INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 1999 seeks to give legislative effect to the income tax changes announced in the 1999 Budget Statement. It also incorporates eight other amendments to the Income Tax Act.

Tax changes announced in the 1999 Budget Statement

I shall begin with the tax changes announced in the 1999 Budget Statement. There are a total of nine tax changes which require amending the Act. I will start with the tax changes affecting individual taxpayers.

I had announced a personal tax rebate of 10% for the Year of Assessment 1999 to help taxpayers tide over the temporary difficult period. Clause 25 amends the relevant section of the Act for this purpose.

To give further emphasis to the importance of lifelong learning and skills upgrading, I had also announced that with effect from Year of Assessment 1999, the maximum tax deduction allowable for certain education expenses for individuals will be raised from $2,000 to $2,500. Clause 15 amends the relevant section of the Act for this purpose.

There are seven tax changes affecting the corporate sector. I had announced further refinements to the bond market tax incentives. The refinements include extending 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 Singapore operations, and the introduction of the 'Approved Bond Intermediary' (ABI) scheme. 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' and there would be no need for an ABI to satisfy, on a transaction-by-transaction basis, the test of 'substantial arrangement in Singapore'. Clauses 5,19 and 21 amend the relevant sections of the Act for this purpose.

I also announced the introduction of an automated procedure for the existing Tax Exemption Scheme for Syndicated Facilities. This is to give arrangers upfront certainty on whether a facility qualifies for tax exemption. Clause 16 amends the relevant section of the Act for this purpose.

To encourage companies to locate and perform their headquarters functions in Singapore to service network companies worldwide, I announced tax exemption for Operational Headquarters which perform at least one substantive global function in Singapore. This change takes effect from Year of Assessment 2000. Clause 18 amends the relevant section of the Act for this purpose.

To encourage finance companies to build up their level of general provisions further and thus strengthen the overall soundness of the financial system, I had announced that the annual limits on tax deductions for general provision of finance companies will be temporarily suspended for two years. Also, the overall limit on tax deductions for general provisions of finance companies will be raised to 3% of qualifying assets. These changes are effective from Year of Assessment 1999. Clause 9 amends the relevant section of the Act for this purpose.

To support Singapore's drive towards higher value-added activities in the shipping sector, I announced the extension of 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. This change takes effect from Year of Assessment 2000. Clauses 3, 5(b) and 6 amend the relevant sections of the Act for this purpose.

I had announced the extension of the One-Year Accelerated Depreciation Allowance Scheme to the purchase of new commercial goods vehicles and buses to replace an existing 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. Clause 13 amends the relevant section of the Act for this purpose.

To encourage more financial institutions to take on the role of Singapore Government Securities (SGS) Primary Dealers and to provide a significant incentive commensurate with the obligations undertaken by SGS Primary Dealers, I announced tax exemption on the income derived by SGS Primary Dealers from trading in SGS. Clauses 19(b) and 19(d) amend the relevant sections of the Act for this purpose.

Tax changes not announced in the 1999 Budget Statement

I shall now deal with the other tax changes, which had not been announced in the 1999 Budget Statement.

The first tax change pertains to the Special Allowance for Hotel Refurbishment announced last June as part of the package of off-Budget measures, to encourage hotel operators to refurbish their premises during the lull period. Clause 10(a) introduces a new section 14M to grant approved hotel owners tax deduction of up to 150% of qualifying expenditure incurred on or after 1st July 1998 on the refurbishment of their hotels.

The second tax change pertains to the payment of upfront land premium introduced by JTC and HDB. To assist companies improve their competitiveness, JTC and HDB have allowed its lessees to opt for an upfront land premium for the entire tenure of the land. Under existing tax rules, such premium would not be tax deductible nor would it qualify for tax depreciation. To provide that lessees would not be worse-off tax-wise if they were to opt to pay land premium upfront, a new section 14N is introduced to extend tax deduction to the amortisation of upfront land premium paid by JTC and HDB lessees for industrial land leases of less than 30 years. Clause 10(b) introduces a new section 14N for this purpose.

To increase companies' ability to adjust their equity base and debt-equity ratio, and improve companies' return on capital, the Companies Act has been amended to allow companies to buy back their ordinary shares using their distributable profits. In tandem with this, the Income Tax Act needs to be amended to provide for the tax treatment of share buybacks, such that share buybacks or capital reduction made out of profits would be treated tax-wise as a dividend distribution. The treatment of receipts from buybacks in the hands of shareholders will depend on the mode of share buyback. For example, in a normal "market purchase" where it is not possible for the companies to identify the shareholders from whom they are buying back the shares, what the shareholders receive on the disposal of their shares will be treated as sales proceeds, like any other disposal which they make on the stock exchange, and not a receipt of dividends. The shareholders will not be taxed on the sales proceeds unless they are assessable to tax on profits from the sale of shares. Neither will they receive any tax credits. The same tax treatment will also apply to selective "off-market purchases" as well as share redemption.

