INCOME TAX (AMENDMENT NO. 2) BILL

INCOME TAX (AMENDMENT NO. 2) BILL: Order for Second Reading read.

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

The Income Tax (Amendment No. 2) Bill 2007 comprises two categories of changes. The first provides for the income tax changes announced in this year's Budget Statement in February 2007. The second category covers other amendments to the Income Tax Act arising from regular reviews to improve our income tax system.

The Minister of State for Finance (Mrs Lim Hwee Hua): 5.07 pm

The Income Tax (Amendment No. 2) Bill was released for public consultation from June to July this year. The draft Bill has been revised to incorporate suggestions from businesses and members of the public.

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Tax policy changes announced in 2007 Budget Statement

Let me first highlight the key policy changes that were announced in the 2007 Budget Statement.

(a) Reducing corporate tax rate

With effect from Year of Assessment 2008, the corporate income tax rate will be reduced from 20% to 18%. This change, together with other related changes, is reflected in the Bill under clauses 18, 20(b), 25(a), 25(e), 25(i), 29, 30, 31(a), 31(b), 31(c), 33 and 35(b).

(b) Increasing partial tax exemption threshold for companies

The chargeable income of companies that qualifies for partial income tax exemption will be increased from the current $100,000 to $300,000 with effect from Year of Assessment 2008. With the change, 75% of the first $10,000 of chargeable income and 50% of the next $290,000 of chargeable income will be exempt from income tax. Clauses 25(f) and 25(g) of the Bill provide for this change.

(c) Lifting the sunset clause for the Income Tax Exemption Scheme for newly incorporated companies

Currently, newly incorporated companies may qualify for full tax exemption on the first $100,000 of chargeable income for each of the first three Years of Assessment falling between Year of Assessment 2005 and Year of Assessment 2009. As part of Government's continuing efforts to encourage entrepreneurship, the Year of Assessment 2009 expiry date will be removed. Clause 25(h) of the Bill provides for this change.

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(d) Promoting Singapore as a philanthropy hub

Several changes to the taxation and regulatory framework for charity were announced in Budget 2007. They formed part of our efforts to promote charitable giving and develop Singapore as an attractive international hub for philanthropic and not-for-profit organisations. One major change is the removal of the "80:20" spending rule for income tax exemption for charities. With effect from Year of Assessment 2008, we will remove the requirement for charities to spend at least 80% of their annual receipts on charitable objects in Singapore within two years in order to enjoy income tax exemption. All registered and exempt charities will enjoy automatic tax exemption. This will enable charities to optimise their investments and use of funds over time to sustain their charitable programmes in Singapore as well as overseas. These changes are covered by clauses 6(g) and 8 of the Bill.

A new tax incentive scheme has also been introduced to give income tax exemption to approved not-for-profit organisations that can either bring economic value to Singapore with linkages to key industry clusters or contribute to developing Singapore as a philanthropy hub. Clause 11 of the Bill provides for this tax exemption.

(e) Promoting fund management in Singapore

As part of Singapore's continuing efforts to promote the fund management industry, the "80:20" rule under our tax exemption incentive scheme for non-resident funds will be removed. Details of the revised tax exemption scheme for fund management have been released by the Monetary Authority of Singapore on 31st August this year. The revised scheme gives certainty of tax exemption to foreign investors and allows resident

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investors to also invest in managed funds, subject to specified investment limits. The changes will help to boost the fund management industry and provide fund managers based in Singapore with greater flexibility in sourcing for mandates. These changes are covered by clauses 7, 10 and 42(o).

Other tax policy changes

Sir, I shall now deal with other tax policy changes which require amendments to the Income Tax Act. Our existing tax policies and incentive schemes are reviewed regularly to ensure they remain relevant. Let me highlight four major changes to our tax policies and incentives that came about as a result of this review process.

(a) Deferral of claim for accelerated capital allowance

Currently, accelerated capital allowances are granted over three years in respect of capital expenditure incurred on plant and machinery used for the purposes of trade, business or profession. Once the claim is made, the law requires that the accelerated capital allowances be made over three years on a consecutive basis. This requirement is now lifted. This change will give taxpayers flexibility to defer the claim for accelerated capital allowances. This change takes effect from Year of Assessment 2009. Clause 16(a) of the Bill provides for this change.

