# Singapore Supplementary Retirement Scheme (SRS) for U.S. Citizen?



## BBCWatcher

I'm looking for some advice on the wisdom (or not) of putting funds into a Supplementary Retirement Scheme (SRS) account in Singapore in relation to U.S. and Singapore overall taxes.

First, I should explain what an SRS is. Anybody legally resident in Singapore can contribute a portion of his/her income -- whether earned or unearned, curiously -- to a tax advantaged account called SRS administered by three Singaporean banks: DBS, OCBC, and UOB. Foreigners (i.e. individuals who are not Singapore citizens nor Singapore permanent residents) can contribute up to 35% of their annual income with a cap of S$85,000 (i.e. maximum annual contribution of S$29,750). Non-foreigners participate in the compulsory Central Provident Fund (CPF), so they can contribute up to 15% with the same earnings cap.

Contributions must be made within each calendar year, so December 31 is the deadline (unlike U.S. IRAs which allow prior contributions up until April 15 of the next year). You can only have one SRS account with one of the three custodians.

Contributions to SRS accounts are free of Singapore income tax in the year they're made -- i.e. they come entirely from pre-tax income. If you later withdraw the funds in a qualified way (e.g. upon retirement starting at age 62) then you pay income tax on only 50% of the amount withdrawn (including the gains, if any). On the other hand, if you break the rules then you pay tax on the full amount plus a 5% penalty. Foreigners (who are still foreigners) can withdraw all their SRS funds in one lump sum at any age once they reach 10 years since account opening at the tax advantaged rate, but they cannot make any further SRS contributions. Foreigners are subject to withholding on their Singapore taxes when they withdraw, but excess withholdings (if any) are refundable.

SRS contributions can be invested in equities (stocks), unit trusts (mutual funds), bonds, certain life insurance products, ordinary time deposits (CDs), etc. However, most if not all brokerages in Singapore will not allow U.S. citizens to invest in U.S. securities (!), and investment expenses are somewhat higher in Singapore. Unit trusts are particularly awful in comparison to, say, Vanguard funds in the U.S.

OK, with that background out of the way, the basic question is whether it makes sense for a U.S. citizen to participate in an SRS account. As I understand it, the IRS would view an SRS account just like any other financial account with no U.S. tax advantages -- there's no tax treaty that says otherwise. Thus I think there are two basic scenarios:

1. If the U.S. citizen is fully (or nearly fully) shielded from U.S. income tax due to the foreign earned income and foreign housing exclusions, then SRS contributions often make sense. The U.S. citizen has little or no U.S. tax liability, and he/she can reduce his/her Singapore income taxes. Upon payout, the U.S. citizen will be subject to capital gains tax on any profits (less expenses, but no tax on the base) and will have a foreign tax to offset at least some of that U.S. capital gains tax. Dividends and interest along the way will be taxable, but one's investment choices (e.g. non-dividend paying stocks held long term) can mitigate that.

2. If the U.S. citizen cannot fully shield that income from U.S. taxes then things get more complicated. The SRS contributions reduce the average Singapore income tax rate paid, so there's some additional offsetting U.S. tax owed as SRS contributions are made. Here's how I think that would work using a crude "back of the envelope" example....

Suppose the U.S. citizen has total income of US$200,000 with a Singapore income tax rate of 15% and a U.S. income tax rate (after exclusions) of 30%. Let's suppose the U.S. citizen has combined foreign earned income and housing exclusions of US$100,000 (to keep the math simple). Suppose she makes a US$20,000 SRS contribution. Let's ignore personal exclusions, etc.

Her Singapore tax liability before SRS is US$30,000 (15% of $200K). After SRS her Singapore tax liability falls US$3,000 to US$27,000 (15% of $180K), and her new effective Singapore tax rate is 13.5% ($27K divided by $200K).

Now turn to U.S. taxes. She would pay a 30% rate on the non-excludable income (US$100,000), but she can subtract her average foreign tax rate on that income. Do that math and the U.S. claws back US$1,500 (half) of her Singapore tax savings. She's still ahead by US$1,500, though. Then, when she cashes out her SRS, it's still the same as case #1: capital gains tax owed to the U.S. less foreign taxes. (She may also be in a lower Singapore income tax bracket.)

