Singapore: A General Outlook Of The Tax Incentives In Singapore

Tax incentives in Singapore have metamorphosed over the last five decades, reflecting the changing economic climate of the country. The evolution of the type and form of tax incentives mirrored the different economic imperatives and political philosophies.

In the 1960s, the focus was on the promotion of investments in new industries with the emphasis laid at the door of the manufacturing sector. It was hoped that any consequential expansion would lead to increased employment and a larger export market for Singapore. Enlarging the export market became especially crucial after the failed merger with Malaysia. The incentives introduced then were also expected to play the role of attracting investors from developed countries who could enhance the development of skills and technology in Singapore besides contributing capital investments. Flowing from these multifaceted objectives, tax incentives were granted in the areas relating to pioneer industries, expansion of established enterprises, export production, procurement of foreign loans for production of equipment, royalties, fees and development contributions.

In contrast, in the late 1970s, the Singapore government shifted the priority to promoting international trading, expansion of the services sector and development of consultancy skills. The government aimed at encouraging the growth of high value-added industries, a move away from the more traditional manufacturing industries. Tax incentives were accordingly introduced in the sectors of international trade, warehousing and services, international consultancy and included an investment allowance scheme for companies investing in manufacturing projects or the provision of specialised engineering or technical services.

Moving on to the mid-1980s, the promotion of high quality technical service companies and investment in new technology companies became the flavour of the month in recognition of the new direction in which the economic development should be moving. This revealed a consciousness and tacit acknowledgment of the dual constraints on the economical evolution of Singapore namely the limited natural resources and the small population. Moving up the ladder of sophistication in the products and services to be offered became the path in which Singapore must move. Hence, we saw the birth of tax incentives for pioneer services companies, expanding services companies and investments in new technology companies.

There was little change in the move towards diversification and technological advancement in the late 1980s. The government sought to extend the incentives for the pioneer industries, pioneer services sector and the export sector. The diversification into the services sector is due in no small part to the slow-down in international merchandise trade and increased protectionist pressures in the export markers. There was also emphasis on promoting the export of qualifying services and investments in venture companies, technology companies and overseas investment companies. Accordingly, tax incentives were extended to post-pioneer companies and the export of services. Venture capital incentive was introduced to encourage local companies to invest in other companies involved in the area of new technology. This incentive was also available to locally incorporated companies which invest in overseas investment companies carrying out projects which are likely to be beneficial to Singapore.

In the 1990s, the progress of the previous initiatives gathered momentum and more efforts were made to promote investments in overseas companies or qualifying activities that would promote or enhance the technological development here. There was also a continual focus on promoting the manufacturing of products beneficial to Singapore’s economy and the capital investment in the provision of satellites for business purposes. These targets or goals were translated into tax exemption for income earned by local companies arising from investments made in overseas companies or qualifying activities which would benefit Singapore. The provision of investment allowance was also extended to provision of satellite services.

The tax incentives are currently contained mainly in two statutory codes of Singapore; the Economic Expansion Incentives (Relief from Income Tax) Act, Chapter 86 ("EEIA") and the Income Tax Act, chapter 134 ("ITA").

• EEIA

The EEIA was promulgated in 1967 to answer the need to provide the necessary impetus for economic growth and development. Throughout the years since its birth, the EEIA has gone through several transformations and additions. Presently, the incentives provided for in the EEIA are incentives in relation to:

• pioneer industries

• pioneer service companies

• post-pioneer companies

• expansion of established enterprises

• production for export

• export of services

• international trade

• foreign loans for productive equipment

• royalties, fees and development contributions

• investment allowances

• warehousing & servicing industries

• international consultancy services

• investments in new technology companies

• overseas investment and venture capital incentive

• overseas enterprises

The list above illustrates the expansion of the tax incentive schemes in Singapore, capturing the movement away from manufacturing and industrial activities towards the provision of higher value-added services and development of technology in Singapore. One of the incentives which we will highlight here will hopefully throw some light on the general nature of these incentives.

Companies and businesses (sole-proprietorship or partnership) eligible for this incentive would be those engaged in the provision of technical and consultancy services overseas. The incentive will be given in respect of approved overseas projects, and the types of consultancy services to be provided in relation to such projects should be in the nature of:

• advisory services on technical, construction or engineering matters;

• design and engineering;

• fabrication of machinery and equipment;

• procurement of materials and equipment;

• management and supervision of the installation or construction of any project;

• data processing, programming and other computer services.

As a prerequisite to qualify for this incentive, the gross income from such consultancy services should exceed or is expected to exceed $1 million per annum. Applications for such incentives should be made to the Economic Development Board of Singapore ("EDB"). Successful applicants will enjoy tax exemption on one-half of the income which qualifies for the incentive for a period of five years.

Where during the tax relief period such companies or businesses carry on a trade or business which is separate and distinct from the consultancy services, separate accounts must be maintained and the resulting income separately assessed. Generally, in computing the income arising from the consultancy services of such companies or businesses, deduction of capital allowances is mandatory. Unabsorbed capital allowances and losses incurred prior to the tax relief period should be taken into account (subject to the relevant provisions of the ITA). Unabsorbed capital allowances and losses incurred in respect of any distinct trade should be set-off against the profits of that distinct trade and the balance should be brought into the computation of the income from the consultancy services. As regards the unabsorbed capital allowances and losses arising from the consultancy services, these shall, during the tax relief period, be deducted against the income derived from the consultancy services only. Any unabsorbed capital allowances and losses at the end of the tax relief period shall be available for deduction in the post tax relief period, subject to the provisions of the ITA.

