ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT) BILL

ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT) BILL: Order for Second Reading read.

3.10 pm

The Minister of State for Trade and Industry (Mr S Iswaran): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

This Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act (EEI Act). It will give legislative effect to allow the Investment Allowance incentive (IA incentive) to also be extended to the aircraft rotables used by the aerospace maintenance, repair and overhaul industry.

Investment Allowance Incentive

Sir, the IA incentive is a tax incentive to encourage investment in high technology equipment for greater productivity and to upgrade the manufacturing industries in Singapore. The incentive allows a company to deduct an approved percentage of its qualifying fixed capital expenditure from its taxable income. This is on top of the capital allowance enjoyed by the company, if it is already allowed under the Income Tax Act.

Currently, the IA incentive can only be applied to the fixed capital expenditure on buildings, the acquisition of know-how or patent rights and productive equipment to be used in Singapore. The rationale is to ensure that Singapore directly benefits from the projects which enjoy the IA. Hitherto, the only exception where the incentive may be given in respect of fixed capital expenditure items that are used outside Singapore, is in the operation of space satellites, where a special concession has been made to encourage companies to launch and operate satellites here.

We propose this legislative amendment to allow the IA incentive to be extended to the aircraft rotables used by the aerospace maintenance, repair and overhaul industry here. There has been a trend in recent years towards companies in this industry managing and providing spares like aircraft engines, avionics and landing gears for airlines when in the past the airlines themselves would have owned these spares. These spares are known as "aircraft rotables" and would be fitted onto the aircrafts which fly around the world while the actual systems and components are being repaired in Singapore. Airlines are now demanding that aerospace maintenance, repair and overhaul companies provide aircraft rotables while their systems are being repaired, so that they can operate their aircrafts with minimal downtime.

As the aerospace maintenance, repair and overhaul industry is a key industry that we want to grow, it is important that our incentives are attractive to encourage such activities here. This Bill amends sections 66 and 67 of the EEI Act to extend the IA incentive to the aircraft rotables used by the aerospace maintenance, repair and overhaul industry in Singapore.

Consequential amendments

Arising from the insertion of the new sections 43T, 43U, 43V, 43W and 43X and the repeal of section 43L in the Income Tax Act by Income Tax (Amendment) Acts 2005 and 2007, clause 2 of the Bill makes consequential amendments to the definition of "concessionary income" in section 66(1) of the EEI Act.

Mr Speaker, Sir, the proposed change to the EEI Act seeks to enhance Singapore’s value proposition for the aerospace maintenance, repair and overhaul industry, and to strengthen our role as an aerospace hub. The proposed amendment reflects the Government’s commitment to constantly monitor the effectiveness of our tax incentives regime, and to keep it relevant and competitive as business models change.

Sir, I beg to move.

Question proposed.

Mdm Ho Geok Choo: Sir, it is most timely that the provisions of this Act and the Investment Allowances are extended to the maintenance, repair and overhaul (MRO) industry. This will spur the development of our own MRO industry, and contribute to the development of Singapore as a regional aviation hub.

To this end, Sir, I do have a few observations and suggestions to make.

One, the MRO business faces competition from around the region. For example, other countries are also setting up MRO companies to service their own aircraft, especially from their national carriers. Our own local MRO companies can expand their

wings into these overseas markets by setting up joint ventures in these countries. In situations such as these, and where the services are complementary to those here, I ask that the investment allowance also covers the capital expenditure and investment relating to the formation of these foreign MRO joint ventures. This should apply to those MRO companies headquartered in Singapore.

Although the EEIA covers the MRO services and aircraft rotable management, also known as Inventory Technical Management (ITM), I would like to ask if it can also be extended to cover aircraft Fleet Technical Management (FTM) services. The FTM services tend to complement ITM services, and both these ITM and FTM services are normally sought after by start-up airlines which need the technical expertise to start up an airline.

An airline-linked MRO which would have all the technical expertise and experience to run the airline could provide such services, which are high in intellectual content and with high value-add. Sir, such "knowledge-based" services will contribute to making Singapore a one-stop aerospace hub, providing the entire suite of services, from MRO to managing the supply chain of aircraft parts and running the entire technical operations of even new airlines.

