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

Order for Second Reading read.

3.25 pm

The Minister for Trade and Industry (BG Lee Hsien Loong): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

This Bill proposes to amend the Economic Expansion Incentives (Relief from Income Tax) Act to effect the following economic policies announced in the 1986 and 1987 Budget Statements:

(a) The establishment of the Post-Pioneer Incentive;

(b) The extension of the Export Incentive to services;

(c) The establishment of the Venture Capital Incentive; and

(d) The extension of the Investment Allowance Incentive to tourist projects.

Sir, the Pioneer Incentive has been an important and useful tool in attracting high value-added investments to Singapore. Companies enjoying pioneer status pay no corporate tax. However, upon expiry of their pioneer period, they are immediately taxed at the full corporate tax rate. To encourage pioneer companies to continue their operations in Singapore upon expiry of their pioneer status, the post-pioneer incentive was introduced.

The Bill creates a new Part IIIA which deals with the incentive for post-pioneer companies. It provides for a concessionary tax of not less than 10% to be levied on the qualifying income of companies which are pioneer companies or export enterprises immediately following pioneer status, on or after 1st April 1986. The incentive will be used to encourage pioneer companies to make additional investments to expand, upgrade and diversify their operations in Singapore upon expiry of their tax relief period.

The Economic Committee had identified offshore services as an area of growth for Singapore. The Bill creates a new Part VIA to extend the Export Incentive, which presently covers only manufacturing activities, to service activities. The incentive provides for 90% of the incremental income from the provision of qualifying services in respect of offshore projects to be exempted from tax. The following services will qualify for the incentive:

(a) technical services including construction, distribution, design and engineering services;

(b) consultancy, management, supervisory or advisory services relating to any technical matter or to any trade or business;

(c) fabrication of machinery and equipment and procurement of materials, components and equipment;

(d) data processing, programming, computer software development; telecommunications and other computer services;

(e) professional services including accounting, legal, medical and architectural services;

(f) educational and training services; and

(g) any other services as may be prescribed.

Sir, the Bill also creates a new Part XIIIA which deals with the Venture Capital Incentive. The incentive is aimed at encouraging local companies and individuals to invest in non-traditional areas and new technologies. Investments in these new fields are inherently risky but, if successful, beneficial not only to the investor himself but also the economy as a whole. The Venture Capital Incentive provides for the investor to deduct, up to the full amount of investment, any loss arising from the sale of shares in an approved venture project. The incentive also covers investment in overseas venture companies made through an investment technology company in Singapore.

To further promote the tourist industry, the Minister for Finance recently approved a special package of tax incentives for tourist projects with a minimum investment of $20 million. The package consists of Investment Allowance, industrial building allowance, property tax concession and entertainment duty exemption. The Investment Allowance Incentive comes under the Economic Expansion Incentives Act. The Bill provides for an amendment to section 67(1) of the Act to extend the investment allowance incentive to approved projects for the promotion of the tourist industry.

The Bill also provides for an amendment to section 66(1) of the Act to extend the Investment Allowance Incentive to buildings or structures specially designed and used for carrying out approved projects in selected services.

The opportunity is also being taken to make certain technical amendments to the principal Act:

Section 8 of the Act is being amended to provide that the non-pioneer loss need not be deducted against pioneer income if the Comptroller is satisfied that such loss was not incurred to obtain a tax advantage. In the case of non-pioneer profits, the amendment gives the Minister the discretion to deem the profit margin to be at a rate less than 5% in any particular case.

Section 15 of the Act is being amended to allow any unabsorbed losses from a pioneer trade to be carried forward to the post-pioneer period.

Section 64 of the Act is being amended to provide the Minister with the discretion to exempt wholly or partially, on a case-by-case basis, withholding taxes on royalty payments to non-residents. Currently, the Minister can only grant total exemption or impose a reduced withholding tax rate of 20% on such royalty payments. The amendment gives the Minister flexibility to set the appropriate withholding tax rate according to the circumstances of each case.

Section 68(1)(b) of the Act is being amended to remove the time limit on the availability of the Investment Allowance Incentive to construction operations.

Sir, I beg to move.

Question proposed. 3.33 pm

Dr Augustine Tan: Mr Deputy Speaker, Sir, I rise on behalf of my GPC to support this Bill and also to make a few observations on the state of the economy.

