INCOME TAX (AMENDMENT) BILL

INCOME TAX (AMENDMENT) BILL: Order for Second Reading read.

3.05 pm

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 2010 comprises two categories of legislative changes. The first category puts into legal effect the income tax changes announced in the 2010 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 28th June to 19th July this year. The Ministry of Finance (MOF) has revised the Bill to incorporate the suggestions that had been accepted for implementation.

Sir, most of the tax changes in this Bill have already been debated upon in this House following the announcement of the 2010 Budget Statement. Let me summarise some of these key changes.

First, the introduction of the Productivity and Innovation Credit (PIC) scheme to support enterprise investments in productivity and innovation. Clauses 2(a), 12 to 15, 17, 18(b), 23 to 25, 29 to 32, 51, 52 and 55(e) of the Bill provide for this change;

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Second, a new tax allowance to help companies restructure, upgrade and expand their operations through mergers and acquisitions. This is provided for in clause 34;

Third, a Land Intensification Allowance to support enhanced land productivity among industrial land users. Clauses 22, 27, 54(a), (b), (c), (e), (f), (g), 55(a) to (c) provide for this change;

Fourth, the phasing out of the Industrial Building Allowance (IBA). Existing claimants can continue to claim the IBA on qualifying industrial buildings until the remaining expenditure of such buildings is written down. Clauses 19 to 22, 26, 54(a), (c), (e), (f) and 55(a) provide for this change;

Fifth, the Bill introduces a new tax incentive for angel investors to claim deductions for 50% of the cost of their investments in qualifying start-ups. Clauses 28(d) and 33 provide for this change; and

Sixth, various personal income tax reliefs such as the wife relief, parent and handicapped parent reliefs, dependant-related reliefs, and course fee relief are enhanced. These changes are covered by clauses 2(b), 35(a) to (g), 35(j) to (t) and 53.

Sir, I shall now deal with the other tax changes covered in this Bill that arise from the periodic review of our income tax policies and administration. Let me highlight three of these changes.

First, we will enhance the Global Trader Programme by extending its current list of qualifying activities to include qualifying structured commodity financing activities. This enhancement is aimed at attracting more sophisticated financing and risk management services to be performed in Singapore and further

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strengthen our position as the leading trading hub in Asia. Clause 42 effects this change.

Second, we will introduce a new tax incentive for sovereign funds to encourage the building up of a cluster of sovereign funds as a niche class of financial institutions that promotes the development of our financial sector. This incentive, which takes effect for five years from 1st April 2010, will grant tax exemption on prescribed income derived by sovereign funds and their investment offices. Clause 10 provides for the introduction of this tax incentive.

Third, donors will be required to provide Unique Identification Numbers (UIN) or Unique Entity Numbers (UEN) for their donations to an Institution of a Public Character (IPC), unless the Comptroller waives such requirement. This mandatory provision is to streamline the processing of claims for tax deduction for such donations. Once the donors provide their unique numbers that I have just mentioned – both UIN or UEN – to the IPC, the donors would not need to make a separate claim in their tax returns as the donation would be automatically reflected in their tax assessment based on information from the IPC. This change will take effect from 1st January 2011. Clauses 28(a) and (c) effect this change.

The remaining six 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.

Sir, I beg to move.

Question proposed.

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3.10 pm

Mdm Ho Geok Choo: Mr Speaker, Sir, the Income Tax (Amendment) Bill seeks to implement the tax changes announced in the Government’s 2010 Budget Statement. I would like to focus on four issues relating to the proposed amendments.

Sir, clause 48 amends section 43P to provide that Structured Commodity Financing (SCF) activities will now be able to qualify for tax concessions. I understand that this move is to increase the competitiveness of Singapore's trading environment. As Asia continues to grow as the centre of the world’s trade flow, Singapore should similarly take this opportunity to build up our trading environment.

Reports have shown that the total revenue for companies under the Global Trader Programme (GTP) grew at a compounded annual growth rate of 14% over the last five years to US$465 billion. However, the total revenue of US$465 billion recorded last year was 30% lower than that of 2008.

Sir, under the enhanced GTP and SCF incentive, a concessionary tax rate of 5% or 10% will be granted on qualifying income derived by an approved company from qualifying SCF activities. I understand that this GTP enhancement is expected to contribute to higher trade volumes and to make up for the 30% reduction between 2008 and 2009. Sir, will this concessionary tax rate enjoy flexibility such that the percentage is adjusted to suit each year’s performance of companies under the GTP? Or will it be a fixed percentage?

