TAX CHANGES FOR COMPANIES Tax Incentives to Promote Fund Management

Currently, fund managers approved under the Tax Exemption Scheme for Fund Management enjoy a concessionary tax rate of 10% on the fee income earned from managing non-resident funds. In addition, fund managers which manage at least $5 billion worth of non-resident funds can also enjoy a reduction in the tax rate to 5% on the incremental income earned compared with the previous year. Further, those which manage at least $10 billion of non-resident funds are totally exempt from tax for the income earned from managing non-resident funds. These tax incentives, coupled with the Government's decision to place more public funds with the private sector for management, have boosted the growth of our fund management industry. In 1996 alone, total funds managed by financial institutions in Singapore jumped 45% to reach $125 billion. While growth in the fund management industry may have slowed somewhat amidst the current financial turmoil, we remain optimistic about Singapore's long-term potential as a major fund management centre in the region. I have therefore decided to introduce further measures to enhance the competitiveness of the industry. These complement the initiatives to promote the fund management industry, announced by DPM Lee on Thursday, 26th February.

To encourage more fund managers to expand their operations in Singapore, I have decided to lower the threshold requirement to qualify for the full tax exemption. Fund managers which manage at least $5 billion of non-resident funds will now enjoy the full tax exemption for fee income earned from managing non-resident funds for a period of 5 years. This will replace the existing concessionary tax rates of 5 and 0% for fund managers which manage $5 billion and $10 billion worth of non-resident funds respectively. For those which already manage $5 billion of non-resident funds and have made strong commitments to further increase their level of fund management activities in Singapore, a longer exemption period of up to 10 years may be considered. In addition, fund managers which manage less than $5 billion of non-resident funds may qualify for the tax exemption for up to 5 years if they increase their fund management activities in Singapore substantially. MAS will negotiate these conditions with individual fund managers, on a case-by-case basis, in the same way that EDB negotiates pioneer status and investment allowance awards with individual companies.

This new incentive scheme will be effective from Year of Assessment 1999 and will be reviewed after 5 years.

Tax Incentives to Promote the Bond Market

Singapore has grown in importance as a regional centre for the issue of bonds and other debt securities. However, our bond market is still less developed compared to our equity market as most corporations still prefer to raise funds through equity listing on the stock exchange or through direct borrowing from banks. This is generally true of most markets in Asia. A vibrant bond market is important to the overall development of Singapore as an international financial centre. I have therefore decided to introduce a package of incentives to promote the development of an active bond market in Singapore. They are:

(a) tax exemption on fee income earned by financial institutions in Singapore from arranging debt securities in Singapore, including the underwriting and distribution of such securities;

(b) a 10% concessionary rate of tax on interest income earned by financial institutions and corporations in Singapore from debt securities arranged by financial institutions in Singapore;

(c) tax exemption on interest from debt securities arranged by financial institutions in Singapore and earned by non- residents who do not have any permanent establishments in Singapore. The exemption will apply automatically to debt securities which meet the criteria. There will be no need to seek approval for the tax exemption for each debt issue as is currently the case; and

(d) a 10% concessionary rate of tax on income earned by financial institutions in Singapore from trading in debt securities.

The new tax treatment for fee and interest income will apply to debt securities issued within a period of 5 years commencing 28th February 1998. The incentive for income earned from trading in debt securities will be granted for a period of 5 years from 28th February 1998.

Taxation of Unit Trusts

In the 1995 Budget, I introduced a tax incentive to promote the domestic unit trust industry. Under this incentive, income except Singapore dividends received by a designated unit trust would be taxed at the time of distribution instead of at the time when the income was received by the trustee. The trustees are however required to withhold tax on the taxable distributions. The incentive also granted a concession to resident individual unit holders who were taxed only on 10% of the distributions made out of gains from the disposal of securities.

To make investments in unit trusts more attractive to resident individuals, I have decided to remove the tax imposed on resident individual unit holders for 10% of the distributions paid out of gains from the disposal of securities.

Further, to simplify the management of unit trusts, I have also decided to remove the withholding requirement on taxable distributions made to unit holders who are tax residents of Singapore. Unit holders who are tax residents are however still liable to pay tax on the distributions.

The changes will take effect from 28th February 1998.

