INCOME TAX (AMENDMENT) BILL

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INCOME TAX (AMENDMENT) BILL: Order for Second Reading read.

The Second Minister for Finance (Mr Lim Hng Kiang): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

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The Income Tax (Amendment) Bill 2003 has two components. First, it provides for the income tax changes announced in this year's Budget Statement by the Deputy Prime Minister and Minister for Finance. The second component also includes other amendments to the Income Tax Act arising from our regular review to improve our income tax system.

The Income Tax (Amendment) Bill was released for public consultation in June this year. This was the first time such a public consultation has been conducted. The draft Bill was revised to incorporate suggestions from businesses and the public. Let me now highlight six key policy changes which were announced in the 2003 Budget Statement.

Exemption of foreign source income

First, exemption of foreign source income. To improve our tax competitiveness, all foreign source dividends, branch profits and service income remitted into Singapore from 1st June 2003 onwards are exempted from income tax. This tax exemption is available to any resident taxpayer, whether an individual or a company, so long as the Comptroller of Income Tax assesses that the taxpayer would be better off coming under the exemption scheme than continuing under the existing tax credit system. To prevent abuse, the exemption would only apply if the foreign income is received from jurisdictions with headline tax rates of at least 15% and would normally be subject to income tax in the foreign jurisdiction. Clauses 3(e) and (f) amend the Act to provide for this exemption.

Exemption of domestic interest income

The second change is the exemption of domestic interest income. To attract foreign funds and retain domestic funds in Singapore, interest income derived by

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individual on or after 1st January 2003 from deposits in standard savings, current and fixed deposit accounts, in excess of $100,000, with any approved bank or licensed finance company in Singapore, will be exempt from tax. From Year of Assessment 2006 the exemption would be extended to the full amount of these deposit accounts held by individuals. Clauses 3(d) and (l) amend the Act to provide for these changes.

Portable medical benefits

The third major change is the portable medical benefits. Portable medical benefits would provide our workers with medical benefits coverage, not only when they are in employment, but also when they are in-between jobs. To encourage workers and employers to adopt the new portable medical benefits scheme, or the new transferable medical insurance scheme, the additional amount of tax exempt Medisave contributions that employers can make per year would be raised from $720 to $1,500 per employee with effect from 1st January 2003. From 1st April 2004, employers who implement either of the two new schemes will also enjoy tax deduction for medical expenses up to a limit of 2% of the payroll. Other employers would qualify for deductions of up to 1% of total payroll. Clauses 2 and 10 amend the Act to provide for these tax changes.

Tax exemption of foreign trusts

The fourth change is a tax exemption of foreign trusts. The development of world class trustee services in Singapore is important to our growth as a wealth management centre. To boost the development of trust administration and custodian services, the current income tax exemption granted to foreign trust administered by approved trustee companies will be extended to foreign trust administered by any trustee company in Singapore. This will take

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effect from Year of Assessment 2004. Clause 7 amends the Act to provide for this change.

Enhancement of global trading programme

The fifth change is the enhancement of the global trading programme. International trading companies in Singapore have helped build our global reach over the years. To further promote Singapore as an international trading centre, the global trading programme was enhanced with effect from Budget Day on 28th February 2003. Approved global trading companies may now qualify for concessionary tax rate of 5% on qualifying income instead of 10%, depending on their contribution to the Singapore economy. Clause 40 amends the Act to provide for this change.

Intellectual property promotion

The sixth change is intellectual property promotion. With the focus of new services like healthcare, education and creative industries, that involve high-value added and knowledge-based activities, it is critical to continue to build up talents in R&D and in the creative fields. Tax deductions would be granted for patenting costs incurred on or after 1st June 2003. Clause 17 amends the Act to provide for this change. Automatic writing-down allowance over a 5-year period will also be granted for capital expenditure incurred on intellectual property rights such as patents, copyrights and trademarks acquired on or after 1st November 2003. Clause 23 amends the Act to provide for this change.

