Singapore Minister for Finance Tharman Shanmugaratnam on January 22 announced an extraordinary fiscal 2009 budget.1 For the first time, the government will tap its reserves to fund a SGD 20.5 billion (US US$13.7 billion) stimulus package, in response to a crisis.
"We are likely to experience the deepest recession in the Singapore economy since our independence, arising from the worst global economic decline in 60 years…. This is not a normal Budget. It is a not even a normal countercyclical Budget," Tharman said.2
Highlights of the fiscal 2009 budget include a reduction of Singapore's corporate income tax rate from 18 percent to 17 percent, to enable Singapore to stay competitive with archrival Hong Kong. The government also announced an enhanced tax incentive for fund management, with no restrictions on the residency status of fund vehicles or investors, to strengthen Singapore's position as a leading fund management hub in Asia. The budget includes other tax measures to improve business cash flow and competitiveness, such as a one-year tax holiday for the repatriation of all foreign-source income and a proposed simplification of the tax framework for corporate amalgamations.
Race to the Bottom: Part II
The government will reduce the corporate income tax rate by 1 percentage point, from 18 percent to 17 percent, effective from year of assessment 2010.3 That will bring Singapore's corporate income tax rate down to within a half percentage point of archrival Hong Kong's 16.5 percent corporate profits tax rate for the second time in three years. The tax cut underscores how serious the Singapore government is about staying competitive – it had to amend the Singapore Constitution to help pay for the tax cut in the middle of what likely will be Singapore's deepest recession since its independence in 1965. Under the new constitutional framework, the government has greater scope for drawing from investment returns on reserves for spending each year.4
As a result, Singapore's corporate tax regime will be very competitive. Companies will continue to enjoy a partial tax exemption scheme for income up to SGD 300,000,5 together with the new 17 percent corporate tax rate. That means that Singapore's effective corporate tax rates for small and medium-size enterprises will be lower than in any competing jurisdiction.6 In addition, Singapore offers attractive tax incentives and an extensive network of 60 comprehensive income tax treaties.
History, however, suggests that this neck-and-neck phase of the race to the bottom may be only temporary. Two years ago, Tharman announced in the fiscal 2007 budget a reduction of Singapore's corporate income tax rate from 20 percent to 18 percent, a half percentage point above Hong Kong's then 17.5 percent profits tax rate. Hong Kong promptly responded in kind, by reducing its corporate profits tax rate by 1 percentage point, to 16.5 percent, in its fiscal 2008 2009 budget. Therefore, if history were to repeat itself, Hong Kong may widen the tax gap again by reducing its corporate profits tax rate in the next leg of the race to the bottom. That, however, may not happen any time soon. According to a recent news report, a Hong Kong government source has said that people should not expect any profits tax reduction, as Hong Kong's level is one of the lowest in the world. With further global financial turmoil on the horizon, Hong Kong Financial Secretary John Tsang is expected to sail a tight fiscal ship in his fiscal 2009-2010 budget speech on February 25.7
The fund management business contracted globally over the past year. However, the government still views fund management as a long-term growth area, especially in Asia, where wealth will be on an upward trajectory over the next 15 to 20 years. Therefore, it intends to enhance the current tax incentive schemes for fund management, to reinforce Singapore's position as a leading fund management hub in Asia.
The government will introduce an enhanced-tier tax incentive for funds with a minimum fund size of SGD 50 million at the point of application that meet prescribed conditions. The enhanced tier will be open to fund vehicles in the form of companies, trusts, and limited partnerships. There will be no restrictions on the residency status of the fund vehicles or the investors. The enhanced tier will be effective from April 1, 2009, through March 31, 2014. However, funds that are in the scheme on or before March 31, 2014, will continue to enjoy the tax exemption after March 31, 2014, if they continue to meet the scheme's conditions.8 In addition, the government has simplified the rules for recovering input goods and services tax for the fund management industry9 and expanded the list of specified income and the list of designated investments, effective from January 22 (see "Other Financial Sector Tax Changes" below).
The enhanced tier will be significantly better than the current tax incentives.10 Under the current incentives, specified income derived by qualifying funds from designated investments is exempt from Singapore income tax. Qualifying funds can be in the form of companies, trusts, or individual accounts. When a qualifying fund is in the form of a company or a trust, the fund must not be 100 percent beneficially owned by resident investors. Resident nonindividual investors of a qualifying fund are subject to a 30 percent or 50 percent investment limit, depending on the number of investors in the fund. If that limit is breached, the resident nonindividual investors would have to pay a financial penalty. Therefore, the current tax incentives inadvertently discourage resident companies from having their funds managed from Singapore because of the limits placed on their holdings in the funds. When the fund vehicle is a limited partnership, the incentive conditions are applied to each partner to determine whether the partner qualifies for a tax incentive.
