INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

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 1993 gives legislative effect to income tax changes announced in the 1993 Budget Statement, as well as other changes not announced in that Statement.

In the 1993 Budget Statement, I have announced certain tax changes to promote an external wing to Singapore's economy and to attract new investments into Singapore. Members would also recall that I have announced several GST-related tax changes.

Tax Changes to Promote an External Economy

To encourage Singapore companies to venture and invest overseas, I have announced that unilateral tax credit will be granted to facilitate the remittance of foreign dividends and overseas branch profits. Clause 33 amends section 50A to provide for this tax concession.

Currently, to promote the export of Singapore manufactured goods, double tax deduction is granted for expenses incurred in the promotion of such goods. To assist our companies to seek and exploit opportunities overseas, I have announced that this existing scheme for the promotion of export of goods will be expanded to cover services. It will also be extended to new activities, namely, feasibility studies, product certification and packaging for exports. I have also announced that double tax deduction will be allowed for exploring and developing investment opportunities abroad. Clauses 12, 13 and 15 amend sections 14B and 14C and insert a new section 14K to provide for these tax incentives.

To encourage companies to form venture capital and regional funds to promote investments in the region, I have announced that the gains and certain investment incomes of approved venture capital and regional funds will be exempt from tax. Clause 10 inserts a new section 13H for this purpose.

Tax Changes to Attract Offshore Activities to Singapore

To attract offshore activities to Singapore and facilitate Singapore's development into an international art and antiques market, one of the tax incentives I have announced was a 10% concessionary tax rate for approved art and antique dealers on income derived from transacting on behalf of non-residents with approved auction houses. In addition, well established auction houses and private museum operators can also qualify for the Pioneer Services tax incentive which exempts their income from tax for a period of five years. Donations to the National Museum will also be tax deductible up to twice the value of the donations. Clauses 21 and 27 amend section 37(2) and insert a new section 43L to provide for this new incentive.

Approved trustee companies are currently taxed at a concessionary rate of 10% on income derived from providing specified trustee services to non-residents in respect of non-Singapore dollar investments. To further promote trustee services which are an important support to fund managers and investors, I have announced that the specified income of non-resident beneficiaries of trust where the trustee is an Approved Trustee Company will be exempt from tax. Clause 10 inserts a new section 13G to provide for this new incentive.

Currently, for a company which has some income taxable at a concessionary rate and other income taxable at the full corporate tax rate, it is allowed to set-off its loss or capital allowances under one tax rate against the profit under another tax rate on a dollar for dollar basis. This dollar for dollar set-off can result in a tax reduction which is different from that based on the tax rate at which the income is taxed. To rectify this situation, an adjustment factor will be applied whenever losses or capital allowances under one tax rate are to be set-off against the income under another tax rate. The adjustment factor is the ratio that one tax rate bears to the other tax rate. Clause 22 inserts a new section 37B to provide for this tax change.

Tax Change to Contain Health Care Expenditure

Members will recall that to contain health costs and to prevent misuse of health services, I have announced that tax deductibility of expenses on medical benefits by employers will be capped at 2% of total employees' remuneration. Clause 11 amends section 14 to provide for this change.

GST-Related Tax Changes Affecting Companies

To ensure that the overall tax burden remains competitive internationally when GST is introduced, I have announced that the corporate tax rate will be reduced from 30% to 27% with effect from Year of Assessment 1994. The reduced rate will also apply to non-residents, trustees and executors as well as tax withheld at source on payments to non residents. Clauses 25 and 29 amend sections 43 and 45 for this purpose.

Two consequential amendments are necessary as a result of the reduction in corporate tax rate. The first is to adjust the dividend franking credit mechanism. Although the reduction in corporate tax rate takes effect from Year of Assessment 1994, that is, from 1st January 1993, companies could only be informed of this after our Budget announcement. Adjustment is therefore necessary for those dividends declared in the early part of 1993, of which tax has been withheld at 30%. A transitional measure is also needed in the case of dividends declared before 1st January 1993 and received by companies with accounting periods ending before December 1993. Such dividends received are to be assessed in Year of Assessment 1993 instead of Year of Assessment 1994. Clauses 20, 28 and 30 amend sections 35(2A), 44 and 46 to provide for these changes.

The second amendment is to cap the tax rates in Part B of the Second Schedule to the Income Tax Act. With the lowering of the corporate tax rate to 27%, the highest effective tax rate imposed under Part B of the Second Schedule to the Income Tax Act will also be limited to 27%. This will ensure that those who are taxed under the existing Part B marginal rates, such as management corporations and clubs, will in fact not be taxed above the corporate rate of 27%. Clause 24 amends section 42(5) for this purpose.