(b) Enhancement and refinement of tax transparency treatment for Real Estate Investment Trusts (REITs)

The scope of the tax transparency treatment currently granted for REITs is further enhanced to encourage the listing of REITs in Singapore. Tax transparency treatment means that the REIT will not be subject to income tax on its qualifying income at the trust level. Instead, the distribution out of such income will be assessable in the hands of REIT unit

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holders, unless otherwise exempted. With the enhancements, the Comptroller of Income Tax will be able to extend tax transparency treatment to a wider range of income streams derived by REITs from the activities they engage in. This will help to improve the tax competitiveness of our REITs regime. These changes take effect from Year of Assessment 2008. Clauses 6(e), 20(f), 25(b), 25(c), 25(d) and 25(j) of the Bill provide for these changes.

(c) Amendment to facilitate income tax data sharing

To facilitate the application by individuals for Government schemes such as social assistance, this amendment provides explicitly that the Comptroller of Income Tax may share taxpayer information with relevant Government agencies, subject to the express consent by taxpayers to release the information. This amendment to facilitate income tax sharing will also allow the Comptroller to share non-identifiable taxpayer information with relevant Government agencies to improve research and the quality of statistics for policy formulation and evaluation. Agencies receiving the information will be subject to rules that ensure that the confidentiality of the information is not compromised. These changes are covered by clause 2 of the Bill.

(d) Amendment to eligibility criteria for Parenthood Tax Rebate and Working Mother's Child Relief

The Parenthood Tax Rebate is currently given for a qualifying child who at the time of birth has siblings in the same household. For reconstituted households after a divorce, both divorcees may want to claim the same child or children from their previous marriage as a member of their separate households, so that any subsequent births in their new families can qualify for the rebate. This change will specify the manner of determining the

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household membership of children born before the divorce of the parents, so as to avoid the situation of the same child being double counted in separate households for Parenthood Tax Rebate claims.

Currently, when there is a divorce, both the biological and stepmothers could potentially claim

Working Mother's Child Relief for a qualifying child. The change is to allow Working Mother's Child Relief for only one claimant in respect of the child. The deduction shall only be made to a married woman, divorcee or widow who has maintained the child, and shall be limited to only one claimant. Where there are competing claims, the Comptroller shall determine, having regard to the circumstances of the case, to whom the deduction shall be allowed. Both changes will take effect from Year of Assessment 2008. These changes are covered by clauses 24 and 41 of the Bill.

Finally, Madam, 13 other changes have been incorporated in this Bill. As they are either technical in nature or relate to improvements in tax administration, I will not put members through the details of these remaining changes.

Conclusion

With the above changes, the Income Tax Act will be enhanced and updated to better achieve our economic and social objectives.

Mdm Deputy Speaker, I beg to move.

Question proposed.

5.16 pm

Mr Inderjit Singh: Mdm Deputy Speaker, I support the Bill.

Madam, while I understand that the Bill is a technical follow-up of the far-reaching changes which were announced

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during the Budget this year, I want to however raise a few points, especially since the environment has significantly changed since the beginning of this year.

Madam, first, with respect to clause 6 of the Bill which amends section 13 of the Income Tax Act, that many exemptions are part of the overall bid to make Singapore more attractive as a destination for capital and business activity, and these changes are welcomed. The addition of the new subsection (1)(zm) by clause 6 of the Bill, read together with the amendments proposed in clause 8 of the Bill, which actually repeals section 13M of the Act, exempts the income of charities and abolishes the requirement of charities to spend 80% of their income and the receipts accrued in the past year on charitable projects within Singapore. This is positive in that charities will then avoid the dilemma on spending on objects for the sake of fulfilling this requirement of spending 80% and will also allow them to accumulate capital for major expenditure projects in the future. However, given the possibility now that more charities will accumulate more of their income than previously, we should also ensure that there is proper scrutiny of the affairs of the charities. To this end, we have seen some good measures put in place recently that improve the framework of regulation for charities. For example, we had the appointment in August last year of a full-time Commissioner of Charities and the setting up of the Charity Council, and the National Council of Social Services itself is taking a more active approach in overseeing and investigating the affairs of charities. We have seen that a few charities were recently audited thoroughly, pursuant to the direction of the NCSS, and the reaction to this has been positive, including from the charities involved.

