Legal and Regulatory Framework
Tax Incentives
Corporate Income Tax
Annual Returns and Accounts
Deductions and Allowances
Treatment of Losses
Withholding Tax
Tax Changes for the Financial Sector
Tax Incentives for Specific Industries
Share Buybacks
Asset Securitization
Conclusion
Legal and Regulatory Framework
Income tax
Singapore's Income Tax Act (ITA) was enacted in 1948 and is based on the Model Colonial Territories Income Tax Ordinance of 1922, which was drawn up for the then British colonies. Consequently, there are similarities between the income tax statutes of Singapore, Malaysia, South Africa, Australia and New Zealand. To this day, decisions of the courts of these other jurisdictions interpreting similarly worded legislation continue to provide useful guidance for the interpretation of the ITA.
Another act relevant to income tax in Singapore is the Economic Expansion Incentives (Relief from Income Tax) Act (EEIA). This act offers companies tax incentives to encourage the development of specific sectors of Singapore's economy. There is extensive subsidiary legislation that has been enacted pursuant to the ITA and the EEIA which implement the schemes and arrangements authorized by these two acts.
Another important feature of Singapore income tax law is the double tax agreements entered into with various countries. Singapore has signed full double tax agreements with 38 countries and has signed restricted double tax agreements with another five countries. While most of these agreements are based on the Organization for Economic Cooperation and Development model agreement, some appear to be based on the United Nations model convention.
Since 1993 the Inland Revenue Authority of Singapore has issued interpretation and practice notes on certain tax provisions. These do not have the effect of law but provide useful guidance in interpreting the law. It is also possible to obtain a ruling from the authority on the interpretation of the provisions of the ITA and the tax effects of certain transactions.
Stamp duty
All stamp duty was abolished with effect from February 28 1998 except for stamp duty on documents relating to shares and immovable property. Stamp duty on contract notes on share transactions was reduced to 0.05%, suspended until June 29 2000 and finally abolished with effect from June 30 2000.
With the 2000 budget speech, the scope of Section 15 of the Stamp Duties Act (which provides for stamp duty relief for corporate restructuring and merger) was expanded. Before the 2000 budget, to qualify for stamp duty relief on the transfer of assets between associated companies, the transfer must not involve less than 90% of the company's shares and the consideration may not be made in cash. These two requirements have now been lifted. The two-year moratorium on changes in beneficial ownership of shares in publicly-listed companies, and companies that intend to list their shares after restructuring or merger, has also been lifted so that stamp duty relief is more easily applicable.
Goods and services tax
A goods and services tax was introduced in April 1994 with the enactment of the Goods and Services Tax Act. A 3% tax is levied whenever a registered business supplies goods or services in the course of its business.
Tax incentives are often used in Singapore as a means of encouraging the development of particular industries. Singapore's tax incentives generally concern corporate income tax rates rather than individual taxes. Most of the incentives are provided under the EEIA, with some special concessions available under the ITA. Double tax treaties also provide tax relief that may benefit certain economic sectors.
Finally, pioneer, pioneer service, post-pioneer, and development and expansion incentives are perhaps the most important contributors to the development of particular economic sectors in Singapore. These incentives are provided for by the EEIA.
Pioneer status incentives
The first provisions granting pioneer benefits were introduced in 1959. Pioneer status is awarded to companies in order to encourage the manufacture of certain products or the development of certain services. Most companies that have been given pioneer status manufacture high technology products or provide engineering, medical or financial services. Companies that are awarded pioneer status are exempt from income tax for a period of five to 10 years.
In April 1996 the post-pioneer incentive was introduced to provide continued relief for companies awarded pioneer status. Companies with post-pioneer status enjoyed a concessionary tax rate of not less than 10% for up to 10 years following the tax-exempt period provided by the pioneer incentive scheme.
Development and expansion incentive
The development and expansion incentive was introduced in 1997 to replace the post-pioneer incentive. Any company that is engaged in a qualifying activity may apply for the benefits of this incentive scheme (ie, they need not have pioneer status). The tax relief is a concessionary tax rate of not less than 10% on 'expansion income' - the income derived from qualifying activities which exceeds the taxpayer's average corresponding income (ie, the average yearly income from qualifying activities over the three preceding years).
Other government measures
The Singapore government set up the Committee on Singapore's Competitiveness in May 1997 to examine Singapore's prospective economic competitiveness over the next 10 years. With the onset of the regional economic crisis in July 1997, the scope of the committee was expanded to include proposals to help the Singapore economy cope with the crisis.