GST-Related Tax Changes Affecting Individuals

I will now proceed to the amendments to the Income Tax Act pertaining to the tax changes affecting individuals which are GST-related. I have announced that the top personal income tax rate of 33% will be reduced by three percentage points to 30%, with proportionate reductions in other tax brackets. In addition, personal relief will also be increased from $2,000 to $3,000. Clauses 23, 24 and 36 amend sections 39 and 42 as well as the Second Schedule to the Income Tax Act to effect this.

To reward effort and enterprise, I have also granted a 5% one-off and across-the-board rebate on personal income tax payable for Year of Assessment 1993. In addition, I have also granted a $700 rebate on personal income tax payable for Year of Assessment 1994 to offset the effects of the GST. Clause 38 provides for these rebates.

Other Tax Changes Affecting Individuals

I have also announced six other changes which affect individuals. Currently, our tax law allows a married woman to be separately assessed only on her earned income and income derived from accumulated earned income. I have announced that with effect from Year of Assessment 1994, married women will be allowed to elect for separate assessment on all their incomes. Clause 34 amends section 51 to enable this change.

At present, a taxpayer is able to claim the tax relief for aged parents or handicapped siblings only if they stay in the same households. As some taxpayers have legitimate reasons for living apart from their aged or handicapped dependants, although they are still supporting these dependants, clause 23 amends section 39 to allow the Comptroller of Income Tax to waive the residence requirement for claiming these reliefs.

Currently, a married woman can only claim the enhanced child relief for any of her children if she also claims the normal child relief for the child. I have announced the removal of this restriction and we will now allow the claim for normal child relief to be separate from the claim for enhanced child relief. Clause 37 amends the Fifth Schedule to the Income Tax Act to provide for this change.

To rationalise the tax treatment of all retirement benefits, I have announced that the maximum level of tax-free retirement benefits allowed will be pegged to the 40% compulsory contributions to CPF. Other than CPF benefits, all retirement benefits received from private employers, including gratuities and pensions, will be taxable. Clauses 3, 4, 5, and 11 amend sections 10, 10C, 13(1) and 14 to provide for these tax changes.

To encourage a self-employed person to save more to provide for his own needs when he retires, Government has allowed tax deduction for his voluntary contributions to the CPF, subject to a limit. With the increase of the employer's CPF contribution rate to 18% from 1st July 1992, the limit for tax deduction has to be raised in tandem to 18% of the assessable income from self-employment, subject to a maximum of $12,960. This will be effective from Year of Assessment 1994. Clause 23 amends section 39 to provide for this change.

To encourage Singaporeans to work overseas, I have announced that unilateral tax credit will be granted for foreign tax paid on employment income derived from countries with which we do not have a tax treaty. Clause 33 amends section 50A to provide for this tax concession.

Tax Changes Not Announced in the Budget

I shall now deal with the remaining tax changes not announced in the 1993 Budget Statement. Two of them are to attract activities to Singapore. The first concerns double tax deductions which are currently granted to financial institutions for expenses relating to the establishment and development of approved financial activities in Singapore. This tax concession is now extended to include expenses incurred in engaging consultants in the research and development of approved financial activities. Clause 14 amends section 14J to provide for this extension.

The second amendment provides for a new incentive to encourage the transfer of technology through cost-sharing agreements. Currently, payments made under cost-sharing agreements are treated as capital expenses and are therefore not tax-deductible for income tax purposes. To encourage the transfer of technology as well as to attract research and development activities to Singapore, clause 17 inserts a new section 19C to allow tax deduction of payments for technology under bona-fide cost-sharing agreements.

The next two amendments pertain to our tax incentives for the shipping industry. Firstly, clause 6 amends section 13A to extend the tax exemption currently granted to profits derived from the operation of Singapore flag ships to include the income of a shipping enterprise derived from the charter of Singapore flag ships. Secondly, clause 9 amends section 13F to extend the exemption of tax on the income of an Approved International Shipping Enterprise to income derived from the carriage of passengers, mails, livestock or goods by any foreign ship to Singapore for transhipment.

