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

Order for Second Reading read.

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

The Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act, which I will refer to as the EEI Act in short. The Bill is to put into effect several tax changes which were announced in the 1994 Budget Statement. It will also make a few technical changes to the EEI Act to facilitate the administration of the incentives, and two consequential amendments to bring the EEI Act in line with the Income Tax (Amendment) Act 1994.

I will now describe each of the proposed amendments in turn.

Tax changes of the 1994 Budget

The first set of amendments are those pertaining to the tax changes announced in the Budget Statement. The changes are in the tax relief period of four existing incentives to make them more attractive. The four incentives are the Expansion of Established Enterprise incentive, the Expanding Service Company incentive, the Export of Services incentive and the Warehousing and Servicing Companies incentive.

The Expansion of Established Enterprise incentive and the Expanding Service Company incentive seek to encourage companies which are in businesses of very substantial economic benefit to Singapore to expand their operations. Both incentives exempt from tax the incremental profits of the incentive company which are in excess of the agreed pre-expansion level.

The Export of Services incentive is granted to companies which export their services in qualifying activities spelt out in the EEI Act to other countries. The incentive company will be exempt from tax on 90% of its qualifying income. The Warehousing and Servicing Companies incentive, as the name suggests, is applicable to companies which operate warehousing facilities or those which provide technical or engineering services. It exempts from tax one-half of the incentive company's qualifying income.

The problem with these four incentives now is that they are not attractive enough to companies. Firstly, the maximum length of the initial tax relief period is only five years which is too short to give companies enough certainty for planning purposes. Secondly, the two expansion incentives, that is, the Expansion of Established Enterprise and the Expanding Service Company incentives, cannot be extended beyond the initial tax relief period. That these incentives are unattractive is reflected in the low number of companies which have received these incentives since the incentives were introduced. For example, only four companies have obtained the Expansion of Established Enterprise incentive since 1967, while no company has been given the Expanding Service Company incentive since its inception in 1984.

Clauses 3, 4, 5 and 13 of the Bill relate to the amendments to address the weaknesses of these incentives. Firstly, they will increase the maximum length of the initial tax relief period of these incentives to 10 years, instead of the current five years. Secondly, they will allow these four incentives to be extended beyond the initial period by further periods of not more than five years each time, subject to a maximum total tax relief period of 20 years.

Technical amendments

I now move on to the technical amendments which are intended to facilitate the administration of three tax incentives.

The Approved Foreign Loan Incentive

The first of the technical amendments is to the Approved Foreign Loan incentive. In this incentive, the interest on an approved foreign loan will be fully exempt from tax, but only if the Comptroller is satisfied that the exemption will not increase the foreign lender's tax liability in his home country. It is a statutory condition. The intention is to ensure that the foreign lender has sufficient foreign tax credit to benefit from the exemption so that the exemption will not result in the mere transfer of tax revenue to the foreign treasury.

In practice, companies which have been given the Approved Foreign Loan incentive have found the statutory condition administratively onerous to comply with. Clause 6 of the Bill will therefore remove that statutory condition.

But while we will remove the statutory condition, it is important to continue to have some safeguards to minimise the likelihood of the revenue forgone by Singapore going to a foreign treasury. To achieve this, an assessment of whether the foreign lender will have sufficient foreign tax credit to benefit from the exemption will still be made at the point of the application for the incentive. In addition, the amendment will give the Minister an option to grant a concessionary withholding tax rate of, say, 10% or 15%, instead of a full exemption only, on the interest payable on approved foreign loans.

The Approved Royalties Incentive

The Approved Royalties incentive has a similar statutory condition - the Comptroller may exempt approved royalties from tax only if he is satisfied that the home-country tax liability of the non-resident recipient will not increase as a result of the exemption. Clauses 7 and 8 of the Bill will make similar changes to the Approved Royalties incentive, for the same reasons which I have given above.

Investment Allowance

The third set of technical amendments pertains to the way an Investment Allowance, or IA in short, may be used. IA is given for fixed asset investment, and may be used to set off chargeable income. However, the EEI Act has not specified how an IA may be used where a company has various incomes which are taxed at different rates. There is a need to clarify how IA can be used.

The amendments in clauses 9 to 12 are to provide that under normal circumstances, an IA given for an activity where the income is taxed at the normal rate (or normal IA) may only be set-off against income taxed at the normal rate (or normal chargeable income), and an IA given for an activity where the income is taxed at a concessionary rate (or concessionary IA) may only be set-off against income taxed at the concessionary rate (or concessionary chargeable income). Normal IA that cannot be fully absorbed within one year of assessment may be carried forward to be set-off against future normal chargeable income. Similarly, companies may carry forward unabsorbed concessionary IA to set off against future concessionary chargeable income.

Unabsorbed normal IA may also be used against concessionary chargeable income, on a dollar for dollar basis, if a company chooses to do so instead of carrying forward the unabsorbed normal IA to be used against its normal chargeable income in subsequent years.

However, concessionary IA will not be allowed to be used to set off normal chargeable income. This will only be allowed under one situation, which is when the company has ceased to derive concessionary income permanently. And the concessionary IA will be adjusted using a conversion factor in the ratio of the two tax rates. Such adjustment is similar to that provided for in the Income Tax Act vis-a-vis unabsorbed losses arising from activities which enjoy a concessionary tax rate. To give an illustration, an absorbed concessionary IA of $100,000 for an activity taxed at 10% rate will be reduced by a factor of 27/10 when it is used to set off against normal chargeable income.

