INCOME TAX (AMENDMENT) BILL

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

3.03 pm

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

The Income Tax (Amendment) Bill 2009 comprises two categories of legislative changes. The first category puts into legal effect the income tax changes announced in the 2009 Budget Statement. The second category covers other amendments to the Income Tax Act arising from regular reviews to improve our income tax system.

The Income Tax (Amendment) Bill was released for public consultation from 22nd June to 14th July this year. The Ministry has revised the Bill to incorporate the public feedback received.

Sir, the key tax changes have already been debated upon in this House following the announcement in the 2009 Budget Statement. Let me summarise some of these key changes which are covered by this Bill. I shall begin with the permanent changes:

Firstly, the reduction of the corporate income tax rate from 18% to 17%, with effect from the Year of Assessment 2010, to enhance Singapore’s attractiveness as a business hub and to spur entrepreneurial activity. This change and its consequential amendments are covered by clauses 33(b), (h) and 36 of the Bill;

Secondly, the introduction of a new corporate amalgamation framework to ensure that most of the tax consequences of a continuing business will apply to the amalgamated company, thus making it easier for companies to restructure and rationalise, as effected through clause 23; and

Thirdly, an enhancement of the incentives for promoting fund management to further strengthen Singapore as a hub for fund management. These changes are covered by clauses 8, 9(f), 13(a) and 14. Sir, let me now cover the key one-off or temporary measures which were part of the Resilience Package announced during Budget 2009.

Firstly, the enhancement of the existing capital allowances regime and loss carry-back relief scheme to ease business cashflow, and the liberalisation of foreign-sourced income exemption to help businesses meet their financing needs in Singapore. Clauses 7(c), 18, 19, 21, 26, 27, 28(b), 29 and 30 of the Bill provide for these changes; and

Finally, the granting of a one-off 20% personal income tax rebate, capped at $2,000 for YA2009, to reduce the tax payable by individuals. This is aimed at providing immediate cashflow relief to taxpayers. Clause 41 of the Bill provides for this change.

Sir, I shall now deal with the other tax changes which require amendments to the Act arising from our ongoing regular review. Let me highlight three of these changes.

Firstly, the removal of the Commonwealth Tax Relief. Currently, we grant the Commonwealth Tax Relief (CTR) to our tax residents for income derived from and taxed in Commonwealth countries which do not have an Avoidance of Double Taxation Agreement (DTA) with Singapore. This relief will be removed with effect from Year of Assessment 2010 to rationalise the various tax reliefs for alleviating double taxation for our tax residents. This removal of the now obsolete relief takes into account enhancements to the tax regime over the years, namely the introduction of foreign-sourced income exemption for income remitted on or after 1st June 2003 and the extension of Unilateral Tax Credit (UTC) for all foreign-sourced income from non-DTA countries from YA2009. Clauses 37 and 40 effect this removal of the Commonwealth Tax Relief.

Secondly, we will exclude from withholding tax, management fees paid to related persons outside Singapore for services performed outside Singapore. This is in line with the policy intent not to deem the income from certain services performed outside Singapore, to be derived from Singapore. Clause 6 effects this change.

Thirdly, we will provide for the avoidance of doubt that the arm’s length principle, an internationally accepted standard, is to be adopted for all related party transactions. This amendment provides explicitly that the Comptroller of Income Tax may make adjustments to the profits of a taxpayer in a related party transaction if that transaction is not carried out on an arm’s length basis. Clause 24 effects this change.

Sir, as for the remaining 11 legislative changes arising from our periodic review, they 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.

Mr Terry Lee (Nominated Member): Mr Speaker, Sir, thank you for allowing me to speak on the proposed Income Tax (Amendment) Bill, specifically on clause 33, Amendment of Section 43(b). This allows the reduction of the corporate tax from 18% to 17%.

Post crisis, this amendment seem in line with tax movement in the world as well as in Asia. There have been many media reports on world economies slashing their tax rates to retain and attract investments. One such report was carried in the Straits Times in October this year. It is therefore timely that we also review our tax rates and its effectiveness.

