Introduction
The Government
of Singapore provides a comprehensive package of tax
concessions and incentives to businesses, whose very
nature reflects the direction in which the state is
trying to steer economic development. Singapore is a
densely populated country with a high standard of living,
a shortage of land and a high cost, highly skilled labor
force and accordingly the country comparative advantage
lies in the development of high value, export orientated
service industries.
In Malaysia
by contrast a surplus of land, a large labor pool and
low labor costs have resulted in the development of
a low value, labor intensive, export orientated manufacturing
economy. The result has been that labor-intensive components
industries have moved to Malaysia, whereas Singapore
has seen the growth of industries engaged in financial
services, research & development, the production
of computers & robots and computer aided design
& manufacturing.
The government
plays a key role in driving Singapore's economic development
through the granting of fiscal incentives. The allocation
of an incentive depends primarily on such considerations
as the amount of investment involved, the technical
output, the export potential, the employment opportunities
and the general conduciveness to Singapore economic
activity.
In the
2002 budget, it was announced that:
"Several
of the eleven existing incentives will be merged into
a single umbrella Financial Sector Incentive (FSI) scheme,
which offers simpler administrative procedures and more
flexible qualifying criteria. The FSI scheme will offer
a concessionary tax rate of 5% for qualifying high growth
and high value-added activities and 10% for mature but
tax-sensitive activities. As this involves a major revamp
of the many existing incentives, the FSI scheme will
only be implemented from YA 2004."
In the 2008
budget, the FSI scheme was extended for a period of
five years from January 1, 2009 to December 31, 2013
(both dates inclusive).
Singapore
is emerging as the most popular Asian location amongst
hedge fund managers for fund start ups, and in June
2006, Singapore Exchange Ltd (SGX) announced that it
would accept listings of hedge funds from the end of
that month.
Although
eligible hedge funds were listed, however, there was
to be no trading in their units on SGX. Typically, issue
and redemption takes place in the over-the-counter market.
The
new listing rules for hedge funds had the following
key features:
A hedge fund must:
- Be authorised or recognised
under section 286 or 287 of the Securities and Futures
Act; or be offered only to institutions and/or accredited
investors.
- Have
a minimum asset size of at least S$20 million (at
the time the new rules were introduced) or US$20 million
for Singapore and foreign currency denominated funds
respectively.
Under additional rules:
Fund managers are required to
have in place an independent risk management function.
The investment management team
of a hedge fund is expected to have at least one principal
with a minimum of five years relevant investment management
experience.
A hedge fund will announce its
net asset value per unit, as soon as practicable after
each month end, but in any event no later than seven
business days.
In addition, a fund must immediately
announce any material change relating to its operations,
including but not limited to, any change in its investment
manager, custodian, administrator or independent auditor.
The
factor that has appeared to spur hedge fund growth in
Singapore is the relatively short time taken to register
a fund in the city-state, an issue identified by hedge
fund managers as the most crucial.
In
his 2006 budget, Lee Hsien Loong announced a range of
tax and other initiatives aimed at spurring growth in
the financial services and asset management industry.
Among the measures designed to promote the development
of Singapore as a financial centre were enhanced tax
incentives for asset and wealth management, capital
and treasury markets, and captive insurance.
With a
view to encouraging the growth of financial services
companies the Government grants the following categories
of fiscal incentives:
- Trading
Income: Capital gains and income made by financial
service companies trading investments for and on behalf
of their non-resident clients are often tax exempt
both in the hands of the financial services company
and in the hands of the non-resident client. The effect
of this incentive is to make Singapore an attractive
location for foreigners to base their investments.
- Fee
Income: Concessionary tax rates are levied on profits
earned by financial services companies in respect
of income earned billing clients for investment services
rendered. Profits distributed as dividends are also
granted a concessionary tax status.
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Fund
Management
Fund management
companies have traditionally been entitled to the following
fiscal concessions:
- Fee
income received by fund management companies in respect
of services rendered are exempt from corporate income
tax for a period of 5 years provided the fund management
company manages an asset portfolio with a value in
excess of S$5m (at the time of writing). The exemption
period can be 10 years if the fund managers can make
suitably strong commitments to significantly increase
their level of fund management activities in Singapore.
The exemption is granted by the monetary authority
of Singapore on a case by case basis.