Tax Exemption Scheme For Syndicated Offshore Credit And Underwriting Facilities

The tax exemption scheme for syndicated offshore credit and underwriting facilities was introduced to promote the development of loan and debt syndication activities in Singapore. Under the scheme, income earned by financial institutions in Singapore from arranging and participating in syndicated facilities denominated in foreign currencies for non-resident borrowers is exempt from tax. The scheme has resulted in the growth of the loan and debt syndication activities in Singapore. In the past three years, an average of $13.5 billion of such facilities were syndicated by financial institutions in Singapore annually.

The scheme is due to expire on 31st March 1998. I have, however, decided to extend it for another five years. In addition, I have also decided to extend the scheme to credit and debt facilities which are syndicated by financial institutions in Singapore for Singapore borrowers, provided the funds raised are used outside Singapore. These measures will help to further develop the syndication market in Singapore. They will take effect from 1st April 1998.

Tax Deduction for General Provisions Made by Banks and Merchant Banks

In 1991, we introduced an incentive to encourage banks and merchant banks to build up their level of general provisions as a cushion against unexpected losses. Each year, banks and merchant banks are allowed to claim tax deduction on general provisions of up to 25% of qualifying profits or 0.5% of qualifying loans and investments, whichever is lower. For each bank or merchant bank, the level of tax deductible general provisions on a cumulative basis cannot exceed 3% of qualifying loans and investments. Many banks and merchant banks have taken advantage of this incentive to build up their general provisions. This has helped to enhance the soundness of individual banks and merchant banks, and also the financial system, especially during this period of regional financial turbulence.

To encourage banks and merchant banks to further build up their general provisions, I have decided to temporarily suspend the annual limits of 25% of qualifying profits and 0.5% of qualifying loans and investments for a period of two years with effect from Year of Assessment 1998. This will give banks greater flexibility to make as much general provisions as possible to cushion against potential losses arising from the regional financial difficulties. The overall limit of 3% of qualifying loans and investments, which was raised from 2% last year, will remain unchanged.

Extension of Tax Holiday for SIMEX

The Singapore International Monetary Exchange Limited (SIMEX) was granted a 5-year tax holiday when it was first established in 1984. The tax holiday was extended in 1988 and again in 1993 for additional 5-year periods to support the growth of SIMEX. The incentive has enabled the Exchange to build up its reserves and improve on its trading infrastructure.

SIMEX is currently the foremost financial futures exchange in the Asian time zone for the trading of international futures and options contracts. But there is no room for complacency. In order to meet the challenges of global competition and the emergence of other exchanges in the region, SIMEX must continue to improve on its facilities and strengthen its financial reserves. I have therefore decided to extend the tax holiday for SIMEX by another 5 years to the year 2003.

Extension of Venture Capital Incentives

The Government has been actively promoting the venture capital industry since the mid-1980s. Venture capital funds managed in Singapore have reached $7.7 billion as at end of last year. Currently, venture capital funds enjoy tax exemption on the gains from disposal of investments, and on certain investment incomes for a maximum of 10 years. At the same time, fund management companies which manage venture capital funds are awarded pioneer status for managing these funds.

The current 10-year limit may be too restrictive for some investments which have maturity periods which are longer than 10 years. I have therefore decided to extend the tax incentive enjoyed by venture capital funds, on a case-by-case basis, by up to a further 5 years beyond the current maximum of 10 years. This will encourage venture capital funds to take a longer term perspective of their investments and to minimise premature divestment. The extension will take the form of a concessionary tax rate of not more than 10%. The fund management companies which manage these venture capital funds will also in tandem enjoy concessionary tax rate under the Development and Expansion Incentive beyond the tenth year. The changes will take immediate effect.

Transport and Logistics

Our transport and logistics network has played a pivotal role in Singapore's development as a global city of international trade. Today, the transport and logistics sector contributes 9% to GDP and employs more than 110,000 workers or about 7% of our work force. As an industry which provides essential support to our trade sector, it needs to constantly evolve new and improved services to meet the demands of the trade. Our continued growth as a global city of international trade and hub port also depends critically on the development of a transport and logistics sector with extensive networks. To encourage major transport and logistics operators to further expand their businesses in Singapore and use Singapore as a base for their operations, I have therefore decided to introduce the following tax concessions:

(a) Tax Exemption for Income Derived from Uplift of Freight

Currently, tax is levied on the uplift of cargoes from Singapore, except for Singapore-flagged vessels and vessels from countries with which Singapore has signed a tax treaty. To further boost Singapore's development as an international cargo and shipping hub, I have decided to exempt non-resident ship owners and charterers from tax on their freight uplift from Singapore. This benefit will also be extended to resident shipping companies and companies under the

Approved International Shipping Enterprise Scheme. Removal of the tax on freight uplift would allow shipping companies greater flexibility in planning their shipping schedules and operations. The exemption will take effect from Year of Assessment 1999.