Currently, we rank third in the region for our low tax rates after Macau at 12% and Hong Kong at 16.5%. Unlike the West, the Asia-Pacific region still holds an average tax rate that is relatively in line with its previous year – falling from around 28.4% to 27.5% – an approximate of 0.9% drop. Therefore, our reduction of 1% is relative to the average tax reduction in the region.

Nevertheless, we are still considered by many as a tax haven and this posed certain challenges with the crackdown by OECD on tax havens sometime back. But I am heartened to read that we are progressing well in graduating into OECD white list. This boost confidence between cross-border tax transparencies and investment will certainly help Singapore.

As an advocator for workers, especially in these challenging times, I believe that these changes will improve our competitive edge and help retain as well as attract jobs for Singaporeans. Only when the economy thrives and people have jobs can we progress as an inclusive and competitive society. Besides low taxes, we also have a single tier tax rates and moreover, we do not tax on capital gains. These advantages, offered in an environment on par with developed economies put Singapore in a better position to attract and retain investments but that is not all.

Over the years, we have painstakingly forged a strong tripartite relationship that enhances our competitiveness by ensuring stability in the way we resolve conflicts. This is our foundation for success and we must zealously continue to guard it.

Other strategic advantages we offer businesses are our locality, our operational efficiency, a harmonious living environment among the many religions and races. Our high standard of living is certainly an advantage but it also comes with a cost and many workers are concerned that this cost will further rise while their income diminishes. This is especially worrisome for the low wage, casual workers and the middle income sandwich class. Definitely this has an impact on our social, economic wellbeing.

Sir, as we read further, on this global trend in tax slashing across the world, the study also states that indirect taxes will likely increase to fund government budgets. Indirect taxes can hit companies as well as individuals. Therefore, I feel it is important that this amendment be sustainable and that the common man on the street must understand the long term effect of our decision.

Having said so, I would like to ask the Minister: what the impact on Government tax revenues does this reduction have? How will the Government make up for the loss in tax revenues or are there alternative measures in coping with this fall in revenue?

Mr Speaker, Sir, though I rise to support this amendment, and also feel it is timely, I am concerned about how these changes can affect the common man on the street in the longer run.

Mrs Lim Hwee Hua: Sir, first allow me to thank Mr Terry Lee for his support of the Bill. I agree with the Member's observation that many countries now compete on the basis of attractive tax rates, especially post crisis, but allow me to share with Mr Lee and Members of the House some of the guiding principles on how we set our tax rates.

Firstly, our tax rates must indeed be competitive, relative to the alternatives that investors have. However, I would like to reiterate that Singapore is not a tax haven. We are a real economy with substantive businesses.

Secondly, taxes are but one component of what it takes to be a conducive business environment and Mr Lee has rightly pointed out that there are other equally important attributes such as a quality workforce, a strong tripartite relationship, political stability, rule of law and so on. So we need to preserve, if not enhance, these attributes as well.

Thirdly, our headline tax adjustments are designed for the long haul. This is in recognition of the long-term perspective that serious investors take. Hence we consider very carefully to see if our fiscal position can allow these adjustments before making them.

Sir, our overall fiscal strategy is one of spending prudently and living within our means. Mr Lee has expressed concern about how much the tax foregone would be and how the Government would make up for this loss.

The estimated tax foregone would be about $400 million to $500 million per year in the steady state. The reduction in the corporate tax rate is really an important part of our overall strategy to restructure revenue sources. If I may just recap for the House, steps were taken earlier on to raise revenues from other sources. In 2007, we increased the GST rate from 5% to 7% and in 2008, we revised the framework for spending investment returns from reserves to one based on the long-term expected returns which will enable us to tap on more of these returns. I would like to assure Mr Lee that the increases in revenue from these two sources would be more than sufficient to offset the reduction in revenues from the corporate tax reduction.

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 Lim Hwee Hua].

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