Sir, we are all heartened by the rapid economic recovery of our country from a very severe recession. It was a combination of factors, both domestic and external, that enable us to recover so quickly. Domestically, of course, we have just heard the Minister putting into formal effect the tax incentives which have been announced earlier. There was the CPF cut of 15 percentage points for the employer's contribution, various statutory costs were cut and, above all, there was wage restraint which required the full cooperation of the NTUC and the workers. Externally, of course, various Ministers went around trying to encourage foreign investors to come to Singapore successfully. But more importantly, we were the beneficiary of exchange rate realignments which have occurred since September 1985. These were the realignments concerning the US Dollar vis-a-vis the Japanese Yen and the European currencies, in particular. In the first place, the realignments allowed our goods to be much more competitive in European markets as well as in the US and to a lesser extent in Japan. But more importantly perhaps, it gives impetus to foreign investors to come to Singapore, particularly Japanese investors.

The question that we must pose to ourselves is this. Can we expect this economic expansion to continue? What are the prospects likely to be? Hon. Members would have read the various economic reports in newspapers and magazines indicating that economic growth performance of the OECD countries is not up to expectations. In particular, I think there is concern that Japan and West Germany are not serving as the additional locomotives for the world economy that the Americans have been urging them to do. I think for various domestic reasons, in particular, the fear of kindling inflation has restrained the West Germans and to some extent to the Japanese from stimulating their economies to the extent that might be necessary.

The impetus to protectionism continues as a result of the slow growth in the OECD countries. In America we read of various trade bills which come before the Congress and our Ambassador there and our trade officials have their hands full coping with the new bills and trying to project the right image of Singapore, trying to tell the Americans that we are a free port, we are not protectionistic unlike other countries, and that therefore we ought to be treated differently from countries which may come under the ambit of those restrictive bills. All these spell difficulties for us in the future. So we should not be complacent about our economic performance but we should redouble our efforts not only to increase productivity, but to put into effect the proposed wage reform. And I would like to emphasize the importance of this that we need to have a wage structure which has a bigger variable component by way of bonuses which can be altered from year to year in response to profitability of firms. Because this will enable us to, in effect, cut wages without having to cut employment.

Earlier on this morning there was a Question tabled about the labour market in Singapore and our need for foreign workers. My Committee has received comments from the private sector in regard to the problems of high turnover of workers, as a result of which labour costs have been rising.

Sir, at a time of rising economic growth and in the face of the wage restraint policy, one obvious way of overcoming wage restraint is for workers to move from company to company. Obviously in the process they gain higher wages. But this adds up to higher labour costs for the firms involved, both the firms losing the workers and the firms gaining these workers. In addition, there are training costs involved of new workers that are needed to replace these workers who have gone away. Perhaps we need to emphasize this to the workers in Singapore that there should be a greater sense of responsibility, that job-hopping is not something to make a habit of, that jobs are not something to be taken for granted in a very uncertain world.

Some of the private sector representatives who met our Committee have proposed to us that perhaps some form of restraint might be introduced to hinder or at least to slow down this high turnover of workers. But we are still studying the matter and perhaps the Minister himself may have some ideas to share with us. But it is a matter of concern to us.

The Minister also mentioned earlier the problem of the older retrenched Singapore workers, a matter of concern also of the NTUC Secretary-General and the Minister for Labour. My Committee is equally concerned for two reasons. Firstly, the older retrenched Singporean workers.

Mr Deputy Speaker: Order. Dr Tan, it appears to me that what you are speaking on so far is not relevant to this Bill under discussion. May I therefore ask you to please be relevant to what is under discussion.

Dr Augustine Tan: I will take heed and focus accordingly, Mr Deputy Speaker, Sir.

Mr Deputy Speaker: Thank you. Continue, please.

Dr Augustine Tan: Incentives, Sir, are designed to promote economic expansion but at the same time there are disincentives that we may be producing within Singapore and these are matters of public concern. The older retrenched workers are by and large breadwinners, and moreover they are going to be an increasing percentage in the future because of the ageing of the workforce. There is another concern expressed to us in the matter of incentives by the local private sector and these are the following.

