Singapore
Tay Hong Beng and Harvey Koenig
KPMG
Singapore
The government makes clear regularly that a competitive tax system is an essential tool in sustaining economic growth, explain Tay Hong Beng and Harvey Koenig of KPMG
Tax policy and economy of a city-state
Singapore is considered one of the most advanced economies in Asia. It is a first-world city-state with one of the highest GDP per capita in the world. It also has a world-class infrastructure and a stable political climate. A number of multinational companies have established their operations in its jurisdiction.
One of the key factors contributing to Singapore's success is its competitive tax regime. The targeted and judicious use of tax incentives, especially, has helped to establish it as a hub for various industries, and now supports its push to develop a knowledge-based economy.
A business-friendly tax infrastructure
From its earliest days, Singapore has sought to create a tax infrastructure conducive to business activities. One of the infrastructure's underpinnings is an extensive network of avoidance-of-double-taxation treaties. Since 1961, Singapore has signed and ratified 67 comprehensive tax treaties, giving it one of the strongest treaty networks within the Asian region.
Singapore's tax administration, the Inland Revenue Authority of Singapore (IRAS), is also recognised as one of the most progressive tax authorities in the world. Its mandate is to foster a competitive tax environment, and to this purpose the IRAS works with other government agencies to increase Singapore's economic wealth and review rules and regulations inhibiting business innovation.
The Singapore government has further committed to keeping the tax regime simple and relevant wherever possible. To this end, Singapore's income tax is of a territorial nature, and foreign income is not taxed unless received in Singapore. Even then, foreign dividends and other active foreign business income may be exempt subject to meeting specified conditions.
In addition, dividends from Singapore-resident companies are not subject to tax, and there are no controlled foreign corporation rules.
Building a knowledge-based economy
Innovation and productivity have emerged as the drivers of sustainable economic growth around the world. Recognising this, Singapore has invested significant amounts of money in tax and fiscal incentives to create a comprehensive supporting infrastructure for research and development activities.
These range from setting up a National Research Foundation, to funding doctorate scholarships to grow the pool of local researchers, to the establishment of various centres of innovation.
A broad-based tax incentive scheme, providing 150% to 400% tax deduction for expenditure on R&D activities undertaken in Singapore was also introduced to encourage enterprises, big and small, foreign or local, in any industry, to engage in innovation driven activities. This incentive scheme can potentially provide a generous incremental tax benefit of up to 68 cents on every dollar of eligible R&D spending.
Supplementing these R&D initiatives, Singapore has one of the strongest intellectual property protection regimes in Asia. The World Economic Forum rated Singapore as having the best intellectual property protection regime in the world in the latest World Competitiveness Report. The costs of acquiring intellectual property are allowed to be written down over an accelerated period of five years, while tax incentives may allow intellectual property income to be taxed at rates of 5% or below, providing further incentive for businesses to consider using Singapore as a base for creation, protection and commercialisation of intellectual property.
With a rich ecosystem of research institutes, corporate laboratories and researchers in universities, Singapore is fast becoming an intellectual property capital of Asia.
A recent high-level Economic Strategies Committee, comprising members of the public and private sectors, also identified productivity improvements as a key economic driver for the next five years or more.
To this end, Singapore introduced significant tax incentives providing an unprecedented 400% tax deduction for expenditure incurred on employee training, investments in automation, investments in product and industrial design, registration and acquisition of intellectual property and R&D. This is capped at $400,000 of expenditure incurred in each activity area in each financial year.
The intention of this incentive is to provide a powerful impetus for enterprises in Singapore to implement productivity schemes.
A strong financial sector
Singapore has one of the most highly developed financial sectors among the Asian countries. It is a major financial centre of international repute. Almost all the major global financial institutions have a presence in Singapore, using it as a base to serve their regional and global clients. Tax policy has contributed significantly to its present status.
The Financial Sector Incentive (FSI) is an umbrella scheme, providing concessionary tax rates of between 5% to 12%, covering a range of financial sector activities. FSI status is awarded, subject to a company meeting economic commitments made, such as professional headcount and local business spending as well as carrying on qualifying activities.
The tax incentive for the financial services sector dates back to the 1970s, whereby banks' offshore income from operating its Asian Currency Unit (ACU) was subject to tax at a concessionary tax rate of 10% instead of the prevailing corporate tax rate of 40%.
