INCOME TAX (AMENDMENT) BILL

Order for Second Reading read. 12.52 pm

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 1989 gives legislative effect to seven income tax concessions announced in the 1988 Budget Statement. Opportunity is also taken to include three other amendments to the Act.

The first budget concession allows the following selected services to deduct twice their approved research and development expenses incurred on any research and development projects:

(a) computer software;

(b) information services;

(c) agrotechnological services;

(d) laboratory and testing services;

(e) medical research services; and

(f) any other prescribed services or activities. Clauses 2, 9 and 10 amend the Act to provide for this concession which will take effect from 1st April 1988.

The second budget concession extends industrial building allowances to approved companies in the following industries with effect from the Year of Assessment 1988:

(a) agrotechnology;

(b) horticulture;

(c) aquaculture; and

(d) other approved services with specialized structures. Clause 12 amends section 18 of the Act to provide for this.

The third budget concession provides for 90% tax exemption on incomes of an inventor or author from an approved invention or approved product innovation. Clause 3 inserts a new subsection (10) to section 10 of the Act to give effect to this.

The fourth budget concession extends the period of tax exemption granted to the Singapore International Monetary Exchange from 5 years to 10 years. Clause 5 amends section 13(1)(z) of the Act to provide for this.

The fifth budget concession relates to the deduction of trade losses and carry forward of allowances by companies. The existing legislation allows companies to carry forward allowances and deduct trade losses incurred in one year against profits in subsequent years only if there are no substantial changes in shareholders. This may unintentionally penalize companies whose restructuring is beyond their control. To avoid this, the Comptroller of Income Tax will now be given the discretion to allow companies with substantial shareholding changes arising from reasons unconnected with tax considerations, to carry forward all allowances or deduct trade losses against profits from the same trade or business. To effect this, clause 13 inserts a new subsection (2A) to section 23 of the Act and clause 14 inserts a new subsection (8) to section 37 of the Act.

The sixth budget concession limits the highest effective tax rate imposed under Part B of the Second Schedule of the Act to 33% with effect from Year of Assessment 1988. This ensures that those who are taxed under the existing Part B marginal rates, such as management corporations, will not be taxed above the effective corporate tax rate of 33%. Clause 16 inserts a new subsection (5) to section 42 of the Act for this purpose.

The seventh budget concession allows approved investment holding companies and unit trusts to elect to have their profits from stocks and shares or other marketable securities taxed according to the length of time for which the securities had been held. Clauses 4, 8 and 11 amend the Act to provide for this.

I now move to the other amendments. Presently, under section 13A of the Act, dividends paid out of exempt shipping income on shares of a preferential nature are exempt from tax in the hands of shareholders. This has resulted in shipping companies raising capital through preferential shares and redeemable preference share issues instead of through a loan, as to avoid tax. Clauses 6 and 7 amend the Act to prevent this as well as to be consistent with the provisions in the Economic Expansion Incentives (Relief from Income Tax) Act, whereby dividends paid on shares of a preferential nature are not given exemption in the hands of shareholders.

The law as it stands requires taxpayers to render a statement of dividends paid to the Comptroller of Income Tax at the end of each year of assessment, failing which prosecution action could be undertaken. To give taxpayers a reasonable period of time to comply with this requirement, clause 17 amends section 44(8) of the Act to allow a time limit of three months from the end of each year of assessment for taxpayers to furnish the required statement. This would also be consistent with other sections of the Act pertaining to submission of annual returns and estimated chargeable income for which a time limit of three months is given.

The next amendment provided by clause 19 amends section 94(2A) of the Act to apply the penalty under that section in respect of continuing offences, to offences for failure to comply with sections 44(7) and (8). Sections 44(7) and (8) require every company to render to the Comptroller a statement containing particulars on the balance in their section 44 account after the payment of each dividend and at the end of the year of assessment respectively. Effectively, section 94(2A) imposes an additional penalty for those who pay up the original penalty but continue with the offence of not submitting the required forms to the Comptroller.

Sir, I beg to move.

Question proposed.

Mr Chng Hee Kok (Tiong Bahru GRC): Mr Speaker, Sir, I welcome the provisions in the Bill to implement the tax changes announced last year. I have two points to raise. The first relates to the taxing of profits made by unit trusts. Under the new amendment, unit trusts which previously were not subject to tax are now subject to tax. Sir, unit trust is actually a method or conduit, a means by which investors collectively come together to invest in a larger portfolio of shares or money instruments. They do so because they can take advantage of professional management. At the same time by having a larger portfolio they minimize or lower their risk. Therefore, it is no surprise that the inves- tors in unit trusts, or so-called unit holders,are actually small investors. On their own they do not have the means to go into the market to buy a large number of different shares to diversify the risk. So they buy units in the unit trusts.

