Singapore Tax Rate and income rate system 2010

Singapore Tax Rates and Income Tax System

Introduction

Singapore’s is one of the world’s biggest economies. Since the global financial crisis and more recently, the Eurozone sovereign debt crisis and the downgrading of the US credit ratings, many global and local investors has sought Singapore as a new safe haven for investing their wealth in and setting up businesses and regional headquarters. In 2010, Singapore’s economy has rebounded close to 15% year on year.

Singapore, due to its scarcity of natural resources, depends heavily on foreign investments for growth and economic expansion. Therefore, the government’s policy is to advocate Singapore as a global hub for international trade and commerce. Over the past years, Singapore has always been ranked of one the frontrunners in the world in terms ease of doing business (1), world leader in foreign trade and investment (1), best investment potential for 16 consecutive years (2), most open economy for international trade and investment (1).

Source: http://www.weforum.org/reports/global-enabling-trade-report-2010?fo=1 http://app.www.sg/who/196/Business-and-working-conditions.aspx http://www.doingbusiness.org/data/exploreeconomies/singapore/ Another significant reason Singapore continues to attract both local and overseas investment is due to its tax regime – well-known for its attractive corporate and personal tax rates, tax relief measures, absences of capital gains tax, one tier tax system and extensive double tax treaties.

Since her independence, Singapore has always strived to develop a vibrant and robust global hub of knowledge-driven industries in a knowledge-based economy. To help active this aim, the Economic Development Board (EDB), actively promotes foreign capital inflows and local investment into Singapore as well as to ensure Singapore can compete with other major economies such Hong Kong, the Singapore government has incorporated laws and schemes to provide incentives and rebates to both local and foreign investors. Some examples of these schemes are the Economic Expansion Incentives Act (EEIA), Double Tax Agreements (DTA) and the Singapore Income Tax Act (ITA).

The report serves as a guideline and provides an overview on how these schemes and incentives broaden the industrial and financial base in Singapore, and how efficient it has been since its incorporation.

Economic Expansion Incentives Act

The Economic Expansion Incentives Act (EEIA) is the principal piece of legislation granting tax incentives to companies, both local and foreign, to promote and encourage economic and industrial development. Incorporated and legislated in 1967, EEIA provides tax exemptions and incentives on certain industries that the government has deemed beneficial to Singapore’s economic expansion. The EEIA can be sub-divided into four main groups which are targeted at different types of industries.
Incentives for manufacturing and service companies,
Incentives for financial services companies,
Incentives which are aimed at specific sectors of the economy and;
Incentives which apply to all sectors of the economy.

The Singapore Government provides special incentives for companies whom qualify for special statuses under the EEIA. All these incentives will encourage companies to continue expanding and to boost productivity through automation and mechanization, develop new technologies through research and development, upgrade employee skills to improve efficiency, encourage local companies to engage in overseas projects and to attract pioneer industries companies to set up their operations in Singapore. These would ensure that Singapore remains competitive worldwide.

In the next section, we will be providing an insight into the various incentives that are available and how efficient it has been it achieving its aims, with greater emphasis placed on pioneer incentives, development and expansion incentive and investment allowances.

Pioneer Incentive

Overview

To continuously attract companies, especially pioneer industries to invest in Singapore, the government has rolled out schemes under the EEIA to act as an incentive for these companies to come to Singapore. One such incentive is the pioneer incentive given to pioneer industries and service providers in Singapore.

The purpose of pioneer incentive is to promote the growth of high-technology and value-added manufacturing and services industries in Singapore. The scheme also encourages the acquisition of new technologies, skills and knowledge by training and upgrading employees in specialized skills and importing innovative processes and equipments to increase efficiency and to raise production capabilities.

Incentives and Rebates
The pioneer status incentive is awarded to projects that are considered strategic by the government and will result in the creation of desirable industries and companies, both manufacturing and services, in Singapore.

Companies qualifying under the pioneer status scheme get to enjoy incentives and rebates given out by the government. For starters, companies and industries are exempted for full corporate tax on qualifying profits for up to 15 years (S (6) EEIA). This tax relief period will commence on production day.
This exemption is vital as pioneer companies will be able to channel resources into expanding their operations in Singapore, instead of having to pay corporate taxes which could hinder their expansion. In addition, having fully corporate tax exemption also allows Singapore to remain competitive not only in the region, but around the world.
In addition, when the company incurs losses during any year, it calculates its assessable income by deducting losses incurred during that period as provided for in S37 (2) ITA, bringing forward losses until the relief is used up. The balance of any losses which remains unabsorbed at the end of the company’s tax relief period is available to its new trade or business once the pioneer period ends, S15(1)EEIA.
The enabling of carrying losses being brought forward even after the end of the tax relief period will better attracts foreign investors to set up their businesses in Singapore. The incentive scheme has proven to a certain extent to be beneficial in attracting companies to invest in Singapore.