Did I get that calculation right (more or less), or am I missing something?

There are a couple possible negatives to point out:

1. She'll have somewhat more complicated tax returns to file.

2. There's currency risk that could have some tax consequences.

Any other comments or observations? Thanks in advance.


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## BBCWatcher

I should add that foreign mutual funds, REITs, and money market funds probably wouldn't be good investments because of U.S. passive foreign investment companies (PFIC) tax complications.


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## BBCWatcher

Does anyone know if owning equities (stocks) of publicly traded foreign (non-U.S.) banks would run afoul of the IRS's PFIC rules?


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## robnw

BBCWatcher said:


> Does anyone know if owning equities (stocks) of publicly traded foreign (non-U.S.) banks would run afoul of the IRS's PFIC rules?


Will not. The broad solution we've chosen for investments for USCs is never to invest in funds, always invest in direct securities. 

and referring to above game plan:-

> 1. If the U.S. citizen is fully (or nearly fully) shielded from U.S. income tax due to the foreign earned income and foreign housing exclusions, then SRS contributions often make sense. 

A standard way used by cross border planners to analyse the above problem is to compute tax and charges during accumulation and depletion (to death) for the tactic of using the SRS, and not, and then fine tune to find the optimum premium. When computing this one assumes growth=inflation which won't be true but gives a comparison measure of (proportion of capital returned). 

Problems to consider before doing the above: 
(a) US tax on build up income and gains inside SRS 
(b) what basis will be if you are claiming foreign earned income and foreign housing exclusion on part of the income 
(c) which country's tax rates to use on the resulting income when you take - and whether that's taxed as income or gains, or has some special tax discount
(d) subsidiary concerns - estate taxes on SRS.. currency risk... whether you can transfer out of the SRS once non-Singapore resident... limitations on investments imposed by the SRS... comparion of using Roth IRA etc.

I guess planners would take about 5 hours to do the above analysis and report.


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## BBCWatcher

I think I've basically concluded that Singapore's SRS accounts represent too little reward for too much complexity for U.S. citizens.

I'm not so sure about direct equities always being safe from PFIC treatment. Singapore is chock full of stock listings that have "trust" or "holdings" in their names, and I strongly suspect many of them do not meet the 75% "real business" requirement to avoid PFIC treatment.

Bonds (not bond funds) look safe, though. It also looks like bank and insurance stocks are safe due to their exceptional status under PFIC rules. So that would include direct stock ownership in DBS, UOB, OCBC, Great Eastern, and UOI from what I can tell.


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## BBCWatcher

As a follow-up, OCBC, which is one of the three SRS operators in Singapore, recently introduced its Blue Chip Investment Plan (BCIP). Although BCIP trading fees are slightly higher than they would be when dealing with a broker, there's much less complexity when investing SRS funds. (And not all brokers handle SRS funds.) You don't have to bother opening a separate brokerage account and a separate CDP (depository) account. However, for some strange reason you need to have an ordinary OCBC savings or checking account -- having an SRS account alone doesn't work if you want to use the BCIP.

BCIP offers a very limited selection of investment choices, but it does offer the ability to purchase shares in any of the three major Singaporean banks. Those shouldn't run afoul of U.S. IRS PFIC rules. Again, I do not recommend SRS accounts for U.S. citizens. They're just too complex for too little benefit, in my view. However, OCBC with its BCIP is probably the simplest way to participate in SRS in a meaningful way. Read the fine print carefully, though, about SRS and BCIP. In particular, you need to be careful to turn off the automatic investments as soon as you hit the total amount you want to invest. Otherwise the account will apparently attempt to overdraw and charge a penalty fee.

You also need to maintain careful records in order to deal with U.S. tax issues. OCBC offers online banking, and once you get that set up it's pretty good. The BCIP information is integrated into OCBC's online banking, and you don't need a separate online account like you do for a brokerage.


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