Singapore Research Paper

| Singapore Taxation Assignment 2 | Research Paper |

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Contents Introduction 2 Income Tax 2 Double Tax Agreement 3 Economic Expansion Incentives 3 Conclusion 8

Introduction
Singapore is a small country with only 660 square kilometer and around 5 million people. The main resources in Singapore are intellectual ones and skilled manpower with assistance in continuously improving infrastructure.
Therefore, Singapore will depend heavily on foreign capital inflows and local investments to keep up economic expansion and to mimic wealthier countries with higher living standards. In order to do so, Singapore government offers and encourages business, using the economic expansion incentives act to give many advantages for local and foreign investors.
Income Tax

Double Tax Agreement
Double taxation occurs when two or more countries put on taxes on taxpayers through income or capital. Income will be taxed twice, one by the country of residence and the other whereby the country of source where the income increases.
The key objective of a DTA is to maintain validity on tax to be imposed in the country. This is made by an activity that generates income or when payment is made. Thereby, this provides a clear vision of each country’s taxing right. It avoids international tax invasion between contracting countries. These provide countries to claim relief for taxed paid overseas. It allows us to claim for relief for taxes paid overseas.
Since 1965 to date, Singapore has provided DTA to over 60 countries. And there are grouped into 3 parts. Firstly, the Comprehensive Avoidance of Double Taxation Agreements. This agreement is set upon 64 countries. It overs on all types of income.
Secondly, Limited Treaties. This treaty covers only income from shipping and/or air transport over 7 countries.
And lastly, Treaties which are signed but yet to be approved are imposed over 14 countries.
The credit and exemption method are used to avoid the burden of double taxing. In order to be entitled to these exemptions, the company has to provide the certain information. If not, the company has to provide details on incentive granted on the business to add evidence that income was exempt in the foreign country.
Such credit and exemptions relief reduces tax, therefore encourages foreign capital inflow into Singapore.

