TAX CHANGES

Tax on companies Company Income Tax

Last year, the rate of corporate tax was reduced from 33% to 32%. This year, I intend to reduce the corporate tax rate by an additional 1%, from 32% to 31%. This further reduction of the tax rate reaffirms Government's objective of taxing productive sectors as lightly as possible, so long as economic conditions allow. The move also ensures that our tax rates will remain competitive worldwide. The 31% tax rate will take effect from Year of Assessment 1991. Hence, any dividends paid on or after 1 January 1990 would carry a tax credit of 31%. The revenue loss is expected to be $70 million annually. For many companies, this will offset some of the additional business costs which they have to pay, such as higher foreign workers levies and premiums for vehicle quotas.

Stamp Duty for Share Transactions

The Stock Exchange of Singapore will commence scripless trading on its Main Board from April 1990. Under this electronic trading system, stocks and shares transacted will be automatically registered without any transfer document. Currently, a stamp duty of 20 cents per $100 or part thereof of the value of the stocks or shares is payable on such transfer documents. To keep our stock market competitive, I have decided not to levy stamp duty on transfers done electronically. This will lower the costs of transacting securities on the scripless system. Transactions on the scripless trading system will therefore be subject only to the existing stamp duty on contract notes of S$1 per $1,000 or part thereof of the stock or shares transacted. This will cost the Government a revenue loss of about $35 million per year.

Finance and Treasury Centre (FTC) Incentive

The last decade has been characterised by sweeping de-regulation in the global financial markets. International capital flows have become larger and more variable, leading to increased volatility in exchange and interest rates. Consequently, more multinationals have found it necessary to hedge their financial risks through treasury and risk management activities. MNCs which have worldwide businesses and financial activities, have established separate divisions to manage their treasury and financial operations. Such divisions of MNCs are now among the major participants in international foreign exchange and capital markets.

To encourage them to set up and expand their operations here, I propose to grant a tax incentive for the establishment of Finance and Treasury Centres in Singapore. This incentive will spur such institutions to perform treasury, financing and other financial services for their own account and for companies in their group. Income accruing to such centres from trading in foreign exchange, offshore investments and provision of financial services to related companies will be taxed at a concessionary rate of 10%. This incentive will take effect from Year of Assessment 1991.

Approved International Trader (AIT) Incentive Scheme

Singapore has prospered as an entrepot centre due to its conducive business environment, free trade policies and good infrastructure. It is ideally suited to service the trading requirements of the Asia Pacific region, in the same way that London and New York support their respective geographical regions and time zones.

Last year I introduced the Approved Oil Trader Scheme under which oil traders were granted a concessionary tax of 10% on approved offshore oil trading activities. The AOT scheme has already brought additional business to Singapore. To develop Singapore as a Global Entrepot and to promote international trading of other major commodities in Singapore, I have decided to grant the 10% concessionary tax rate to Approved International Trading companies, trading in approved commodities.

The approved commodities would include rubber, timber, edible oils, coffee, cocoa, metals and minerals and bulk chemicals. This scheme will essentially be similar to the Approved Oil Trader Incentive and will be administered by the Trade Development Board in consultation with the Revenue Division of my Ministry and the Inland Revenue Department. The incentive will take effect from Year of Assessment 1991.

Tax Guidelines on Financial Leasing and Incentive for Offshore Leasing

Tax guidelines were first proposed in 1982 to regulate the tax treatment of financial leasing transactions. Based on feedback from the leasing industry, I have decided to simplify the guidelines and to relax the criteria for determining whether a leasing contract will be treated as a genuine lease agreement for tax purposes. Constraints will no longer be placed on the total rental payment and duration of the initial lease term, the rental reduction on extension of lease, and the way payments are scheduled. However, to prevent financial leasing transactions from being used as a tax shelter, capital allowances for leased assets will not be allowed to be deducted against non-leasing incomes of the lessor. This will apply to assets leased under lease agreements made on or after 1 April 1990. This restriction on capital allowance deduction will not apply to operating leases, such as the hiring of vehicles. The revised guidelines are attached as Appendix I (Cols. 51 - 52) to my Budget Statement. Appendix I - TAXATION GUIDELINES FOR FINANCIAL LEASING (Cols. 51 - 52)