So, overall, this latest move to allow charities greater flexibility in their spending decision is a positive move which will add efficiencies to all charities, in my

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opinion. When viewed against the strengthening of the regulatory framework covering charities, we see that this loosening up does not however signal a lowering of scrutiny, which is overall good for us.

Second, on the exemptions relating to the funds managed in Singapore, clause 10, which repeals and re-enacts section 13R, provides exemption for income of companies incorporated and resident in Singapore arising from funds managed by fund managers here in Singapore. Clause 7 of the Bill amending section 13C and 13C(a) of the Bill there are a couple of important things that we should note.

First, I agree with this initiative, and it gives a strong signal that the Government is serious about positioning Singapore as a global wealth management hub. We must however not be too surprised if this leads to the trend of fund managers locating here while managing the funds that are essentially parked elsewhere. In terms of the direct value-add, aside from the actual expenditure in Singapore, their role would be to act, perhaps with the critical mass of the banking and financial expertise here, and improve Singapore's position as an investment destination. We would, however, want to watch closely to see that we do not become a convenient shield for persons to avoid tax liabilities to their states. Can I therefore ask the Minister of State how can we avoid this situation from arising where they just locate themselves here to take advantage of the exemptions but do not really manage the actual funds here in Singapore?

Madam, turning now to amendments to clause 11, this provides for the insertion of a new section 13V into the Act, which grants partial exemption to law firms involved in international arbitration work of their income derived from such work. The issue which I hope that the Minister of State can clarify is whether the law firms would get undue

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advantage over other companies which also derive their incomes from overseas operations. I do not think it is healthy to overly help the law firms while companies are treated differently. So I hope the Minister of State can clarify how is this going to be treated.

On corporate tax restructuring, we have debated this extensively in this House, especially during the Budget debate. But the lowering of income tax rates alone is no longer an innovative move, as we have seen other countries doing the same. The latest move was made by Hong Kong in October to lower its own tax rates yet again to 15% for personal income tax and 16 1/2% for corporate tax. In the light of Hong Kong throwing the gauntlet down with its rate cuts, I wonder how far we can go, and should go, and also how we hope to remain competitive in the long run when this happens around us. Would the Minister of State also care to comment on how Singapore will be affected by Hong Kong's recent rate cuts, given that we are essentially in direct competition with Hong Kong in attracting foreign companies, particularly in the service industry? I worry that this may be a race to the bottom between Hong Kong and Singapore. Certainly, if we look at the raw numbers of Hong Kong's personal income tax, they are lower than Singapore's. Just focusing on income tax rates might not be the way to go in the future. We need to ensure that the total package we present is nonetheless still attractive for companies to want to come down here.

Madam, one question I have not been able to answer is why, in Singapore, we have chosen to make the personal tax rate higher than the corporate tax rate, while in Hong Kong it is the reverse. Could the Minister of State care to comment on what might be the rationale for this difference between Singapore and Hong Kong? For example, is it simply because Hong Kong has a broader base of

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taxable citizens and residents or very rich citizens and residents so that even collecting income tax at a lower rate would be sufficient but it is not the same for us?

Finally, Madam, I would like to talk about one thing which may not be directly related to the Bill but which is in line with the spirit of corporate tax restructuring that is being implemented with this Bill. This is an issue that I hope the Minister of State would urgently look into. In the last nine months, and especially since the Budget announcement early this year, the cost of doing business in Singapore has significantly increased. In many cases, especially for our small and medium companies, their cost increases have rendered their businesses uncompetitive. Not only are we impacted by ridiculous increases in property prices and rentals, costs of raw materials and commodities have also been spiralling upwards. In such a scenario where costs are going up almost uncontrollably, I ask the Minister of State to be prepared to come in soon with new off-Budget measures to help companies cope with the sudden cost increases. And these cost increases were something that many of the businesses have not forecasted or could not forecast. We cannot wait for the next Budget cycle to help these businesses. There is an urgent need for a review by the Government, especially by the Ministry of Finance and the Ministry of Trade and Industry, on the issue of rising cost of doing business in Singapore, and I am sure we will have a very interesting debate on this during the Budget debate next year.