It is important to remind ourselves that tax rates are but one factor in ensuring a competitive trading environment as well as the performance of such companies. Hence, much as we want to maintain competitive tax rates compared to other

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countries, we should not be unnecessarily liberal with these concessions. May I clarify with the Minister on how the Government is planning to make up for this reduction in tax revenue, especially since there is a whole slew of tax incentive schemes in this Bill?

Sir, sections 37 and 37K will be amended to provide for the tax incentive for qualifying investments by angel investors, which is introduced to encourage eligible individuals to invest in start-up companies and to help these companies grow and succeed.

Mr Speaker, Sir, this is a positive step because it provides incentives for these eligible investors to take up mentoring roles and contribute through their management expertise and business networks. This new scheme would also provide a source of entrepreneurial expertise to help nurture start-ups as they kick-off their businesses.

However, I note that angel investors who put in a minimum of $100,000 in eligible start-ups over a year, will enjoy the 50% tax deduction only at the end of a two-year holding period. I understand that the purpose of this holding period is to ensure that the investor is committed to the start-up.

However, considering the many mandatory requirements for angel investors to qualify for this tax scheme, is it necessary to impose such a stringent two-year holding period? The minimum required sum of $100,000 is already a huge sum and will be sufficient to ensure that angel investors are committed to the start-up. Hence, would the imposition of a further two-year holding period backfire and deter angel investors from investing? If so, this will not be in accordance with the original intention behind this tax incentive scheme. After all, there are already many mandatory requirements in place under the criteria to qualify for this scheme.

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Sir, the next issue is on the increase in the income threshold of dependants for dependant-related reliefs. Currently, the income of the dependant cannot exceed $2,000 in the preceding year if a taxpayer wishes to claim for dependant-related reliefs. With the amendments, the income threshold of $2,000 will be increased to $4,000. Further, this income threshold condition will be removed for handicapped dependant-related reliefs. Accordingly, taxpayers would be able to claim handicapped dependant-related reliefs regardless of the income of the handicapped dependants, if other conditions are satisfied.

Sir, I understand that the purpose of removing this income threshold for handicapped dependant-related relief is to recognise the extra resources and attention needed in providing care for the disabled. On this note, may I seek clarification on why this income threshold was not removed in respect of parent relief in general? Likewise, extra resources and attention will be needed in providing care for the elderly, even if they are not disabled.

I am positive that the Government can do more to enhance the incentives for children to care for their parents, and this will be in line with the Maintenance of Parents (Amendment) Bill proposed by the hon. Member Mr Seah Kian Peng. After all, an all-round approach should be adopted to address this and tax relief would definitely be one incentive.

Fourth, is expansion of wife relief to spouse relief. Sir, the current wife relief is a $2,000 relief granted to male taxpayers who take care of their wives, subject to the income threshold for dependants. With the amendments, female taxpayers will now be allowed to claim relief of $2,000 if their husbands meet the same qualifying conditions of the current wife

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relief. On behalf of all women, I would like to commend the Ministry for taking this step in light of the increasing number of female breadwinners in Singaporean households.

With that, I support the Bill.

3.16 pm

Assoc. Prof. Paulin Tay Straughan: Thank you, Sir, for this opportunity to share my thoughts on this important Bill.

At the Budget debate, I had raised my concerns on the implications of the stress on productivity on family life. While I fully support the drive towards improving our productivity at the workplace, I am also mindful that this strategy of national growth will only work if Singapore workers feel empowered as active stakeholders in this endeavor, and when a healthy worklife balance is maintained.

Specifically, I am concerned that with this call to raise productivity, the workplace may be proliferated with training programmes and as employees are subjected to increased demands from training to level up their skills, little attention will be placed on monitoring the quality of the various productivity skills enhancement programmes.

In this regard, I would like to share a suggestion on how we can leverage on the Productivity and Innovation Credit (PIC) Scheme provisions in the Bill to promote more effective training.

Clause 17, section 6, details the various training schemes that qualify for tax exemptions.

May I suggest that instead of giving out tax exemptions indiscriminately, training expenditure will only be eligible for tax exemption if the employee feedback on the respective programme is positive. It is not unusual in education

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that incentives will only be given to instructors if the student feedback, for example, for the module conducted achieves at least a "satisfactory" rating.