In his 1998 budget speech the minister of finance specifically mentioned a number of measures to be taken to ensure the competitiveness of the Singapore economy, including the recommendations of the committee and other off-budget measures as may be needed. In June 1998 a S$2.5 billion package of off-budget measures was announced. The objectives of these measures were to reduce business costs, to build economic infrastructure and capabilities, and to help stabilize specific sectors of the economy.
Furthermore, a committee report completed in October 1998 included short-term measures to deal specifically with the economic crisis, and long-term recommendations to ensure Singapore's competitiveness in the Asia-Pacific region. In response to the report, the government announced a S$10.5 billion cost-cutting package in November, providing mainly short-term measures to reduce business costs in order to help companies survive and to preserve jobs.
As a further incentive to encourage technopreneurship, the minister of finance stated in his 2000 budget that a scheme that enhances the tax treatment of employee stock options for high tech start-ups would be announced by the end of May 2000. On May 222000 the minister announced the Entrepreneurial Employee Stock Option Scheme.
Under the scheme, an employee of a company can enjoy tax exemption of 50% of up to S$10 million of stock option gains arising over a period of 10 years, if certain criteria are met. The scheme will apply to all stock options granted on and after June 1 2000 by a qualifying company under an Entrepreneurial Employee Stock Option Plan to a qualifying employee to acquire ordinary shares of the qualifying company. A qualifying company is any Singapore-incorporated company that grants stock options to its own employees and, at the time of the grant of options, it must carry out business activities in Singapore. The aggregate market value of its gross assets must not exceed S$100 million. A qualifying employee is one who is granted stock options by a company or its parent company under an Entrepreneurial Employee Stock Option Plan and at the time of the grant of options, he or she is employed by the company. The employee must have working week of at least 30 hours, and he or she must not have effective control of the company.
Sources of income
In Singapore, tax is imposed only on income; there is no tax on capital gains. However, there is no definition of 'income' in the ITA and consequently, in certain ITA cases involving the sale of properties, the dividing line between income and capital gains may be difficult to discern.
Section 10(1) of the ITA lists the various types of corporate income subject to tax, including:
- gains or profits from any trade, business, profession or vocation;
- dividends, interests or discounts;
- charge or annuity;
- rents, royalties, premiums and any other profits arising from property; and
- gains or profits of an income nature not falling within the defined sections of the ITA.
Locality considerations
Singapore imposes tax on a territorial basis for both resident and non-resident companies. Only income accruing in or derived from Singapore is subject to tax. Foreign-sourced income is not taxable in Singapore unless it is received in Singapore.
A company is 'resident' in Singapore if control and management of the company is exercised in Singapore. Control of a company lies with the governing body vested with superior directing authority (ie, authority to decide whether the company carries on business, the nature of the company's business and the company's policies). Companies that are not resident in Singapore are subject to the following tax treatment:
- they are not subject to the dividend franking requirements of Section 44 of the ITA;
- they may not benefit from Singapore's double taxation agreements; and
- they may not claim unilateral tax credits in relation to income derived from countries with which Singapore does not have a tax treaty.
Tax rate
The rate of corporate income tax for the year of assessment 2000 is 26% - the same as for the three previous years. The rate will be reduced to 25.5% in the year of assessment 2001. This is to ensure that tax competitiveness is maintained in light of the lowering of corporate taxes in many developed countries in the recent years.
All companies are required to file an annual tax return with the Inland Revenue Authority, together with (i) a copy of the audited accounts of the company which have been certified by an auditor and signed by the directors, and (ii) a statement of any dividends paid.
The comptroller has wide powers including the authority to do the following:
- gain access to books of accounts (Sections 63 to 70 of the ITA);
- direct the taxpayer to make available all books of accounts and other related documents for inspection (Section 65 of the ITA);
- gain access to particulars of bank accounts, and assets and liabilities (Section 65A of the ITA); and
- direct a company to keep proper accounting records (Section 67 of the ITA)
Section 67(1)(a) requires that the books of accounts be sufficient to enable income and
allowable deductions under the act to be readily ascertained.
Expenses incurred in the production of income are deductible from taxable income. Expenses incurred in the production of capital gains are not. Capital allowances in respect of depreciation of certain fixed assets (ie, industrial buildings, plant and machinery) are also deductible from taxable income. Companies may elect to accelerate allowances over a three-year period. In addition, a 100% write-off is available for computers and prescribed automation equipment.