Dividends declared from the exempt profits of the pioneer trade are also tax exempt in the hand of the shareholders, except for dividends declared on any preferential shares. Where the recipient shareholder is a company, which owns at least 50% of the shares, the benefit of the exemption may be passed on to the shareholders of that holding company.

• ITA

Quite apart from the EEIA, the ITA itself is a treasure-trove of tax incentives catered to boost the economy of Singapore in the right direction. Certain provisions of the ITA provide for tax exemption or impose a preferential tax rate on certain types of income, whilst others provide for increased deductions and allowances. An incentive which has succeeded in establishing Singapore as a service centre is the Headquarters incentive granted by the EDB.

This incentive was introduced in 1986 to encourage foreign companies to set up regional operational headquarters in Singapore. It was hoped through the administrative, technical, management and treasury services which the OHQs would provide to its subsidiaries, new businesses would be generated in Singapore. Section 43E of the ITA encapsulates this incentive and provides that the income of these OHQs would be taxed at a concessionary rate or be exempt from tax for a period of ten years (with the possibility of an extension). With effect from the Year of Assessment 2000, tax exemption may be granted to OHQs which perform at least one substantive global function in Singapore.

Foreign companies wishing to qualify for incentive under this scheme may apply to the Minister through the EDB. In considering the application, some of the factors which the EDB would take into consideration are the track record of the company, the substantive headquarter functions in Singapore, the minimum paid-up capital of the company, the total business spending per annum, the number of senior professional or management personnel and the types of services performed. To qualify for the incentive, the companies must be carrying on in Singapore, businesses consisting of the provision of management, technical or other supporting services to its offices or associated companies outside Singapore. Details of the qualifying services are set out in the Income Tax (Concessionary Rate of Tax for Approved Headquarters Company) Regulations.

Another benefit of this scheme is that foreign dividends received by OHQs from its associated companies may be exempt from tax as approved by the Minister. Dividends declared out of the tax exempt income as well as income which had been subject to tax at a concessionary rate are also tax exempt in themselves. This benefit may be transferred to the holding companies of these OHQs provided the holding companies own at least 50% of the beneficial interest in the issued share capital of the OHQs.

Companies which provide business, technical and professional services may also apply to qualify as a business headquarters under the EDB Business Headquarters Programme. This scheme has been put in place to develop and expand the service technologies of Singapore companies in Asia. Companies which are granted this status may be eligible for any of the tax incentives provided under the EEIA, as well as exemption on dividend income received from offshore companies.

In an effort to promote the bond market in Singapore, the government introduced tax incentives in relation to income derived from debt securities. Debt securities would include bonds, notes, commercial papers and certificates of deposits. Section 43N of the ITA provides for tax at a concessionary rate or full exemption on income derived from debt securities. Such income include:

• income derived by companies from arranging, underwriting and distributing qualifying debt securities issued during the period from 28 February 1998 to 17 February 2003

• interest income derived by companies on or after 28 February 1998 from qualifying debt securities issued during the period from 28 February 1998 to 27 February 2003

• income derived by financial institutions from trading in debt securities during the period from 28 February 1998 to 27 February 2003

• income derived by a primary dealer from trading in any Singapore Government securities during the period from 27 February 1999 to 27 February 2003.

Another area in which Singapore is keen to delve into is the ever-expanding arena of electronic commerce. With the aim of enhancing Singapore’s competitiveness as an electronic commerce hub, the Approved Cyber Trader ("ACT") incentive was introduced by the Minister of Finance in 1998. An ACT company is eligible for tax incentives under section 43O of the ITA. Section 43O of the ITA provides that income derived by an approved company from qualifying electronic commerce transactions may be taxed at a concessionary rate or such other rate as specified by the Minister. Applications to qualify for the incentive will be processed by the Trade Development Board of Singapore. Successful companies will enjoy the benefits of the incentive for a period of five years.The types of income which would be taxed at a concessionary rate under Section 43O are:

a). trading profits and fees or commissions for commerce services

b). fees or commissions from acting as a broker in -

i). provision of pay-per-view and business services other than medical advice, business and trade information, legal counselling and advice; excluding services connected to immovable property in Singapore or any online mall

ii). trading of consumer and industrial products, machinery components, IT equipment or immovable property outside Singapore,

c). royalties or licence fees from granting licences to persons neither resident nor a permanent establishment in Singapore for the use of the right to use any computer software.

As regards brokerage fees or commissions referred to in (b) above, the transactions must be between persons who are neither resident nor a permanent establishment in Singapore, or offshore branch offices of Singapore resident companies.

Tax incentives have always been a common tool used by many countries to steer and promote their individual economic growth and development. It remains important that the tax incentives put in place reflect the direction in which the growth is intended to take place and the increasing globalisation of the different economies and intensity of borderless transactions. Singapore will therefore constantly ensure that the tax incentive schemes remain effective, current and relevant to international and domestic investors.