Sir, if this Bill, as it stands at the moment, goes through, it will penalize these small investors. Most investors in the stock market, in the securities industry, are not subject to tax at the moment. But if we tax unit trusts at source, we are, in fact, penalizing the small investors.

Another factor is that in countries like Hong Kong, Japan, Europe, including the UK and even the US, unit trusts are not subject to tax. So therefore by doing otherwise, Singapore is actually impeding the progress of the fund management industry. Of course, this must result in a negative impact on our securities industry. So I hope the Minister will clarify or re-do this particular section of the Bill which classifies unit trusts under investment company.

The other point I want to raise is on clause 13 which allows for tax losses to be carried forward to subsequent years. I welcome this change. This is particularly useful for public companies in which a major shareholding change is outside the control of many shareholders, particularly the minority shareholders. By allowing losses to be carried forward, this Bill will, in fact, benefit a large number of minority shareholders who can now have the advantage of the tax benefit.

What I want the Minister to look into is to have a liberal interpretation of what is meant by the same business or same trade which allows losses to be carried forward. On the one hand, we want companies to upgrade, and to improve, to go into new technology and new services. However, by restricting to the same trade, we are encouraging companies to remain where they are just to take advantage of the carried forward tax losses. Presently the Bill allows only for losses to be carried forward if the company remains in the same trade or in the same business. A more liberal interpretation will help our companies to diversify and that should, of course, in the long run benefit Singapore, Sir.

Mr S. Chandra Das (Cheng San GRC): Mr Speaker, Sir, I would like to seek one clarification with the Minister. But before I ask for this clarification I have to declare my interest. I am a director of a shipping company, the national shipping line, and this company has issued preferential shares.

Sir, section 13(A) is to be amended whereby dividends paid will not be exempt from income tax. Sir, I would like to ask the Minister whether this will be applied retroactively or is it only for new issues?

Mr Choo Wee Khiang (Marine Parade GRC): Sir, I would like to express my support for this Bill. However, I would like to make a comment on clause 13 which relates to section 23 of the principal Act.

The Minister earlier said that if there is any reorganization or restructure of a company which is not directly for the purpose of deriving tax benefit, then the tax advantage will be passed on to the new set-up. I would like the Minister to consider putting in an additional word such as, if you were to read from subsection (2A):

'(2A) The Minister may, where there is a substantial change in the shareholders of a company and he is satisfied that such change is not ...'.

I wonder whether the Minister will consider inserting the word "directly". So that it reads:

' ... such change is not directly for the purpose of deriving any tax benefit ...'. so that the restructuring or reorganization of a company will really benefit from such an amendment. Because any reorganization or restructuring of a company will invariably involve taxation, and somehow for a company that has made a loss whenever there is a restructuring or reorganization of capital or of shareholders of that particular company, it will have an indirect or direct tax effect. I would like the Minister to consider this particular point.

Dr Lee Siew-Choh (Non-Constituency Member): Mr Speaker, Sir, generally speaking, everybody would like to see a reduction of taxes. But sometimes while the Government reduces its taxes for big companies, it also imposes taxes on the people in different ways. For example, now reductions of taxes have been made from 40% to 33%. But diesel taxes are up, levies on foreign workers are up, all these things have gone up. So it amounts to ---

Mr Speaker: Dr Lee, can I know the relevance of what you are saying to this Bill?

Dr Lee Siew-Choh: My relevance, Sir, is that income tax goes towards building up a more and more regressive tax structure in Singapore.

Mr Speaker: What you are saying has no relevance to what this Bill is all about. Can you be more precise in what you wish to say and relate yourself to this Bill?

Dr Lee Siew-Choh: Well, Sir, many of these tax incentives and allowances are, in fact, subsidies given to many of these big companies. If they should be given to the local companies, one can quite understand that. But if they are all given to the big companies, they are unnecessary because these big companies anyway are making big profits and if they want to make further profits they have to make further investments and, of course, ultimately these subsidies will only help them to increase their profits. Generally speaking, we do not mind people coming here to invest and make profits but, as I said, Sir, while on the one hand the Government gives all these subsidies, on the other hand they impose more taxes on the people. Therefore, under those circumstances, I think, generally that is not correct. I would like to know, Sir, for example, with this reduction of taxes from 40% to 33%, how much tax has been foregone for the year of assessment 1987 and 1988? We would like to know the figures, Sir.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, I will take the questions as they were addressed.

