TAX CHANGES FOR COMPANIES

Financial Services Sector

The financial services sector is one of the key sectors of the Singapore economy, contributing 12% to GDP. It is the second largest economic sector after manufacturing. The financial services sector is a high value-add industry, employing almost 90,000 people or 5% of the workforce.

Singapore has successfully developed into a major international financial centre. Today, we have about 700 international banks and financial institutions from almost 40 countries operating in Singapore. We are also the fourth largest foreign exchange and derivatives trading centre in the world, after London, New York and Tokyo. The fund management industry has seen rapid growth in recent years. There are now 161 fund managers operating in Singapore, managing funds totalling more than S$125 billion.

The Stock Exchange of Singapore (SES) has also developed into a regional securities trading centre. There are now 45 foreign companies listed on the exchange and their total market capitalisation is about S$137 billion. Our financial futures exchange, or SIMEX, trades a wide range of international products with an annual turnover of 22.6 million contracts valued at US$ 16.1 trillion.

Our financial services sector has come a long way. However, there is room for our financial market to grow. To further develop our financial services sector, I have decided to introduce a package of new incentives.

Tax Incentive for ACU Activities

At present, Asian Currency Units (ACUs) of banks and merchant banks enjoy a concessionary tax of 10% on income earned from ACU activities. They also enjoy a further reduction in the tax rate to 5% on the incremental income derived from certain high-value added activities. To qualify, the taxable income of some of these activities must each exceed S$10 million.

To give a further boost to ACU activities, the 5% tax on incremental income will be extended to income derived from all taxable ACU activities if the total taxable income from all such activities exceed S$50 million. ACUs can avail themselves of either the existing incentive for selected high-value activities or the new incentive which covers all ACU activities. The new incentive will be granted for an initial period of 5 years with effect from Year of Assessment 1998. Tax Incentive for the Fund Management Industry

Since 1986, fund managers approved under the Tax Exemption Scheme for Fund Management enjoy a concessionary rate of tax of 10% on income earned from managing non-resident funds. Further, with effect from Year of Assessment 1996, those which manage more than S$5 billion worth of non-resident funds can enjoy a reduction in the tax rate to 5% on the incremental income earned compared with the previous year.

To encourage major fund managers to further expand their business in Singapore and use Singapore as a base for their regional operations, I have decided that fund managers who have substantial operations in Singapore will be exempted from tax altogether for income earned from managing non-resident funds. To qualify for the tax exemption, the fund manager must be managing at least S$10 billion of non-resident funds in Singapore, employ at least 7 professional fund managers and analysts, and have a track record of 3 years operating in Singapore under the Tax Exemption Scheme for Fund Management. The incentive will be granted for an initial period of 5 years with effect from Year of Assessment 1998.

Tax Exemption for Managing IPOs of Foreign Currency Shares

In line with the objective of developing Singapore into a regional financial market, the SES has been actively encouraging foreign companies with the necessary track record to list their shares on the Exchange in foreign currencies. To further develop the Exchange into a regional securities trading centre, I have decided that income earned by banks and merchant banks from managing initial public offering of foreign currency denominated shares to be listed on the SES will be exempt from tax for an initial period of 5 years, beginning from Year of Assessment 1998.

The tax exemption will enable banks and financial institutions in Singapore to offer more competitive terms to foreign companies to list their shares on SES. This will make Singapore a more attractive centre for fund raising by international companies.

Tax Exemption for Trading in Foreign Currency Shares

ACUs and Approved Securities Companies (ASCs) currently enjoy a concessionary rate of tax of 10% on income earned from the trading of foreign currency denominated shares. We need to ensure a certain degree of liquidity in the trading of foreign currency shares if we are to attract foreign companies to list their shares in Singapore. To encourage the trading of foreign currency shares, I have decided to fully exempt from tax income earned by ACUs and ASCs from the trading of foreign currency denominated shares which are listed on SES. The exemption will be granted for a period of 5 years with effect from Year of Assessment 1998.

Extension of Tax Exemption Scheme for Syndicated Offshore Credit and Underwriting Facilities

Under the existing tax exemption scheme for syndicated offshore credit and underwriting facilities, income earned from the underwriting of syndicated offshore debt securities are exempted from tax. One of the conditions for granting the tax exemption is that the issue must be underwritten by financial institutions in Singapore.

As borrowers in the region become more sophisticated and their credit standing becomes more acceptable in the financial markets, the debt papers of reputable issuers would not need to be underwritten by financial institutions. To encourage such borrowers to issue bonds and other debt securities in Singapore, the requirement that the debt issues must be underwritten by financial institutions will be removed with immediate effect. All fees earned by financial institutions in arranging offshore debt issues will therefore be exempted from tax irrespective of whether the issues are underwritten by financial institutions or not. Tax Incentive for Credit Rating Agencies

The Asian debt market is expected to grow sharply in the next decade to meet the huge financing needs of Asian economies. The attractiveness of Asian debt papers to international investors would be enhanced if such papers are rated by international credit rating agencies. Singapore can play a pivotal role by attracting internationally reputable credit agencies to conduct such operations here. This would also complement our efforts to develop Singapore into a regional capital market.

