INCOME TAX (AMENDMENT) BILL

[Mr Speaker in the Chair]

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill, 1988, gives legislative effect to four income tax concessions announced in the 1987 Budget Statement. Opportunity is also taken to include 11 other amendments to the Act.

In my last Budget Statement, I announced an incentive package to encourage procreation. A special tax rebate to be utilized over five years and subject to a maximum of $20,000 was granted in respect of a third child born on or after 1st January 1987. The rebate may be used to set-off either or both the husband and wife's tax liabilities. A further rebate, equal to 15% of a working wife's earned income, to be set-off against her tax liability, is also granted. Clause 10 inserts a new section 42A to the Act to provide for this.

The normal child relief for the third child was also raised to $750 and the enhanced child relief extended to a fourth child if the birth occurs on or after 1st January 1987. Eligibility for enhanced child relief is also lowered to three GCE 'O' level passes or equivalent, taken in one sitting. The Fifth Schedule to the Act is amended by clause 19 to provide for this.

The second Budget concession allows an individual, who has incurred delivery and hospitalization charges in respect of a legitimate fourth child born to him on or after 1st January 1988, to claim a deduction against his earned income, subject to a maximum of $3,000. This is provided for by clause 8 which inserts a new paragraph (da) to section 39(2) of the Act.

The third Budget concession to grant tax relief for those who wish to top-up the CPF for their parents is also effected by clause 8 which inserts a new subsection (4) to section 39 of the Act. The new subsection will allow an individual who has paid money in accordance with the CPF Act to his or his parent's retirement account to claim a deduction of the amount of such payments or $6,000 whichever is the less.

The fourth concession in the 1987 Budget Statement enables the following income earned by Asian Currency Units and securities companies to be taxed at a concessionary rate of 10%:

a) Commission and fee income of approved securities companies from transacting in non-Singapore dollar securities on behalf of non-residents.

b) Income derived from trading in non-Singapore dollar securities with non-residents, other than ACUs and other approved securities firms. Clause 11 repeals and re-enacts section 43A of the Act to allow for this.

I now move to the other amendments. Clauses 5 and 6 amend the Act by inserting two new subsections to section 16 and amending section 18(1) of the Act respectively. It puts into effect the tourist incentive package relating to industrial building allowances announced earlier last year. Buildings or structures in approved tourist projects will now be allowed to claim an initial allowance of 20% and an annual allowance of 2%.

Section 33 of the Act is repealed and re-enacted by clause 7 to clarify and define instances whereby a transaction will be deemed as factitious for tax purposes. It empowers the Comptroller to disregard and make adjustments to certain arrangements which are carried out for the purpose of tax avoidance and not principally for bona fide commercial reasons.

The need to strengthen section 33 stems from the fact that tax avoidance schemes are getting increasingly complex and are becoming "tailor-made" to suit specific clients, thereby adding to this difficulty in identifying them. The existing section 33 is grossly inadequate to deal with these schemes. Most countries have taken steps to strengthen their legislation to combat tax avoidance. Even Hong Kong has far wider provisions than our proposed amendment.

In assessing whether a particular scheme would fall under the ambit of section 33, the Inland Revenue Department would, among other things, look for the presence of artificiality, the interposing of various intermediaries or transactions to reduce or avoid tax and transfer pricing. It should be stressed that the aim is to reduce blatant or contrived tax avoidance arrangements and is not intended to affect normal commercial transactions. I would also like to clarify that companies and individuals granted tax exemptions and concessions under specific incentive schemes would not be affected by the new section 33. They will continue to enjoy the tax concessions.

The Inland Revenue Department would be prepared to assist taxpayers wishing to consult them on specific transactions as to whether such transactions would fall within the ambit of the new section 33 provided details of the transactions are presented clearly to them.