To compete profitably and effectively in a global marketplace, a Singapore MRO company would have to establish facilities overseas to store aircraft inventories and spares. We can have the "brains" in Singapore but, for an efficient flow of aircraft spares and inventories, it would be better to set up forward Distribution Centres (DCs) in countries like China, India, Middle East and North America at strategic locations (or air hubs) around the world in support of ITM and FTM services.

Sir, I ask that the IA should be extended to Singapore MRO companies engaged in these global businesses.

Sir, the MRO is a knowledge-based industry, with a high level of value-add and intellectual capital. To quickly build up a base of local MRO domain knowledge, I would like to ask if the Government could provide incentives for our MRO companies to bring in foreign talents who have specialised skills in the MRO, ITM or FTM businesses, like the specialists for passengers-to-freight (PTF) conversion aircraft, aircraft design, aircraft structures (such as aircraft stress engineers), etc, to grow the depth and breadth of our local MRO industry. They can provide the knowledge and skill transfer to help us build up our own pool of local talents.

Finally, Sir, I have also received feedback that the current claim process is very long and tedious with many forms to fill, together with a lot of justifications required. If the MRO industry is seen as strategic to our economic development, we should then look into streamlining the claim process as well.

To this end, Sir, I ask that the relevant Government agencies, such as EDB, CAAS and IE Singapore, work closely with the aerospace industry association or MROs to simplify and streamline the entire claim process.

On this note, I rise in support of the Bill.

Ms Jessica Tan Soon Neo: Mr Speaker, Sir, with reference to the EEIA and the extension of the investment allowance, I ask if there will be consideration given to the repairs and returns industry, in terms of inclusion into this investment allowance scheme.

Mr Liang Eng Hwa (Holland-Bukit Timah): Mr Speaker, Sir, I rise in support of the Bill to extend the investment allowance under the EEIA as well. In fact, I support the suggestion to extend this incentive beyond the MROs and to other areas, such as those mentioned by Ms Jessica Tan.

The proposed amendment will be a welcome relief for companies who are prepared to spend large capital expenditure. Tax incentives have always played an important part in Singapore's economic development. While we should continue to use tax incentives to develop new and high-growth sectors, such a scheme should always be regularly reviewed for its relevance and, if need be, we should include a sunset clause. We should also review its attractiveness vis-a-vis countries in the region with similar aspiration. We should also closely monitor whether we achieve the desired outcome. There must be measures there to assess such outcomes.

Singapore's tax rates are already among the most attractive in the world and, come 15th February, it may even go lower. Hence, I would like MTI to also look beyond corporate tax relief as an incentive or to encourage big-ticket item investments and to consider other incentives such as lower cost financing and other measures.

Sir, I support the Bill.

Mr Iswaran: Mr Speaker, Sir, let me thank the Members - Mdm Ho, Ms Jessica Tan and Mr Liang Eng Hwa - for their comments and support for the Bill.

In responding to their comments, allow me to, first, reiterate the primary purpose of this Investment Allowance Incentive. It is to encourage high-technology equipment investments in order to promote greater productivity and to update the manufacturing industry in Singapore in particular. So, it is applied quite selectively and only when the economic agencies, and in particular EDB, assess that there is a significant economic benefit or contribution to Singapore. So, if you take the maintenance, repair and overhaul business for the aerospace industry, for example, it is a big contributor to our economy. The aerospace sector has been one of the fastest growing sectors in Singapore. In 2005, it grew by about 15% to 16% and its value-add to the Singapore economy was about S$2.2 billion, and 90% of that comes from the MRO industry. In terms of job creation as well, it is quite significant - more than 15,000 jobs and these are professional jobs, high-wage jobs typically.