Madam, on the whole, this Bill is implementing changes that we have already approved in the Budget this year. It takes us in the right direction, including in the area of building a business-friendly climate. But, as I mentioned, the environ-

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ment is quickly changing and I hope that the Minister and the Minister of State are watching these developments closely with a view to intervening fast, if we need to. I support the changes proposed in the Bill.

Madam, I support the Bill.

5.24 pm

Mdm Ho Geok Choo: Mdm Deputy Speaker, the proposed amendments are notable for their focus on making Singapore a better place to do business. Most notably, the current amendments propose to cut corporate income tax from 20% to 18%. In the current global environment, the pivotal consideration for a company's decision to plant its flag in Singapore might just be our attractive corporate tax rates.

This reduction is in keeping with the global realities of competition. A KPMG survey recently showed a global reduction in corporate tax rates on the average from 27.2% to 26.8%. Countries like Germany, Spain, the UK and France have corporate tax decreases in the pipeline. Hong Kong's corporate tax rate is still 0.5% below ours. The writing is on the wall. In a cut-throat global economy, Singapore must compete on every front, including its tax environment, to attract businesses to invest and operate in Singapore.

However, Madam, like my hon. colleague before me, Mr Inderjit Singh, I have concerns with regard to the amendments in the Bill on corporate tax at this point in time. We know that no policy exists in a vacuum. While the income tax amendments are a positive development, the rationale must be clearly communicated to the public. Coming hard on the heels of consumer price increases, the GST hike and the increases in ERP, the lowering of taxes for those perceived to be economically better off in society will draw criticism.

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If our Government does not explain its intentions clearly, the impression in the minds of the people will be of a government that is a reverse Robin Hood, ie, tax the poor and give to the rich. The Government has a track record of doing what is in the best interests of the country, and we must prevent any attempts to draw connections between increasing prices for the laymen and decreasing tax rates for corporations and top earners. We must make it clear that the purpose of these amendments is to benefit all Singaporeans by attracting investment and encouraging enterprise in Singapore, resulting in potential increases in jobs and standards of living.

Madam, to do this, the Government should demonstrate with tangible data that these measures are indeed the best way forward. Can the Ministry provide the public with statistics showing that lowering income and corporate tax rates encourages investment and job creation? These would be of great help to MPs in explaining the new measures to their constituents. Such assurances from our leadership will go a long way in keeping the politics of envy at bay. If unheeded, public perception will allow the green-eyed monster to rear its ugly head.

Income tax exemptions

Madam, the income threshold qualifying for partial tax exemption has been increased from $100,000 to $300,000. With the increase, 75% of the first $10,000 of chargeable income and 50% of the next $290,000 of chargeable income will be exempt from income tax. However, I am concerned that exempting 75% of the first $10,000 of chargeable income will make little difference to companies, due to the low income base of $10,000.

I would like to question whether this simple two-tier system removes much steam from the company's growth

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because it will be exempted only by a substantially lower 50% of a significant base of $290,000. Would it be better if we offered exemption for 100% of a higher initial base income so as to encourage entrepreneurship and help in the initial growth of the company, and then a staggered system of taxation by a greater number of tiers? Members may refer to Appendix A, which has been circulated, for an example of how a staggered system of taxation would be better for entrepreneurship than the current simpler two-tiered system.

Madam, in both systems, the total tax revenue remains the same at $26,550. But because the base income for initial tax exemption is higher, ie, $22,500 as opposed to $10,000, and because this new system offers full tax exemption, growth of new companies would be less affected by tax payments in the initial stage. This system will not reduce Government revenue from companies with a taxable income of $300,000 or more and will reduce Government revenue only marginally from companies with a taxable income of less than $300,000. However, the slight reduction of tax revenue from each such company will be compensated by the increased number of new companies which are formed because of the more supportive tax environment. Members may refer to Appendix B for examples why less revenue will be collected for taxable income falling below $300,000.

Charities tax exemption

Madam, the move to abolish the requirement for charities to spend at least 80% of their annual receipts on charitable objects in Singapore within two years in order to enjoy income tax exemption is a laudable one. The current requirement is simply unsatisfactory. Profit-making companies may not always be able to find enough investment opportunities in any given year and may keep monies in

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reserve to take advantage of opportunities when they do arise. Similarly, the fund-raising

conducted by non-profit organisations and charities may exceed their worthwhile expenditures in certain years and they should be allowed to save the excess funds for future years and should not be forced to spend the money in that year just to retain their tax-exempt status. The amendment will give charities much needed flexibility in the use of their funds and this will ultimately benefit the persons that charities are set up to serve.

