DOUBLE TAXATION AGREEMENTS (Assessment of benefits)

Mr Ho Kah Leong asked the Minister for Finance what benefits Singapore has derived from the many double taxation agreements concluded with other countries; how are the benefits assessed; and whether a similar agreement will be concluded with Indonesia.

Mr Hon Sui Sen: Sir, it is easy to understand that the inflow of funds, investments and technical expertise to Singapore from another country would be greatly discouraged if full taxes have to be paid according to the laws of both countries. In the absence of any agreement otherwise, income which arises and is taxed in Singapore and is then remitted home by a foreign company would still be subject to tax in its own country. At prevailing income tax rates, such cumulative taxation by two countries would be prohibitive. It would completely deter foreign investment in Singapore. The converse is also true for Singapore companies which have plans for substantial investments overseas.

In bilateral tax treaties to avoid this situation, double taxation is eliminated through full or partial tax credit or exemption on interests, royalties, dividends, etc.

Another important feature found in bilateral tax treaties between Singapore and the developed countries is "tax sparing". This is a means of ensuring that the tax on the profits of foreign-owned companies foregone by the Government through various tax incentive measures is "spared" from tax by the foreign government. Without such bilateral treaties, incentives such as tax holiday benefits granted to such companies could be nullified if the foreign country should unilaterally decide to increase its tax by an amount equivalent to the tax remitted by the Singapore Government as a tax incentive.

Besides the avoidance of double taxation, tax treaties also contribute to the prevention of fiscal evasion. As a company's books and records in one country are generally not available to another country, effective control is only possible if the two countries agree on the exchange of information. Tax treaties therefore invariably have provisions for the prevention of tax evasion and for the exchange of fiscal information.

We have concluded avoidance of double taxation agreements with all the major EEC countries and Japan. In ASEAN, agreements with Thailand and Malaysia are in force, while an agreement with the Philippines was recently initialled.

There is no simple method of assessing the benefits which Singapore derives from the conclusion of avoidance of double taxation agreements, but it is significant to note that it was only after the conclusion of tax treaties with Germany. Netherlands and Japan that big multi-national corporations from these three countries such as Rollei, Philips and Mitsubishi established themselves in Singapore in response to the various tax incentive measures granted by the Government. The tax treaties with these countries ensure that these benefits are not eroded through increased taxation by the home countries. Rollei Singapore Private Limited has invested $106 million, Philips Singapore Private Limited $45 million and Mitsubishi Singapore Heavy Industries Private Limited $110 million as at June 1976.

The principal benefits flowing from tax treaties are the encouragement of the inflow of capital and technical expertise. In the process, local technical and managerial skills are upgraded and more employment opportunities are provided.

Preliminary discussions were held in Djakarta in November 1973, on a Double Taxation Agreement between Singapore and Indonesia. An Indonesian team is expected to come to Singapore for the next round of negotiations, but the date has not been fixed. We would welcome an early agreement with Indonesia as this would contribute to expansion of intra-ASEAN trade and would encourage greater investments among member states. However, pending the conclusion of a tax treaty with Indonesia, Singapore grants exemption from tax on income derived from certain approved Singapore investments in Indonesia which enjoy pioneer status or tax holidays in Indonesia.