In the case of the MRO, when we seek this amendment to apply the IA to the MRO industry, it is because we want to promote the investment in the stock of replacement rotables, such as the engines which cost several tens of millions of dollars, to drive the MRO operations in Singapore, in other words, the maintenance, repair and overhaul activities in Singapore. So, whilst the engine is brought in and replaced from the aircraft that is flying around the world, the MRO activity occurs in Singapore, giving direct spin-offs for us. The test really in applying this incentive, or for that matter other incentives, is really, first, does the industry bring significant economic benefit to Singapore? Secondly, is this incentive necessary to attract and sustain this kind of industry in Singapore? And if the answer to these two is yes, then to proceed to calibrate a package of incentive measures for particular companies in these sectors. In that regard, the investment allowance is not the only incentive available either, and I want to inform Members, because there is a slew of other measures available at EDB's and other economic agencies' disposal. These include HQ incentives, pioneer status, development and expansion incentives, and so on. But I think the key point here really, at the end of the day, is that EDB and MTI agencies are keenly aware - and this is the point that several of the Members have made - business models are evolving and changing, and our incentive structures must adapt flexibly to these needs. That is really what we are trying to do even through this amendment.

Just to take up the specific questions. Mdm Ho raised the point about incentives for overseas expansion, ie, using this investment allowance for that purpose. As it is framed now, this investment allowance does not allow it to be applied for investments in capital equipment and other investments overseas. However, if it is, in fact, linked back to Singapore through other activities - I think Mdm Ho mentioned the possibility of a HQ and so on - then we do have HQ incentives and other incentives which can be made available to these companies in order to facilitate this regional expansion that they are contemplating.

On the point of fleet technical management, it is a fair point. What I would urge the Member is that any companies in this business who are interested in this area should get into a dialogue with our Economic Development Board, and I think they will find that there is a very responsive set of officers there who are prepared to come back with measures that they think will help them and, if necessary, extending the IA for that purpose.

On this point about incentives to attract foreign talent, for the MRO industry in particular, as it stands now, there is no specific incentive for this talent flow for the particular industry. But what we do know is that, generally, the companies do not necessarily look for incentives to bring in individuals or a group of talent per se, but they are looking for concessions for their entity as a whole. For example, if we can provide them with HQ incentive or some other tax concessions at the top level, then all this cost that they incur as part of their attracting talent and setting up their operations here will be deducted and thereafter whatever taxable income there is would be entitled to further concessions.

So, I think that is a more holistic way of providing these incentives. But, again, I want to assure Mdm Ho that if there is specific change in the system where she feels that with some intervention, we can facilitate greater flow, we would be very happy to engage her in a more detailed dialogue in the matter.

She raised the point about long and tedious claim process. I want to assure Members that EDB is now in the process of streamlining its processes once again, and this is an on-going process. But I also want to place one caveat on record. When we dispense such incentives, we have to bear in mind that what we are giving away are public resources, in other words "tax revenue". When we do this, we need to make sure that it is being allocated through a valid legitimate claim, and for that we need appropriate diligence done by the Government agencies. So, we cannot do away with this. In our desire to streamline and be business-friendly, we need to strike a balance between that and our desire to be also accountable to public resources.

Ms Jessica Tan raised a point about the repairs and maintenance industry. I think the point I made earlier would apply here as well, that is, if the activity is anchored primarily in Singapore, and the investment in parts is in order to facilitate that activity in Singapore, then I think it would technically be qualified because there is a provision in the Act that allows for specialised engineering and technical services. However, it still has to meet the test of significant economic contribution and so on, which I have outlined earlier. Just to reiterate the point, it is something we can look at if, in fact, there is sufficient economic justification.

Mr Liang made several points. The point about regular review and the sunset clause, I think both of these we agree fully. In fact, this is part of the regular review process and the sunset clause has been built in even for this particular amendment, the logic being that we need to revisit these incentives from time to time, either to enhance or maybe even to remove, if it is no longer necessary. The agencies are regularly involved in monitoring and comparing the regime we have in Singapore, fiscal and other incentives vis-a-vis our competitors.

I would like to assure Members that MTI agencies are quite seized with the whole notion of evolving business models and ensuring that Singapore continues to maintain its position as an attractive place to do business and to be a business hub for the region. This amendment is part of our ongoing efforts to maintain that pre-eminent position.

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 Iswaran].

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