TAX CHANGES FOR COMPANIES

Corporate Tax Rebate

As announced in November last year, the Government will give a 10% rebate on corporate income tax, excluding Singapore dividends, for the Year of Assessment 1999.

Tax Incentives to Promote the Bond Market

In the FY98 Budget, I announced several tax incentives to promote the development of an active bond market. The incentives included tax exemption on interest income earned by non-residents from qualifying debt securities and on fee income derived by financial institutions from arranging debt securities in Singapore. I am now pleased to announce further refinements to these bond market tax incentives.

Currently, tax exemption on interest from qualifying debt securities paid to non-residents only applies if the non-residents do not have permanent establishments in Singapore. To facilitate a wider distribution of qualifying debt securities, I have decided to extend the tax exemption to include non-residents who have permanent establishments in Singapore, provided that such non-residents do not purchase the securities using funds from their Singapore operations.

Qualifying debt securities are currently defined as debt securities which are substantially arranged by financial institutions in Singapore. In some cases, this condition gave rise to uncertainties about the availability of the incentives. This is because the global character of institutions and markets makes it necessary for the arrangers to use staff based outside Singapore, or employed by affiliated companies, to successfully execute the transaction. To rectify this situation, I have decided to create an "Approved Bond Intermediary" (ABI) scheme to complement the existing regime. Under the ABI scheme, the Monetary Authority of Singapore (MAS) will evaluate a financial institution's debt origination and trading capabilities in Singapore on an overall basis. Once a financial institution has been awarded ABI status, all debt securities lead managed by it would be treated as "qualifying debt securities". There would be no need for an ABI to satisfy, on a transaction-by-transaction basis, the current test of "substantial arrangement in Singapore". This will enable ABIs to provide their clients with greater certainty regarding our tax incentives, and will also serve to emphasize Singapore's goal of encouraging financial institutions to increase their debt market capabilities here.

The above refinements will be effective from 27th February 1999 up to 27th February 2003. ABI status may be awarded to financial institutions upon application to MAS. MAS will publish further details in a circular. Tax Exemption on Income Earned by Primary Dealers in Singapore Government Securities (SGS) from Trading in SGS

The Singapore Government Securities or SGS market is a key element in Singapore's domestic debt market. To develop a robust bond market, it is important to first establish a liquid SGS market to define a benchmark yield curve to which private issuers can make reference when pricing their bond issues.

Currently, income earned by all financial institutions from trading in debt securities, including SGS, is taxed at a concessionary tax rate of 10%. Government recognises that Primary Dealers play an essential role in SGS markets, by fulfilling the role of market makers and driving the process of price discovery and trading liquidity. To encourage more financial institutions to take on the role of SGS Primary Dealers and to provide a significant incentive commensurate with the obligations undertaken by SGS Primary Dealers, I have decided to exempt from tax income derived by SGS Primary Dealers from trading in SGS. The incentive will be effective from 27th February 1999, for a period of four years.

Tax Exemption Scheme for Syndicated Facilities

The Tax Exemption Scheme for Syndicated Facilities was introduced in 1983 to encourage financial institutions to base their syndication activities in Singapore. The scheme has operated successfully and there has been a steady increase in syndication activities in Singapore since its introduction. Last year, I announced that the scheme would be extended for a further five years until 2003.

Currently, MAS approves each syndicated facility on a case-by-case basis. To give arrangers upfront certainty on whether a facility qualifies for tax exemption, I am introducing an automated procedure. Under the automated procedure, facilities which meet certain defined criteria will automatically be granted tax exemption, without the need to obtain case-by-case approval from MAS. The automated procedure will take effect from 27th February 1999. MAS will publish the details of the procedure in a circular.

Tax Incentive to Promote Boutique Fund Management

Since the early nineties, fund management activity has grown rapidly. Compared to 1991, there has been a five-fold increase in the amount of funds managed in Singapore to $124 billion in 1997. This is expected to grow further, despite the Asian economic crisis. Many large and internationally reputable fund management companies have established a presence in Singapore.