Losses may be carried forward indefinitely but they must be revenue (as opposed to capital) losses. In addition, there must generally be continuity of ownership of the company (ie, the same shareholders must own at least 50% of the paid-up capital on the first day of the year or basis period in which the loss occurred, and the first day of the assessment year in which the loss is claimed). An exception to this rule is that if the minister of finance is satisfied that a substantial change in ownership was not for the purpose of deriving a tax benefit, he may exempt a company from the continuity of ownership requirement. Losses may then be carried forward and deducted from future taxable income derived from the same trade or business.
Certain payments including interests, royalties and technical assistance fees are subject to withholding tax if they are made to non-resident persons. The tax rate for interest and royalty payments is 15%. Fees for personal services are generally subject to withholding tax of 26%. However, services that are wholly performed outside Singapore may qualify for an administrative exemption. Exemptions or reduced rates of withholding are also available under the ITA and the EEIA for payments that are considered to be for the economic or technological benefit of Singapore. These exemptions and concessions are granted on a case-by-case basis.
Tax Changes for the Financial Sector
The Sub-Committee on Finance and Banking, formed under the auspices of the Committee on Singapore Competitiveness, completed a report (the banking report) in January 1998 setting out certain tax benefits specifically designed to stimulate the financial sector. Four of these initiatives deserve special mention, including those relating to:
- fund management;
- the bond market;
- syndicated offshore credit and underwriting facilities; and
- general provisions.
Fund management
Singapore's commitment to the development of fund management began in 1983 with the implementation of a tax exemption for gains earned from funds managed on behalf of non-resident investors and managed by fund managers with Asian Currency Unit (ACU) licences. (The fund managers' fees were also taxed at a concessionary rate of 10%.) In 1986 the scope of this incentive was expanded to include all fund managers approved by the Monetary Authority of Singapore (MAS).
Under the ACU scheme, ACUs are taxed at a concessionary rate of 10% on income from transactions in certain specified derivatives, including interest rate and currency swaps in non-Singapore dollars, with offshore counterparties and other ACUs. In the 2000 budget the minister of finance extended this 10% tax to income derived by ACUs from all other offshore derivative transactions in non-Singapore dollars. This extension will take effect from year of assessment 2001 and apply for five years.
The exemption of withholding tax on interest rate and currency swap payments made by ACUs to non-residents in place since 1989 has been extended by the 2000 budget and takes immediate effect. It now includes all bona fide interest rate and currency swap payments made by financial institutions (including ACUs).
Before 1995 the fund managers' fees were taxed at a concessionary rate of 10%. In 1995 the tax concession was amended to allow approved fund managers managing at least S$5 billion worth of non-resident funds to enjoy a 5% concessionary rate of tax on the incremental income. In 1997 a tax exemption was granted to fund managers managing at least S$10 billion in non-resident funds. Finally, in 1998, the exemption was expanded to include those managing at least S$5 billion of non-resident funds. The exemption period may be up to 10 years if these fund managers "made strong commitments to further the level of their fund management activities in Singapore". Fund managers managing less than S$5 billion of non-resident funds may be exempted from tax for up to five years if they have increased their fund management activities in Singapore substantially.
The MAS was given the discretion to negotiate these conditions with individual fund managers on a case-by-case basis from year of assessment 1999.
In addition, boutique fund managers were also given some incentives in 1999. ('Boutique fund managers' is defined as primarily indigenous fund management companies set up and run by professionals with considerable expertise in the industry.) The minister of finance announced in the 1999 budget speech that income derived by foreign investors from funds managed by qualifying boutique fund managers would be exempt from tax for five years from February 27 1999. This exemption has the effect of bringing the tax treatment of offshore investors whose funds are managed by boutique fund managers in line with those whose funds are managed by approved fund managers.
Bond market
The banking report commented on the underdeveloped status of the Singapore bond market and suggested that government-linked companies and the statutory board take the lead in borrowing from the debt market. The government accepted this recommendation and, in his 1998 budget speech, the minister of finance announced a package of new incentives to promote an active bond market. These include:
- tax exemption on fee income earned by financial institutions in Singapore from arranging debt securities in Singapore, including the underwriting and distribution of such securities;
- a 10% concessionary rate of tax on interest income earned by financial institutions and corporations in Singapore from debt securities arranged by financial institutions in Singapore;
- automatic withholding tax exemption on interest from debt securities arranged by financial institutions in Singapore and earned by non-residents who do not have a permanent establishment in Singapore (the 1999 budget speech has since extended this exemption to non-residents with permanent establishments in Singapore, provided that such non-residents do not purchase the securities with funds from their Singapore operations); and
- a 10% concessionary rate of tax on income earned by financial institutions in Singapore from trading in debt securities. This concession has been extended to income derived by financial institutions from trading in interest rate and currency swaps with effect from year of assessment 2001.
