Income Tax (Amendment) Bill

Order for Second Reading read.

The Minister of State for Finance (Mrs Josephine Teo): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 2011 comprises two categories of legislative changes. The first category puts into legal effect the income tax changes announced in the 2011 Budget Statement. The second category covers other amendments to the Income Tax Act arising from the regular review of our income tax system. The Income Tax (Amendment) Bill was released for public consultation from 11 July to 1 August this year. MOF has revised the Bill to incorporate the suggestions accepted for implementation.

Sir, most of the tax changes in this Bill have already been debated upon in this House following their announcement in the 2011 Budget Statement. Let me summarise some of these key changes.

First, the Productivity and Innovation Credit (PIC) Scheme has been enhanced to encourage innovation and productivity efforts. Changes include increasing the PIC deduction from 250% to 400%, increasing the cap on qualifying expenditure from $300,000 to $400,000 per activity, and raising the cash payout in lieu of deduction to $30,000. Clauses 17, 19, 23, 24, 25, 29, 30, 31 and 33 of the Bill provide for the changes.

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Second, a one-off corporate income tax rebate of 20% up to $10,000, or an SME cash grant of up to $5,000 has been granted to help companies cope with the rising cost. This is provided for in clause 61.

Third, businesses will be able to pool their tax credits for foreign tax suffered on their foreign incomes with the new Foreign Tax Credit (FTC) Pooling system. This should simplify compliance and reduce the tax payable on the remitted foreign income. This is provided for in clause 54.

Fourth, all existing maritime tax incentives will be streamlined under a new umbrella incentive - the Maritime Sector Incentive. Apart from streamlining, the umbrella scheme improves on existing shipping-related incentives by covering more shipping-related support services and new entrants into the industry. The enhancements will strengthen Singapore as an International Maritime Centre. Clauses 7, 10, 12, 43, 45, 46, 48, 49, 69(a) and 71 provide for these changes.

Fifth, a new tax deduction has been introduced to allow a company to claim for the cost incurred on acquisition of its parent company's shares, through a Special Purpose Vehicle, for its Employee Equity-Based Remuneration Scheme. This is provided for in clauses 22 and 27(b) and (c).

Sixth, start-ups will be able to claim tax deduction for expenses incurred prior to its earning any revenues. The expenses should be incurred in the accounting year before that in which it earns the first dollar of revenues. This enhancement will further relieve businesses of start-up costs. The change is provided for in clause 26.

Seventh, the tax deduction of 250% for donations made to Institutions of a Public Character, Government, approved persons and prescribed educational or research institutions will be extended for another five years to 31 December 2015. This is provided for in clause 32(a).

Eighth, the personal income tax rate structure will be amended effective from the next year of assessment in 2012. The new personal income tax schedule is more progressive. A one-off personal income tax rebate of 20% up to $2,000 has also been granted for Year of Assessment 2011. These changes are covered by clauses 68 and 70 respectively.

Finally, following an increase in the employer's CPF contribution rate from 1 September 2011, the corresponding tax deduction allowable to the employer is increased to the new CPF contribution rate of 16%. The contribution that is exempt from tax or the contribution in excess of which is deemed taxable, as the case may be, is accordingly raised to $5,000 per month. Clauses 4(b) and (c) and 16(a) provide for the change.

Sir, I shall now deal with the other tax changes covered in this Bill that arise from the on-going review of our Income Tax Act. Let me highlight four of these changes.

First, clause 3 clarifies for the avoidance of doubt that Government-Paid Childcare Leave payments received by self-employed individuals are taxable income since their introduction on 31 October 2008. This ensures consistency with the tax treatment of Government-Paid Maternity Leave payments received by self-employed women.

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Second, amendments are made to the income tax appeal procedures for greater clarity and certainty in the timely resolution of tax disputes, and savings in tax compliance and administration costs. Changes include enabling taxpayers to take their case to the Income Tax Board of Review even if their case is non-taxable for that year, and extending the time to file appeals from 14 days to 30 days. Clauses 56 to 60 provide for this.