The Banking and Finance Subcommittee of the Committee on Singapore's Competitiveness has, however, recommended that Singapore should also encourage the growth of boutique fund managers. Boutique fund managers are primarily indigenous fund management companies set up and run by professionals who typically have considerable experience in the fund management industry.

Nurturing boutique fund managers will create more diversity and also contribute towards the growth of our local fund management industry. I have therefore decided to exempt from tax, the qualifying income derived by foreign investors from funds managed by qualifying boutique fund managers. The types of income qualifying for exemption will be the same as that under the Approved Fund Manager scheme. The scheme will be effective for a period of five years from 27th February 1999 and will be administered by MAS. MAS will be releasing the details separately.

Tax Deduction for General Provisions Made by Finance Companies

Since 1997, finance companies have been given tax deduction for general provisions made against their loan and investment portfolios. This is subject to an annual limit of the lower of 25% of qualifying profits or 0.5% of qualifying loans and investments, as well as an overall limit of 2% of qualifying loans and investments. This has encouraged finance companies to make adequate general provisions to cushion against unexpected losses in their operations.

The Singapore economic environment has, however, been adversely affected by the downturn in the regional economies. In view of this, it is prudent for finance companies to build up their level of general provisions further. To encourage them to do so, the annual limits of 25% of qualifying profits and 0.5% of qualifying loans and investments will be temporarily suspended for a period of two years with effect from Year of Assessment 1999. In addition, the overall limit of 2% of qualifying loans and investments will be raised to 3% from Year of Assessment 1999. These changes will provide finance companies greater flexibility in making general provisions to cushion against potential losses that could arise owing to the poor economic environment. This will strengthen the financial position of finance companies, and the overall soundness and stability of the financial system.

To qualify for the above concessions, the finance company must satisfy the existing statutory minimum capital funds requirement of $50 million and minimum capital adequacy ratio of 12%, as prescribed under the Finance Companies Act.

I will now move on to corporate tax changes for other sectors of the economy.

Tax Exemption for Global OHQs

The Operational Headquarters (OHQ) scheme was introduced in 1986 to promote the services sector as one of the twin engines of growth. Under the OHQ scheme, companies awarded OHQ status will enjoy a 10% concessionary tax rate on their qualifying income. At present, most companies awarded OHQ status have been based in Singapore to service the Asia Pacific region. To encourage companies to locate and perform their headquarters functions in Singapore to service network companies worldwide, I have decided to enhance the existing OHQ incentive by granting tax exemption to OHQs which perform at least one substantive global function in Singapore. The incentive will be granted for a maximum period of ten years, and will take effect from Year of Assessment 2000. Companies may apply to EDB for this incentive after Budget Day.

Approved Contract Manufacturer and Trader (ACMT) Scheme

Contract manufacturers play a key role in our manufacturing sector. Some of our homegrown contract manufacturers have become global players. These companies usually contract to perform value-added manufacturing activities on semi-finished goods consigned to them, and then export the finished goods to their overseas clients. In recent years, contract manufacturing has become more complex. For example, instead of exporting the finished goods, it is not uncommon for contract manufacturers to be asked by their overseas clients to deliver the finished goods to customers in Singapore. This local delivery is considered a taxable supply under our GST laws. However, in some instances, the overseas clients to whom the finished goods belong do not designate an agent in Singapore to account for the GST on their behalf in respect of the local delivery. The contract manufacturers in such a situation would have to bear the GST on local delivery and have no recourse to claim it back. This GST burden could make our contract manufacturers less competitive internationally.

To help our local contract manufacturers remain competitive, I have decided to introduce a scheme, called the Approved Contract Manufacturer and Trader (ACMT) scheme, to relieve contract manufacturers whose businesses are substantially with overseas clients, of this GST burden. Under this scheme, the local delivery of the finished goods to the customers of the overseas client and the fees for the value-added activities on the goods will be deemed to be outside the scope of GST and GST will not be chargeable. Instead, the overseas client's customers who purchase and receive the goods in Singapore will account for GST by way of a "reverse charge". Besides contract manufacturers, this scheme will be made available to traders who also engage in value-adding activities substantially for overseas clients, and face the same GST problem as the contract manufacturers on their local deliveries. The scheme will be administered jointly by IRAS, EDB and TDB. Further details of the scheme will be released separately by the administering agencies.

