TAX CHANGES FOR THE FINANCIAL SERVICES SECTOR

Abolishment of Stamp Duty on Contract Notes

The Government will continue to fine-tune its tax regime to promote the development of the financial services sector and to ensure that Singapore continues to be a conducive centre for trading and transacting financial products.

The securities markets today are facing a period of intense technological change and competition. Exchanges worldwide have been restructuring themselves in the face of globalising equity markets. Advancement in technology has not only created new competition from alternative trading systems, it has also facilitated the rapid flow of capital to markets which offer the greatest efficiency and lowest trading costs.

The Monetary Authority of Singapore (MAS) has responded to these challenges with a series of initiatives. Liberalisation of the fixed brokerage commissions system will be accelerated. Commissions on all trades regardless of value will be freely negotiable from 1st January 2001, instead of 1st January 2003. Stamp duty on contract notes on share transactions is now only 0.05%, and had been suspended until 29th June 2000 as part of our earlier response to the economic crisis. To further enhance the competitiveness of our stock exchanges, stamp duty on contract notes on share transactions will be abolished with effect from 30th June 2000. The annual revenue loss to Government is estimated at $70 million, based on the average stock market transactions for the past 3 years. Abolition of Withholding Taxes on Financial Guaranty Insurance Contracts

The recent financial crisis has highlighted the need for Asia to develop a deeper and more liquid bond market to facilitate raising of longer-term funds. Increasingly, there is a need for issuers of debt securities to employ credit enhancement tools, as investors become more concerned over credit quality. This will open up business opportunities in Asia for credit enhancers, such as financial guaranty insurers, which insure the payment of the principal and interest to investors.

The MAS has amended its regulations to allow multi-line insurers, reinsurers and branches of foreign insurers, to write financial guaranty business. To further promote this activity, claim payments made under financial guaranty insurance policies by approved financial guaranty insurers to non-residents will be exempt from withholding tax. This will take effect immediately.

Extension of Tax Concession for Bond Trading to Swap Trading

In the 1998 Budget, I announced a concessionary 10% tax rate on income derived by financial institutions from trading in bonds. For the bond market to flourish, it is important to develop a swap market to provide market players with avenues for risk-hedging and arbitraging. To encourage the development of the swap market here, the concessionary 10% tax rate will be extended to income derived by financial institutions from trading in interest rate and currency swaps. This concession will take effect from Year of Assessment 2001 and will apply until 27th February 2003, which is also the expiry date of the 5-year bond incentives which took effect on 28th February 1998.

Withholding Tax Exemption on Interest Rate and Currency Swaps

During the 1989 Budget, I announced the exemption of withholding tax on interest rate and currency swap payments made by Asian Currency Units (ACUs) to non-residents. To further develop our swap market, withholding tax exemption will be extended to all bona fide interest rate and currency swap payments made by financial institutions besides ACUs. The exemption will take immediate effect.

Extension of the Asian Currency Unit (ACU) Scheme to All Offshore Financial Derivatives

At present, ACUs are taxed at a concessionary rate of 10% on income from transactions in certain specified derivatives, including interest rate and currency swaps in non-Singapore dollars, with offshore counterparties and other ACUs.

The trading of financial products other than plain vanilla swaps has expanded considerably. To further develop this area of business, the 10% tax rate will be extended to income derived by ACUs from all other offshore derivative transactions in non-Singapore dollars. This extension will take effect from Year of Assessment 2001 and will apply for 5 years.

Goods and Services Tax on Trustee Services Provided to a Trust with Non-Resident Settlors and Beneficiaries

A cardinal principle underlying the GST is that it is a tax on domestic consumption of goods and services. Under present tax rules, the provision of trustee services by a trustee to the trust is standard-rated if the trustee representing the trust is situated in Singapore. This treatment applies even where the settlors and beneficiaries of a trust are all or mostly foreign.

In order to put Singapore trustees on a more competitive footing with offshore trustees, I have decided to zero-rate trustee services in cases where at least 80% of the settlors and beneficiaries are non-resident, and at least 80% of the assets of the trust were originally contributed by settlors who are non-resident. This measure will also facilitate the development of our private banking industry, where trusts are likely to play an increasingly substantial role.