To encourage the setting up of reputable credit rating agencies in Singapore, I have decided to grant a concessionary tax of 10% on the income earned from providing credit rating services with respect to the issue of foreign currency denominated securities in Singapore. The incentive will be for an initial period of 5 years, and will take effect from Year of Assessment 1998.

To qualify for the incentive, the credit rating agency must:

have a track record in international credit rating of at least 10 years;

employ at least 2 qualified credit analysts in Singapore; and

incur annual business spending of at least S$500,000 in Singapore.

Tax Deduction for General Provisions Made by Banks and Merchant Banks

Since 1991, banks and merchant banks in Singapore have been given tax deduction for general provisions up to a limit of 2% of their loan and investment portfolios. As the financial markets become more competitive and sophisticated, banks and merchant banks are now exposed to greater risks in their activities. To encourage banks and merchant banks to increase their level of general provisions to buffer against any unexpected losses, the limit on tax deductible general provisions will be raised from 2% to 3% of qualifying loans and investments from Year of Assessment 1998. A higher level of general provisions will make for a more sound and stable banking system.

The above package of tax incentives, which I have just outlined, will further enhance the competitiveness of our financial services sector. The package is designed to give an added boost to the growth of our financial market, and to strengthen Singapore's position as a regional financial centre. The Government is committed to developing Singapore into a major financial hub. We will provide every necessary support to ensure the growth of our financial services sector.

I will now move on to other tax changes for companies.

Overseas Enterprise Incentive - Onward Payment of Tax Exempt Dividends Out of Qualifying Income

In the 1993 Budget, I introduced the Overseas Enterprise Incentive (OEI) as part of the Government's effort to encourage the development of an external economy. The OEI provides for tax exemption on income derived from approved overseas investments and projects for a maximum period of 10 years. The OEI also allows the follow-through of tax exempt dividends up to two levels of shareholding, subject to a 100% shareholding requirement.

In 1995, changes were made to the Income Tax Act to allow the follow-through of tax exempt dividends beyond two levels of shareholding for foreign sourced income exempted under the Income Tax Act, provided the 50% shareholding requirement is satisfied. The new rules have worked well. To further support regionalisation, I have decided that the OEI scheme be similarly relaxed. I will therefore be making the following changes to the OEI:

reduce from 100% to 50% the shareholding required for follow-through of tax exempt dividends to the second level of shareholding;

extend the follow-through of tax exempt dividends beyond the two levels of shareholding provided the 50% requirement is satisfied. Holding companies at every tier of a group corporate structure will be allowed to onward pay exempt dividends declared out of the qualifying OEI income; and

waive the 50% shareholding requirement 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 11th July 1997.

Tax Incentives for Satellite Operations

Satellites play an important role in today's telecommunications and broadcast industries. With most of the world still unwired by conventional land lines, there exists a huge potential market for wireless transmission of voice, video and other multimedia content which can be exploited.

To encourage companies in Singapore to launch their own satellites, I have decided to extend the investment allowance incentive to satellite operators on approved capital expenditure which satisfy certain criteria. The extension of the investment allowance incentive will take immediate effect.

Having our own satellites will enhance Singapore's competitiveness as a communications and media hub by extending our communications infrastructure beyond just submarine cables, land lines and TV broadcasting stations. It will also allow service providers in Singapore to offer competitive packages to attract content creators, developers and distributors.

Currently, payments to non-resident persons for the use of satellites are subject to withholding tax at a rate of 15% . To give a further boost to the broadcasting and telecommunications industry, I have also decided to exempt from tax payments for the leasing of capacity on satellites operated by non-resident persons. The exemption will take immediate effect for an initial period of 5 years.

Industrial Building Allowances for Logistics Operators

There is a growing trend by manufacturers and traders to focus on their core activities and to outsource their logistics needs. With this development, there is now an increasing demand for integrated logistics services covering physical distribution, warehousing and information management.

Singapore, with its strategic location and network of comprehensive infrastructure, is well positioned to serve as a logistics hub for international companies. To promote the growth of the logistics industry, I have decided to grant industrial building allowance (IBA) to buildings owned and used for storage of goods or materials by companies providing logistics services, and which currently do not qualify for IBA. These would include companies which provide integrated logistics services covering warehousing, distribution, information management and other high value-added logistics operations. The change will apply to approved buildings with effect from the Year of Assessment 1997.

Singapore Commodity Exchange (SICOM)

The Singapore Commodity Exchange Limited (SICOM), formerly known as the RAS (Rubber Association of Singapore) Commodity Exchange, was granted a five-year tax holiday when it was established in 1992. This was to allow the Exchange to get off to a successful start. As the Exchange is still in its developmental stage, I have decided to extend the tax holiday granted to SICOM for another five years.

In addition to existing income items which qualify for the tax holiday, I have decided to exempt from tax new income items which have arisen from the Exchange's development such as fees for the quality assurance of physical commodities, registration fees for Nominated Warehouses, fees for the processing of applications for Registered Representatives and Associated Persons, annual subscription fees from Registered Representatives and Associated Persons, locals membership processing fees, fees for the processing of leases of seats on SICOM, and proceeds from the sale of trading permits.