Firstly, is the local private sector as a percentage of the contribution to the GDP declining? Secondly, in particular, in manufacturing, is the local private sector declining in terms of its contribution? Thirdly, should there not be special incentives for the local private sector participation which are better than those offered to foreign investors? Given the international climate, I think it might be in order for us to look more closely at the potential role that local entrepreneurs can play in our development. I am also concerned, Mr Deputy Speaker, Sir, about the small businesses in Singapore. The macro-economic indicators look good but the question is whether there is a percolation of economic growth right down to the small man, the shopkeeper level. There is a third stage - shop rental increase that is coming, on 1st January 1988. It is a matter of some concern to over 8,000 shopkeepers who rent them from the HDB. The rentals for JTC premises are also a matter of some concern, whether and how soon these are going to be revised. All these would be affecting our economic performance. I would urge that there be a monitoring process in respect of the small business sector in Singapore. I have here the Survey of Business Expectations of the Services Sector in Singapore but unfortunately there is no distinction made between the big firms and the small firms, the foreign firms and the local firms.

Then there is the problem in the area of tourism, since the Minister mentioned incentives for tourism. The problem brought to the attention of my GPC is this. That people who come here on package tours are limited to certain shops which pay commissions to the tour agents, as a result of which the prices are not the lowest that our shops can offer to these tourists. The tourists may go away with the wrong impression of Singapore. So can something be done about this, if we want to project Singapore as a shopping centre? Secondly, are the airline seats for travellers coming into Singapore sufficient? These are some of the questions which I would like to address to the Hon. Minister.

Mr Chew Heng Ching (Kaki Bukit): Mr Deputy Speaker, Sir, I shall be relevant. I shall come to the point straightaway.

I rise to support the Economic Expansion Incentives Bill, in particular, Part VIA on the export of services. The section is meant to encourage Singapore companies to export their services and expertise overseas. This is indeed an admirable move. In a small country like ours, with a high concentration of professional talents and skills, selling such services overseas becomes a logical extension in the growth of our services sector. Indeed, the services sector has and will continue to be an important pillar of growth in the years to come.

Sir, I have two observations or comments to raise with the Hon. Minister. First, I wish to draw the Minister's attention to page 7 of the Bill under section 44A, which attempts to define "overseas customers" under "qualifying services". It is stated that these services refer only to overseas services undertaken with respect to overseas projects for persons who are neither residents of nor permanent establishments in Singapore. Sir, will this definition of "overseas customers" not prevent a Singapore services company providing support services to a larger Singapore company from being eligible under the scheme? Sir, many small services companies need to build up a track record overseas. By themselves they find it difficult to achieve this. They therefore often rely on a bigger Singapore company, a big brother so to say, in the initial years to secure the business and build up that track record. By limiting the customer definition to only non residents and non permanent establishments in Singapore, are we not shutting out this scheme to many small services companies that provide support to bigger Singapore companies overseas? Will the Minister please clarify this observation?

Sir, the other observation relates to implementation of the scheme. Section 44E and section 44F of the Bill require that the aplication be sent to the Inland Revenue Department in order to establish the qualifying income base. Inevitably, this will require Income Tax officials to scrutinize past financial records and practices of companies which choose to apply for the scheme. To many a businessman and company executive, having to face Income Tax officials is often not a pleasant experience. It is an onerous task and at times can be quite embarrassing. I will not be surprised therefore that many deserving companies may choose to stay away from the scheme. This may negate our efforts to promote the service companies. Sir, whilst I agree that meeting with Income Tax officials is a necessary part of the application procedure under the scheme, may I suggest that the Minister consider making the encounter with Income Tax officials less painful, less onerous and more pleasant.

BG Lee Hsien Loong: Mr Deputy Speaker, Sir, I have not prepared a tour of the horizon of the economy of Singapore. I will come straight to the point. The Member for Whampoa asked about the Singapore labour market. I expressed myself comprehensively on this subject this morning in answer to the question from the Member for Potong Pasir. I have nothing to add to those remarks.

Should incentives for the local private sector be better than incentives for overseas investors? Mr Deputy Speaker, Sir, one of the fundamental principles on which we have managed this economy is that we open it to free and fair competition so that whoever is best able to make use of our economic resources, our manpower, our infrastructure, our political stability, in order to generate economic wealth, that is whom we promote, whether it is a local or a foreigner. The beneficiaries ultimately will be the Singapore population. This is the best way to safeguard the Singapore population. Therefore, to propose incentives which overtly discriminate between local investors and foreign entrepreneurs, I think, goes contrary to this fundamental spirit and would be totally wrong.