Efficiency of Pioneer Status
Since its inception in 19XX, the pioneer status incentive has benefited many newly setup companies and industries in Singapore. An example of such company is

Nagase : http://www.nagase.com/about/venture/sep01.asp http://www.nagase.com/about/venture/sep0101.mht

Source: http://www.business.gov.sg/EN/Government/GovernmentAssistance/TypeOfAssistance/TaxIncentives/ProductDevelopmentNInnovation/gp_edb_PC-M_PC-S.htm http://www.asean.org/21403.pdf http://www.pioneerassociates.com.sg/pdf/DoingBusiness.pdfDevelopment & Expansion Incentive
Overview
Another innovative scheme that the Singapore government has provided for industries and companies is the development and expansion incentive scheme.

Previously known as the post-pioneer status, the development and expansion incentive scheme has since replaced its predecessor and is available to companies whose pioneer incentive status has expired.

One of the outlying purposes of this incentive is to encourage existing companies and industries to expand their businesses and operations into high value-added businesses and services through means such as acquiring new technologies to develop and upgrade existing or new products and services e.g. wafer fabrication.

Another aim of this incentive is to persuade companies to upgrade existing equipments and at the same time acquiring new equipment to automate work processes thereby increasing productivity and increase work efficiency.

Lastly, the development and expansion incentive encourages new and existing companies to expand their operations in Singapore through methods such as setting new regional headquarters or factories, or even increasing their production capacity.

Incentives and Rebates
To ensure that companies and industries continue expanding their operations in Singapore, the government has rolled out the following tax concessions, rebates and benefits for those qualifying under the development and expansion incentive scheme

Income relating to "qualifying activities" is subjected to a corporate income tax rate of not more than 10%. However, "Non-qualifying activities" are still taxed at the prevailing corporate income tax rate of 17%. “Qualifying activity” can be related to any of the following: the manufacturing or increased manufacturing of any product from any industry that would be of economic benefit to Singapore any qualify activity as defined in s16, EIAA, or other services or activities as may be prescribed (s19I, EIAA)

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. In the case of companies which hold Development & Expansion Scheme status the shortfall is exempt from any further taxation in so far as the shortfall is caused by tax free income from "qualifying" activities.

Source: http://www.business.gov.sg/EN/Government/GovernmentAssistance/TypeOfAssistance/TaxIncentives/ProductDevelopmentNInnovation/gp_edb_dei.htm Investment Allowance
Overview
Incorporated in 1982, the investment allowance (IA) scheme, administered by the Building and Construction Authority (BCA), provides incentives for companies especially those in the manufacturing sector. It was introduced to encourage manufacturing companies to spend more on capital investments, upgrading on technological advanced construction equipment, with aims to increase productivity, efficiency and capability.

Incentives and rebates
The IA gives an allowance to the company based on an approved percentage of qualifying equipment cost for an approved project. The fixed capital expenditure must be incurred during a qualifying period of up to five years, or up to eight years for purchase of qualifying equipment on hire purchase. In addition, expenditure incurred by Singapore-registered companies on new construction related equipment is eligible for investment allowance at a support level of 50%. The equipment must bring about at least 20% improvement to the project or work trade. The proposed project where the equipment/machinery or tool will be utilized must fall in at least one of the following categories:
Construction IT;
Buildability; and
Quality, environment and safety on a case-by-case basis
(a) For the manufacture or increased manufacture of any product;
(b) For the provision of specialised engineering or technical services;
(c) For research and development;
(d) For construction operations;
(e) For reducing the consumption of water;
(f) In relation to any qualifying activity as defined in section 16;
(g) For the promotion of the tourist industry (other than a hotel) in Singapore;
(h) For the operation of any space satellite; or
(i) For the provision of maintenance, repair and overhaul services to any aircraft, the company may apply in the prescribed form to the Minister for the approval of an investment allowance in respect of the fixed capital expenditure for the project.