I would caution, however, that the NKF affair is still fresh in the public's mind and with the financial irregularities in Ren Ci's accounts being the latest talk of the town, the public will be concerned about something that may be perceived as a relaxation of Government's oversight of charities.

Madam, to address the public's reasonable concerns, their attention should be brought to the fact that the Charities Act requires charities to furnish annual statements of accounts and annual reports on the activities of the charities during the year. And charities should be informed in no uncertain terms that these requirements will be enforced firmly and vigilantly.

In addition, the Code of Governance for Charities and Institutions of a Public Character should be brought into force as soon as possible, as it sets out further best practices that are conducive to the transparency and good governance of charities. I understand that even though compliance with the Code is not a mandatory requirement, charities and IPCs must either comply or explain why they do not comply with the guidelines of the Code. This will help to assure the public that the Code has bite and will be effective in regulating the conduct of charities and IPCs.

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Madam, on this note, I support the amendments to the Bill.

5.32 pm

Mr Gautam Banerjee (Nominated Member): Mdm Deputy Speaker, I would like to start by applauding the Government for the way it is converting feedback from the business community into tangible legislation.

Let me now comment on a few specifics starting with charities.

Charities

For a long time, charities were plagued by the need for adherence to some largely arbitrary spending rules. They had to spend all of their trading income and 80% or more of their donations and other income for charitable purposes. This made life difficult for those organisations wishing to build up a war chest for future significant capital outlays as it meant often protracted explanations and negotiations with the IRAS. The replacing of the convoluted and difficult section 13M with the one-liner of section 13(1)(zm) is to be applauded.

Under the new section, the income of any charity registered or exempt from registration under the Charities Act will be exempt from tax. Full stop. This clearly recognises that a charity is bound to apply its income at some point for charitable purposes, otherwise, it would simply lose its charitable status anyway. This will make life a whole lot cheaper and easier for such organisations. Hopefully, the governance framework that we put in will ensure that issues that MPs have raised will be properly addressed. But certainly, from a tax point of view, this will make it easier for charities to work.

Fund management

Two momentous changes for the industry are now enshrined in the Act.

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The first is the ability of funds managed from Singapore to be brought onshore and incorporated here and still enjoy tax exemption that was hitherto only available to offshore funds. This recognises the reality that the funds themselves are pieces of paper. It is the people - the managers, the administrators, accountants, lawyers and bankers who create the jobs and bring the expertise. Bringing the funds onshore inevitably will bring all those resources onshore too. This was something a number of us had championed for some years and the changes are a shining example of the Government's eagerness to listen and pragmatic approach.

The second is the scrapping of the notorious 80:20 rule which played havoc with funds seeking exemption under the tax incentive for funds managed from Singapore. The rule stipulated that no more than 20% of a fund could be held by Singapore investors. This was arbitrary and all or nothing approach. The replacement of the rule with a far more liberal and "honesty box" approach is a major leap forward for the industry. Unfortunately, the wording in the new legislation is somewhat cumbersome and not as clear as the circular that announced the changes. Perhaps, we should have just stuck to the circular.

Aircraft leasing

A good step forward here is an attempt to make Singapore attractive as an aircraft leasing hub with the introduction of section 43Y which provides for a 5% or 10% tax rate on specified leasing income and for 10% for an aircraft leasing manager under section 43Z. However, there is still some work to be done. For example, it is not entirely clear that capital allowances will be available for lessors for the cost of aircraft where each plane is held in its own special purpose vehicle. Indications are that if each special

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purpose vehicle forms part of an overall leasing group business that there should be no problem.

However, the uncertainty for the moment is causing some still to shy away from the risk and look at alternatives. Some clarity in this area would be helpful.

This has also been assisted immeasurably by the relaxation to the loss/capital allowance set off rules in section 10D which previously quarantined different types of leases and made most allowances only available to be set off against the rental income, not other income of the lessor. These new changes will inevitably result in the perking up of interest in the industry.