Third, the provision of the Unique Identity Number (UIN) or Unique Entity Number (UEN) will be made compulsory and extended to donors who make cash donations to IPCs through grant maker, cash donations to Government, donations of computers to prescribed institutions, and donations of art works to approved persons. This requirement was already introduced for qualifying donations made to IPCs directly. With the amendment, donors will not need to declare their donations in their tax returns in order to enjoy tax deductions on their donations. Clause 32(b) provides for this.

Fourth, to meet our commitments towards the international Exchange of Information (EOI) standard, the Income Tax Act is amended to allow Singapore to exchange information via separate EOI arrangements, where necessary. Presently, EOI can only be done through Avoidance of Double Taxation Arrangements. Clauses 62 to 67 provide for this change.

The remaining legislative changes arising from our periodic review of the income tax system are either technical in nature or relate to improvements in tax administration. With the above changes, the Income Tax Act will be enhanced and updated to better achieve our economic and social objectives. Mr Speaker, Sir, I beg to move.

Question proposed.

3.10 pm

Mrs Lina Chiam: Mr Speaker, Sir, I welcome the Government's proposal to exempt court-ordered maintenance payments to women from tax as in clause 6 of this Amendment Bill. I believe this will go some way to relieve the burdens that single mothers face in Singapore today.

However, I would like to query the Minister for extending tax relief for research and development expenditure to R&D incurred overseas. Would this not lead to an exodus of R&D activities and investments from Singapore? I also wonder how the Minister hopes to ensure that R&D activities valuable to Singapore is being carried out once it is moved overseas and that this relief is not merely used as a mechanism to evade tax.

A landmark study by Mr Ho Yuen Ping, Wong Poh Kam and Toh Mun Heng of NUS in 2009, found that the impact of R&D on growth in Singapore is not as strong as it is in other developed countries. In fact, to catch up with other developed countries, the study recommended that Singapore needs "some effective exploitation of domestic R&D activity". Instead the Government must think of ways to make it really attractive for these companies to consider putting their R&D investments in Singapore. Put simply, create more incentives locally and create disincentives for doing it overseas.

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Furthermore, on the subject of tax relief, since this is part of the Economic Expansion Incentive Act being amended here, there are many ways in which the Government can be creative in addressing several problems at one go. For instance, would the Government consider giving tax relief to companies that hire disabled people, or tax relief for the purchase of gym or exercise equipment in order to promote a healthy lifestyle for Singaporeans, or for occupational health support, especially when prescribed by a doctor?

I question the preferential tax rate for Singapore Government Securities and ask how this benefits common Singaporeans since most retail investors do not trade in these securities. On the many clauses where the Minister has discretion on a case-by-case basis, may I ask whether the Minister compiles an annual report to Parliament on all cases – whether discretion has been exercised and the reasons for rejecting or approving an application?

Mr Speaker, the Gini coefficient is rising around the developed world, and Singapore is not spared. The rich are getting richer and the middle-income earners and the poor are getting poorer. We should rethink our income tax policy for the highest earners, for the top 5%. It should be compulsory for foreign earners in Singapore to pay capital gains tax.

The British Prime Minister has been seriously considering raising taxes on rich income earners to ensure better social equity. May I remind this House that the current British government is a Conservative-led government and not a Labour or Socialist government. A few months ago, the billionaires in Europe even told their governments, "Tax us more. We want to help Europe get out of the financial crisis."

Let us not wait for an economic crisis to hit Singapore before we take action. In so proposing, Mr Speaker, the Singapore People's Party is not pandering to populism; we simply believe in making things as fair and equitable as possible to reward Singaporeans for their hard work, for the greater good and stability of society in the long term.