Consequential amendments

Finally, there are two amendments found in clauses 2 and 14 of the EEI Bill which are consequential to the Income Tax (Amendment) Act 1994. These are to provide that the Comptroller may raise additional tax assessments to recover tax only within the time limit allowed under the Income Tax Act, which is six years.

Mr Speaker, Sir, the proposed amendments to the EEI Act will improve and update existing tax incentives for the inflow of foreign investments into Singapore, and encourage local companies to expand and upgrade.

Sir, I beg to move.

Question proposed.

Mr Chiam See Tong: Mr Speaker, Sir, I support the Bill.

While supporting the Bill, I have some queries for the Minister regarding this legislation which gives tax holidays to pioneer companies which produce specific products which could be declared as pioneer products.

This legislation is laudable when it was first enacted in 1967. Singapore, at that time, suffered large-scale unemployment. The British were pulling out their troops and Singapore's survival depended on attracting large-scale foreign investments so that factories could be started here to mop up the existing unemployment and to give jobs to the large numbers of school leavers. It was proper at that time to give attractive tax holiday schemes to investors.

The employment situation has now changed. There is full or over-full employment now. Our banks and other financial institutions have ample funds. The question is: why do we still need to give complete tax holidays or partial tax holidays to foreign companies, sometimes up to 20 years? Perhaps the Minister could enlighten the House why this legislation is still necessary in the light of Singapore's full employment, its economically advanced status and also Singapore itself is investing massive funds abroad, like in China, Vietnam and India. There is no shortage of funds in Singapore today. Is Singapore, on balance, losing out by continuing to give such generous tax-free packages to foreigners? What about the issue of technology transfer? Are these pioneer status foreign companies, while enjoying tax holidays, required to employ Singaporeans or local people in their top level positions and to have a minimum expenditure on their R&D programme? How many such companies are enjoying pioneer status in Singapore today and how much annual turnover are they generating? What are the types of business or companies which Singapore hopes to attract under the Economic Expansion Incentives (Relief from Income Tax) Act? Perhaps the Minister could enlighten the House.

Mr Goh Chee Wee: Sir, we have a number of incentives to encourage foreign investments. This particular Bill actually deals with only four incentives: the Expansion of Established Enterprises, the Expanding Service Company, the Export of Services, and the Warehousing and Servicing Companies. These are four specific incentives and they apply to both foreign companies as well as local companies.

I think it is wrong for Mr Chiam to become complacent, thinking that since everything is good in Singapore, we have full employment, there is no need for us to offer incentives in order to attract foreign investments. We are in a highly competitive world. Many countries are still continuing to compete for foreign investments. I think we must continue to make our incentives attractive enough to attract foreign investments.

Mr Chiam See Tong: The Minister of State has not really answered my questions. What are the types of companies and the type of products which the Government is aiming? I do realise that every country is competing for foreign investments. But you are giving them so many give-aways. In return, what do we hope to get from these companies?

Mr Goh Chee Wee: In the initial years, we focused on attracting labour-intensive industries which could provide jobs. Later on, we upgraded and tried to attract high-value added operations and more capital-intensive type of operations to Singapore. And that has been our policy in recent years. High-value added industries can cover quite a whole range of industries in the industrial sector. Of course, we have been attracting electronic and petroleum companies. But any industry or company which can add value to Singapore and which can provide good jobs to Singaporeans will be welcomed.

Mr Chiam See Tong: Other than petroleum companies, what are the other companies that are enjoying pioneer status in Singapore today?

Mr Goh Chee Wee: Pioneer status incentive applies to all sectors. That means all industries or investments can apply for the incentive. Of course, they must meet certain conditions. We do not say that this incentive only applies to, say, electronics or petroleum companies. It applies to all industries. But in evaluating whether we should give them incentives, whether it is pioneer incentive or other incentives, we consider the value to Singapore. We consider their investment. We consider what sort of employment they are providing to Singaporeans. All these are taken into consideration.

Mr Chiam See Tong: What sort of turnover are these companies generating every year? Can the Minister of State name a figure?

Mr Goh Chee Wee: We do not specify the minimum turnover for companies to enjoy the benefits and we have actually a whole range of incentive schemes. It does not mean that every company that comes to Singapore will be given pioneer status. Depending on the type of investment, we will evaluate them and decide on which type of incentive tof be accorded to them.

Mr Speaker: May I remind hon. Members that a debate is deemed to have concluded when the mover of the motion has given his reply. I shall only allow clarifications from hon. Members if it is to seek clarification on points which have been raised, but Members should not introduce new matters.

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 Goh Chee Wee].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clause 1 -

The Chairman: In page 1, line 5, the citation year will be changed to 1995 as indicated in the Order Paper Supplement.

Clause 1 ordered to stand part of the Bill.

Clauses 2 to 9 inclusive ordered to stand part of the Bill.

Clause 10 -

The Chairman: In page 9, line 26, the citation year will be changed to 1995 as indicated in the Order Paper Supplement.

Clause 10 ordered to stand part of the Bill.

Clauses 11 to 14 inclusive ordered to stand part of the Bill.

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