But the final piece in the jigsaw is something which is more difficult to control. There is no doubt that countries like Ireland still have a more favourable tax treaty network with low withholding taxes and until Singapore can come alongside in this area, competing will remain difficult. This is something that can only be dealt with over time, but it is an area that we should not overlook as withholding taxes are on the gross rentals, which can often wipe out the lessor's margins at a stroke. The lack of a treaty with the US (with 30% withholding tax rates) makes this market largely inaccessible without a deal of risk.

And, of course, the US is the single biggest market for aircraft leasing - so we need to remove this fiscal barrier to enable our companies to compete on an even keel.

REITs

Another thriving area is the S-REIT industry and there are probably more than a dozen in the pipeline that will hit the streets early next year. There is a need for separate REIT legislation as the path to

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transparency/exemption is presently fairly tiring and unnecessary. Well, legislation has been brought in in an attempt to sort that problem. The difficulty with it is two-fold though. It is still at the discretion of the Comptroller for transparency to apply, so this really undermines the legislation. The second is that the relevant pieces are so badly written (with double, and if you can manage to get to the end of the sentence, potentially triple) negatives. It is also leafed in amongst existing legislation, and so it is very difficult to follow. There have been suggestions for a separate REIT section, rather like the LLP section, and so on, as has been done for the LLPs and business trusts to make it all crisp and clear. But that plea has not been answered yet.

I would reiterate the desire to see the REIT legislation consolidated, with also the removal of any discretionary involvement by IRAS so that the whole process becomes clear and automatic.

Interest expenses and other borrowing costs

Changes to the legislation include amendments to section 14, the section that prescribes the extent of deductible expenses, in particular, in relation to (non-interest) borrowing costs. While these address certain illogicalities in the current practice, there is still an issue that remains a thorn in the side of many companies, but most acutely of property companies that construct properties that they then rent out. Current practice is not to allow any "pre-commencement" expenses, the largest component of which is generally interest expense on borrowings to construct the property. This can amount to two or three years' worth of interest cost and the disallowance adds significantly to the cost of borrowing. Put that in the context of the $5 billion for the

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Integrated Resort and the sums at stake can be quite staggering.

We can find few examples anywhere else in a developed world where there is such a restriction on the deductibility of interest expense, and it is true to say there is no commercial rationale for it. We should consider introducing legislation which either loosens up the deductibility of interest in general, or which deems pre-commencement interest expense to have been incurred on the first day of business. This would reduce the cost of finance as well as reduce the pressure on property companies to recoup that cost through enhanced rentals.

So I hope my comments and suggestions will be considered by the Second Minister for Finance when he crafts the Budget in early 2008.

Mdm Deputy Speaker, thank you for giving me the opportunity to speak.

5.40 pm

Mrs Lim Hwee Hua: Mdm Deputy Speaker, first of all, let me thank all three Members for their support of the Bill. I will try and respond to as many points and suggestions as possible.

Madam, the topic of tax competitiveness has been extensively debated in this House, especially during the past Budget, so I will be specific with regard to the comments. Nonetheless, I would like to reiterate the overall approach which is that the taxation framework would serve as an enabler of economic activity and it would always be changed, designed or refined so as to respond to changing business conditions, to be conducive to the pursuit of new opportunities and, ultimately, to ensure that Singapore's competitiveness will remain.

Firstly, on Mr Inderjit Singh's comments on the Hong Kong's tax system. I

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will not speculate on how Hong Kong determines its personal and corporate income tax rates as this is a matter for their policy-makers, except to say that in Singapore, we set our personal income tax and corporate tax rates in a way where we can ensure that it is competitive and encourages work, savings and enterprise. There is no pre-conceived intent to make personal income taxes higher than corporate income taxes or vice versa . So, ultimately, it is really competitiveness that is the key consideration. And as we all know, there is a global trend towards cutting corporate tax rates, so we expect to face continued pressure to lower our corporate tax rates.

As regards personal income taxes, there is also the issue of ensuring progressivity within our system. Although Hong Kong has a lower headline personal income tax rate, the vast majority of taxpayers enjoy a lower effective tax burden in Singapore than Hong Kong, because Singapore's tax system is more progressive. In other words, we have lower and more progressive personal income tax rates for the lower and middle income taxpayers.