Taking a similar stance, we should institutionalise systematic feedback in training programmes that include indicators on the quality of trainer and materials covered, and if the training had imparted practical skills that could be applied in the workplace to level up productivity. The feedback will give employees a voice in shaping the quality and nature of their work-based training programmes, and encourage employees to be active stakeholders in the quest to improve productivity. Concurrently, it will also serve to ensure that only quality training programmes can sustain.

Related to this, I have a second query. Before an enterprise receives tax exemption under the PIC Scheme provisions, will the claims, for example, on equipment and software have to be rationalised on how productivity would be raised through these investments? Personally, I think they should be rationalised as the tax exemptions are specifically for investment in raising productivity. However, my proposal does flag certain concerns. For example, how will productivity be measured? And how will the claims be audited? I do not have the answers.

Thank you, Sir, for your patience.

Mr Tharman Shanmugaratnam: Mr Speaker, Sir, I would like to thank Mdm Ho Geok Choo and Assoc. Prof. Paulin Straughan for their comments on the Bill. I will deal with their points in turn.

First, Mdm Ho had queries relating to the extension of the Global Trader Programme (GTP) incentive to structured commodity financing activities. I think Mdm Ho viewed the GTP extension as

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something to offset the impact of the reduction in total revenue of GTP companies, which is quite a large reduction of 30% from 2008 to 2009. And she asked if the concessionary tax rate under the GTP, going forward, would be adjusted based on the performance of the GTP companies each year. The GTP is not, in fact, aimed at making up for any reduction in revenues of GTP companies in any particular year. What we are aiming to do is to attract a larger critical mass of sophisticated financing and risk management services into Singapore, thus strengthening our position as a leading trading hub in Asia.

The concessionary tax rates of 5% or 10% under the GTP are fixed and subject to the recipients meeting their commitments, in terms of business spending or employment of professionals, over the incentive period. The rates are not adjusted based on the performance, in terms of turnover or revenue, of GTP companies for each year. This fixing of the rates in advance provides certainty to the GTP companies and allows them to plan ahead and invest in their people.

Mdm Ho also asked how the Government is planning to make up for a reduction in tax revenue arising from this enhancement of the GTP scheme. The reduction in tax revenues is, in large part, notional. Without the GTP incentives, some of the activities would not be here. While there would be actual tax losses for activities that would have come or remained here without incentives, overall, we believe that our incentives serve to strengthen the sector, create spin offs for other businesses and hence increase tax revenues over the long term. In the case of the current GTP enhancement, companies carrying out structured commodity financing activities would have to grow and meet incremental commitments in order to enjoy the concessionary tax rates.

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Second, Mdm Ho asked whether it is too stringent for angel investors to hold their investment in the qualifying start-ups for at least two years in order to enjoy the tax deduction for their investment. Our two-year holding period is, I believe, quite reasonable. We want angel investors to commit to contributing funds, expertise and experience to help grow the startups. An early exit would suggest a different motivation, different from that of wanting to nurture start-up companies. The holding period is also necessary to balance between making the scheme attractive and preventing abuse of the scheme as a means of enjoying lower personal income tax rates. A few other countries have similar schemes for angel investors. In the UK and Ireland, the scheme, in fact, requires a holding period of three to five years.

Third, Mdm Ho asked if the income threshold should be removed in respect of parent relief, similar to what the Bill puts into effect for handicapped parent relief. Both the parent and handicapped parent reliefs provide recognition to individuals supporting their dependent parents. There is, therefore, a need to have a threshold to determine whether the parents can be considered as dependants. We have doubled the income threshold to $4,000 per year. Strictly, this income threshold should apply to both sets of parent reliefs – the general parent relief as well as the handicapped parent relief. Nonetheless, the Government recognises that apart from financial resources, the time, resources and attention needed in caring for a handicapped person is typically of a very different order, compared to looking after other dependants. As a concession, we have, therefore, removed the income threshold for tax reliefs relating to handicapped dependants. This includes the handicapped parent relief.

To remove the income threshold for the parent relief, in general, irrespective of

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whether the parent is a dependant or not, will also amount to cutting the personal income tax rate for a much broader group of taxpayers. It amounts to a macro policy change. Whether we should adjust personal income tax rates is a separate issue which we will continue to review in the future.

