FY93 TAX CHANGES

The thrust of this year's tax changes will be to promote our investments abroad. This is in line with our current economic strategy. There will also be tax incentives to promote offshore activities in Singapore. In addition, in view of the healthy revenue position, I will grant some one-off tax rebates for Year of Assessment 1993. These will benefit both companies and individuals.

Tax Changes for Companies

Property Tax Rebate

For companies, I propose to give a rebate on property tax. It shall be a one-off 25% rebate for commercial and industrial properties for the year commencing July 1993. This will offset some of the business cost increases in the year and help maintain Singapore as an attractive location for doing business. The revenue loss to Government is estimated at $145 million per annum. The rebate is intended to be shared between landlords and their tenants. In order to demonstrate this, HDB, JTC and other Government agencies owning properties will pass on most of this rebate to their tenants. The Government strongly encourages other private landlords to do likewise, and pass on at least half the rebate to their tenants.

Tax Incentives to Promote an External Economy

While I recognise the importance of building an external economy, I must stress that tax-wise we must not make outward investments generally more attractive than domestic ones. Foreign incomes therefore cannot be exempt from tax across-the-board. This is to avoid a hollowing out of our domestic industries. An across-the-board exemption will also open up a tax loophole for local source income to make a round-trip and return disguised as foreign income to enjoy tax exemption. For these reasons, the exemption of foreign incomes from tax will be given only on a case-by-case basis.

A total of seven incentives to promote the development of an external economy are proposed. They are:

(a) Unilateral tax credit for dividend income remitted from countries with whom we do not as yet have tax treaties.

(b) Extension of the unilateral tax credit scheme for services income, to include income remitted from Fiji, Kampuchea, Laos, Myanmar and Vietnam, and to include other types of services.

(c) Extension of the double tax deduction scheme for approved expenses incurred in the promotion of exports, to cover export of services.

(d) Double tax deduction for approved expenses incurred in exploring and developing overseas investment opportunities.

(e) Removal of a requirement under the Overseas Investment Incentive to form separate companies.

(f) Tax exemption scheme for venture capital and regional funds to promote investments in the Asia-Pacific region.

(g) Overseas Enterprise Incentive. This incentive provides approved Overseas Enterprises with tax exemption for qualifying income from approved kinds of overseas investments for periods of up to 10 years.

I will now ask the Clerk of Parliament to distribute a paper entitled Paper 1 (Cols. 589 - 592) which gives details of the incentives I have described. Paper 1 - TAX INCENTIVES TO PROMOTE AN EXTERNAL ECONOMY (Cols. 589 - 592)

Tax Changes to Attract Offshore Activities to Singapore

I now move on to tax changes to attract offshore activities to Singapore. A total of six incentives are proposed and they are:

(a) To promote Singapore as an international centre for the trading of arts and antiques, a 10% concessionary tax rate will be granted to approved art and antique dealers on income derived from transacting on behalf of non-residents with approved auction houses.

(b) Tax exemption for non-resident beneficiaries of trusts where the trustee is an Approved Trustee Company. This is an extension of an existing incentive to promote trustee services in Singapore.

(c) Extension of tax holiday for SIMEX by a further 5 years.

(d) Provision for extending the Warehousing and Servicing Incentives for periods not exceeding 5 years at a time.

(e) Extension of the tax exemption scheme for syndicated offshore credit and underwriting facilities, by an additional 5 years.

(f) Exemption from tax for interest paid by members of the RAS Commodity Exchange. This is an extension of an existing incentive to enhance the international competitiveness of the Exchange.

