TAX CHANGES FOR COMPANIES

Corporate Income Tax

Corporate income tax was last reduced to 27% in 1994. As a further step towards the medium term target of 25%, the corporate tax rate will be reduced by 1 percentage point, from 27 to 26%, with effect from Year of Assessment 1997. This will help maintain our attractiveness to foreign investors and at the same time lighten the burden on local industries. Revenue loss is estimated to be $200 million annually.

Development and Expansion Incentive

We have used tax incentives ever since Independence to promote economic development. The pioneer and post-pioneer incentives have played a major role in attracting high value-added investments to Singapore. There are however no appropriate incentives today for companies which either do not qualify for pioneer status or whose post-pioneer status has expired. To encourage companies which engage in high value-added activities to operate in Singapore and continue to invest in high technology projects and the major upgrading of equipment and operations, I intend to introduce a new incentive which will replace the post-pioneer incentive.

Under this new incentive, which will be known as the Development and Expansion Incentive, income from qualifying activities will be taxed at a concessionary rate of not less than 10%. The incentive is intended for companies which engage in new projects and expansion or upgrading of their operations. For a company awarded this incentive, the initial period of the incentive will not exceed 10 years. Extensions of the incentive after the initial period may be granted. Each extension will not exceed a period of 5 years and the total period for this incentive will not exceed 20 years.

The Development and Expansion Incentive will apply to qualifying income derived from any period beginning in or after 1996. When this incentive comes into operation, it will replace the post-pioneer incentive. Further details of this incentive will be announced shortly.

Investment Allowance Incentive (IA) for Water Recycling Plant

Under the present investment allowance incentive, the investment allowance granted to a company on the capital expenditure incurred for an approved project can only be set-off against the chargeable income from that project. Consequently, companies which carry on projects or activities where the income is already granted exemption from tax are not granted the investment allowance incentive. This is because there is no benefit from setting-off such allowances against exempt income.

In line with the national thrust to encourage water conservation, companies in water-intensive industries have been asked to reduce their water consumption through the installation of efficient water recycling plants. The high capital expenditure on such plants can qualify for investment allowances. However, companies in water-intensive industries may already have been awarded tax exemption or other incentives. I have therefore decided to allow the investment allowances which are granted to such companies for water-recycling plants to be set-off against chargeable income taxed at the normal rate, provided they satisfy certain water conservation levels. This will apply to investment allowance granted for qualifying water-recycling plants incurred on or after 1st January 1996.

Tax Deduction for General Provisions of Finance Companies

Finance companies have grown over the years. Their loans and deposits now account for 13.5% and 12.4% of total domestic loans and deposits. It is therefore crucial for finance companies to build up adequate provisions to cushion against unexpected losses and diminution in the value of their assets. This will enhance the overall soundness and stability of our financial system.

To encourage finance companies to build up their reserves, I have decided that with effect from Year of Assessment 1997, finance companies will be able to claim tax deduction for general provisions made for loans and investment in securities. This tax concession has been available to banks since Year of Assessment 1992.

The tax concession will be available only to finance companies which meet the statutory minimum capital funds requirement of $50 million and minimum capital adequacy ratio of 12% as prescribed under the Finance Companies (Amendment) Act. This is to ensure that only those finance companies whose shareholders have demonstrated their commitment to strengthen the companies_ capital will be allowed the incentive to further build up their general provisions. At present, 11 of the 22 finance companies are able to meet such capital requirements.

As in the case of banks, the total amount of general provisions eligible for tax deduction will be limited to 2% of each finance company_s prescribed loans and investments. The amount deductible each year will be limited to 1/2% of such loans and investments or 25% of each finance company_s qualifying profit, whichever is the lower. First Year Depreciation for Highly Efficient Pollution Control and Energy-Efficient Equipment

As Singapore continues to develop, increasing amounts of emissions will be released into the environment from more factories and motor vehicles. The demand for energy is also expected to increase significantly, bringing with it the potential for more pollution. The need to conserve energy and protect the environment cannot be over-emphasised. To achieve the objective of energy conservation and improving the quality of our air and water, industries are encouraged to install highly efficient pollution control devices and use highly energy-efficient equipment.

Currently, all enterprises are allowed to write-off their plant and equipment for tax purposes over three years. To encourage the use of highly efficient pollution control and energy-efficient equipment, I have decided to allow all expenditure on such equipment incurred with effect from 1st January 1996 to enjoy 100% depreciation in the first year. This means that the qualifying expenditure on such equipment can be written off completely against the taxable income of the enterprise in the year following the year of purchase. If the enterprise does not have sufficient profits to take full advantage of the 100% depreciation allowance, the balance will be available for deduction in subsequent years.

I hope that all enterprises in Singapore will take advantage of this concession to install highly efficient pollution control and energy conservation equipment as soon as possible. The scheme will be administered by the Ministry of The Environment. Details of the guidelines and qualifying criteria for these incentives are set out in Annexes (Cols. 809 - 820) I and II. Annexes - ACCELERATED DEPRECIATION ALLOWANCE TO APPROVED ENERGY-EFFICIENT EQUIPMENT AND TECHNOLOGY, ACCELERATED DEPRECIATION ALLOWANCE TO APPROVED HIGHLY EFFICIENT POLLUTION CONTROL EQUIPMENT, QUALIFYING CRITERIA FOR HIGHLY EFFICIENT AIR POLLUTION CONTROL EQUIPMENT, QUALIFYING CRITERIA FOR HIGHLY EFFICIENT WATER POLLUTION CONTROL EQUIPMENT (Cols. 809 - 820) Reduction of Withholding Tax Rates

Currently, payments of royalty and interest (other than interest on bank deposits and inter-bank transactions) to non-residents are subject to tax at 27% of the gross amount payable less allowable expenses. In practice, as the law requires withholding of tax on such payments to non-residents at 27% of the gross amount, and the recipients either cannot or do not claim the expenses, the tax is effectively 27% of the gross amount. Unless reduced under a double taxation agreement, this tax rate of 27% is high in comparison with the rates of other countries in this region. This high level of tax discourages the development of activities which require high input of technology or funding from overseas.

To facilitate the development of Singapore as a knowledge centre and a node for technology transfer, I have decided to reduce the rate of tax on royalty and rent for movable properties payable to non-residents to 15% of the gross amount with immediate effect. This will benefit creative services as well as knowledge and technology intensive activities.

Similarly, I have also decided to reduce the rate of tax on interest payments to non-residents to 15% of the gross amount with immediate effect. This will make it more flexible for Singapore companies to diversify their borrowing sources to include financial institutions overseas, particularly in the financing of operations outside Singapore. It will further facilitate our regionalisation efforts as business enterprises which need to borrow offshore for venturing overseas or expanding their overseas operations will benefit from lower borrowing costs.

With the rate of tax on such payments reduced to 15% of the gross amount, the rate for withholding of tax on these payments will be similarly reduced. This reduced rate of tax will, however, not apply to interest, royalty and rent for movable properties derived by non-residents through their operations carried out in or from Singapore. Such interest, royalty and rent will continue to be taxed on the net amount at the normal corporate income tax rate.

Notwithstanding this reduction in the rate of tax on interest and royalty payments to non-residents, full or partial exemption on such payments will continue to be granted selectively under the various incentive schemes for projects which contribute significantly to the economic and technological development of Singapore.