Clauses 4(b) and 4(c) amend the relevant sections of the Act to provide for the tax treatment of payments made pursuant to buyback of shares, capital reductions and redemption of shares.

Sir, companies have also requested the Stock Exchange of Singapore allow for "market purchases" through special trading counters, which will allow listed companies to identify the shareholders from whom they are buying back the shares. I note that transactions through special trading counters could provide considerable room for tax arbitrages and abuses. These include risk-free arbitrages, artificial arrangements with low-tax persons to transact in shares through the special trading counters to maximise tax refunds, as well as the room available to those trading in shares to tax plan or arbitrage arising from their ability to deduct the cost of their shares from the receipts for shares sold through the special trading counters. This concern of tax abuse has in fact also been highlighted in the media. To prevent revenue leakage through such abuses, the Ministry of Finance and IRAS will be studying the issues thoroughly before share buybacks through Special Trading Counters may be allowed.

The next tax change pertains to the existing tax incentive for SIMEX members. At present, SIMEX members who trade with non-residents are granted a concessionary tax rate of 10% on such trading income. Clause 17 amends the Act to make clear that the tax concession is also applicable to transactions made by SIMEX members with Approved Fund Managers acting on behalf of their non-resident clients.

The next tax change deals with the tax treatment of cars. In tandem with the Land Transport Authority's vehicle tax rationalisation exercise in March 1998, changes were made to the tax treatment pertaining to company cars, rental cars and motor cars used for instructional purposes. Clauses 4(a), 7(c), 11(a), 11(b), 12 and 14 amend the relevant sections of the Act for this purpose.

A 10% corporate tax rebate for the Year of Assessment 1999 was announced as part of the cost-cutting package in November last year. Clause 24 amends the relevant section of the Act for this purpose.

The next tax change pertains to the 10% cut in employers' CPF contribution with effect from 1st January 1999, which was announced as part of the cost-cutting measures announced in November 1998. Arising from the cut in CPF contribution, clauses 7(a) and 7(b) amend the Act accordingly to reduce the maximum deduction allowable for employer's contribution to CPF, or any designated pension or provident fund.

The last change pertains to Non-Tax Assessment. Currently, the Comptroller of Income Tax issues a notice of assessment only to taxpayers who have been assessed positively to tax. In the case where an assessment does not give rise to any tax payable, the Comptroller would only issue a letter (rather than a notice) of non-tax computation to the taxpayer. The taxpayer is not required to object within 30 days to the letter of non-tax assessment if he disagrees with the computation. The 6-year time limit within which the Comptroller can make an assessment or an additional assessment is also not applicable in the case of a non-tax assessment.

To give greater finality to both the Comptroller and the taxpayers for non-tax assessment cases, clauses 22 and 23 amend the Act to provide for the Comptroller to issue a notice to a taxpayer even if there is no tax payable by the taxpayer and for the 6-year time limit to also apply to non-tax assessment cases.

Sir, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Deputy Speaker in the Chair]

Clauses 1 to 3 inclusive ordered to stand part of the Bill.

Clause 4 -

The Chairman: Clause 4, Amendment No. (1). Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 8, to leave out line 13 to the end of line 27, and insert -

"(b) a dividend received by the shareholder where the buyback is an off-market purchase made in accordance with an equal access scheme authorised in advance by the company at a general meeting of the company.".

Sir, this amendment is to delete mention of the tax treatment for share buybacks to special trading counters until possible tax abuses involved with the share buybacks through special trading counters have been thoroughly considered.

Amendment agreed to.

The Chairman: Amendment No. (2). Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 9, to leave out line 6 to the end of line 22, and insert -

"(6) Where a shareholder sells his shares to the company in an off-market purchase referred to in subsection (3) (b) -

(a) no deduction shall be allowed to him in respect of the costs he incurred to acquire the shares he sold to the company; and

(b) the cost of each remaining share in the company held by the shareholder immediately after the sale shall be ascertained by the formula A/N where

A is the aggregate cost of all shares in the company held by the shareholder immediately preceding the buyback of his shares; and

N is the number of remaining shares in the company held by the shareholder after the buyback of his shares.".

Sir, the reason for amendment No. (2) is similar to amendment No. (1).

Amendment agreed to.

Clause 4, as amended, ordered to stand part of the Bill.

Clauses 5 to 25 inclusive ordered to stand part of the Bill.

Bill reported with amendments, read a Third time and passed.