- Dividends:
In Singapore there are no withholding taxes levied
on dividends. Instead dividends are taxed at the standard
rate, with a tax credit being given for any corporate
tax levied on the profits out of which dividends are
paid. Where there is a shortfall between the tax credit
and the standard rate charge levied on dividends the
shortfall must be made up by the company paying the
dividend and not by the shareholder receiving it.
Companies engaged in fund management are exempt from
any further taxation on the shortfall in so far as
that shortfall is caused by the concessionary fiscal
status granted to the company.
Regulatory
changes introduced in 2004 meant that international
fund managers are no longer required to maintain a physical
presence in the territory, and are permitted to make
their funds available via private banks.
The
number of hedge funds in Singapore grew from just eight
in 2001 to more than 50 in 2004. However, accounting
firm PricewaterhouseCoopers warned that future growth
in the industry would be stifled unless the government
made key changes to tax legislation.
The
firm called on the government to address the rule requiring
at least 80% of investments in foreign hedge funds to
have originated from overseas in order for them to qualify
for tax exemption.
"They
probably have to relook at the 80-20 rule,” observed
Deepak Kaul, Manager, Corporate Tax Services, PwC. He
added: “I think the easiest thing is to do is to relax
the imposition of the 80-20 rule, maybe make it applicable
over a period of time. In which case then, even fund
managers who are not meeting the 80-20 rule initially
will be incentivised to actually start up in Singapore."
Singapore's
Prime Minister Lee Hsien Loong responded by announcing
in his 2005 budget that start-up fund managers would
be given a 12-month grace period to meet the requirement
that 80% of share capital must come from foreign investors
to qualify for a 10% tax rate on fee income.
The
80-20 rule was rescinded by the Monetary Authority of
Singapore (MAS) in August 2007, and the requirements
for benefiting from the aforementioned tax exemption
were significantly loosened.
The
other aspect of hedge fund taxation that industry participants
called for to be changed was the level of the 10% tax,
considered somewhat high by many. By cutting this levy
to 5%, observers believed that Singapore would be able
to continue to carve out a niche as a centre for the
management of Indian, Japanese and Korean-based funds,
in addition to capturing some of the growing interest
in specialist Islamic hedge funds.
In
his 2005 budget speech, Lee Hsien Loong announced that
foreign non-individual investors would be encouraged
to invest in the Singapore property market with a proposed
reduction in the withholding tax on REIT distributions
to 10% from 20%, for a period of five years. Additionally,
to attract more REIT listings, the government wants
to waive stamp duty on the instruments of transfer of
Singapore properties into REITs to be listed, or already
listed on the SGX, for a five-year period.
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Bond Market
Debt market tax concessions have traditionally included:
- A
concessionary tax rate of 10% on interest income from
holding qualifying debt securities arranged in Singapore.
-
Withholding tax exemption on interest from qualifying
debt securities arranged in Singapore payable to non-residents.
-
Withholding tax exemption on swaps in relation to
S$ bond issues. Issuers are automatically waived from
the requirement under S45 of the Income Tax Act to
withhold tax on interest paid on qualifying debt securities.
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Foreign
Securities Companies
Companies
which deal in foreign securities have traditionally
been entitled to various fiscal concessions. The rate
of corporate income tax payable depends on the nature
of the activity. For example:
-
A corporate
income tax rate of 10% is payable on income earned
from providing advice to and buying and selling
foreign securities on behalf of non-residents.
-
Income
earned from arranging and underwriting initial public
offerings of foreign currency denominated shares
on the Singapore stock exchange and from transactions
in respect of the same are exempt from corporate
income tax.
- Dividends:
In Singapore there are no withholding taxes levied
on dividends. Instead dividends are taxed at the standard
rate, with a tax credit being given for any corporate
tax levied on the profits out of which dividends are
paid. Where there is a shortfall between the tax credit
and the charge levied on dividends the shortfall must
be made up by the company paying the dividend and
not by the shareholder receiving it. Companies which
deal in foreign securities on behalf of non-residents
are exempt from any further taxation on the shortfall
in so far as that shortfall is caused by the concessionary
fiscal status granted to the company.
- Commodity
derivatives: Under this scheme, a concessionary tax
rate of 5% will be granted for income derived from
qualifying activities undertaken by a financial institution
granted Commodity Derivatives Traders (CDT) status.
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Financial
Services Processing Companies
To
promote Singapore as the hub for high value-add processing
activities, a tax incentive scheme for Qualifying Processing
Services Company ("QPC") was introduced in
2004.
This
scheme aimed at encouraging companies which undertake
high value-added processing services supporting financial
institutions to set up their operations in Singapore.