(b) Tax Concession for International Freight and Logistics Operators

Singapore has a long history as the main shipping and distribution hub in the region. To further enhance our hub status, I have decided to introduce a tax incentive to encourage international freight service providers to expand their activities in Singapore. This incentive will be available to ship agencies, ship management companies and logistics providers. To qualify for the incentive, the company must have substantial operations and a good track record in the provision of freight and logistics services. Companies that qualify will be accorded a concessionary tax rate of not less than 10% on their incremental income. The incentive will be granted for a period of five years and will take effect from Year of Assessment 1999.

c) Tax Exemption for Income Derived From Writing Offshore Marine Hull and Liability Insurance Business

It is estimated that Asian shipping companies own more than 40% of world shipping tonnage today. Singapore is well placed to serve the marine insurance needs of the companies in the region, particularly in the provision of marine hull and liability insurance. I have therefore decided to exempt from tax the income derived by approved insurance companies from writing offshore marine hull and liability insurance business for a period of 10 years. The incentive would allow insurance companies to tap the insurance potential of the shipping communities in the region. It would also complement Singapore's development as a shipping hub. This concession will take effect from Year of Assessment 1999.

Tax Incentive For Exhibition Organisers

Singapore is currently a major venue for international exhibitions and trade fairs. Given our strategic location and excellent infrastructure, we are well positioned to develop into an International Exhibition City. To provide further impetus to the development of the exhibition industry, I have decided that approved exhibition organisers will be granted a concessionary tax rate of not less than 10% on their incremental income. The incentive will enable exhibition organisers to offer better quality and bigger exhibitions and trade fairs to the international business community. The incentive will take effect from Year of Assessment 1999.

Approved Cyber-Trader Scheme

Changes in technology have revolutionised the mode of business transactions. Internet, for example, is set to change the way companies conduct their businesses. The value of goods and services currently being traded on the Internet is estimated at US$46 billion. It is expected to grow to between US$200-300 billion by the year 2002.

Internet electronic commerce holds many opportunities for businesses. The financial and logistics sectors will gain from the increased international trading generated by this new mode of transaction. The media and communications sectors, including advertising, information technology, and content creation will also benefit from this development. Local companies can take advantage of this new medium to expand their businesses to the region and beyond through direct marketing and other new strategies. Foreign companies can also use Singapore as a test-bed for broadband applications and a launch pad for its Internet trading activities in the region. The uniqueness of Asia calls for a hub that can service this time zone, and meet its distribution and consumer needs.

Singapore is well placed to become an electronic commerce hub. To tap this growing market, I have decided to grant a concessionary tax rate of 10% on offshore trading income derived from transactions made over the Internet under the Approved Cyber Trader Scheme for companies that qualify. Approved companies will also enjoy an Investment Allowance of up to 50% of the cost of qualifying new fixed investments, and full or partial exemption of withholding tax on qualifying payments. These incentives will be granted for a period of 5 years with effect from Year of Assessment 1999. The scheme will be administered by the Trade Development Board.

Double Tax Deduction for Employing Talent from Abroad

The Prime Minister has at last year's National Day Rally spoken on the need for Singapore to tap the best talent from around the world to meet future competition. In support of this, I have decided to allow companies to claim double tax deduction for approved relocation and recruitment expenses incurred in the hiring of talent from abroad. The double tax deduction will help to offset the extra costs which companies have to bear in employing such talent to supplement our local work force. Further details of the scheme will be announced later.

One-Year Accelerated Depreciation Allowance For Industrial Noise And Chemical Hazards Control

Noise and harmful chemicals are the two main occupational health hazards in industries. Exposure to excessive noise can cause hearing loss, while overexposure to harmful chemicals may result in poisoning and diseases. As Singapore continues to industrialise, more workers could be exposed to these hazards unless measures are taken to prevent them.

To encourage factories to implement effective measures to counter noise and chemical hazards, I have decided to allow expenditure on such measures to enjoy 100% depreciation in the first year, provided that certain qualifying criteria relating to noise and chemical exposure levels are satisfied. This incentive will apply to expenditure incurred with effect from 1st January 1998. The scheme will be administered by the Ministry of Labour. Details of the guidelines and qualifying criteria for these incentives are set out in Annexes (Cols. 565 - 572) I and II. Annexes - ACCELERATED DEPRECIATION ALLOWANCE FOR NOISE CONTROL IN FACTORIES (Cols. 565 - 568)

Annexes - ACCELERATED DEPRECIATION ALLOWANCES FOR CHEMICAL HAZARD CONTROL IN FACTORIES (Cols. 569 - 572) (c) Three-Room Flats

One and a half months' net S&C charges, after deduction of the GST offset rebates and S&C grant to be given. The S&C rebate will be made on 1st June and 1st December this year.