Mr Speaker, Sir, I will now ask the Clerk of Parliament to distribute copies of Paper 2 (Cols. 593 - 598) with details of these incentives. This paper also contains a proposal on the treatment of capital allowances and losses of companies enjoying tax incentives. Paper 2 - TAX CHANGES TO ATTRACT OFFSHORE ACTIVITIES TO SINGAPORE (Cols. 593 - 598)

Cap on Deduction for Medical Expenses

Hitherto, employers have been allowed to deduct for tax purposes all expenses incurred in providing medical benefits to employees without limit. This was not a problem in the past, when medical benefits were a minor expense. But in the long term, this arrangement will inflate health care expenditures and encourage over-consumption of medical services. It makes it worthwhile for both employers and employees to provide more medical benefits in their compensation packages than they would otherwise, rather than cash salaries. This is because employees have to pay tax on cash salaries while they enjoy medical benefits free of tax, and yet both medical benefits and cash salaries are tax-deductible to the employer. This difference in tax treatment between medical benefits and cash salaries reduces the incentive for both employers and employees to be cost-conscious in consuming medical services, as part of the cost of these services is borne by the Government in the form of forgone taxes.

In the US, employer-provided medical benefits enjoy unlimited tax exemption. As a result, these benefits account for 10% of all health care spending. According to a recent report on the US automobile industry, the cost of steel per US-made car is less than the cost of medical benefits per car. Many experts who have studied the problem of high medical costs in the US have concluded that this tax exemption is a major cause of the high costs, and that any serious attempt to contain health costs must include setting a cap on tax-free medical benefits. However, it is extremely difficult for the US to do so now, after medical costs have risen and the high medical benefits have become the norm.

We do not as yet have a serious problem in Singapore. A recent survey of 325 companies by the Inland Revenue Authority of Singapore showed that in 59% (around 190) of them, health care expenditure formed less than 1% of the total remuneration for their employees. I refer Members to Table 3 (Cols. 587 - 588). In another 26% (or 85) of the companies, health spending was between 1% and 2% of total remuneration. However, a few astute employers paid medical benefits amounting to over 5% of total remuneration. Table 3 - Medical Benefits as Percentage of Total Remuneration in 325 Companies (Cols. 587 - 588)

To prevent a problem from developing in future, Government will cap the tax deductibility of expenses on medical benefits by employers at 2% of total employees' remuneration with effect from Year of Assessment 1994. Companies are free to give medical benefits even beyond this 2% figure if they wish to do so, but such benefits will no longer be tax-deductible.

Government's aim is to pre-empt a future problem and not to deprive any workers of existing medical benefits. Most companies (85%) will be unaffected by this 2% cap, as their medical benefits form less than 2% of payroll. Government will give companies which have already exceeded the 2% cap in Year of Assessment 1992 time to adjust to the new rules. These companies will not have to pay tax on the entire amount of the excess above 2% immediately. In the first year, they will be allowed to deduct up to 4% of payroll or their percentage in Year of Assessment 1992, whichever is the lower. This transitional cap of 4% for such companies will be reduced gradually by 0.5 percentage point per year until it reaches 2% after 5 years.

The cap for new companies will be 2%. For companies enjoying concessionary tax treatment, the resulting increase in income from disallowing expenses in excess of the cap will not be treated as concessionary income but will be taxed at the full corporate tax rate.

Government is also reviewing the medical benefits of public sector employees. Details will be announced later in the year.

I will now move on to deal with personal income tax changes for FY93.

Personal Income Tax Changes

Individual Income Tax Rebate

Our economy grew by a satisfactory 5.8% in 1992. Singaporeans have worked hard to achieve this despite the sluggish world economy. As encouragement for continued effort, I have decided to give an across-the-board one-off rebate of 5% on individual income tax in Year of Assessment 1993. The estimated revenue loss to Government is $91 million.

Rebate of Service and Conservancy Charges

For Singaporeans staying in 1 to 3-room HDB flats who pay little or no income tax, Government has decided to pay on their behalf the Service and Conservancy charges payable in the month of December 1993. This will be a one-off payment for citizens only, the equivalent of the 5% income tax rebate. The estimated expenditure by the Government is $10 million.