The enhanced tier will be an improvement over the current tax incentives because it will apply to funds that are constituted in the form of limited partnerships, in addition to funds that are in the form of companies, trusts, or individual accounts; in other words, there will no longer be any need to look through to the partners' level to apply the incentive conditions. Moreover, the 30 percent or 50 percent investment limit on resident nonindividual investors will be lifted for funds that come under the enhanced tier. That will allow resident companies to enjoy the full benefits of tax exemption for qualifying income derived by funds, without any worries about being subject to financial penalties.
Singapore's enhanced-tier tax incentive also will be significantly better than Hong Kong's profits tax exemption for offshore funds. Singapore's enhanced tier will exempt both onshore and offshore funds from income tax, whereas Hong Kong's profits tax exemption is available only to offshore funds. Moreover, Singapore's enhanced tier will not impose any restrictions on the residency status of the investors, whereas Hong Kong's tax laws include deeming provisions to prevent abuse or round-tripping by Hong Kong resident persons disguising themselves as nonresident persons to take advantage of the profits tax exemption. A Hong Kong resident person who is subject to those provisions would be deemed to have derived assessable profits calculated under the prescribed formula, taking into account the percentage of the resident person's beneficial interest in the offshore fund and the length of ownership within there levant year of assessment.11
Singapore's announcement of the enhanced tier increases the pressure on the Hong Kong government to introduce a similar tax exemption for onshore funds. Historically, the Hong Kong government has rejected calls from the fund management industry to expand the scope of its profits tax exemption for offshore funds to also cover onshore funds. Its position has been that a Hong Kong-based fund with its directors and principal officers exercising central management and control of the fund in Hong Kong is no different from a normal resident company, which is not the intended beneficiary of the exemption for offshore funds. Widening the scope of exemption might lead to abuse and open up the exemption to all local funds.12 Moreover, when the Hong Kong government decided the scope of its profits tax exemption, it was not aware of any major financial center that offered a tax exemption to its onshore funds.13 However, it may need to reconsider its position because the situation clearly has changed.
Singapore still lags behind Hong Kong in terms of the total amount of assets under management. According to the latest official statistics available, in 2007, Singapore had SGD 1,173 billion (US US$0.8 trillion) of assets under management,14 as compared with Hong Kong's HKD 9,631 billion (US US$1.2 trillion) of assets under management.15 (The 2008 figures are expected to be lower for both jurisdictions because of the global financial crisis.) However, it is conceivable that Singapore could one day overtake Hong Kong because of Singapore's increasingly attractive tax incentives and its user-friendly regulatory framework for fund management.
Other Financial Sector Tax Changes
The government expanded the list of specified income and the list of designated investments for the foreign trust scheme, the fund management incentives, the approved trustee company scheme, the financial sector incentive standard-tier scheme, and the financial sector incentive fund management scheme. Designated investments now also include investments in structured products, units in business trusts, qualifying Islamic investments involving the Murabaha, Mudaraba, Ijara wa Igtina, Musharaka, Istisna, and Salam concepts, emissions derivatives, stocks and shares of unlisted companies (whether resident in Singapore or nonresident) denominated in any currency, and adjudicated and nonadjudicated liquidation claims.16 The enhancements to the lists are effective from January 22.
The government also will enhance the Financial Sector Incentive-Headquarters Services scheme and the Commodity Derivatives Traders scheme.17
Easing Cash Flow
Foreign-source income exemption
The government announced a one-year tax holiday for the repatriation of all foreign-source income to Singapore, to ease business cash flow during the credit crunch. Resident nonindividuals and resident partners of partnerships in Singapore will be exempt from tax on remittances to Singapore of all their foreign-source income earned or accrued outside Singapore on or before January 21, 2009, if the remittances are made during the period from January 22, 2009, through January 21, 2010. The government also will temporarily lift the conditions that currently are required for foreign-source income to be exempt from tax when remitted to Singapore. The Inland Revenue Authority of Singapore (IRAS) will issue further details by April.18 Businesses may wish to take advantage of the temporary tax holiday to repatriate their foreign-source income to Singapore tax free.