Of course, we understand that local companies do have some additional difficulties adapting to the new economic environment. In the manufacturing sector, we are not at a comparative advantage. We are at a comparative advantage offering infrastructure, so that multinationals with technology, with markets, with their economic might, can come and make use of it, employ Singaporeans and do well here. But for Singapore companies to take full advantage of the same set of circumstances is not so easy. There is no easy way out. Pioneer status benefits, by and large, the bigger companies. We have introduced another incentive - the investment allowance - which is more suited to small and medium-sized companies, so that they too will be encouraged to invest in new activities.

I am happy to tell the House that since we liberalized the provision of investment allowances two years ago, and particularly since we made it easier for small companies to benefit from these allowances, the number of small companies which have taken them has gone up. This year alone, between January and July, for total investment allowances, we have $679 million worth of projects, of which $112 million are local companies. These are the bigger ones. Then we have for smaller companies, $117 million worth of projects, of which the local companies take $59 million, a bigger share. Admittedly, in absolute numbers, this is not a lot, but I think it is significant. The assistance is reaching a sector of the economy which we would like also to promote, in an even-handed way.

Small businesses and percolation of economic benefits down to shopkeepers. We can see the performance of the economy. Last year manufacturing and transport and communications were the boom sectors. This year, growth has diffused to banking, to retail trade, to commerce, to supermarkets and department stores. That is percolation. Has it gone down to every last provision shop and every last small shopkeeper in Singapore? I would say no. Not yet. Partly it has further to go. Partly also because many small shops operate in traditional ways which are not well adapted to the new economy. For the small shops to prosper, they must adapt to the changing circumstances and reorganize their management. Provision shops must convert themselves into members of mini-market chains. Those provision shops which have done so have, in fact, prospered in the last two years. I encourage others to do so.

As for tourism, tour agents taking tourists to particular outlets and then collecting premiums, this is an age-old problem. When we find unscrupulous tour agents, we catch them. The best solution is to make sure that there is free competition so that other tour agents come in and the market bids the premium down. I think the problem is within control. It has not prevented a very strong growth in our visitor arrivals this year. We have had 15% more tourists this year since January than in the same period last year. So we should see the problem in perspective.

The other tourism problem - not enough airline seats - is more interesting. So many visitors are coming that the aeroplane capacities are inadequate. For example, this year, from Japan alone, there has been an increase of one-third in the number of tourist arrivals. The aeroplanes are all fully booked. STPB is aware of this problem. So is SIA, of course, because this represents good business for them. I understand that SIA will very shortly be negotiating with the Japanese for more flights on the route.

The point raised by the Member for Kaki Bukit - how export incentive for services is more advantageous for big companies than small ones. That is true because to operate overseas, unless you have the critical mass, it is hard to penetrate the market and take the risks, which are significant. So small companies which supply to big companies which then operate overseas will not benefit directly from this. But I would offer two points for his consideration. One, small companies who want to do overseas business can get together in consortia and operate overseas. Some have done so. In that way, they can benefit from the rules. Secondly, we have to draw the line somewhere. Let us say, he operates a company selling businesses to China. I am a subcontractor of his. According to the argument presented, I should benefit also from the tax incentive. But I do not provide everything myself because I buy supplies from other people who are sub, sub-contractors. There are many expenses which I incur in Singapore. If you follow it through to the logical conclusion, nearly every cent in Singapore is earned from exports. Where do we draw the line? We have drawn the line at the first stage, which I think is probably the cleanest place to do it. Small companies who really want to go overseas, as I said, should get together and form consortia.

As for section 44E and F and having to establish a base in your financial records so we know what is your normal overseas earning and only earnings above that base will be entitled to tax exemption, the Member suggests that it can be quite embarrassing at times to have a confession session with the Comptroller of Income Tax. I do not know about this embarrassment. I pay my taxes every year. I have never had such a problem. But, more seriously, this is a principle which has already been established for economic expansion incentives for merchandise. It is not a new principle we are introducing. It is necessary to have a floor. Without a floor, we will be giving away incentives to encourage people to do things which they have already been doing all along. One of the cardinal principles of any Minister for Finance is never to give people money to do things which they are already doing. Because if you do that, there will be no end and eventually there will be no money. Because of this principle, I think the export expansion incentive is workable. The rule has not prevented the merchandise incentive from working, and I think the services incentive will also be a success.

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. - [BG Lee Hsien Loong].

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