On corporate taxes, I would agree with Mr Inderjit Singh that the headline tax rate cannot be viewed in isolation and it is always the overall tax package that matters. Even though our headline corporate tax rate of 18% is higher than that of competitors like Ireland and Hong Kong, our tax regime is still competitive. Let me elaborate.

For example, with the partial tax exemption granted on the first $300,000 of income as approved in this year's Budget, about 93% of the tax-paying companies will pay tax at effective rates of below 16.5%, which is Hong Kong's tax rate. And about 82% of the companies will pay an effective tax rate of below 12.5%, which is Ireland's corporate tax rate. So there are many more

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companies here that are actually paying below the respective tax rates.

Singapore's competitiveness is not just about low tax rates. Indeed, the World Economic Forum ranked Singapore as the most competitive economy in Asia and the seventh most competitive economy overall in its 2007/2008 Global Competitiveness Report . Nonetheless, we will not be complacent and we will continue to monitor the global environment to ensure that our tax regime remains competitive.

Madam, Mdm Ho asked if there was a correlation between the corporate tax cuts and investments. We recognise and we have to accept that we live in a competitive world and that companies will locate where it makes the most economic sense for them to do so. Many factors come into play, in terms of determining their investment decisions, but a favourable tax regime is a key factor in helping Singapore attract investments and creating good jobs as a consequence. If we are not attractive as an investment location, then our people will suffer. So corporate tax cuts, as I have said earlier, are a reality. They are not conceived at the expense of Singapore residents.

It is difficult to have statistics showing the direct correlation between tax rates and the investment or job creation. Nonetheless, if we were to track the investment commitments made over the last few years, they have remained healthy at over $8 billion for each of the last three years. I would agree with Mdm Ho that we should continue to share information on the increased economic activity level as a result of the tax incentives and the benefit, in terms of job creation that this has brought to Singaporeans.

Mdm Ho also made suggestions about helping new companies. Madam, I would like to clarify that currently, we already grant a full tax exemption for the first

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$100,000 of normal chargeable income for new companies that meet the qualifying conditions during the first three years of assessment of their establishment. So this is specifically targeted to help start-up companies.

This concession, which was due to expire in Year of Assessment 2009, was extended indefinitely during this year's Budget. Also, in the same Budget Statement, the partial tax exemption, as Members have heard, of all companies, not just new start-ups, was raised from $100,000 to $300,000. We will continue to monitor these limits for effectiveness and will make the necessary changes where it is deemed to be helpful.

Madam, let me now go to the specific points raised by the different Members. Mr Gautam Banerjee asked if we could allow the deduction of pre-commencement interest expenses. Allowing pre-commencement expenses will essentially touch on the fundamental issue that only expenses incurred in the production of income are allowable for tax purposes. Such expenses are incurred to put the business in a position to start functioning and are not incurred in the production of income. Therefore, that divide would remain. There is currently already a concession to allow tax deduction for certain revenue expenses, including interest expenses, prior to the commencement of business. Under this concession, a business, other than a section 10(e) company, will be treated as having commenced operations on the first day of the accounting year in which it earns the first dollar of its business receipts. Again, as with all tax incentives, this is a situation where we will continue to monitor for competitiveness reasons.

Next, moving on to Mr Inderjit Singh's point about the international arbitration incentive. Our regime, as I said, serves to promote and enable more economic activities to be carried out in Singapore. In

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the case of international arbitration, we have to recognise that international arbitration carries high economic value and it is also a very mobile one, much more so than for the other professional services. Arbitrations can be held anywhere, and there is stiff international competition. So we have to be proactive with regard to creating incentives.

The incentives for the sector will be consistent with the location of more ancillary support services here in Singapore to serve the regional market as well as the global market. A very good example would be the maritime services sector. The income would be earned in Singapore, as the hearing must be done in Singapore, even if the subject of the dispute does not involve or happen in Singapore or the parties involved do not locate their businesses here. Law firms that are qualified for the tax concession in international arbitration do not compete with companies in other sectors doing businesses overseas. So there is no conflict of interest or competition for incentives. In fact, building Singapore into an international arbitration centre would help Singapore companies which are doing businesses overseas as well, as they can in turn have their arbitration done in Singapore.

