ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT) BILL

Order for Second Reading read.

The Minister for Trade and Industry (BG George Yong-Boon Yeo): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act, or the EEI Act, in short. The Bill gives legislative effect to two tax changes which were announced in the 2002 Budget Statement, as well as the implementation of the Technopreneur Investment Incentive Scheme. It will also make consequential amendments arising from other changes to the Income Tax Act.

These changes serve to enhance the attractiveness of existing tax incentives, and make them more flexible to better meet the needs of businesses. They will also support the development of the technopreneurial sector in Singapore.

I will now describe each of the proposed amendments in turn.

Amendment to Development and Expansion Incentive Tax Rates

First, clause 6 of the Bill amends the relevant section of the EEI Act to reduce the tax rate under the Development and Expansion Incentive (or DEI in short) from not less than the current 10%, to not less than 5%. The DEI was introduced in 1996 to replace the post-pioneer incentive. Currently, a company that qualifies for the DEI is taxed at a rate of not less than 10% on income derived from qualifying activities. The reduction of the DEI rate to 5% would allow our economic agencies greater flexibility in administering the DEI.

For example, a company may currently have a mix of DEI and Pioneer incentives for different projects at 10% and 0% tax rates respectively. The company may now apply to EDB to convert its current incentives granted on the project basis to a single tax rate of, say, 5% DEI, on a company basis instead, for all its qualifying activities. This will obviate the need for the company to keep separate accounts for different incentives awarded for each qualifying activity, thereby reducing the compliance costs for businesses. It will also provide the company with greater certainty of the benefits when it invests in Singapore.

Unlimited Flow-Through of Tax-Exempt Dividends

Second, clauses 2, 4, 7 through 10 and 13 of the Bill amend the EEI Act to provide for unlimited flow-through of tax-exempt dividends for incentives granted under the EEI Act to the final shareholders, without any minimum shareholding requirements. Currently, for example, a company receiving tax-exempt dividend income under the EEI Act is able to pay an exempt dividend out of such income to its shareholders only if:

(a) it holds not less than 50% of the shares of the dividend paying company (unless a lower threshold is approved); and

(b) the exempt dividend is paid on shares of a non-preferential nature. In most instances, the second tier holding company would not be able to flow through the exemption to its shareholders. With the tax change, such dividend would now flow through as tax-exempt dividend to all tiers of shareholders, regardless of shareholding level. This tax change enhances the tax benefits available under the various incentive schemes and simplifies the compliance requirements under the schemes. The unlimited flow-through of exempt dividends applies to all credit balances in the exempt dividend account of companies.

Apart from the above unlimited flow-through of tax-exempt dividends, these clauses also treat payment of exempt dividends as having been distributed to the shareholders in accordance with the proportion of their shareholdings in a company. They also provide for dividends paid on shares of a preferential nature, to be deemed as interest income in the hands of shareholders and, in certain circumstances, as interest expense in the hands of a company.

Technopreneurship Investment Incentive Scheme

I now move on to clause 14 of the Bill. It inserts a new Part XIIIC, comprising sections 97S to 97Z, which give legal effect to the implementation of the Technopreneur Investment Incentive (TII). The TII eases the difficulty faced by high-tech start-ups in obtaining capital investment in their initial phase of growth, by providing investors of qualifying start-ups with tax write-offs for qualifying losses incurred. Qualified technopreneur start-ups which are accorded TII status may allot shares to their investors, so long as the total amount paid to the company for all qualifying shares by eligible investors does not exceed $3 million. When eligible investors incur a loss from selling qualifying shares or from the liquidation of the start-up within the eligibility period, they are entitled to deduct their loss amount against their taxable income, subject to terms and conditions.

Consequential Amendments

Finally, the Bill seeks to make consequential amendments to the EEI Act arising from changes to the Income Tax Act. Clauses 3, 5 and 12 relate to the amendments to sections 37, 37B and 37C of the Income Tax Act. Clause 11 relates to the amendments to sections 13H and 43P of the Income tax Act. The above consequential amendments are to provide for the following:

(a) allowing the carry forward of unabsorbed donations;

(b) extending the application of the adjustment factor under section 37B of the Income Tax Act to income of the company subject to tax at different tax rates; and

(c) expanding the definition of "concessionary income" under the provisions governing investment allowances.

Mr Speaker, Sir, in all, the above EEI Act amendments will enhance our tax incentive regime, and make Singapore a more attractive place for doing business.

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. - [BG George Yong-Boon Yeo].

Bill considered in Committee; reported without amendment; read a Third time and passed.