CPF Share Ownership Top-Up Scheme

At the National Day Rally last August, the Prime Minister spoke of the Government's intention to increase the assets of Singaporeans under an Assets-enlargement Programme. In addition to HDB upgrading and the sale of HDB shops programmes, he said that the Government would sell shares of corporatised statutory boards at a discount to Singaporeans. His aim was to make Singapore a share-owning society as well as a home-owning society.

The Ministry of Communications will be floating Singapore Telecom (ST) on the Stock Exchange later this year. Details will be announced nearer the date of flotation. As part of the flotation, Government will sell several hundred ST shares at a discount to each CPF member who is a Singapore citizen. This is part of a programme to build up the assets held by Singaporeans, and promote widespread long-term ownership of blue-chip stocks, so that Singaporeans will have a more direct stake in the growth and prosperity of Singapore.

To launch this share-owning programme, in addition to the 5% rebate on personal income tax and the rebate for Service and Conservancy charges, the Government will implement a Share Ownership CPF Top-Up Scheme to help middle and working-class Singaporeans to own shares.

The CPF Top-Up Scheme will be confined to citizens aged 21 and above who are CPF members. In September, the Government will contribute a $200 grant into each such CPF account, provided the member or his employer has paid in at least $500 during the 6-month period from 1st March 1993 to 31st August 1993. Members who pay in less than $500 will receive a pro-rated contribution from the Government. Citizens without CPF accounts will be allowed to start one to benefit from the Scheme. Retirees, housewives and the self-employed can therefore also enjoy, first the CPF Top-Up, and later, the purchase of Singapore Telecom shares at a discount.

This $500 co-payment that we require corresponds to a CPF contribution of $83 per month, or a salary of about $250 per month. Thus almost all working Singaporeans will qualify for the full $200 CPF top-up. The Scheme is expected to cost the Government around $200 million.

It will take some time for Singaporeans who have not owned shares to become familiar with shares, and to learn the value of investing part of their assets in the shares of blue-chip companies like Singapore Telecom. They will learn from experience how good shares can multiply many times in value over the next 5 to 10 years. In future, when we have strong budgetary surpluses, we will from time to time top-up their CPF accounts to help Singaporeans buy shares of other statutory boards which will be corporatised. This way, every Singaporean will own shares and properties, which will appreciate in value as Singapore continues to prosper because of sound economic and social policies plus their own hard work.

Other FY93 Tax Changes Affecting Individuals

In addition to the foregoing, I am proposing six other tax changes affecting individuals. The proposals are set out in detail in Paper 3 (Cols. 597 - 600) which I will now ask the Clerk of Parliament to distribute. Briefly, they deal with:

(a) Unilateral tax credit for overseas employment income and director's fee.

(b) Taxation of retirement benefits.

(c) Waiver of the residence requirement for the aged parent and handicapped sibling reliefs.

(d) Separate assessment for married women on all incomes.

(e) Separate claims for normal and enhanced child reliefs.

(f) Tax deduction for CPF contributions by self-employed individuals. Paper 3 - OTHER FY93 TAX CHANGES AFFECTING INDIVIDUALS (Cols. 597 - 600)

Other Tax Changes

Duties on Cigarettes and Tobacco

Duties on cigarettes and tobacco were last revised in March 1991 to discourage smoking. In support of the national anti-smoking campaign and in particular to discourage smoking among our younger population, the import duty on cigarettes will be raised from $100 to $115 per kilogram. The import duty on tobacco and excise duty on cigarettes will also be raised from $50 to $60 per kilogram. Details of the duty changes for the various types of igarettes and tobacco are in Appendix A (Cols. 601 - 604). The change in duties will take effect from today. Appendix A - CHANGES IN CIGARETTE AND TOBACCO DUTIES (Cols. 601 - 604)

I now turn to tax changes which will take effect next year when the GST is introduced. These tax changes constitute a major reform of our tax system, and are a principal reason for the Government to introduce the GST now.