TAX CHANGES FOR COMPANIES

5% Tax on Incremental Profits from High Value-Added Financial Activities

The rapid growth of economies in the Asia Pacific has opened up new business opportunities for the Singapore financial sector. In line with government's efforts to encourage Singapore financial institutions to undertake high value-added activities, various tax incentives have been put in place over the years. These incentives have been successful.

Nevertheless, our financial institutions need to continue to strengthen their capabilities in fund management and investment banking if Singapore is to position itself to play a key role in servicing the expanding financial needs of the East Asian economies.

To further boost fund management, risk management and capital market activities in Singapore, I have decided to grant a concessionary tax rate of 5% on the incremental profits of such activities. With effect from Year of Assessment 1996, the increase in taxable income over the preceding qualifying year from the following activities will be taxed at a concessionary rate of 5%:

i) the managing of funds of at least S$5 billion from foreign investors by Asian Currency Units and Approved Fund Managers;

ii) the underwriting, managing or placing of foreign securities by Asian Currency Units and Approved Securities Companies, if the taxable income from such activities exceeds S$10 million;

iii) the trading of foreign securities by Asian Currency Units and Approved Securities Companies, provided the taxable income from such activities exceeds S$10 million; and

iv) the trading of new futures and options contracts on SIMEX by its members for a period of up to 5 years from the commencement of trading of the new contract on SIMEX. Only the top 20 most active firms will qualify for the 5% tax. Further details of the scheme will be announced later. The scheme will be effective for 5 years in the first instance and may be reviewed after that.

Taxation of Unit Trusts

I have decided to introduce a tax incentive to foster the development of the domestic unit trust industry. For a unit trust granted this tax incentive, all income except Singapore dividends received will no longer be taxed at the level of the unit trust. For distributions made out of income that is not taxed at the trust level, the tax treatment will be as follows:

i) all distributions to non-resident unit holders will be tax exempt.

ii) distributions paid out of gains from disposal of securities to residents other than individuals and partnerships will be taxed. In the case of individuals or partnerships, only 10% will be subject to tax. The remaining 90% will be tax exempt.

iii) distributions of other income such as interest and foreign dividends to resident unit holders will be taxed.

For distributions which are taxable, tax will be withheld by the unit trust at the prevailing corporate tax rate at the time of distribution. As with Singapore dividends, unit holders will be able to claim a credit for the tax withheld at the trust level. This incentive will take effect from Year of Assessment 1996.

The new tax treatment will make it more attractive for individuals to invest in unit trusts. This will boost our domestic unit trust industry, which will in turn help generate greater demand for fund management services and build up fund management expertise in Singapore.

Tax Deduction for General Provisions made by Banks

Because of the special role which banks play in the economy, I have allowed general provisions made by banks and merchant banks to be tax deductible with effect from Year of Assessment 1992. Since then, banks and merchant banks have recorded strong profit growth. While the economic prospects for Singapore and the region are expected to remain good in the foreseeable future, no economy is immune to business cycles. During periods of healthy profit growth, banks and merchant banks should build up their financial reserves to see them through business downturns.

To encourage banks to set aside a greater proportion of their profits as general provisions, I have decided to increase the maximum annual limit on the amount of general provisions eligible for tax deduction. Currently the general provision allowable is the lower of 25% of qualifying profit or 1/4% of qualifying assets. With effect from Year of Assessment 1996, the 1/4% will be increased to 1/2% of qualifying assets. The total amount of general provisions eligible for tax deduction will continue to be limited to 2% of qualifying assets.

Removing the Present Constraints for Onward Payment of Tax Exempt Dividends Out of Foreign Income

I had earlier introduced a package of incentives to encourage our companies to venture abroad. These incentives have worked well for most companies. At present, a Singapore company does not have to pay any Singapore tax on foreign income received if tax exemption has been granted or the foreign tax credit is equal to or exceeds the Singapore tax payable. Such income is also allowed to be distributed as tax exempt dividends. This is to enable foreign income to flow through to shareholders without double taxation.

Under the existing law, the flow through of tax exempt dividends is limited to two levels of shareholding and subject to a 50% shareholding requirement. There are, however, companies which have found it necessary to form consortiums and set up more complex group corporate structures to venture overseas. In such instances, the current restrictions can result in the foreign income being subject to double taxation when it is finally distributed to the ultimate shareholders.

To overcome such constraints, I have decided to:

i) extend the follow-through of tax exempt dividends beyond the two levels of shareholders where the 50% shareholding requirement is satisfied. Holding companies at every tier of a group corporate structure will be allowed to onward pay exempt dividends received where the dividends originate from foreign income received in Singapore.

ii) waive the requirement of a 50% shareholding in the dividend-paying company for onward payment of exempt dividends on a case-by-case basis.

These changes will apply to dividends received on or after 1st March 1995.

Waiver of the 25% Shareholding Requirement for Unilateral Tax Credit to be Given on the Underlying Tax of Foreign Dividends

A Singapore company does not have to pay any Singapore tax on dividends derived from investments in countries where the tax rates are comparable to or higher than Singapore, if it holds at least 25% of the share capital of the dividend paying company. The tax credit for foreign dividends received by such company includes the underlying tax, that is, foreign tax on the profits out of which the dividends are paid.

For most investors, the 25% shareholding requirement to qualify for credit of the underlying tax poses no problem. However, there are cases where for valid reasons, the 25% shareholding cannot be achieved. I have therefore decided to waive the 25% shareholding requirement on a case-by-case basis. This will apply to dividends received on or after 1st March 1995. Double Tax Deduction for Approved Expenses Incurred in the Promotion of Master Franchising and Master Licensing

To further encourage companies to invest and expand into the region, the Double Tax Deduction scheme for the promotion of Singapore services overseas will be extended to include the promotion of master franchises and master licences overseas.

Approved expenses incurred by companies to promote master franchising and master licensing overseas will be granted double tax deduction. The extension will take effect from 1 Apr 1995 and will be administered by the Trade Development Board.

Approved Aircraft Leasing Incentive

Economic growth in the East Asian region will lead to increased demand for air transport services. Singapore's location at the centre of the region provides potential for its development into a regional aircraft leasing hub.

Aircraft leasing companies wishing to operate from Singapore can already enjoy a 10% concessionary rate of tax on income derived from offshore aircraft leasing. I propose to introduce additional incentives to complement this concessionary tax treatment. Interest payments on foreign loans taken during the incentive period to finance the operating leases will be exempt from tax. Approved companies will also be allowed the flexibility to depreciate their aircraft bought during the incentive period over 20 years instead of the normal 5 years. The additional incentive may be granted for 5 years in the first instance, and may be extended thereafter. It will take effect from Year of Assessment 1996.