Finally, the last three amendments are necessary to fine tune the existing provisions in our tax legislation. The first amendment pertains to the tax relief for maintaining a handicapped spouse. Currently, section 39(2)(ca) of the Act provides for a handicapped spouse relief not exceeding $3,500 to an individual who maintains a handicapped spouse or ex-spouse whose income in the year was not more than $1,500. On the other hand, any alimony received by an ex-wife, or any maintenance payment received by a wife separated from her husband in accordance with an order of court or deed of separation is income chargeable to tax under section 10(1)(e). Therefore, if such alimony or maintenance payment exceeds $1,500 a year, the income ceiling of $1,500 would be breached and the ex-husband or husband cannot claim the handicapped spouse relief. Clause 23 thus amends section 39(2)(ca) to provide that alimony or maintenance payment received by a handicapped woman who is divorced or separated from her spouse will not be deemed as income for the purpose of section 39 of the Income Tax Act.

The second amendment extends the period for payment of withholding taxes. Clause 29 amends section 45 to allow companies up to 10 days to pay to the Comptroller of Income Tax, the taxes which they are required to withhold under section 45 of the Income Tax Act. The period currently allowed is seven days. The extension is to take into account the non-working days in the week.

The last amendment relates to the service of summonses. At present, summonses on taxpayers to attend court have to be served personally. As this is both time and manpower consuming, clause 35 inserts a new section 99A to provide for service of summonses on taxpayers by registered mail.

Sir, I beg to move.

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.

[Mr Speaker in the Chair]

Clauses 1 to 31 inclusive ordered to stand part of the Bill.

Clause 32 -

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 34, to leave out lines 1 to 7 inclusive.

There is no longer a necessity for inserting a new section 50(12). The reason is that clause 33 of the original Bill has been re-drafted.

Amendment agreed to.

The Chairman: There are consequential amendments:

(1) In page 33, lines 34 and 35, to leave out the dash and "(a)".

(2) In page 33, lines 36 and 37, to leave out the semi-colon and "and" and insert a full-stop.

These will be done.

Clause 32, as amended, ordered to stand part of the Bill.

Clause 33 -

Question proposed, "That clause 33 stand part of the Bill."

Dr Richard Hu Tsu Tau: Sir, it is intended that the question "That the clause stand part of the Bill" be negatived, and a new clause be substituted therefor.

Question put, and negatived.

Clause 33 accordingly disagreed to.

New Clause 33 - "Repeal 33. Section 50A of the principal Act is and re- repealed and the following section substituted enactment therefor: of section 50A. "Uni- 50A.-(1) Notwithstanding that there lateral are no arrangements for the time being in tax force under section 49 with the government credits. of any territory outside Singapore, tax credit under section 50 shall, subject to this section, be given to any person resident in Singapore for tax payable under the law of that territory in respect of - (a) any income derived from such professional, consultancy and other services as the Minister may by regulations prescribe; (b) any dividend derived therefrom; (c) any income from employment therein; or (d) any profit derived from outside Singapore by a branch in that territory of a company resident in Singapore. (2) The Minister may, in regulations made under subsection (1)(a), specify the territories to which those regulations shall have effect. (3) Where any dividend in respect of which tax credit is given under subsection (1)(b) is paid by a company which is resident outside Singapore to a person resident in Singapore who owns not less than 25% of the shares of the company paying the dividend, the tax credit shall take into account any tax paid by that company in the country in which it is resident in respect of its income out of which the dividend is paid. (4) Where under arrangements for the time being in force under section 49 with the government of any territory outside Singapore no provision is made for tax credit in respect of income out of which any dividend is paid by a company resident in that territory, tax credit under section 50 in respect of such income shall be given to any person resident in Singapore who owns not less than 25% of the shares of the company paying the dividend. (5) Section 50 shall, with the necessary modifications and subject to any regulations made under subsection (1)(a), apply for the purposes of this section as if any territory to which this section and the regulations have effect were a territory with which arrangements have been made under section 49. (6) Any person granted any tax credit under subsection (1) or any regulations made thereunder on any income shall not be given any tax relief under section 48 or tax credit under section 50 in respect of that income.".".

Brought up, and read the First time.

Dr Richard Hu Tsu Tau: Sir, I beg to move, "That the clause be read a Second time."

I have announced during the 1993 Budget that in the case of dividend remitted from a country with which Singapore has a tax treaty, Unilateral Tax Credit will be granted to the underlying foreign corporate tax paid on the profits out of which the dividend is declared. Clause 33 of the Bill is therefore amended to reflect this.

Question put and agreed to.

Clause read a Second time and added to the Bill.

Clauses 34 to 38 inclusive ordered to stand part of the Bill.

Bill reported with amendments, read a Third time and passed.