In the case of a tourist project, the qualifying period is up to ten years. The qualifying period begins on the “investment day”, the date from which the company qualifies for the IA [S66 (1), EEIA].

The IA is to be set off against chargeable income derived from the project and is given in addition to the normal capital allowance. Unlike unabsorbed capital allowances, unutilised IA can be carried forward indefinitely for set-off against the chargeable income in future years.
In the list below, it shows the projects that qualify the company to eligible to apply for IA:

Efficiency of IA
Since its inception, many companies especially in the construction and manufacturing industry have benefited from the IA scheme. One such company is Straits Construction Pte Ltd, who specializes in construction of high rise buildings. They have invested in equipments such as the rotary concreting pumps. Incorporating a stationary concrete pump with high-pressure pipe system and the rotary distributor, the transportation of concrete from ground level has proven to be more efficient for concreting work in very high-rise structures. Without the IA scheme, Straits Construction Pte Ltd could have found it difficult to invest in new equipment and machineries.

The IA incentive is effective in a way that it encourages long term planning and approach towards investment. Also, allowances are less costly to the government as compared to tax holidays. Besides, investment allowances are not subjected to transfer pricing manipulation and it provides immediate upfront financial benefits to investors.

However, businesses may not be interested in the IA to enjoy the bonus deduction since an outlay of cash is needed to buy the assets. Financing the purchase of the asset may exert pressure on their business’ balance sheet and future cash flow to a certain extent. This is especially so in times of a financial crisis, adequate cash flow is crucial in enabling the businesses to ride through tough times. Hence, this may discourage businesses to take on the IA to a certain extent. Despite that, IA does have its effectiveness in attracting businesses which are financially sound given that the amount of investment allowance presented is considerably attractive.

Source: http://www.bca.gov.sg/AssistanceSchemes/assistance_schemes_ias.html http://www.bca.gov.sg/AssistanceSchemes/modernct_straits.html http://www.business.gov.sg/EN/Government/GovernmentAssistance/TypeOfAssistance/TaxIncentives/ProductDevelopmentNInnovation/gp_edb_ia.htm Double Tax Agreement (DTA)
Origin and Purpose of Double Tax Agreement (DTA)
There is an increasing trend of Singapore businesses as well as Singaporeans venturing overseas. When these businesses and individuals derive income from a foreign country, their income may be subjected to the taxation of the foreign country.
International double taxation arises when the same income is being taxed twice, once in the state where the income arises (Country of Source) and another time in the state where the income is received (Country of Residence).
Therefore, to mitigate the effects of double taxati on on its residents, the Double Tax Agreement (DTA) was introduced to avoid double taxation with other countries through bilateral agreements.
The DTA is a bilateral agreement entered into between two countries to avoid the issue of double taxation. The main purpose of the DTA is to provide certainty with regards to when and how tax is to be imposed in the country where the income-producing activity is conducted or payment is made. Through DTA, the taxing right of each country is defined and there are provisions for one of the countries to give tax credit or exemption to abolish double taxation.

Benefits of Double Tax Agreements
Having a DTA with another country provides the following benefits:
It defines the jurisdictional authority on cross-border transactions.
It clearly defines the taxing right of each country.
It prevents international tax evasion by sanctioning the exchange of information between the tax authorities of the contracting countries.
It allows the claiming of relief for taxes paid overseas.
However, there are also some limitations to the benefits. For example, the treaties of some countries, such as the United Kingdom and Italy, focus on the subjective purpose for a particular transaction, denying benefits where the transaction was entered into in order to gain benefits under the treaty. Other countries, such as the United States, on the other hand focus on the objective characteristics of the party seeking benefits. In general, individuals and publicly traded companies and their subsidiaries are not adversely impacted by the provision of a typical limitation of benefits provision in a U.S. tax treaty. With respect to other entities, the provisions tend to deny benefits where an entity seeking benefits is not sufficiently owned by residents of one of the treaty countries.

Efficiency of Double Tax Agreement
The consequences arising from double taxation is that certain activities are taxed at higher rates than similar activities that are located solely within a taxing jurisdiction. This led to unnecessary relocation of economic activities in order to lower the incidence of taxation, or other, more objectionable forms of tax avoidance. Businesses especially have had the most trouble with double taxation, but individuals also might find it uneconomic to work abroad if all of their income is subject to taxation by two authorities, regardless of the origin of the income.
The introduction of DTA seeks to avoid / relieve double taxation of income that is earned in one country by a resident of the other country. It states clearly the taxing rights between Singapore and her treaty partner on the different types of income arising from cross-border economic activities between the two countries.
The DTA is also efficient in providing for reduction or exemption of tax on certain types of income. However, only Singapore tax residents and tax residents of the treaty country can enjoy the benefits of a DTA.
Moreover, the efficiency of the DTA can also be illustrated through the provision of relief for this double taxation by allowing the Singapore Company to claim credit of the foreign tax suffered against its Singapore tax payable on the same income. This credit is known as a double tax relief (DTR).