These new tax rates/exemptions will apply to debt securities issued within five years beginning February 28 1998 and ending February 27 2003.
As there was some ambiguity as to what constituted 'qualifying debt securities', the minister of finance introduced an approved bond intermediary scheme in his 1999 budget speech. Under this scheme, the MAS evaluates a financial institution's debt origination and trading capabilities in Singapore on an overall basis, and awards approved bond intermediary status accordingly. Any debt securities managed by such an institution are automatically treated as qualifying debt securities, eliminating the requirement of "substantial arrangement in Singapore".
In addition, to encourage the development of deeper and more liquid bond markets, the MAS has amended its regulations pertaining to financial guaranty insurance contracts (which insure the payment of the principal and interest to investors). Claim payments made under financial guaranty insurance policies by approved financial guaranty insurers to non-residents will be exempt from withholding tax. This took effect from the date of the 2000 budget speech.
Syndicated offshore credit and underwriting facilities
The Income Tax (Income from Syndicated Offshore Credit and Underwriting Facilities) Regulations contain a tax incentive scheme to encourage offshore loan syndication in Singapore. Under this scheme, income derived by financial institutions and approved securities companies from offshore syndication activities is tax exempt. The duration of the scheme was extended by the minister of finance for five years from April 1 1998. The scope of the scheme has also been expanded to cover credit and debt facilities syndicated by financial institutions in Singapore for Singapore borrowers, provided the funds were used outside Singapore.
The MAS's previous practice was to approve the tax exemption for each syndicated facility on a case-by-case basis. In order to give arrangers certainty as to whether a facility qualifies for tax exemption, the minister of finance in 1999 announced the introduction of an automated procedure. As a result, facilities satisfying certain defined criteria are automatically granted tax exemption. This new procedure took effect from February 27 1999.
General provisions
Banks and merchant banks were previously allowed to claim an annual tax deduction on general provisions of up to 25% of qualifying profits or 0.5% of qualifying loans and investments, whichever was lower (subject to an overall cumulative limit on qualifying loans and investments of 3%). In the 1998 budget these limits were suspended for two years with effect from the year of assessment 1998, in order to give banks greater flexibility to make as many general provisions as they deem prudent, irrespective of how much profit they make.
In June 1998, as part of the government's off-budget measures, the 3% cumulative limit was lifted for the 1999 year of assessment, subject to the approval of the MAS. General provisions exceeding the 3% mark will be taxed when they appear on a bank's profit and loss account. If general provisions still exceed the 3% level at the end of five years, provisions in excess of the 3% level will be taxed.
Since the 1997 year of assessment, finance companies have been allowed to make deductions for general provisions. The deduction for doubtful debts was the lower of 25% of qualifying profits or 0.5% of the prescribed value of loans and investments (subject to an overall cumulative cap of 2% of the value of the qualifying loans and investments). In the 1999 budget speech, the finance minister announced that for the years of assessment 1999 and 2000, the annual limits of 25% and 0.5% will be temporarily suspended and the 2% overall cap will be increased to 3%.
Trustee services have been zero-rated for GST purposes in cases where at least 80% of the settlors and beneficiaries are non-resident, and at least 80% of the assets of the trust were originally contributed by settlors who are non-resident.
Tax Incentives for Specific Industries
Cyber trade
The cyber trader scheme was announced in the 1998 budget and provides approved companies with a concessionary tax rate of 10% on offshore trading income derived from transactions made over the Internet. These companies also enjoy an investment allowance of up to 50% of the cost of qualifying new fixed investments and full or partial exemption of withholding tax on qualifying payments.
This scheme is administered by the Economic Development Board and will be available for five years from the year of assessment 1999.
Shipping and transport
In order to add to the number of ship owners in Singapore, a shipping enterprise scheme was introduced with effect from the year of assessment 1992. Under this scheme, the income of an approved shipping company's non-Singapore flag ship's activities outside Singapore is granted tax exemption. Qualifying dividends from its approved subsidiaries and associated shipping companies are also granted the tax exemption. Income derived by the company from the uplift of freight in Singapore by its non-Singapore flag ships is subject to the normal corporate tax.
The Singapore Trade Development Board administers this scheme and grants initial periods of exemption for 10 years, but tax-exempt status may be extended.