Additionally, I would like to suggest that financial institutions and other companies approach the Monetary Authority of Singapore and the Economic Development Board respectively for assistance in the event of any uncertainty. The MAS and EDB would assist companies in their consultation with the Inland Revenue Department to determine whether their proposed schemes or transactions fall within the ambit of the new section 33. If necessary, the matter would be referred to the Ministry of Finance where a decision will be taken after considering the substance of the transactions and the benefits they would bring to Singapore.

I believe the measures I have just enumerated would give businesses sufficient degree of certainty in respect of the new section 33. I would like to reiterate that the sole objective of the amendment is to curb the proliferation of blatant tax avoidance schemes in Singapore and is not intended to affect normal commercial transactions.

Clause 9 inserts a new subsection (4) to section 42 of the Act to clarify that non-exempt dividends received by any institution, authority or persons specified in the First Schedule to the Act will be taxed at the corporate rate. Presently, there is doubt as to whether they should be taxed at the corporate rate or the rates specified in Part B of the Second Schedule to the Act.

Under the existing legislation, tax deducted from dividend distributions is only allowed to be set-off against current year assessments. This has forced companies, under certain circumstances, to delay declaring dividends by up to one year. The existing legislation also allows tax deducted from dividend distributions to be retained by a company for set-off against its tax liability when the company is assessed to tax in the following year. This has resulted in the Comptroller having to give credit to shareholders before the assessment on the company is completed. With effect from 1st January 1987, tax deducted from dividend distributions will be allowed to be set-off against current and future year assessments. In addition, no credit will be given to shareholders until tax relating to that distribution has been paid to the Comptroller. Clauses 12, 14 and 17 amend the Act to provide for this.

In 1983, Government granted a 10% tax concession on royalties or payments received by authors and composers in order to encourage creative talents and to help local publishers. It was not the Government's intention, however, to grant the concession to payments received in respect of any work published in any newspaper or periodical. Clause 3 amends section 10(9) of the Act to effect this restriction.

Presently, it is not clear that the tax exemption granted in respect of withdrawals from approved pension or provident funds is applicable only to those withdrawals which satisfy the conditions relating to withdrawals under the CPF Act and any regulations made thereunder. Clause 4 amends section 13(1)(j) of the Act to make this clear.

Under the existing law, the Comptroller of Income Tax may only transmit information to the Comptroller of Property Tax. Clause 2 amends section 6(8) of the Act to enable the Comptroller of Income Tax to also transmit information to the Chief Valuer or the Comissioner of Stamp Duties which may be required in the performance of their duties.

Section 45A of the Act is amended by clause 13 to extend the provisions for withholding of tax to cover fees, commissions and other payments related to indebtedness and paid to non-residents. This is to rectify an oversight in past amendments when withholding was extended to cover section 12(7) but not on new items introduced into section 12(6).

Clause 16 is a technical amendment to section 88(1) of the Act to provide for the normal collection and recovery methods for penalties.

Clause 18 is a technical amendment to section 94(2A) of the Act to make it an offence if the precedent partners fail to comply with provisions on the filing of returns. Presently, penalties are imposed only on persons failing to submit returns. Precedent partners were inadvertently left out.

Clause 15 is another technical amendment to section 86 of the Act to ensure that tax assessed under any of the provisions of the Act is duly paid up within one month of a notice being issued. This section presently covers tax payable by ordinary taxpayers only. Tax payable under any other sections such as the concessionary 10% rate for ACU income is not covered.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee (Thomson): Mr Speaker, Sir, the Finance Minister has given an account of the Bill which essentially covers the incentives which have been debated in the last Budget debate. But there is one point which has been introduced in the Bill which I would like to bring to the Minister's attention. This is with regard to section 33. This new section, in my view, gives the Comptroller of Income Tax too much discretionary power to disregard and to vary the income tax adjustment made by any company and therefore make them pay additional tax, if necessary. This Bill has been a point of concern by the business community and I would like to express my concern in this House.