Conclusion
In conclusion, global transactions across international boundaries have given rise to international double taxation. To diminish international double taxation, Singapore has concluded DTAs with more than 50 treaty partners.
Although the general principles underlying Singapore’s DTAs are similar, the provisions in each DTA may differ. This is because every DTA is the result of a series of negotiations between two countries which have their own sets of national objectives, policy and technical considerations, and each country may have to make various compromises in order to conclude the DTA. Therefore, in order to understand the tax treatment of a specific income derived from a treaty country, it is necessary to refer to the relevant DTA.

References
Guide Me Singapore, viewed 21 Sep 2011

Understanding our DTAs, Viewed 22 Sep 2011
Inland Revenue Authority of Singapore, Viewed 23 September 2011,
< http://iras.gov.sg/irasHome/page04_ektid464.aspx>
Income Tax Act
Overview
Income tax is defined as a tax levied on the income of either individuals or businesses. The type of income tax system depends on the degree of tax incidence. There are different types of taxation such as progressive, proportional or regressive tax.

Inland Revenue Authority of Singapore (IRAS) is responsible for the administration, assessing and collection of tax. Currently, Singapore adopts progressive taxation, with a tax rate range of 0-20%, whereas corporate tax is fixed at 17%. In addition, Singapore adopts the territorial tax policy, which means that the corporate tax is only levied on the portion of income that is generated or received in Singapore. In today’s global environment, Singapore is well positioned in maintaining its economic competiveness by having a significantly low corporate tax rate of 17% with generous tax exemptions, investment and financial tax incentives for SMCs. The range of investment incentives for investors includes tax concessions, grants and favourable loan conditions and accelerated depreciation schemes. Financial services incentives will include Finance and Treasury Centre (FTC) and Financial Sector Incentive - Headquarter Services (FSI-HQ) scheme.

Benefits of FSI-HQ:
A FSI-HQ company will be able to get a concessionary tax rate of 10% on the income received from the provision of the HQ services to Singapore-based associates and offices. On 22 January 2009, a new scheme named Qualifying Processing Service Company (QPC) was introduced under the FSI-HQ scheme where the income from a company providing prescribed processing services to any financial institution or to another FSI-HQ company would be taxed at a concessionary rate of 10%. The 10% concessionary rate is only applicable to income that is received from the activities under S43E.

Benefits of FTC
The income earned from an FTC is subjected to a concessionary tax rate of 10%, provided that the income is earned on its own account from qualifying activities and from the provision of qualifying services to approved offices and associated companies. The types of qualifying activities and services are defined in the Income Tax (Concessionary Rate of Tax for Approved Finance and Treasury Centre) Regulations, Rg18. Besides having the tax benefit, another benefit also includes the exemption of income from funds managed by foreign investors. Only the specified income earned by any approved subsidiaries, offices, related companies, and associates of an approved FTC outside Singapore, from funds managed by the approved FTC, is exempted from Tax.

Efficiency
Given the multiple benefits of having the FSI-HQ scheme, multinationals and other world leaders will be able to base their Asia-Pacific or global HQ operations in Singapore. These multinationals managed their regional or international operations, spearhead new developments and undertook high value added activities more effectively from their base in Singapore. With the FTC scheme, multinational companies with international businesses and financial activities can expand their treasury and risk management activities within Singapore. Moreover, companies are encouraged to set up FTCs in Singapore so that they can perform treasury, financing and other financial services for their own account, and for companies in their group.

http://www.mas.gov.sg/fin_development/fin_sec/insurance/Assistance_to_Financial_Institutions.html http://www.guidemesingapore.com/taxation/corporate-tax/industry-specific-tax-incentives http://www.sedb.com/edb/sg/en_uk/index/why_singapore/Guide_to_Investing_in_Singapore/financial_assistance.html http://www.dutchcham.sg/singapore-budget-2011-tax-changes-and-policy-impact-on-businesses