Singapore has also invested heavily in the development of a fund management industry. Several initiatives were introduced to jumpstart this industry as early as the 1980s. For example, to encourage foreign investors to place their funds in Singapore, investment income may be tax-exempt, if managed by fund managers in Singapore.
The fund incentive schemes have evolved and also apply to the funds of local investors, under certain circumstances. Also, in a bid to attract fund managers to Singapore, the management fees of fund managers are taxed at a concessionary tax rate of 10%, subject to conditions.
Singapore is also a major international trading hub and has successfully created clusters of global trading companies in oil and chemicals, agricultural commodities as well as metals and minerals. Apart from Singapore's proximity to source and consumer markets, international trading activities are encouraged through the Global Trader Programme, which offers a concessionary tax rate of 5% or 10% on income from qualifying trades. These include trades not just in commodities, petroleum products and minerals, but also consumer products and industrial equipment and even trading of carbon credits.
As with most of Singapore's other tax incentives, the incentive is awarded subject to substantive conditions such as professional headcount, the presence of corporate functions, volume of transactions and business spending.
Encouraging shipping operations
Tax incentives have also been used to push Singapore's aspirations of becoming an International Maritime Centre. To encourage shipping operations from Singapore, income from the operation and charter of Singapore ships is exempted from income tax. The Maritime Sector Incentive, which is an umbrella scheme of incentives, provides tax exemptions for qualifying international shipping operators and ship owners based in Singapore.
More recently, the Maritime Finance Incentive scheme was also introduced to encourage companies to use Singapore as a base to finance their maritime vessels and sea containers.
Keeping corporate taxes competitive
Singapore's tax rates are among the lowest in the world. Its corporate income tax rate is 17%, and the top marginal individual income tax rate is 20%. This is made possible by the strategic introduction of a consumption tax, which provides a stable revenue source.
The Goods and Services Tax was introduced in 1994 to help Singapore move away from reliance on corporate and individual income taxes. The government had recognised that many countries had begun using tax rates as a competitive tool. It was anticipated that globally, income tax rates would fall.
Today, Singapore's low tax rates continue to be complemented by targeted tax incentives that are awarded to companies, both foreign and domestic-owned. The extent and relevance of these incentives depends on the economic commitments that these companies can bring to Singapore. Such commitments may come in the form of fixed asset investments, employment headcount, corporate functions to be undertaken in Singapore and local business spending, among others.
Benefitting from Singapore's incentive offerings
Multinationals have found that, by building a regional business based in Singapore, not only do they benefit from a politically stable environment, with sound infrastructure and highly-skilled workforce, they can benefit from a tax incentive regime that provides relatively low corporate tax rates. Singapore's wide network of tax treaties further extends the benefits of being in Singapore.
The wide range of tax incentives in Singapore means that there would be some form of incentives available for most businesses with intentions of setting up in Singapore. These incentives can take the form of corporate tax exemptions or concessionary tax rates, investments allowances or withholding tax exemptions, just to name a few. Most of these incentives require negotiations with relevant agencies, which would involve agreeing on the scope and extent of substantive commitments the multinational would agree to commit to in exchange for a package of tax incentives and possibly financial subsidies. The goal of the negotiation process is to anchor activities and investments in Singapore.
With the wide range of tax incentives available, which in turn are administered by different government agencies, some multinational companies may take time to learn the system. This is exacerbated because each incentive would have its own specific qualifying conditions and regulations. Nevertheless, because of the potential of tax incentives to provide significant tax benefits, it is worthwhile for companies that intend to invest into the region to invest time and resources to study Singapore's incentive offerings.
A fundamental factor for growth
In just over 40 years, Singapore has developed from a Third World backwater to a first world city-state. Its competitive tax regime, coupled with a wide network of tax treaties and a progressive tax administration, has attracted foreign investments from around the world. It is today a hub for various industries, ranging from shipping, to financial services and to R&D, among others.
Tax incentive programmes have also helped it move from a labour-intensive economy to a high-skilled one. Today, various tax incentives, aimed at encouraging innovation have been implemented to support the push to develop a knowledge-based economy.
Singapore's commitment to maintain a consistent, competitive and forward-looking tax system has unquestionably contributed to the ongoing development of its economy. As the global economy evolves, it is ineluctable that tax policy will continue to play a major part in the growth of this small nation.
Tay Hong Beng (hongbengtay@kpmg.com.sg), head of tax, and Harvey Koenig (harveykoenig@kpmg.com.sg), partner, Enterprise Incentive Advisory of KPMG in Singapore.