3.14 pm

Mr Vikram Nair (Sembawang): Mr Speaker, Sir, I speak in support of this Bill. Broadly speaking, I think this Bill, which provides for substantial tax breaks in various areas, is to be welcomed at a time when we are facing a potential global slowdown. At a time when many other governments are struggling with trying to find answers or find ways to raise taxes and cut spending to deal with serious fiscal deficits, we are in the happy position of being able to offer tax breaks.

Many of these are timely and thoughtful. The corporate income tax rebate or cash grant for SMEs will hopefully help them to deal with rising costs, while the one-off personal income tax rebate would reduce the burden across the board, but the cap means that the full reduction would be enjoyed most by the middle-income and low-income groups, in so far as they are subject to tax.

There are a number of sector specific taxes, which are undoubtedly ways to assist the promotion of those sectors in Singapore. Two proposals I found particularly interesting were the enhanced deduction for research and development expenditure set out in clause 19 of the Bill and the concessionary tax rate for shipping related support services in clause 49. I will discuss both of these in turn.

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One thought I have in relation to both these amendments is whilst it is good to promote both these areas, it would be helpful if we could further skew these incentives to encourage the employment of Singaporeans in both these areas specifically.

In relation to the tax incentives for research and development, I think one of the main benefits of such incentives would be to improve Singapore's reputation as a hub for research and development. In the face of the current climate of economic uncertainty, this is one way of attracting investment to Singapore.

One of the criticisms that has been levelled against our plans to attract research is the allegation that many of the new jobs created go to foreigners and, therefore, while GDP may grow as a result of the added investment, this may not necessarily translate into high quality jobs going to our citizens.

One suggestion to this proposal that may skew the incentives a little further in favour of hiring of Singaporeans in this sector would be to tighten the definition of "staff costs". For example, at the moment, one of the qualifying expenditures that may enjoy tax incentives is the deduction of "staff costs". Staff costs are defined as the salary, wages, and other benefits paid or granted in respect of employment and include expenses incurred for training or certifying the employee. If the definition of employee were confined to Singaporean employees, this would essentially mean that the hiring and training of Singaporeans in this sector is incentivised, but the hiring of non-Singaporeans does not enjoy any similar incentives.

In practice, this would mean that some companies with a large foreign workforce may in fact get fewer incentives, even after the amendments. But I think this may not necessarily be a bad thing because the training of Singaporeans would also be incentivised. And also picking up on Mrs Lina Chiam's point, I think one of her concerns was that foreign research and development may also be deducted but ironically if this foreign research and development is engaging Singaporeans, then ultimately I think that would also be to the benefit of Singaporeans. So, perhaps where the research takes place is less important but if the benefits come back to Singapore and Singaporean companies, that may ultimately still be in the best interest of our country.

The next point: Tax incentives for the marine sector. The maritime sector is one that, I think, has been important to Singapore from historic times. And coming from Sembawang, I think Sembawang Shipyard remains both an important employer and contractor for small business operators.

The shipping sector is also subject to intense competition, and our shipyards are facing competition from lower cost regional shipyards. The concessionary tax covers a very wide range of maritime-related sectors, and, I think, one which will still be an uphill battle for many of these operators to compete. I think this tax will go some way to helping them deal with the pressures of global competition. Over the past couple of months, I have met a couple of residents who were working in the maritime sector, and these residents were retrenched over the past couple of months. Usually they are able to find new jobs but they have difficulty finding similar jobs in the maritime sector. The result of this is they have to take pay cuts because their previous work experience was not directly relevant.

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One thing we might do to make sure that the new jobs are created by these incentives would be to find a way to link the tax breaks to the employment of Singaporeans. One way to do this would be that in order to get the tax incentives under this, approval needs to be given by the Minister or his appointed representative. One of the considerations that might be taken into account in giving approval to companies applying for this tax break would be the composition of their workforce.