I now move on to the issues raised by Assoc. Prof. Straughan with regard to the Productivity and Innovation Credit Scheme. Assoc. Prof. Straughan was concerned that the enhanced tax deductions for spending on training, equipment or software would be granted indiscriminately. It could, she felt, result in a proliferation of trading schemes, for example, without assurance of quality or effectiveness.

She also suggested that feedback could be obtained from employees on whether the training courses were useful before granting the tax deductions and, likewise, that the company be required to justify or rationalise how productivity will be raised through its investments before it receives its tax deductions. It may be helpful if I first explain that there are two distinct forms of fiscal incentives that we use to support our economic objectives. First, we have discretionary fiscal incentives in supporting focused objectives, such as the development of a new high value industrial cluster that has spin offs for the rest of the economy or the growth of R&D capabilities in the sector. Examples of this approach of using discretionary fiscal incentives include the pioneer status tax incentives for manufacturing and service industries, the Research Incentive Scheme for Companies (RISC) which provides co-funding for corporate R&D and, in fact, the Global Trader Programme (GTP) tax incentives that we were just discussing. So that is one type of fiscal incentive.

The second type comprises across-the-board fiscal incentives which aim at

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tilting behaviour in the economy or society at large, for example, to promote economic upgrading and investments in productivity, wherever possible, in any sector or company. These two types of fiscal incentives have to be administered quite differently. The discretionary incentives like the pioneer status or the GTP scheme are granted only where the Government agencies administering that incentive are satisfied that the company merits the incentive because of the value it adds to Singapore and that it has committed to meeting specific investment targets or other deliverables. The company's performance of these specific deliverables is tracked. This is different from fiscal incentives which support economic restructuring across-the-board.

The Productivity and Innovation Credit (PIC) is a major example of a broad-based fiscal incentive for economic restructuring. It is impractical and, in fact, not desirable to attempt to manage company's use of such schemes administratively. The PIC gives companies a clear and strong incentive to invest in their workers, equipment, software or R&D. A company still has skin in the game when they do so. They still bear more than 50% of the training cost or cost of investment in machinery, although they can get further subsidies from the Workforce Development Authority (WDA) for approved training schemes. It is in their interests to spend wisely on training to ensure that the courses are indeed relevant to raising the skills of their employees or to invest in machinery that truly raises their game in productivity. We should, therefore, let them decide which expenditures are most effective and to plan and invest ahead with certainty on whether they qualify for the PIC. In particular, we should avoid making companies report to IRAS on post-training outcomes for every training course attended by their employees or to justify how their investments in equipment actually raise productivity. The claim process for the PIC should not be

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cumbersome, given especially that the scheme aims to encourage productivity enhancements amongst a broad base of our SMEs. The market will decide which companies invest most successfully. This includes the employment market.

I quite agree with Assoc. Prof. Straughan that employees should be empowered as active stakeholders in raising productivity. Employees will ultimately judge if this is so. However, I should add that while the PIC covers training expenditures, any inhouse training will need to be certified by the WDA or the ITE. The WDA which disburses training subsidies does, in fact, have quality assurance systems in place which include post-training feedback from employers and employees to ensure that the courses remain relevant and value-adding. This is much like what Assoc. Prof. Straughan had in mind.

The PIC should also be viewed in context of the full range of discretionary grant schemes in supporting productivity enhancement which are being administered by various agencies and overseen by the National Productivity and Continuing Education Council. These grant schemes allow us to catalyse the changes that are required in several sectors like construction and food and beverage. These changes would involve coordinated efforts by enterprises, unions and Government agencies so as to maximise productivity improvements. We have decided on a deliberate balance between across-the-board tax incentives which leave room for free market forces and discretionary grants which are targeted at sector and industry-focused efforts at raising productivity.

Finally, I agree with Assoc. Prof. Straughan that efforts to improve productivity will work best if they go hand-in-hand with maintaining a healthy work-life balance. It is worth reiterating that productivity improvement is not about working longer hours or generating

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greater stress on the job. Through process improvements, upgraded technologies, better management and training up for better skills and by everyone working smarter, enterprises can increase the value each worker contributes without extra hours on the job. That is higher productivity, and is ultimately how workers can receive higher wages and enjoy a higher standard of living. To stick with low productivity operations will only mean the opposite – in other words, workers spending longer hours on the job in order to get higher wages. Higher productivity is, therefore, part and parcel of achieving a good work-life balance in Singapore.

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. – [Mr Tharman Shanmugaratnam]

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