In his 1999 budget speech, the minister of finance announced that the benefits of this scheme will be extended to cover income derived from the operation of floating production storage offloading vessels and floating storage offloading vessels. This will be done in order to complement Singapore's role as the world's third largest oil refinery and trading centre. Companies intending to apply for the incentive must have substantial operations and a team of professional experts in Singapore. The incentive will be granted for 10 years and will take effect from the year of assessment 2000.
Certain ship agencies, ship management companies and logistics providers were also granted a concessionary tax rate of not less than 10% on their incremental income from the year of assessment 1999 for a period of five years.
Venture capital
Approved venture capital companies enjoy a 10-year period for tax exemption on gains from the disposal of investments and on certain investment spacing income. This period can be extended on a case-by-case basis for a further five years, but is limited to a concessionary tax rate of not more than 10%.
Fund management companies managing these funds are also usually granted the pioneer service incentive. Under this incentive scheme, these companies enjoy tax relief of up to 10 years in respect of management fees and performance bonuses received from an approved venture capital fund.
The minister of finance announced in the 1998 budget that after the 10th year, these companies will enjoy a concessionary tax rate of not less than 10% (granted under the development and expansion incentive) with effect from February 27 1998.
Global operational headquarters
An operational headquarters scheme was introduced in 1986 to attract multinational companies to Singapore. Under this scheme, income from an approved operational headquarter's activities was taxed at a concessionary rate of 10%. To further encourage the presence of operational headquarters in Singapore, with effect from the year of assessment 2000, those that perform at least one substantive global function in Singapore will be granted tax exemption for a maximum period of 10 years.
New company legislation was passed in 1998 to enable both listed and unlisted companies to purchase their own shares by using distributable profits. For income tax purposes, a company purchasing its own shares will be treated as if it is making a payment of dividends to its shareholders. The franking mechanism provided in Section 44 of the ITA will therefore apply to such transactions.
The tax treatment of the monies received by the shareholders as a result of these buy-backs will depend on whether the buy-backs are off-market purchases or market purchases. In the case of off-market purchases, monies received are treated as dividends. Shareholders will thus be taxed on the amount received grossed up by a factor of 1.35%. A tax credit for tax deducted at source is given as in the case of a regular distribution of dividends to shareholders.
Proceeds received by shareholders selling their shares back to a company through the stock market are treated differently. Since these shareholders will be unaware of the fact that they are selling their shares back to the company, the sale of these shares will be treated like any other sale of shares. Whether or not these proceeds are taxable will depend on whether the proceeds are of an income or capital nature.
In May 1999 the Stock Exchange of Singapore issued a press statement indicating that companies listed on the exchange would be able to buy back their shares through special trading counters. Shareholders who sell their shares over a special trading counter will be treated as receiving a net dividend. The payment received will be grossed up and these shareholders will be taxed on the receipt of the grossed up dividend. However, a tax credit for tax deducted at source will be allowed.
Subsequently, in February 2000, another press statement was issued by Inland Revenue Authority, stating that the amount received from such share buybacks will be treated as a receipt of dividends only if the shareholders have held the shares for a period of at least 183 days prior to the sale. Any tax credits associated with these dividends, which is in excess of the tax payable by the shareholders concerned, shall be disregarded and no deduction of the cost of the shares which are sold back through the special trading counter shall be allowed to the shareholders.
Asset securitization as an alternative mode of financing is still in its nascent growth stages in Singapore. As such, many of the tax issues associated with a securitization transaction have yet to be ironed out. Tax legislation has not been specifically amended to deal with the issues brought up in a securitization transaction and the local tax authorities have yet to come up with a comprehensive practice note dealing with the multiple tax issues that surface in a securitization arrangement. Briefly, these issues include:
- whether payments made by a special purpose vehicle are deductible if it is liable to tax in Singapore;
- whether there is withholding tax on payments made from Singapore;
- whether goods and services tax will be levied on the transfer of receivables from the originator to the vehicle and on other miscellaneous fees paid out by the vehicle;
- whether the provision of administrative services to an offshore special purpose vehicle will be treated as an exempt service under the Goods and Services Tax Act; and
- how certain provisions in Singapore's tax treaties will be interpreted in relation to certain payments made under a securitization transaction.
In the last two years, Singapore has implemented a wide variety of tax measures focusing both on short-term measures to reduce business costs to off-set the effects of the current regional economic difficulties, and other measures to offer substantial incentives to industries identified as potential contributors to Singapore's long-term development.
For further information on this topic please contact Lian-Ee Teoh or Christina Ng at Drew & Napier by telephone (+65 531 2248) or by fax (+65 535 4864) or by e-mail ([email protected] or [email protected]). The Drew & Napier web site can be accessed at www.drewnapier.com .
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