Following the revision in the leasing guidelines, I propose to encourage offshore leasing activities by taxing incomes from offshore leasing at a concessionary rate of 10%. This is in keeping with existing incentives for promoting offshore financial services. However, capital allowances for assets leased overseas will only be allowed to be deducted against the offshore leasing income. This will take effect from Year of Assessment 1991. Extension of Offshore General Insurance Incentive

Currently, underwriting profits from insuring offshore general risks and the interest and dividends from investing such profits are taxed at a concessionary rate of 10%. Although this incentive has helped the offshore insurance business to grow by over 10% per year since 1980, the absolute size of the business is still minuscule by world standards for it started from a very small base. The insurance industry is an important leg of our financial services industry. There is high potential for growth, especially in reinsurance and captive insurance.

To promote further growth, I propose a tax incentive to broaden the capital base of insurance companies. With effect from Year of Assessment 1991, a concessionary tax rate of 10% will apply to interest and dividends from investing the whole of the shareholders' funds which are used to support the offshore insurance business. However, to prevent our tax base from being eroded, Singapore dividends and interest from investing the shareholders' funds and the offshore insurance fund, apart from interest from ACU deposits, will be excluded from the tax concessions.

Offshore Life Insurance Incentive

In keeping with the objective of promoting offshore insurance business, I propose also to extend to the offshore life insurance business, tax concessions that are similar to those granted to the offshore general insurance business. A concessionary tax rate of 10% will therefore apply to interest and dividends from investing the offshore life fund and the shareholders' funds supporting the offshore life business. Singapore dividends and interest, apart from interest from ACU deposits, will similarly not qualify for the tax concessions. This will take effect from Year of Assessment 1991.

Extension of Post Pioneer Incentive

In my 1986 Budget Speech, I announced the introduction of a post-pioneer incentive to be made available to companies upon expiry of their pioneer period. The incentive provides for a concessionary tax rate of as low as 10% for companies undertaking approved activities, and is granted for a period of up to 5 years. It was introduced to cushion pioneer companies from having to pay the full corporate tax rate, upon expiry of their pioneer incentive.

I now propose to extend the post-pioneer period by 5 years. This means that a company can enjoy the concession for up to 10 years. This is in keeping with our intention to remain competitive. Furthermore, the concession would be useful as a promotional tool to encourage pioneer companies to continue upgrading their operations in Singapore. This extension will take effect from Year of Assessment 1991.

Extension of Operational Headquarters (OHQ) Incentive

The Operational Headquarters or OHQ incentive scheme was introduced in 1986 to attract multinational companies to set up their headquarters in Singapore to service the needs of their subsidiaries and related companies in the region. With the growth and expansion of investments and trading opportunities, OHQs are increasingly called upon to provide finance and treasury services to their related companies. In the course of providing such services, they may also derive income from trading in foreign exchange and offshore investments, on their own account.

As these are high value-added activities and in line with our objective of developing Singapore into an international financial centre, I intend to extend the OHQ incentive to cover such income. The income will now qualify for the 10% concessionary tax rate. This concession will take effect from Year of Assessment 1991.

Mr Speaker, Sir, I will now turn to tax on individuals.

Tax on Individuals Personal Income Tax

I am satisfied that our existing personal income tax rates remain fair and equitable so that there is no immediate need to alter the tax schedule. However, to reward effort and enterprise, I propose to give an across-the-board once-off rebate of 5% on personal income tax for Year of Assessment 1990. The estimated revenue loss is $60 million.

Procreation Incentives

Our population problems have been aggravated by a trend of delayed childbearing, especially for lower order births. From 1980 to 1989, the median age of mothers at first birth increased from 25.3 to 27.4 years of age. For second births, the median age of the mothers increased from 27.6 to 29.8 years. The delay in the second birth follows inevitably from the delay in the first birth. These delays are particularly pronounced for the higher educated. The second births for post-secondary and tertiary educated mothers, for instance, tend to occur after age 31. Survey findings have also shown that if a mother has the second child in her early thirties, it is less likely for her to have a third child.