Under this scheme, a QPC would be granted concessionary
tax rate of 5% on income derived from the provision
of the prescribed processing services, which are in
support of financial activities such as Treasury and
Securities, Asset Management, Private Banking, Wholesale
Banking and Retail Banking.
Examples
of core processing services which are eligible under
the scheme are settlement and reconciliation, cash management,
product control, securities borrowing/lending processing,
portfolio valuation, etc. In addition, ancillary services
such as risk management, IT processing, financial control,
compliance and legal, and management information and
reporting, which are in support of the core processing
services, may also be eligible under the incentive.
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Credit
Rating Agencies
With a
view to encouraging the growth of companies which provide
credit rating services on foreign securities such companies
have traditionally been entitled to the following fiscal
concessions:
-
Profits
are subject to an indefinite 10% concessionary tax
rate (instead of the current 18% corporate income
tax rate).
-
Dividends:
In Singapore there are no withholding taxes levied
on dividends. Instead dividends are taxed at the
standard rate, with a tax credit being given for
any corporate tax levied on the profits out of which
dividends are paid. Where there is a shortfall between
the tax credit and the charge levied on dividends
the shortfall must be made up by the company paying
the dividend and not by the shareholder receiving
it. Companies which deal in foreign securities on
behalf of non-residents are exempt from any further
taxation on the shortfall in so far as that shortfall
is caused by the concessionary fiscal status granted
to the company.
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R&D
Expenses (Financial Products Research)
This incentive,
which was designed to encourage financial institutions
in Singapore to develop new and innovative financial
products, has traditionally allowed double tax deduction
for expenses such as the cost of R& D personnel, legal
expenses, training costs and consultancy fees.
The
Innovation in Financial Technology & Infrastructure
Grant (ITIG) Scheme, introduced in 2004, was launched
to encourage innovation in technology and/or infrastructure
in financial services. The scheme was designed to target
Singapore-registered companies, and offer grants for
qualifying expenses with respect to innovation in financial
technology and/or infrastructure activity in Singapore.
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Approved
Trustee & Custodian Companies
The
Tax Incentive Scheme for Approved Trustee Companies
has traditionally been aimed at encouraging the development
of reputable trustee companies and banks to offer international
trust administration and custodian services in Singapore,
as well as to complement the growth of the fund management
industry in Singapore. Under the scheme, an Approved
Trustee Companies (ATC) would be granted a 10% concessionary
rate on income derived from the following:
- Trustee
or custodian services in respect of a foreign trust
created in writing, i.e. where both the settlor and
beneficiaries of the trust are not residents or citizens
of Singapore (and, if a company, not incorporated
in Singapore or controlled by persons who are residents
or citizens of Singapore);
- Trustee
or custodian services for or on behalf of a unit trust
which is not owned or controlled by Singapore residents
or citizens, and whose funds are invested in "designated
investments";
- Trustee
or custodian services in respect of foreign bond or
loan stock issues (e.g., monitoring loan covenants,
administering loan repayments);
- Custodian
services for foreign currency denominated stocks and
shares issued by companies not incorporated and not
resident in Singapore; and
- Provision
of trust management or administration services to
foreign trusts of which it is not the trustee, including
the setting up and administration of eligible investment
holding companies for such trusts.
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Offshore
Insurance Business
To
encourage insurance companies, in particular professional
reinsurers and captives to set up operations in Singapore
to write offshore business, a concessionary tax rate
of 10 per cent has traditionally been granted to insurance
companies on income derived from :
-
Underwriting profits of offshore insurance business;
and
-
Non-Singapore sourced dividends, realised capital
gains and interest including interest on Asian Currency
Unit (ACU) deposits, derived from investing offshore
premium income and shareholders' funds used to support
the offshore insurance business.
The
Tax Exemption Scheme for Marine Hull & Liability
Insurance Business aims to encourage all general direct
insurance and reinsurance companies (including P&I
clubs) in Singapore to tap the insurance potential of
the shipping communities in the Asia Pacific region.
It provides tax exemptions for income derived from underwriting
profits of marine hull and liability business, as well
as non-Singapore dividends, realised capital gains and
interest, including Asian Currency Unit (ACU) deposits,
derived from investing premium income from offshore
marine hull & liability insurance business and shareholders'
funds used to support the marine hull & liability
insurance business.
Singapore's
2006 budget gave tax exemption to captive insurance
companies for a period of 10 years on specified types
of income; the exemption will be available until 2011.
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