Waiver of GST for Goods Removed from Bonded Warehouse

The development of a logistics sector with extensive networks is critical to our continued growth as a global trade centre and hub port. To encourage logistics operators to expand their business in Singapore and use Singapore as a base for their operations, I have decided to waive the GST chargeable on goods removed by traders registered with the Major Exporter Scheme (MES) from bonded warehouses operated by logistics companies. With this waiver, MES traders will be able to use their MES status to remove goods from bonded warehouses operated by logistics companies free of GST.

The GST waiver will remove an existing disadvantage faced by local logistics companies, vis-a-vis overseas suppliers of the same goods, as under the current situation, MES traders by virtue of their MES status do not have to pay GST upfront when they import the goods directly from overseas suppliers.

Extension of Tax Incentive for Exhibition Organisers to Cover International Conferences

The staging of international conferences in Singapore complements the many international exhibitions and trade fairs currently held here. Together, they play the important role of enhancing Singapore as the hub for knowledge and trade exchange for the international business community. I have therefore decided to extend the tax concession granted to approved exhibition organisers to companies organising and managing international conferences in Singapore. The approved companies will be granted a concessionary tax rate of not less than 10% on their incremental income. This will provide further impetus to develop Singapore into an International Exhibition and Conference City. The extension to the tax concession will take effect from Year of Assessment 2000.

Tax Exemption for Floating Production Storage Offloading Vessel and Floating Storage Offloading Vessel

Singapore has come a long way in developing as a maritime centre. According to United Nations Conference on Trade and Development (UNCTAD), we have moved from the 19th position in 1991 to become the 13th most important maritime nation. Today, a critical mass of established international shipping companies exists in Singapore, providing a wide spectrum of shipping services.

To support Singapore's drive towards higher value-added activities in the shipping sector, I have decided to extend the existing Approved International Shipping Enterprise Scheme to cover income derived from the operation of Floating Production Storage Offloading vessel and Floating Storage Offloading vessel (or FPSO/FSO) in Singapore. These are primarily crude oil tanker vessels which have been specially converted for deployment in the offshore field for production and storage of crude oil. The operation of FPSOs and FSOs therefore requires the application of both advanced maritime and technology-driven expertise. The development of the FPSO/FSO industry in Singapore will not only serve to broaden the scope of shipping activities in Singapore, it will also complement Singapore's role as the world's third largest oil refinery and trading centre.

To qualify for the incentive, the company must have substantial operations and possess a team of professional expertise in Singapore. The incentive will be granted for a period of ten years and will take effect from Year of Assessment 2000. TDB will administer this incentive.

Extension of One-Year Accelerated Depreciation Allowance Scheme to Replacement of Diesel-Driven Vehicles

With a growing vehicle population in Singapore, total emissions from vehicles will creep up over time. This will adversely affect our ambient air quality and may become a health hazard. We therefore need to impose strict emission standards on new vehicles and at the same time, reduce the number of older vehicles on the roads.

Diesel-driven commercial goods vehicles and buses are allowed to be used on the roads for up to twenty years. Old and inefficient diesel-driven vehicles are a major source of pollution as they generate a disproportionately large amount of particulates and other pollutants that are harmful to health.

The cost of replacing an old vehicle with a new one is high. As a result, older vehicles are generally not taken off the roads before the end of their statutory lifespan. One way of encouraging owners of older vehicles to do so is to provide a tax incentive to partially defray the high cost of replacing vehicles.

I have therefore decided that with effect from 27th February 1999, the one-year accelerated depreciation allowance scheme would be extended to the purchase of new commercial goods vehicles and buses, on the condition that the new vehicle is replacing an old diesel-driven vehicle which was registered before 1st January 1991, and which either has at least one year of valid COE left or is eligible for COE renewal. Ministry of the Environment will administer the scheme.