I believe that in Singapore we do not want companies or individuals to avoid tax or to evade tax. But there is some need for companies to do some form of tax planning. Under the Bill, whatever tax planning is done by a company, the Comptroller will have now has the full discretion to disregard them and to impose tax as he wishes. This has introduced a fair bit of uncertainty and concern in the business community. I am sure in Singapore we do not want our country to be called a tax haven. Neither do we want to be called a tax prison, because now the Comptroller actually has the discretion to impose tax as he deems fit. I hopethe Minister can give due regard to this concern and perhaps allay the fears of the business community that Singapore will not become a tax prison.

Mr Chng Hee Kok (Radin Mas): Mr Speaker, Sir, I refer to the same section raised by the Member for Thomson. The Minister in his opening remarks said that the present Act is grossly inadequate. But my understanding is that in the last two decades there were hardly any cases of tax avoidance that were brought to court. I cannot see how that can be justified. In Singapore where at the moment our tax structure is very streamlined we have one single tax for corporation as well as personal income tax. There is no capital gains tax. There is no value-added tax. In fact, the upper limit of the personal income tax has been brought down to a level which is now in line with corporate tax. This being the case, there is very little room for what you call "tax avoidance schemes." My point is that the present Act itself is quite adequate. Because of this, why do we need to give the impression that this particular Act has been tightened up and cause concern, as mentioned by the Member for Thomson, among the business community? Nothing much has changed. There were not too many cases.

The second point I have relates to clause 10, that is, the tax rebate for the third child. The new section 42A (1) (iii) says that this tax rebate or balance will be stopped the moment there is a divorce. In other words, there will be no more tax rebate once the marriage breaks up. I cannot understand the rationale for this particular provision. In the case of a matrimonial failure, the status of the parent and child still remains the same. There is no change in the status at all, unlike the previous provision (para. ii) in which the third child has been given out for adoption. This being the case, I cannot see why this provision is necessary. If the main purpose is to solve a social phenomenon or problem, I think this is really asking too much of the Income Tax Act. We frown upon divorce but I do not think this is a right place to use this particular clause.

Dr Toh Chin Chye (Rochore): Mr Speaker, Sir, companies invest in new projects in Singapore on the basis of feasibility studies that include cash flow estimates, taking all liabilities, expenditure, including tax liability, into consideration. Taxation is part of the cost of doing business. Assumptions on costs of the project, such as capital expenditure, cost of labour and goods, can be predicated since current market prices are public information. Tax liability can be estimated under the existing Income Tax law. But what threatens the value of such studies and advice given to potential investors is the amendment to section 33 of the Income Tax Act.

The wording of the amendment is so broad and loose that only the Comptroller of Inland Revenue can judge tax liability and the public is no wiser as to how the decision is arrived at. Tax consultants, be they lawyers or accountants, advise their clients how to minimize tax liability not to maximize tax, because taxation can mean a profit or loss at the bottom line.

There is great uncertainty and anxiety as to the purpose of the amendment to section 33, notwithstanding what the Minister for Finance has stated this morning, whether off-shore income that is not remitted into Singapore comes under the ambit of the amendment. The Government has encouraged Singapore companies to spread their wings overseas and be more global in outlook. It makes sense for a company with overseas operations not to repatriate earnings but to use them for purchases of goods and services overseas and thereby resolve the problem of foreign exchange volatility. Or again, will Singapore residents with income earned from foreign investments be liable to tax on their overseas income even though it is not remitted? On these two points, the amendment to section 33 is vague and silent. Is it the Government's intention to pave the way for global taxation? Under the amendment to section 33, it makes it possible to do so.

We have reports of foreign contractors operating in Singapore for years, sometimes a decade, reporting losses and paying no tax. If the purpose of the amendment is to close a loophole such as this, then I am in sympathy with the Comptroller of Inland Revenue because it means that the Singapore contractor is indirectly subsidizing the foreign contractor.