Before the temporary tax holiday, resident nonindividuals and resident partners of partnerships in Singapore generally were taxed when they remitted their foreign-source income back to Singapore, under Singapore's semiterritorial tax system.19 There were some exceptions that allowed tax-free remittances of foreign-source dividends, branch profits, and income from professional consultancy and other services, subject to prescribed conditions and under specified scenarios.20 However, the "Swiss cheese" approach to tax exemption was complicated and increased compliance costs. Moreover, many types of income, such as interest and royalty income, generally did not qualify for tax exemption. That put some Singapore resident companies at a disadvantage vis-à-vis companies based in Hong Kong because Hong Kong has a pure territorial tax system that taxes only domestic-source profits.21
The temporary tax holiday for repatriated foreign-source income is a welcome relief for cash strapped Singapore businesses. Businesses would be even happier if the government would permanently convert Singapore's tax system from a semiterritorial system to a pure territorial system like Hong Kong's.
The government will enhance the loss carryback relief system for years of assessment 2009 and 2010 to allow businesses to receive a cash refund on taxes that they paid in previous years.
The government will raise the cap on losses that can be claimed against past taxable income from SGD 100,000 to SGD 200,000. It also will allow businesses to claim losses against their preceding three years of taxable income, instead of just the immediately preceding year under the current scheme. In addition, the IRAS will allow provisional claims for the tax refund to be based on estimated losses, instead of waiting for the finalization of their chargeable income and tax assessments.22
Other tax measures to ease business cash flow include property tax rebates and deferrals, and rebates and concessions on transport-related taxes and fees.23
The government will simplify the tax framework for qualifying corporate amalgamations because downturns typically provide opportunities for companies to merge, acquire, or restructure. To qualify, the amalgamated company must take over all the assets and liabilities of the amalgamating companies, the amalgamating companies must cease to exist, and other prescribed conditions must be met. The new tax scheme will significantly lower the tax burden on corporate amalgamations. The IRAS will release details of the new tax framework for public consultation in February.24
It would be helpful if the government would consider adopting US-style provisions for all types of tax-free reorganizations,25 not just amalgamations. It also would be helpful if the government would allow tax-free dropdowns of assets, by exempting contributions in kind to a company controlled by the transferor.26 That would greatly facilitate business restructuring to improve efficiency.
Other Tax Changes
Jobs credits will automatically be granted to eligible employers, to encourage businesses to preserve jobs in the downturn.
Businesses that incur qualifying renovation and refurbishment expenses in the basis periods for years of assessment 2010 and 2011 can deduct those expenses in one year instead of over three years, subject to the cap of SGD 150,000 for each relevant three-year period.
Companies limited by guarantee may qualify for the tax exemption scheme for new start-up companies, effective from year of assessment 2010.
Accelerated capital allowances will be provided for plant and machinery acquired in the basis periods for years of assessment 2010 and 2011. Those investments can be written down over two years, with 75 percent of the write-down in the first year and 25 percent in the second year.
The period for writing down allowances under Income Tax Act section 19B will be reduced from five years to two years for the acquisition cost of intellectual property rights for media and digital entertainment content incurred by an approved company or partnership, subject to conditions.
Under the block transfer scheme, a withholding tax exemption can be granted for interest payable on a loan taken by a shipping enterprise from a lender outside Singapore to acquire a Singapore-flagged ship. The exemption is for ships registered with the Singapore Registry of Ships on any date from January 1, 2009, through December 31, 2013.
The tax deduction for collective impairment provisions made by banks, merchant banks, or finance companies under Monetary Authority of Singapore (MAS) notices 612, 811, and 1005 will be extended for a further three years, subject to conditions.
The government will increase the tax deduction for donations made in 2009 to institutions of a public character and other approved recipients (such as approved museums and prescribed schools) from 2 to 2 1/2 times.27
The GST treatment of aircraft and aircraft-related supplies will be enhanced from April 1, 2009. GST will be suspended on goods temporarily removed from zero GST or licensed warehouses for auctions and exhibitions from April 1, 2009.
Other tax changes include a one-off income tax rebate of 20 percent for resident individual taxpayers, up to a cap of SGD 2,000, for the tax payable for the year of assessment 2009.
This article first appeared in the February 9, 2009 issue of Tax and is reprinted here with permission from Tax Analysts.