Mr Inderjit Singh also raised a topic that is frequently discussed, ie, rising business costs. The Minister for Trade and Industry had extensively addressed the issue of rising business costs in this House in August, so I would not repeat his statements. But, nonetheless, I will note Mr Singh's concerns. I would also like to assure Members of the House that the Government is constantly preoccupied with ensuring that we remain competitive on all fronts, and we are therefore open to receiving suggestions from both the GPC as well as from the industry.

Moving on now to the fund management incentive which both Mr Inderjit

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Singh and Mr Gautam Banerjee have raised. The new tax exemption scheme for funds under management will be helpful to the Singapore-based fund managers to the extent that it will give certainty that the fund will not incur tax liability in Singapore simply by virtue of the fact that the fund manager is based in Singapore, or when the resident investor's holdings exceed 20%. So it serves to remove that uncertainty.

Foreign investors are attracted to Singapore not solely for tax reasons but because Singapore is a reputable and credible financial hub, and we expect the foreign investors who participate in such schemes to be compliant with the tax laws in their respective home jurisdictions, as it is their responsibility to do so. As it is with any tax incentive scheme, there will be tracking of businesses to ensure that there is no abuse and that there is real substance of economic activity that is carried out in Singapore.

With regard to the fund management scheme, Mr Banerjee made a comment about the drafting quality. Madam, there is a need to be legally accurate in our legislation which can sometimes result in lengthy but very specific descriptions. The Ministry is mindful of this and will continue to strike a balance between the need for simplicity and accuracy in our legislative changes.

Mr Banerjee has also given some comments on aircraft leasing. The scheme which was enhanced in this year's Budget really serves to position ourselves better as an aviation hub, as we have both the aviation expertise as well as a well-developed financial services sector. There are increasingly many different complex models with which an aircraft lessor may conduct its activities. For certainty of tax treatment, lessors can always seek an advanced ruling from the IRAS, just to be sure.

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As regards tax treaties, I would like to assure Members that we are constantly reviewing our existing treaties as well as exploring new treaties, but this will remain a challenge. Having said that, for this, we aim to attract lessors who are looking to leverage off Singapore's geographical location and advantage in Asia and our competitive cost of operations as well.

Moving now to REITs, again, I would like to thank the Member for his comments on the drafting quality. His comments are well taken. As I have said, we are always seeking to improve the drafting of legislative changes. In fact, that is why the Income Tax Bill was published for public consultation in June and July to get suggestions on improvements to drafting. For this particular topic, we actually received no suggestions.

On the discretion granted to the Comptroller, it is really to enable the Comptroller to respond and to proceed flexibly with regard to the treatment of new business models, as REIT models continue to evolve or change. So this is really more to the contrary, that of providing flexibility. In any case, the Ministry will work with IRAS to make known the details under which the tax transparency treatment will be granted to approve sub-trusts of REITs, to give certainty to the REIT. So there will be a list and there will be the discretion to provide for flexibility to treat and respond to new models.

I would wish to make a clarification here, Madam. There are currently separate pieces of legislation addressing the regulation and governance of limited liability partnerships and business trusts. However, all the income tax matters related to these different business forms are incorporated in the various parts of the Income Tax Act based on whether the positions relate to taxability, tax exemp-

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tions and so on. But I take the Member's point about drafting for clarity.

Finally, Madam, on charities. The 80:20 rule, if I may recapitulate, was previously in place to prevent the hoarding of funds and to ensure that spending takes place in Singapore. But as Members have noted, removing the 80:20 income tax exemption rule will help charities optimise investment and their use of funds to support a more sustained charitable programme in the quest to meet the longer-term needs of the community. I would like to assure the House that the removal of the rule is unlikely to lead to poor governance, as there are sufficient measures in place taken by the Commissioner of Charities to ensure that the charities and institutions of a public character (IPCs) manage their resources responsibly. For example, the Commissioner of Charities can suspend or shorten the period of IPCs if there are governance lapses. For non-IPC charities, they could also be deregistered by the Commissioner of Charities on similar grounds.

As Mdm Ho has noted, the soon-to-be-finalised code of governance for charities and IPCs is not mandatory. But because it is meant to promote self-regulation and not draft more regulations, as this could be too onerous, we are encouraging the disclosure of the extent to which the charity is complying with the code of governance.

Madam, I believe I have addressed all the issues. Once again, let me thank Members for their support of the Bill.

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].

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

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