd.