ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX)(AMENDMENT) BILL

Order for Second Reading read.

The Minister for Trade and Industry (Mr S. Dhanabalan): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

This Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act, which I will refer to as EEI Act in short. It is to put into effect four tax changes which were announced in the 1993 Budget Statement.

I will describe each of the tax changes in turn.

Use of Accumulated Losses and Capital Allowances

The first tax change, on how much accumulated losses and capital allowances may be used, will apply to post-pioneer companies. These are companies which have two types of income after their pioneer period tax exemptions have expired and these two types are income taxed at a concessionary rate under the post-pioneer incentive of the EEI Act, and other incomes taxed at the normal corporate tax rate. In other words, pioneer companies, after their pioneer incentives have expired, may enjoy a post-pioneer incentive for some part of the activity, in which case they will have two types of income, ie, income under the post-pioneer incentives as well as the normal income which will be taxed at the normal corporate tax rate. The two types of income are accounted for separately since they are taxed at different rates. Losses and capital allowances which are not absorbed during the post-pioneer tax concession period are at present allowed to be carried over in full after the tax concession period. For example, if a post-pioneer company enjoying a tax concession of 10% has, by the end of its tax concession period, accumulated a loss of $100 in its approved trade, it can use that $100 loss to offset $100 of its income after the tax concession has expired, and that income after the tax concession period has expired, of course, will be taxed at the normal 27% corporate tax rate. The tax reduction is therefore $27 since the normal tax rate is 27%. When you have a loss of $100, you get a reduction of $27, instead of $10 because, in fact, that loss was incurred at the time when the company was enjoying a 10% tax rate. So in fact he should only enjoy a $10 loss.

Therefore, as announced in the Budget Statement, an adjustment factor will be applied whenever unabsorbed losses and capital allowances of a post-pioneer company under one tax rate are used to set off against the income under another tax rate. This adjustment factor is equal to the ratio of the first tax rate to the second, and this is introduced in clause 3 of the Bill. The effect of such apportioning by the ratio will be in the example that I just gave, that the tax reduction will be $10 instead of $27. A similar provision has recently been introduced in the Income Tax Act, in respect of companies granted tax incentives under the Act and thus have incomes which are taxed at different rates. Extending the Tax Relief Period for Warehousing and Servicing Companies Incentives

The second change relates to extending the tax relief period for Warehousing and Servicing Companies Incentives. This second change is to make extendable the tax relief period under the Warehousing and Servicing Companies Incentives Scheme. The incentives currently provide for a fixed tax relief period of five years for a warehousing or servicing company intending to incur expenditure of not less than $2 million in fixed assets. During the five years, half of the company's qualifying income will be exempt from tax. From past experience, however, the EDB has found that five years is not long enough to encourage the company to make such large capital investments. It does not also provide any incentive for the company to expand further after the initial incentive period is over.

Therefore, the EEI Act is being amended to allow the Minister to extend the tax relief period by further periods of up to five years at a time, subject to such terms and conditions as he may impose, and this is in clause 4 which inserts a new subsection in the EEI Act.

Modification to the Overseas Investment Incentive

Third, modification to the Overseas Investment Incentive. This third change is an amendment to the Overseas Investment Incentive. This particular Incentive is aimed at encouraging investments in approved overseas investment companies for the purpose of acquiring technology for use in Singapore or for gaining access to overseas markets. It allows the capital losses incurred by an eligible investor in an approved overseas investment, after two years and before the 9th year, to be deductible against the investor's domestic income. One requirement under the present law is that every overseas investment must be done through a Singapore-incorporated company specially set up for the purpose. Investors' feedback is that this requirement of setting up a company specially for this purpose is cumbersome.

Therefore, clause 5 of the Bill will insert a new section in the EEI Act to provide for the deduction of losses incurred by an approved eligible investment company on the sale of any share or in the liquidation of an overseas investment held directly by it. Under this additional arrangement, any gain from the disposal of shares or liquidation of the overseas company made after two years and before the 9th year will be treated as trading income and be subjected to tax if any capital loss had been allowed deduction. However, any such gain in excess of the losses already deducted will not be taxed. To put it in simpler terms, since we are allowing the losses to be offset, then the profits will also have to be taxed. But they will not be taxed in excess of the losses already allowed.

Introduction of the Overseas Enterprise Incentive

The fourth change is the introduction of a new incentive called the Overseas Enterprise Incentive. This Incentive will be given to encourage more Singapore companies to venture abroad to develop the external dimension of the economy.

Currently, income derived from overseas investments may be exempt from tax under the Income Tax Act on a project-by-project basis. The new Overseas Enterprise Incentive will grant an approved enterprise, called the Overseas Enterprise, up to ten years of tax exemption on the basis of its qualifying income from qualifying activities. In other words, we define it by activities, not by projects. So there can be a number of projects under the same activity and if it is an approved activity, then it will enjoy tax exemption. This will facilitate the Overseas Enterprise's overseas investment decisions and the remittance of foreign income. It will give companies greater tax certainty in planning their overseas ventures because it need not obtain approval for each and every overseas project separately.

Clause 6 introduces a whole new Part XIIIB to the EEI Act to effect this new Incentive that I have just described. It will allow the Minister to approve a Singapore-incorporated and resident company as an Overseas Enterprise if he is satisfied that the overseas investments or projects of the company will enhance the economic or technological development of Singapore. To be eligible, the company must be at least 50% owned by Singapore citizens and permanent residents.

Additional Changes

In addition to the four changes that I have just described, there is a need to fine-tune the existing pioneer incentive. There is a distortion in the treatment of capital allowances for pioneer companies under the present Act. Under the Act, as presently in force, a pioneer company is deemed to have permanently ceased its old trade or business at the end of its tax relief period and to have commenced a new trade or business on the next day. Thus, for a pioneer company whose tax relief period expires in the middle of the year of assessment, it must set off one year's full capital allowance against its pioneer income for that year of assessment.

Companies have made representations that this distorts the income of the pioneer company in its final year of tax concession and also the income of the company in its first year after the tax concession. There is a tax disadvantage for them. Clause 2 of the Bill thus inserts a new subsection to permit companies to apportion capital allowances in the year of assessment in which their pioneer status ended in the midst of the year, as if the old trade or business had not been deemed to have ceased. In other words, if the pioneer period ends on 30th June, then only half needs to be accounted for, and the other half will be taken up in the post-pioneer activity.

Mr Speaker, Sir, the proposed amendments to the EEI Act will enhance and provide new incentives to facilitate overseas investments by Singapore companies, and also improve and update existing incentives for the inflow of foreign investments into our domestic economy.

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. - [Mr S. Dhanabalan].

Bill considered in Committee; reported without amendment; read a Third time and passed.