TAX CHANGES TO ENCOURAGE INNOVATION, CREATIVITY AND ENTERPRISE

Income Tax Concession for Royalty Payments

Currently, authors, composers and inventors can avail themselves of a tax incentive which exempts from tax 90% of gross royalties received. To further encourage the development of the arts and innovation in Singapore, I have decided to liberalise the current scheme. The changes are as follows:

a) Concession for Authors and Composers

Currently, the concession is only applicable to income received by authors and composers from publishers in Singapore for the assignment of or for the right to use the copyright in any literary, dramatic, musical or artistic work. With effect from Year of Assessment 2001, royalty payments received by a composer or an author from recording, film or drama companies in Singapore will also qualify for this incentive.

b) Concession for Inventors and Innovators

The incentive for inventors and innovators is presently applicable only to income derived by a Singapore citizen or permanent resident for the assignment of or for the rights in any approved inventions or innovations that are manufacturing-related. This incentive will be extended to cover any approved inventions or innovations from the non-manufacturing sectors. The scheme will also be extended to foreigners, provided that the creations of the inventions or innovations are substantially carried out in Singapore.

To qualify for the incentive, the inventions or innovations must be protectable. The Economic Development Board will administer the incentive. It will be granted for a period of 5 years from Year of Assessment 2001.

Estate Duty Exemption Rules for Residential Properties

Currently, estate duty exemption is given on a two-tiered basis: for residential properties in Singapore, exemption is given up to $9 million, and generally for all other dutiable assets, $600,000. However, for residential properties to qualify for the $9 million exemption, they must not be used for any form of business activity. To encourage entrepreneurs who may want to work from home, this rule will be relaxed. With immediate effect, a Singapore residential property used for business activity will also qualify for the estate duty exemption for residential property, as long as the residential character of the property is not materially affected. This relaxation will support the Technopreneur Home Office Scheme, and also allow other small businesses to be carried out in residential properties without disqualifying these from estate duty exemption.

Enhanced Tax Treatment for Stock Options

Equity ownership is key to the development of the vibrant technopreneurial environment in Silicon Valley and other high tech nodes. Talented people, including research scientists and engineers, high tech professionals, MBA holders, and even office staff, are nowadays prepared to accept low or even zero salaries in return for equity stakes in the companies they work in. They hope that their companies will succeed spectacularly, and their equity stakes will increase by tens or hundreds of times in value. Their direct stakes in their firms' success motivates them to put their hearts and souls into building up the firms, and to slog long hours to outdo their competitors.

Many of these equity stakes are offered to the employees through stock option schemes, commonly known as ESOPs (Employee Stock Options). The use of ESOPs is most pervasive among technopreneurial start-ups. But even for mature companies, ESOP schemes have been shown to have a significant impact on corporate performance. The evidence that stock options play a pivotal role in good corporate performance is well established.

The usefulness of stock options lies in their ability to recruit, motivate and retain employees. This is vital in the businesses of today. But it will be even more important in the businesses of tomorrow, which will place a growing premium on developing and applying knowledge, and committing the energies and creative juices of the people working for the company. They may still be called employees, but they are actually partners in the enterprise.

Many developed countries have recognised the importance of employee stock options in helping high-growth companies to retain and motivate top talent. They have made significant changes to their tax systems to encourage employee stock options, or to introduce incentive schemes for stock options. These countries include the UK, Scandinavian countries and even Japan. Under the incentive schemes, tax treatment for ESOPs is more favourable than cash payments.

We must move in the same direction. We need to act quickly, to offer potential entrepreneurs that extra incentive to take the plunge, and to send a clear signal that we are strongly encouraging enterprise and wealth creation. Attractive tax treatment to encourage the use of ESOPs will also help our companies to compete for global talent, which is highly mobile not only across companies, but also across national boundaries. Talent will be attracted to places where opportunities and post-tax rewards are the greatest.

We improved the tax treatment of ESOPs last year, by allowing the tax payable to be deferred by up to 5 years, with interest chargeable for the deferment. But this was only a modest first step. We need to improve the tax treatment of ESOPs further, particularly for the high tech start-ups. As this may have significant implications for our tax system, we need a little more time to complete the study. We will announce an enhanced scheme for high tech start-ups by the end of May this year.