I understand that some degree of discretion is still necessary; so putting hard and fast rules may not be entirely helpful. But one factor that the Minister might take into account, depending on the individual company, would be the proportion of the workforce that is Singaporean. Additionally, it might also be helpful to require these companies to interview people referred to them by the CDC, especially people who get retrenched from the maritime sector who are looking for more jobs in that area. Perhaps guidelines could be incorporated to this effect as well internally. This is not something for legislative change but something which we can use with the current proposed legislation.

In conclusion, I would like to reiterate my support for this Bill. I think the tax incentives are going to be very helpful to the sectors concerned and, hopefully, helpful to Singaporeans who are looking for jobs in those sectors. I hope that the suggestions I have made can be taken into account when they are being implemented.

3.20 pm

Mrs Josephine Teo: Mr Speaker, let me first thank Mrs Lina Chiam and M r Vikram Nair for their comments. Let me respond first to the suggestion on how we could deal with the enhanced deductions for R&D under the Productivity and Innovation Incentive (PIC).

First, let me highlight that the aims of the R&D enhanced deductions are the same as the rest of the PIC. It was not about nurturing the R&D industry per se for which we already have strong incentives. It is really part of a comprehensive PIC incentive to encourage pervasive innovation and to promote improved productivity. The benefits were specifically tailored to favour the SMEs so that they can gain from this to the largest extent possible. And so, as a result, we included as many types of investments that could contribute to productivity. Six categories to be exact, including R&D. For expenditure on training, which is another category under the PIC, we do not discriminate between local and foreign employees. Again, the aim is mainly to get businesses to value skills training and upgrading as a way to improve their productivity.

To the question of why we allow R&D done outside of Singapore to qualify for the PIC scheme: We want a strong incentive for the companies to undertake R&D in the first instance; in other words, please get started on R&D, never mind where it is done. Therefore, as an exception, we have been prepared to be generous to allow the expenses incurred on R&D, whether done in Singapore or abroad, to enjoy the PIC deductions, up to the expenditure cap of $400,000. R&D spending beyond $400,000 will enjoy 100% tax deduction if done outside of Singapore and 150% if done within Singapore. So, there is a differentiation in the benefit depending on the location where the R&D is conducted, but this happens after the first $400,000 of deduction.

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The thinking is that if we restricted costs supportable under the PIC to local employees' costs and to R&D conducted within Singapore only, it will make it difficult for SMEs to benefit fully from the PIC and we are less likely to achieve our objective. What is more critical is that we succeed in raising productivity and reducing manpower needs and, by doing so, wages are more likely to go up over time, and this is how the PIC aims to benefit Singaporeans.

As to the suggestions to look at the workforce composition when approving incentives for shipping related support services: Generally, tax incentives are tools to encourage companies to locate high value activities in Singapore, create jobs and bring about economic benefits. They are subject to conditions such as fixed asset investments, total business spending in Singapore, and the number and types of jobs created. Such incentive recipients, like other companies in Singapore, are also subject to foreign worker quotas and levies which are the existing policy levers to manage our dependence on foreign workers.

Let me turn now to Mrs Chiam's comments on the personal income tax regime. First, I would like to point out that our personal income tax rates are generally already low and progressive. Only 43% of our resident workforce pays income tax at all. So, the lower income earners do not pay income tax. Further, I should point out that with this round of enhancements, all tax payers will pay less personal income tax, but the middle-income earners will enjoy the largest percentage reduction in their taxes. In fact, these changes were made in line with the objective to improve our progressivity of the personal income tax. It is estimated that these changes would result in a revenue loss of $519 million. Quite significant. A sum which, in fact, could alternatively have been used to provide very targeted assistance to the needy. So, the changes have been introduced to benefit the middle-income earners, and taking into consideration that our low-income earners already do not pay personal income taxes, this is a fair approach. Sir, I hope that I have addressed the Members' suggestions and concerns; and so, on that note, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [ Mrs Josephine Teo ].

Bill considered in Committee; reported without amendment; read a Third time and passed.