Interest earned on deposits in the POSB is tax avoidance, so also is income splitting between husband and wife. From time to time, like today, the Minister for Finance has given tax incentive rebates, pioneer status, tax holidays and other various incentives especially to financial institutions. They are all forms of tax avoidance but because they are announced by the Minister for Finance, they are legitimate.

Section 33, after amendment, will generate disputes with the Comptroller of what is tax avoidance and what is not, what is artificial, what is natural, what is incidental, what is purposive. And the Minister has suggested that disputes or doubts can be raised with the Economic Development Board, the Monetary Authority of Singapore and in the last instance, as a matter of last resort, the Minister for Finance himself. I am afraid that this will throw all taxpayers into confusion. It is my experience writing for work permits for my constituents that they have been passed from the Ministry of Labour to the Immigration Department, from the Immigration Department to the Economic Development Board, and they end up in nothing. Likewise, I am fearful that no mechanism has been laid in place to resolve this dispute which will inevitably arise under section 33. The Minister has not made it quite clear what is tax avoidance, what are the examples of tax avoidance that he would like to close. The Comptroller of Income Tax no doubt has many cases on his hand. If the public, who are paying taxes, are given to know what is legitimate and what is illegitimate, then I think they would be more at ease. May I suggest that the Minister further clarify the scope and purpose of this amendment to section 33 or, better still, since we are in doubt, refer the Bill to a Select Committee where public representations can be made.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, the majority of concerns expressed by the Members for Thomson, Radin Mas and Rochore relate to section 33. However, I will first dispose of one other point raised by the Member for Radin Mas, which relates to clause 10 on the rebate for the third child, why is it disallowed when the marriage breaks up? It is an administrative issue because when the marriage breaks up, there will be problems in ascertaining which parent will qualify for the relief. By the way, it may help to discourage the break-up of marriages.

Coming back to section 33 and the various questions asked. I think these are legitimate questions which have been raised not only by Members in this House but by many others from the private sector. It is for this reason that the Bill which was first introduced on 9th November 1987 and was due for Second Reading on 30th November was then delayed for a further month until today in order to allow representations from members of the public who have expressed concern. This is the reason why but I do not think a Select Committee is necessary because there has been ample opportunity for representations. We have, received representations from tax consultants and the Big Eight accounting firms. MAS has consulted the Association of Banks, SIMEX and various other bodies. Generally, all have expressed similar concern over the seemingly very wide powers conferred on the Comptroller. I would first like to reassure Members and the public at large that it is not the intention of this new amendment to penalize legitimate commercial transactions nor, for that matter, legitimate tax planning proposals put up by companies. It is perfectly proper for a company to set up its accounts to reduce the incidence of taxes.

The objective is to give the Comptroller powers which he does not have at the moment - to stop blatant tax avoidance schemes, the numbers of which have increased despite what the Member for Radin Mas has suggested that there have been hardly any cases in the last two decades. The reason that there have been no visible cases is because the Comptroller has never had powers to bring them into court and therefore he has not been able to charge anyone as he is without teeth at the moment.

However, having said that, I think we have in the process of drafting this legislation studied the anti-avoidance provisions of a number of countries before we finalized our draft, including countries such as Hong Kong, Australia and New Zealand. Even Hong Kong has deemed it necessary to adopt similar provisions long before us. The problem faced by countries with a substantial international business community and by financial centres is similar in that schemes of tax avoidance are now becoming so sophisticated and complex that most of them go undetected. They include very subtle schemes of transfer pricing, multiple company transactions, all of which are so difficult to trace that we believe substantial amounts of revenue are lost. The fact that Hong Kong felt it necessary to introduce legislation is probably the best testimony to the need for such legislation. And I do not see that the legislation which was introduced in Hong Kong which, in its turn, evoked tremendous protest when it was under discussion, has caused any detraction in the attractiveness of Hong Kong as a commercial centre.