To correct these trends, the Government has decided to give a special tax rebate to encourage families to have their second child earlier. Families with their second child delivered before the mother reaches 31 years of age will receive a special tax rebate of $5,000. If the delivery is before age 30, the rebate will be increased to $10,000; if it is before 29, the rebate will be $15,000; and if it is before 28, the rebate will be $20,000. The rebate will be granted from Year of Assessment 1991 for the second child born on or after 1st January 1990. It can be used to set off against either or both of the parents' income tax liabilities but must be absorbed within a period of 7 years.

The rebate for the second child, together with the existing rebates for the third and fourth child, will be allowed to be claimed consecutively. To allow more families to claim the full $20,000 tax rebates for the third and fourth child, I have decided to extend the 5-year period within which each of the rebates have to be absorbed to 7 years. This extension will also apply to the additional rebates, equivalent to 15% of the wife's earned income, granted in lieu of maternity leave, for the births of the third and fourth child. The cumulative period within which the three rebates can be claimed will be 21 years.

Relief for Aged Parents and Handicapped Dependants

Last year, in support of the Government's call to families to care for their aged and handicapped dependants, I increased both the aged parent relief and the handicapped dependant relief to $2,500. This year, to further encourage families to care for their aged and handicapped dependants, I have decided to increase both tax reliefs to $3,500. This will take effect from Year of Assessment 1991.

Relief for the Foreign Maid Levy

Last year, in announcing further increases in the foreign maid levy, the Minister for Labour also announced that tax relief for the levy would be given to married women to encourage them to continue working and raise families. I have decided to extend this relief to divorced women and widows with children. The relief will be a sum equal to twice the annual levy paid in respect of one foreign maid. It will be available from Year of Assessment 1991.

Deduction for CPF Contributions of Self-employed Persons

Self-employed persons who make voluntary contributions to CPF, including payments to Medisave, are currently allowed to deduct such contributions from their assessable incomes. The deduction is limited to 10% of the assessable income from self-employment, subject to a maximum of $7,200 per year. In order to encourage self-employed persons save more to provide for their own needs when they retire, I have decided to raise the limit for such deductions to 15% of the assessable income from self-employment, subject to a maximum of $10,800 per year. This will take effect from Year of Assessment 1991. Property Tax on HDB Residential Flats

I announced last year that the property tax rate of 23% will be reduced to 16% of annual value with effect from 1st July 1990. However, for non-HDB owner-occupied residential properties, a concessionary property tax rate of 4% of annual value will be levied. I have decided to extend the same concessionary property tax rate of 4% of annual value to HDB owner-occupied residential properties with effect from 1st July 1990. As in the case of all properties, the annual value of HDB residential properties will be updated from time to time to reflect prevailing market conditions.

Stamp Duty on Transfer of HDB Flats

The cost of buying and selling HDB properties was reduced from last year when I lowered the stamp duty on property transactions. This year, I intend to give a further concession for transfers of HDB flats within a family by remitting the stamp duty in excess of $10 payable on any instrument executed in respect of such transfers. To obtain this concession, the transfer must not be for the purpose of profit and at least one of the original lessees must remain a lessee. This concession will take effect from 1st April 1990 and will be administered by the HDB. The revenue loss arising from this concession is estimated to be $3 million a year.

Mr Speaker, Sir, I will now touch on other taxes.

Duty on Liquor

Duties on liquors were last raised substantially in 1987. I do not propose to make any changes this year.

Duty on Tobacco and Cigarettes

The tax on cigarettes and tobacco has been increased annually since 1987 and has been effective in curbing the growth in consumption. In addition, other measures to discourage smoking have also been introduced, including the national anti-smoking campaign, the ban on advertising of tobacco products and the prohibition of smoking in air-conditioned public places where food is served. These non-price measures need time to work, but if they prove effective, there may be less need in future to rely so heavily on price to discourage smoking. There will therefore be no increase in the duty on tobacco and cigarettes this year.

Duty on Petrol

The duty on petrol was last revised in May last year as part of a package of measures to curb vehicle growth and to discourage the unnecessary use of cars. It is a tax on the usage of cars, and thus complements the controls on ownership, such as the quota system announced earlier this week. There will therefore be no change in the duty on petrol.