(d) Four-Room Flats

Three quarter month's net S&C charges, after deduction of the S&C grant to be given. The S&C rebate will be made on 1st December this year.

(e) Five-Room Flats

Half a month's net S&C charges, to be made on 1st December this year.

The estimated cost of these rental and S&C rebates is $29 million.

Rebates for Revisions in Utilities Rates

Last year, utilities rebates and monthly S&C grants were given to citizens living in 1 to 4-room HDB flats to offset the utilities rates increases for the lower income households. I announced that the Government would grant the same utilities rebates and monthly S&C grants in 1998. I am happy to confirm that the same utilities rebates and S&C grants will be given this year.

The utilities rebate will be $100 for 1-, 2-, and 3-room HDB flats, and $50 for 4-room HDB flats. The rebates will be credited against the utilities bills of eligible households for the month of September which are payable in October. Households with smaller bills which are unable to use up the rebate within the month can carry over the balance of the rebate until it is fully used up.

The S&C grant will be $3 per month for 1-room flats, $4 per month for 2-room flats, $5.50 per month for 3-room flats, and $4 per month for 4-room flats. The monthly grant, which started from July 1997, will continue until June 1999.

The utilities rebates and S&C grant will cost the Government about $72 million. Those lower income households who do not live in HDB flats and hence are unable

to benefit from the utilities rebate and S&C grant can obtain help from the Citizens Consultative Committees Assistance Scheme.

Pre-Medisave Top-Up Scheme

The Pre-Medisave Top-Up Scheme was introduced in 1996 to help older Singaporeans who retired before or soon after the introduction of Medisave to build up their Medisave accounts. The first three instalments under the Scheme had been paid in January 1996, January 1997, and January 1998. The last instalment is to be paid in January 1999, subject to the state of the economy. Notwithstanding the expected slowdown in the economy, I am pleased to confirm that the Government will pay the final instalment of the Pre-Medisave Top-Up Scheme in January 1999 as scheduled.

The top-up will be paid into the CPF Medisave accounts of eligible Singaporeans who are 64 years or older on 1st April 1998. As with the third instalment, the co-payment required will only be $20, instead of $50 for the first two instalments. The lower co-payment is to help as many elderly Singaporeans as possible to benefit from the scheme while maintaining the principle that health care should be a joint responsibility between the individuals, their families and the Government. Eligible recipients will have to make the co-payment of $20 between 1st July 1998 and 31st December 1998 into their CPF Medisave Account. The Government will match this $20 with a contribution of $100 to $350 depending on the age group. 250,000 senior citizens qualify for this scheme and the total cost of this, if fully taken up, is $70 million.

Revision of CPF Interest Rates for Special and Retirement Accounts & Voluntary Transfer of CPF Savings from Ordinary Account to Special Account

Currently, the CPF Special Account and Retirement Account both receive an interest rate premium of 1.25% over and above the Ordinary Account. From 1st July 1998, the Government will raise the interest rate premium for these two accounts by a quarter percentage point, to 1.5%, above the Ordinary Account interest rate. This is to enable CPF members to achieve a higher rate of saving in these two accounts.

In addition, from 1st July 1998, CPF members will be given the option of transferring their savings from the Ordinary Account to the Special Account. These transfers will be on a voluntary basis. The amount that can be transferred will be subject to a cap of $40,000 in the Special Account, that is, a CPF member can only transfer up to the difference between $40,000 and his Special Account balance at the time of the transfer. The $40,000 limit is equal to the eventual cash component of the CPF Minimum Sum.

The transferred funds will form part of the Special Account and will enjoy the higher interest rate applicable to the account. However, the transferred funds will be subject to all existing CPF rules on the Special Account, including the restrictions on the use and withdrawal of funds from the account. Also, all such transfers from the Ordinary Account to the Special Account will not be reversible. CPF members should therefore consider carefully before making such transfers to the Special Account to earn higher interest.

These two changes to the CPF will help CPF members enhance their retirement cash savings. They are estimated to cost the Government more than $100 million per year.