Furthermore, there are adequate safeguards provided under the amendment which are to be found in the judicial interpretations of legislations having similar wordings such as in New Zealand and Australia, for there is a considerable body of case law on which we can rely for the purpose of construing the proposed section 33. One of the principles which has emerged is that the provision will not apply to bona fide transactions even if these result in tax savings where such savings are incidental to the transactions. On the other hand, the provisions will apply to transactions where payment of tax is avoided through deliberate and artificial tax avoidance arrangements.

It is the intention that the IRD will respond in writing publicly to the concerns expressed by the Big Eight accounting firms and their reply would be published for public guidance. And it is also the intention that the IRD will from time to time cite examples of the sort of cases which will be subject to this new amendment and also give examples of those cases which would not fall under the ambit of the present amendment. So the proposal by the Member for Rochore is accepted, in that we will from time to time use illustrations publicly announced to tell the public that certain types of transactions are obvious cases for application of the new section 33 and those which are not.

I would like to assure Members of the House that it is not the Government's intention to hound businesses or to detract from the growth of Singapore as a commercial centre. Certainly this cannot be our objective. And if there should be obvious disadvantages emerging as a result of legislation, we can always look at the way it is applied in future.

Mr Chng Hee Kok: Sir, in reply to my point on clause 10, the Finance Minister says there are administrative problems. But could not these tax rebates be given to the spouse who has custody of the child? Or it may be part of a divorce settlement?

Dr Richard Hu Tsu Tau: On this issue, the Ministry of Finance uses the family unit concept in determining whether the family is a third child family or not. In the case of a divorce, if we continue to give child relief and the child goes to another family which has more than three children, complications will arise. I think the issue is not as simple as it appears on the surface. This has been considered when the law was introduced.

Dr Toh Chin Chye: Sir, can the Minister be quite open and inform the House whether income earned abroad but not remitted to Singapore comes under the ambit of section 33?

Dr Richard Hu Tsu Tau: My apologies, Sir, to the Member for Rochore. I overlooked this point. Present legislation provides that income earned overseas and not remitted to Singapore is not subject to tax and that still holds.

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. - [Dr Richard Hu Tsu Tau]

Bill considered in Committee.

[Mr Speaker in the Chair]

Clause 1 -

The Chairman: The citation year will be altered from "1987" to "1988".

Clause 1 ordered to stand part of the Bill.

Clauses 2 to 6 inclusive ordered to stand part of the Bill.

Clause 7 -

The Chairman: The citation year will be altered from "1987" to "1988".

Clause 7 ordered to stand part of the Bill.

Clauses 8 to 11 inclusive ordered to stand part of the Bill.

Clause 12 -

The Chairman: The citation year will be altered from "1987" to "1988".

Clause 12 ordered to stand part of the Bil.

Clauses 13 to 18 inclusive ordered to stand part of the Bill.

Clause 19 -

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, may I, with your permission, move my two amendments together?

The Chairman: Yes, please proceed.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 14, after line 2, to insert -

"(c) by deleting the words "paragraph (6)" in paragraph (7) and substituting the words "paragraph (5)";".

In page 14, after line 39, to insert -

"(f) by deleting the words "paragraph (8)" wherever they appear in paragraphs (9) and (10)(b) and substituting in each case the words "paragraph (7)";".

Sir, clause 19 of the Income Tax (Amendment) Bill needs to be amended in order to rectify an error in the renumbering of the provisions therein pertaining to amendments to the Fifth Schedule of the Income Tax Act.

Amendments agreed to.

The Chairman: Consequential amendments will be made:

In page, 14, to re-letter paragraphs (c), (d) and (e) as paragraphs (d), (e) and (g), respectively.

In page 15, to re-letter paragraph (f) as paragraph (h).

These will be done.

Clause 19, as amended, ordered to stand part of the Bill.

Bill reported with amendments; read a Third time and passed.