The first question was from the Member for Tiong Bahru GRC. He wants to know why unit trusts which were previously not taxed are now being included under the amendment to the Bill in which they are liable for tax. First, I would like to clarify that up to now unit trusts have always been liable for tax except that no tax has actually been levied because their mode of operation has been such that the income tax authorities consider them not to be trading. Therefore, they were not subject to normal trading tax. Instead the authorities treat the profits made from selling and buying of securities, stocks and shares as capital gains. Under the existing arrangements investors are taxed for the dividend and interest received in their financial securities. But they have always been liable for trading tax on transactions. But because their mode of operation has not attracted tax so far, therefore they have not been taxed. So the amendment does not really introduce anything substantially new.

What has happened is that unit trusts have been under some uncertainty as to their tax liability because there is no specific exemption of their activities in buying or selling shares from tax. So the purpose of this amendment is to allow them to elect to be taxed under a schedule of holding periods for which if they conform, like fund management companies, they would be able to have certainty on the tax liabilities. They can, of course, continue to opt to maintain their present method of operation in the hope that it would not attract tax. So it really is up to the unit trust to decide which they will prefer, to opt for certainty or to continue operating with some uncertainty as to their tax liability.

The Member has also said that unit trusts ought not to be taxed because they act as conduits for the investments of small investors. Theoretically, when small investors buy or trade shares on the stock market, they are not liable to tax because the gains they make would be considered capital gains. However, even if an individual investor transacts in large volumes and frequently, he could be liable to tax as a trader. So it is not true to say that the small investor is not liable to tax at all. But by and large they have not been taxed because their level of activity has not been of a scale which suggests that they should be taxed.

As to the notion that unit trusts are conduits for the small individual investor and therefore ought not to be taxed, up to now it has been the case that for many unit trusts the investors are small individual investors. However, this does not, in fact, stop many large institutions from buying unit trust securities. There is always the risk that if tax exemption is given to unit trusts preferentially, it might be used by institutional investors as a conduit to secure tax-free privileges. This would be quite unacceptable because it means that the unit trust financial activity would be given preferential treatment as opposed to, for example, investment in banks' CDs for which the interest attracts tax. So I do not think it will be equitable to treat unit trusts preferentially.

The Member has also said that other countries do not tax unit trusts. That is not quite true. Unit trusts in the United Kingdom, Australia and the United States are taxed at the unit holder level. Therefore, they are subject to tax if they receive dividends and gains issued by the unit trusts. But it is true that they are not taxed at the trustee level. It is not true to say that they are not taxed at all.

The second question by the Member is in regard to clause 13. He asked for consideration of widening the definition of those who qualify for carrying forward of losses. I think we can look into this to see whether there is merit.

Turning now to the question from the Member for Cheng San GRC about the effect of the amendment on Neptune Orient Lines and whether the amendment would have retroactive effect. The answer is that it will have no retroactive effect. If NOL feels that there are shares which have already been issued and on which there is uncertainty, I would ask them to make their case to the Ministry of Finance and all requests or appeals would be considered sympathetically.

The Member for Marine Parade GRC, again on clause 13, has asked that all companies be allowed even for reorganizations, even those that involve tax matters to be allowed this tax privilege. Is that correct?

Mr Choo Wee Khiang: Point of clarification, Sir. I was trying to say that if you were to read subsection (2A), it says:

'The Minister may, where there is a substantial change in the shareholders of a company and he is satisfied that such change is not for the purpose ...'. I suggest that instead of "is not for" maybe we should consider "is not directly for the purpose of deriving tax" because any reorganization will somehow have tax implications in any case.

Dr Richard Hu Tsu Tau: I do not think we could agree to such a blanket sanction. Each case of course will be examined on its merits but to allow this would open the door to likely abuse. But companies which are on the borderline I think could be considered administratively for special treatment. I think that will be a safer route.

Finally, this question from the NCMP. Mr Speaker has already ruled that some of his questions were irrelevant. Nevertheless, I would like to say that in regard to the reduction in income tax which was introduced in the previous budget, the reduction was not from 44% to 33%. It was from 40% to 33%. It was introduced at a time when the country was going through a recession and it was a measure to assist companies to improve their after-tax profitability in order to help the economy come out of the recession.