Economic Expansion Incentives
Pioneer industries allowances are given to high- tech companies that bring benefits in the public interest and contribute to the economic development in Singapore.
In relation to pioneer industries and pioneer service companies, the income and revenue are tax exempt during the tax relief period, and the tax relief period are all up to 15 years commencing from the production date of pioneer industries and the date carrying out qualifying activity of pioneer service companies.
Both pioneer companies and non-pioneer companies who are conducting qualifying activities may ask for Minister to approve them as a development and expansion company .A qualified development and Expansion Company is taxed at a reduced rate, as low as 5% on its expansion income. And the initial tax relief period is not exceeding 10 years.
Moreover, a pioneer company can obtain benefits from unused capital allowances and unused losses. Unused capital allowances and losses will be deducted from the profit of new business for the company.
This incentive encourages various companies to establish at Singapore by investing a ton of money to start their business.
In addition, Pioneer Service Companies are also given grants for qualifying activities and they are tax exempt during a tax relief period of from 5 to 15 years. The tax relief period will start on the day qualifying activity commence.
Furthermore, Singapore encourages companies to invest in new equipment and to introduce high-tech technology and specialized engineering in their production processes to obtain higher productivity and to improve efficiency in production.
The development and expansion incentive is aimed at encouraging new and existing companies to expend their operations and productions in Singapore and upgrade their existing machinery or acquire new technological equipment to promote products services.
Companies will be granted investment allowances for fixed capital expenditure that must be incurred over a span of 8 years beginning from the date of investment.
Investment allowance is a substantial part of incentives. Which encourage capital investment by deducting a specified proportion of fixed capital expenditure on factory building, plant, and machinery for an approved project from taxable income. It is directly benefit to taxpayers to produce goods for their own trade or business. Before 15 February 2007, the maximum qualifying period of 5 years and after that date it is extended up to 8 years .A Company may apply for a certificate which is issued by the EDB.
The tax incentives aims at speeding up the pace of mechanization through encourage capital investment in updating advanced machinery and equipment. Even though the investment is so high, firms are still willing to do it because the benefits significantly out-value the costs, in terms of remarkable improvement in productivity and efficiency.
On the other hand, with increasing number of companies are using Singapore as a headquarter to carry out higher value-added activities while outsourcing manufacturing department to lower cost region like China, Indonesia etc.
The investment allowances incentives require Singapore firms remain knowledge intensive activities in Singapore and help them to deduct costs of outsourcing their production to other countries.
Data published on the 14/02/2013 stated total new business formations were 56,681 in 2012 and showed an increase of 2.5% for local companies and 2.7% for foreign enterprises. This demonstrates that in the world economic downturn, Singapore is still in a good position and attracts more companies to establish their business here, encouraged by attractive tax relief schemes for pioneer services and industries.
This helps business to minimize the costs of venture capital here, as pioneer enterprises and services companies may face many risks: unstable net profits, products that are new in the market, large advertising expenses to promote products, high production costs, and sizeable fixed overhead costs and fixed capital expenditures.
However, I think that these pioneer allowances only impact a small percentage of companies. The core of a stable economy like Singapore according to Forbes magazine, where Singapore was ranked the third wealthiest country in the world is a stable political system with honest and open government without bribery; a good information system which is open to society via government websites; a high skill, hard-working and intelligent labour force, a well-organized infrastructure, good road structures and convenient transportation.
To increase production, companies may need to modify equipment to meet targets, so they might take a loan from foreign sources. Singapore law permits an approved overseas loan called a foreign loan for productive equipment. The loan must be at least $200,000. Companies will receive an exempt or a low tax rate for the loan interest. The scheme grants companies to source cheapest capital from overseas.
Therefore, this may motivate companies to choose Singapore to set up businesses. However, this could create a risk that Singapore lenders may not be able to compete with foreign lenders.
Companies choose Singapore to establish their business also enjoy these incentive taxes: Royalties, fees and development contributions may be granted to qualifying companies at a full exemption or at a low tax rate for income expended when a “royalties and technical assistance fee” is payable to a non-resident party.
This will help motivate companies to bring their production technology and know-how to Singapore. The result of the project should raise the employment and training of engineers, scientists and professionals in Singapore.
The purpose of this scheme is to reduce the costs of research and development including that invested in equipment, intellectual property management, scientific works, training fees and professional services.
In addition, the Overseas enterprise incentive targets resident companies in Singapore. A company may invest in a broad business in order to expand or implement any qualifying activity. A company might qualify as an overseas enterprise if approved. It would give a company the benefit of tax exemption for above 10 years.
Moreover, the Enterprise investment incentive encourages enterprises to take part in innovation and high production activities in their manufacturing or services provision. This also applies to parties who invest capital in new companies for shares to offset any losses from the investment.
I believe that all these incentive terms facilitate companies expanding their business with continuous support from the Singapore government. They can receive good benefits from these schemes for both local and foreign companies. However, it could create ta problem if companies tend to inward looking and try to pay less tax by incorporating using overseas companies. The application of new production equipment to obtain higher productivity will require vast capital investments instead of using more manpower and not all companies are in a position to renovate equipment and provide training programs.
Integrated industrial capital allowances allow resident businesses in Singapore to execute a project using any foreign subsidiary for production or to obtain high quantities of products. This incentive lasts for five years and is deducted against the income derived from any approved project, which are taxed at concessionary rates and to normal income, and to the supply of production machinery to overseas subsidiaries.
I think that this scheme intends to encourage overseas business and local business to choose Singapore as investment location. Even though it sounds good with a 5 years deduction from tax payable, there is a limitation for companies which must equip Singapore production machinery.
Singapore is characterized as an expert –oriented economy, which means it survived by international trade. This small island with no resources and little population has to heavily dependence on international market and suppliers. Nowadays, Singapore is voted as investor’s paradise due to its successful free market economy, stable prices, open and incorruptible government, most importantly, a low tax incentives including “foreign loans for productive equipment ” “royalties, fees and development contributions” and “overseas enterprise incentive ”, help Singapore government to absorb abundant foreign capital investment.
The Minister of Finance may granted “an approved foreign loan ”for a company to enjoy an exempt loan interest or at a reduced withholding tax rate on loan interest payments, if the loan are used for purchasing productivity machinery and equipment for the purpose of its own trade or business and the credit facilities achieved via financial contract with foreign lender. The amount of loan must be more than $200,000. This is called approved foreign loan incentives.
As same as approved royalties, fees and development contributions made to non-residents by a company enters into an agreement with foreigner, withholding tax are either exempt wholly or taxable at a reduced rate .If he is in the interest of public.
The overseas enterprise incentive is part of Singapore government ‘s effort to develop external market and international trade .an overseas enterprise may enjoys tax exemption on qualifying income for a maximum period of 10 years
Conclusion
Tax incentives in Singapore put in place to reflect the changing in economic climate of the country and the increasing globalization and specialization of different economies all around the world. With effect of these kinds of incentives, Singapore become more and more prosperous in capital market and move towards economic openness, free trade and market for international and domestic investors.

Referencing 1) http://www.lowtax.net/lowtax/html/offon/singapore/sinsmi.html 2) http://www.internationalexperts.com/index.php/research/item/taxes-on-corporations-in-singapore 3) http://www.cfoinnovation.com/content/increase-new-businesses-singapore-2012-despite-slowdown 4) http://www.rikvin.com/taxation/singapore-corporate-tax-rates/ 5) http://www.guidemesingapore.com/incorporation/introduction/singapore-incorporation-advantages
Corporate tax rates table 6) http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

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