CHANGES IN INCOME TAX

Revision of Part B of the 2nd Schedule

With effect from Year of Assessment 1988 (YA88), the highest effective rate of tax imposed under Part B of 2nd Schedule of the Income Tax Act shall be limited to 33%. This will help ensure that those who are taxed under the existing marginal Part B rates will not need to pay tax above the effective corporate tax rate of 33%.

Tax Treatment of Unit Trusts and Investment Holding Companies

When the Government started looking into the promotion of the investment management industry, one factor cited by the private sector as an obstacle to the development of the industry was the issue of whether profits from share transactions should be treated as trading income or capital gains.

The Tax Exemption Scheme for Fund Management, introduced in 1983, effectively resolved this issue for non-resident investors. It relieved them of any Singapore tax liability on gains from disposal of investments acquired with funds managed by approved Singapore fund managers.

To resolve the issue of whether the gains derived by investment holding companies and unit trusts are subject to tax, I have decided that such companies may elect to have their profits from stocks or shares or other marketable securities taxed according to a schedule based on the length of time for which the shares or marketable securities have been held. This method of taxation will only apply to investment holding companies and unit trusts approved for this purpose. With your permission, Sir, I would like to table the schedule (Appendix I) (Cols. 647 -648) for Members' information. This alternative method of taxation will be effective from YA88. I hope it will lead to a more vibrant domestic fund management industry. Appendix I - TAX TREATMENT OF UNIT TRUSTS AND INVESTMENT HOLDING COMPANIES (Cols. 647 - 648)

Deduction of Trade Losses by Companies

The current legislation allows companies to deduct trade losses incurred in one year against profits in a subsequent year, only if there is no substantial change in their shareholders. Although this prevents loss companies from being traded as tax shelters, it has the unintended effect of affecting companies whose restructuring is beyond their control and unconnected with tax considerations. The cases I have in mind are changes in shareholding forced by nationalisation or privatisation of industries, and the changes in the shareholding of a company or its parent as a result of it being widely traded on recognised stock exchanges. Where substantial shareholding changes take place because of these reasons, the companies concerned should not be disqualified from deducting their trade losses.

From YA88 onwards, I propose to give the Comptroller of Income Tax the discretion to allow companies with substantial shareholding changes arising from legitimate purposes unconnected with tax considerations to deduct their trade losses. The losses will, however, be deducted only against income from the same business. This is to prevent companies from shifting profits to loss-making concerns taken over for the primary purpose of avoiding tax.

Unilateral Tax Credits

The 1985 Budget Statement provided for unilateral tax credit to be given to selected service income remitted to Singapore from certain non-DTA (Agreement for the Avoidance of Double Taxation) countries. The services covered include professional services, construction services, computer-related, technical and other consultancy services.

We have recently been promoting the establishment of operational headquarters in Singapore. The unilateral tax credit scheme will be extended to foreign sourced income earned on approved operational headquarters activities which are presently not included in the specified list of services. This is to avoid double taxation of the foreign sourced income earned by these headquarters companies from countries which are at present covered by the scheme. The extension will be effective from YA88.