Tax changes of this sort where corporate income tax and personal tax are reduced are essentially allowed as a means of stimulating productive enterprises. Income tax levied on companies is a tax on production. In fact, if reduces productivity and we believe in this and we will try to ensure that companies which are engaged in productive enterprises will have strong incentives to operate in Singapore and this tax concession applies equally to foreign and local companies.

As to the special tax incentives granted to foreign companies, these are granted to attract companies to come here to start industries for which there is no local capability. In other words, they are to attract the high-tech industries which would not otherwise come here. Companies with this expertise, with their markets, have many alternative places to go to. They could go to Thailand, they could go to Malaysia, Indonesia. Even many countries in Europe and countries around the world are actively trying to encourage them to invest in their countries. So the incentives we have introduced have brought us considerable economic growth. They bring capital, they bring jobs and they bring markets which would not otherwise be accessible to us.

On the question of whether levies are regressive - I believe the levies he is talking about refer to the maids levy, to the levy on foreign workers - I should point out that these were not introduced for revenue purposes but were introduced for the purpose of controlling potential social problems and therefore have no relevance in terms of revenue generation. Of course, it generates revenue in the process because the Government has found that financial control is simpler and more effective. The alternative would be to impose a method of rationing which I think Members will understand raises equally difficult problems.

Mr Heng Chiang Meng (Cheng San GRC): May I seek a point of clarification from the Minister regarding the answer he gave on unit trust. Could the Minister please state clearly whether those unit trusts that are up to now paying tax in the same manner, like he said interests and dividends, but not paying tax on the gains arising from the sales and purchases of securities, will continue to be taxed in the same manner as before even after the passing of this Bill, if they opt to choose their old method?

Dr Richard Hu Tsu Tau: The answer is yes, provided they continue to operate as they do now. Unit trusts are not taxed because their managers, in order to avoid the risk of tax, have been very conservative in their trading transactions, so the majority of the shares or securities they have bought have been held for sufficiently long periods to qualify for capital gains. So if they continue to operate the way as they do now it ought not to attract tax under the new Act.

Mr Chng Hee Kok: Mr Speaker, Sir, I just want to make a comment on the Minister's reply to my point about unit trusts. I welcome the principle that it should not be used by large institutional investors to take advantage of our unit trusts outside the ambit of investment companies. But the point nevertheless is that unit trusts perhaps should be best taxed at the unit holder's level, which some countries have done, because then some of the individuals may not be subject to tax and some will pay their own personal national tax rate but not a fixed rate or a blanket rate if the unit trust is taxed at the level of the trust.

Dr Richard Hu Tsu Tau: Theoretically, that is possible and, in fact, some countries operate that. But in discussions with these countries, most of these countries in fact regret having done that. The reason for this is that the collection of taxes in the hands of the unit holder is extremely complex. As you realize, there are thousands of people involved and the investors buy and trade these units. Therefore, the collection process is very complex and often impossible to enforce. As you know, the unit trusts, the units bought by investors, can be held by trustees, for example. So tracking down ownership would involve administrative enforcement of a type which the Income Tax people feel is almost impossible. Therefore, the declaration of profits from such transactions to the unit holder and experience has been that often many of these transactions would not be declared. Therefore, enforcement and collection become impossible. It is far simpler administratively to collect at the trustee level.

Mr Heng Chiang Meng: Sir, I am sorry to take up more time but I think I need another clarification on the Minister's answer to my earlier clarification and, that is, would he consider informing the Commissioner for Inland Revenue that in looking at the tax angle or the tax payable by unit trusts, that the length of time of the securities held by the unit trust managers is very often not dependent on the mangers themselves since unit trusts have a system of redemption on a daily basis so that if more unit trust holders redeem at the same time, then they may have no choice but to liquidate their investment to meet the demand for redemption. Sir, in this respect, I would also like to add that I am an interested party in the answer.

Dr Richard Hu Tsu Tau: Sir, this problem is recognized and I believe discussions with the Income Tax authorities and the Ministry of Finance are on this very issue. The problem faced by unit trusts is that they are open-ended trusts in which holders can liquidate as and when they choose whereas the tax liability of the trustee could be deferred sometime further down the road. So the trustees face the dilemma that they may be forced to redeem share units which could be substantial, against future tax liability of which they are not certain. This problem is recognized and I think the proposal has been made to the unit trust managers that when such a situation arises there should be some system whereby large redemptions should be granted, on a case by case basis, specific tax exemption. I believe that the matter is not resolved but that is the approach being used. The problem is recognized but we cannot give blanket exemptions. But where redemptions are substantial, specific exemptions could be considered.

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; reported without amendment; read a Third time and passed.