TAX CHANGES TAX ON COMPANIES

Corporate Tax

As I indicated earlier, our corporate tax rate is amongst the lowest in the world and will therefore remain unchanged at 31%.

Tax Exemption on Dividends Paid Out of Foreign Income

We have in Singapore an imputation system which passes back to shareholders of a company the amount of tax it has paid, when its taxed profits are distributed. This is to remove double taxation which would otherwise have occurred if tax were levied first on corporate profits and then again on the dividends paid out of such profits.

However, the imputation system does not completely eliminate the problem of double taxation in the case of foreign income. There is a franking mechanism in our tax law which ensures that the tax imputed to shareholders upon payment of dividends must have already been paid by the company. If the company has not paid sufficient tax to frank dividend payments, it must pay a tax to meet the shortfall in franking credit. This creates a problem where a company received foreign income and the Singapore tax on this income was reduced by a tax credit allowed in recognition of tax already paid on it overseas. In this case, the reduced Singapore tax will not provide the company with sufficient franking credit to distribute the entire foreign income to its shareholders. The effect is that shareholders will not be able to benefit from the foreign tax credit given to the company.

To resolve this, I propose to exempt from tax, dividends paid out of foreign income for which there is insufficient franking credit due to the foreign tax credit given. Where the foreign tax paid is equal to or higher than Singapore's, the entire foreign income, net of foreign tax, will be allowed to be distributed as tax exempt dividends to shareholders. Where the foreign tax is lower than Singapore's, only dividends paid out of a part of the foreign income will be exempt from tax. That part shall be computed by dividing the tax credit by our corporate tax rate and subtracting from it the foreign tax paid. For the remaining foreign income, the Singapore tax will be sufficient to frank dividend payments.

Where a recipient of the tax exempt dividends is a holding company, it can in turn distribute tax exempt dividends out of those it has received.

This tax concession shall apply to dividends paid out of foreign incomes assessable to tax from Year of Assessment 1992. I hope it will encourage more of our companies to invest overseas and to repatriate their profits.

Approved International Shipping Enterprise (AIS) Scheme

Owing to our strategic location at the crossroads of East-West trade, Singapore has developed into one of the busiest ports in the world. Our free shipping policy has been very effective in encouraging ships to register in Singapore, and attracting shipping companies and marine-related businesses to locate here. However, many of the shipping companies now in Singapore are merely operational arms which act on decisions made by their headquarters or holding companies located outside Singapore. There is a need to build up a critical mass of shipowners if Singapore is to develop into an international maritime centre. The presence of such a critical mass will bring technical expertise and economic spin-offs. It will also foster developments in ancillary maritime services.

To encourage major international shipowners to locate in Singapore, I propose to introduce a tax incentive for resident shipping companies called the Approved International Shipping Enterprise Scheme. Under the scheme, the income of an approved international shipping enterprise (AIS) from the operations of its non-Singapore flag ships outside Singapore will be exempt from tax. Qualifying dividends from approved subsidiaries and associated shipping companies of the AIS will also be granted tax exemption. Income derived by the AIS from the uplift of freight in Singapore by its non-Singapore flag ships will be subject to normal corporate tax. AIS status may be granted for a period of up to 10 years in the first instance, and may be extended thereafter. The scheme will take effect from Year of Assessment 1992. It will be administered by the Singapore Trade Development Board.

Tax Deduction for General Provisions made by Banks

Recent developments in the financial markets have highlighted the growing fragility of the international banking system brought about by deterioration in the loan and investment portfolios of banks. Major international banks have experienced a rise in bad debts because of sudden declines in the financial condition of their borrowers. As a result, banks which have not maintained adequate provisions to cushion themselves against unforeseen losses in their loan portfolios had to report large loan losses. If such losses are incurred by an increasing number of banks, the ensuing loss of depositor confidence will have adverse consequences on overall economic activity.

Unlike other sectors of the economy, banks have a unique role in mobilising depositors' savings for productive investment, and facilitating payments in the national economy. Given the increased volatility of the international financial markets, and the need to ensure confidence in our financial system, it is crucial for banks operating in Singapore to build up adequate provisions. This will give the banks more latitude to withstand losses and diminution in the value of their assets.

In view of the special role which banks play in the economy, I have decided to allow the general provisions made by banks and merchant banks in Singapore to be tax deductible. This is aimed at encouraging banks and merchant banks in Singapore to build up their reserves, and promote the overall soundness and stability of our financial system. This, in turn, will promote the further development of Singapore as an international financial centre. Allowing tax deduction for general provision is not a revolutionary measure, as a number of industrialised countries already provide for it.

The amount of provisions eligible for tax deduction will be limited to 2% of each institution's total loans and investments, excluding Government securities. The amount deductible each year will be limited to a quarter per cent of such loans and investments. The deduction will be allowed with effect from Year of Assessment 1992. Further details relating to the deduction will be announced by the Monetary Authority of Singapore.

Tax Incentive for Services Provided by Trust Companies

Trustee services are important supporting services to fund managers and investors. Trustee companies act as custodians, nominees, trustees or agents in investments transactions. The promotion of trust business will thus support the development of fund management and securities trading activities in Singapore, and contribute to the growth of our financial sector.

At present, a 10% concessionary tax rate is available only to Approved Securities Companies and banks, for income from financial trustee activities. I have decided that with effect from Year of Assessment 1992, a concessionary tax rate of 10% shall also apply to income of Approved Trust Companies from providing specified trust services to non-residents in respect of their non-Singapore dollar investments. With this incentive and our strategic location in the rapidly growing Asia Pacific region, our financial sector would be in a good position to develop as a centre for international trustee activities for investments in the regional financial markets. Tax Incentive for Underwriting and Managing International Securities Issues

At present, Asian Currency Units (ACUs) and Approved Securities Companies are taxed at a concessionary rate of 10% on certain types of qualifying income from trading in non-Singapore dollar securities on behalf of non-residents and on their own account. This incentive has significantly promoted the financial sector's development as a centre for trading of international securities.

To develop Singapore further as an international financial centre, we need to promote not only the trading of international securities, but also the issuance of such securities from Singapore. The strong growth in the Asia Pacific region has resulted in a greater demand for funds from regional businesses. Investment banks and securities companies should be encouraged to take advantage of this development by providing services for the issuance of international securities from Singapore.

I have, therefore, decided to extend the 10% concessionary tax rate available to ACUs and Approved Securities Companies to cover income derived by them from arranging, underwriting, managing and placing international securities issued from Singapore. These securities should be issued by non-resident companies in non-Singapore dollars and placed with non-residents. The incentive will take effect from Year of Assessment 1992.