TAX CHANGES TAX ON COMPANIES

Corporate Income Tax

Although our corporate tax rate of 31% remains competitive internationally, I propose to reduce the rate by one percentage point to 30%. This will help to maintain Singapore as an attractive location for investments and will offset some of the business cost increases of the past year. The tax change will take effect from Year of Assessment 1993. The revenue loss is estimated to be $105 million annually.

Tax Incentive For Commodity Futures Market

To develop Singapore into an international trading hub, it is necessary to provide traders with a vehicle to manage their risk in commodity trading. In this regard, the Trade Development Board has announced the setting up of a commodity futures exchange called the RAS Commodity Exchange. The Exchange is expected to come into operation this year. It will provide a centralised and regulated marketplace for the trading of commodity futures. To help the Exchange get off to a successful start, I intend to give it a 5-year tax exemption on its income from futures activities.

Rubber futures will be the first to be traded on the Exchange. Three contracts will be traded when the Exchange opens. One of these is a new contract called RSS 3. The other two are existing contracts, namely RSS 1 and TSR 20. To promote the new RSS 3 contract, the income of corporate members of the Exchange arising from futures transactions in this contract will be taxed at a concessionary rate of 10%. These transactions must be with non-residents, Asian Currency Units and other members of the Exchange. However, income derived from transactions with residents will continue to be taxed at the prevailing corporate rate. This incentive will take effect from Year of Assessment 1993. The current tax treatment will continue to apply for income arising from transactions in the two existing contracts, namely, RSS 1 and TSR 20.

Tax Incentive For Spot Transactions Undertaken by Corporate Members of SIMEX

At present, corporate members of SIMEX are taxed at a concessionary rate of 10% on profits derived from trading in currency futures. However, profits derived from spot currency transactions are taxed at the prevailing corporate rate. This has affected the ability of SIMEX members to undertake an effective hedge in the spot market for their customers as well as for their own account. SIMEX members need to undertake such transactions in order to hedge the risks from their currency futures positions.

To facilitate corporate members of SIMEX in doing this, I have decided to extend the 10% tax concession on currency futures to profits derived from spot transactions in designated currencies. The transaction must be with a non-resident, another member of SIMEX or an Asian Currency Unit. The tax concession will take effect from Year of Assessment 1993.

Double Deduction for Skill and Knowledge-Intensive Financial Activities

Singapore is now a regional centre for financial services. Over the years, we have broadened the range of such services. The global financial market has, however, seen rapid innovations. To stay ahead, Singapore cannot rely on providing the traditional financial services. Competition in these has increased with the emergence of other regional financial centres. We must move on to new and more sophisticated financial services. These would include knowledge-intensive services such as financial engineering and financial research and development.

The cost associated with the development of these financial services can be very high. Besides having to invest in computerisation, it is also necessary to attract talented persons with specialised expertise and experience to work here. To encourage the development of such services in Singapore, I propose to grant a double tax deduction to financial institutions for expenses relating to the establishment and development of approved financial activities in Singapore. This incentive will be given on a highly selective basis. It will be for a period of 5 years, and may be extended thereafter. The scheme will take effect from Year of Assessment 1993. Further details of the scheme will be announced by the Monetary Authority of Singapore.

Basis of Taxation For Life Insurance Companies

At present, life insurance companies are taxed on the excess of investment income over management expenses and agency commissions. Investment income includes gains from sale of investments. For companies with overseas operations, their investment income is determined by apportioning their worldwide investment income in the ratio of Singapore premiums over worldwide premiums.

This basis of taxation is not satisfactory. By confining the income to be assessed to just that from investments alone and excluding premiums, the tax base will not fully reflect the profitability of the insurance company. The present basis also makes no distinction between income of the company that accrues to its policyholders as against shareholders. This means that policyholders are effectively taxed at the prevailing corporate rate.

To bring the basis of taxation for life insurance business in line with that of other businesses, I propose to tax life insurance companies on their total income derived out of the Singapore business. In other words, assessable income will include premiums in addition to investment income arising from the Singapore business. As this investment income can now be identified separately, it is no longer necessary to determine it by apportioning worldwide income. At the same time, the types of expenses which could be deducted will now include benefit payments and increases in actuarial liability to policyholders. Moreover, to make the basis more equitable, the resultant surplus will be taxed at 10% on that portion attributable to policyholders. That attributable to shareholders will continue to be taxed at the prevailing corporate rate.

The new basis of taxation for life insurance companies will facilitate the development of annuity and investment linked insurance products by these companies. The development of annuity is relevant and important as the population ages over the next 20 to 30 years. The new basis of taxation for life insurance companies will take effect from Year of Assessment 1993.

Stamp Duty on Financial Derivatives

Singapore has been developing as a centre for trading in regional securities. To cater to the increased sophistication of regional investors and the growth in interest in financial derivatives, the Stock Exchange of Singapore will soon launch trading of stock options on securities traded on the exchange. To encourage such trading, I have decided not to levy stamp duty in respect of transactions in stock options. With effect from 1st April 1992, stamp duty will also not be imposed on contract notes and instruments of transfers relating to share warrants, rights in shares and units in unit trusts. Only contract notes and transfer instruments for transactions in stocks and shares will be subject to the existing stamp duty.