Other changes

Mr Deputy Speaker, Sir, the other tax policy changes announced in the 2003 Budget Statement are also covered

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by changes in the Income Tax Act. I would not subject Members to a repeat broadcast of the 2003 Budget Statement. If there are any other specific policy changes which Members are interested in discussing, I would be more than happy to oblige.

Let me now focus on the tax policy changes which require amendments to the Income Tax Act, but were not covered in the 2003 Budget Statement. Our regular review on the relevance of our existing tax incentive schemes has brought out changes or refinements that should be made to these schemes. I will now highlight four major changes.

Umbrella financial sector initiative

To streamline and simplify the host of financial sector incentives, clause 41 amends the Act to provide for the merger of seven existing incentives into an umbrella financial sector incentive scheme (FSI). This scheme would provide a 5% concessionary tax rate for high-growth and high-value added activities and a 10% concessionary tax rate for other qualifying financial activities. This scheme will come into effect on 1st January 2004.

Changes to incentives that promote the debt market

The tax incentive for qualifying debt securities will be extended to 31st December 2008 to further promote the growth of the debt market. In addition, the tax exemption for income derived from trading in Singapore Government securities will be extended another five years to 27th February 2008. Both the approved bond intermediary scheme and this incentive to provide a concessionary tax rate for income derived from trading in debt securities will also be subsumed under the financial sector incentive (FSI), which I described earlier, with effect from 1st January 2004. Clauses 3(a), (g), (h), (i) and (j) and clauses 34, 39 and 44(c)

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amend the Act to provide for these changes.

Removal of activities that qualify for industrial building allowance

Industrial building allowance is currently granted for buildings or structures used for qualifying activities. As activities relating to plantation, mining and pig farming are no longer carried out in our urban environment, these activities would be removed from the list of qualifying activities. Clauses 11, 19(b), 21 and 22 amend the Act to provide for these changes.

Removal of tax deductions for expenditure on energy conservation

Tax deductions for expenditure incurred in upgrading air-conditioned commercial buildings was introduced in 1982 to encourage energy conservation. As all buildings constructed since 1st January 1982 have complied with the overall thermal transfer value requirements, the tax deduction scheme is no longer relevant. Clause 13 amends the Act to provide for this removal.

Let me now briefly outline key legislative changes related to improving our tax administration.

Changes in withholding tax administration

Currently, when local taxpayers make payments to non-residents, local taxpayers must notify and pay the amount withheld to the Comptroller of Income Tax within 10 days - the so-called "10-day rule" - from the date the local taxpayer becomes liable to pay to the non-resident. With effect from 1st April 2003, taxpayers are required to notify and pay the tax withheld to the Comptroller by the 15th of the month following the date the amount becomes liable to be paid to the non-resident. This change will help reduce the compliance burden on local taxpayers that have to withhold tax.

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Clauses 35, 44(a) and 45 amend the Act to provide for this change.

Heavier penalties for serious fraudulent tax offences

The current penalty provisions for tax offences under section 96 of the Income Tax Act are similar, regardless of the severity of tax offences committed. To deter serious tax fraud, such as preparation or maintenance of false books of accounts or other records, heavier penalties would be imposed on these more serious tax offences. A new penalty provision (section 96A) is enacted to cater for serious tax fraud. Clauses 47 and 48 amend the Act to provide for this change.

Formalising the Central Fund Scheme

Most Institutions of Public Character (IPCs) are administered through a Central Fund according to the primary area of activity of the IPC. To instill greater accountability and transparency among IPCs, clause 50 amends the Act to formalise the Central Fund Scheme, thereby legally requiring IPCs to comply with minimum operating requirements imposed directly or through the Central Fund, in accordance with the Income Tax Act.

Set-off rules for allowances

The existing practice is to set off capital allowances and industrial building allowances within each source of income first, before setting off excess industrial building allowances and capital allowances against other sources of income. Clauses 25, 26 and 29 amend the relevant provisions of the Income Tax Act to make clear the above set-off rules.

Change in basis of computing the 80% Rule

Currently, a charity has to spend at least 80% of their annual receipts on

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charitable work in Singapore before it is granted exemption from income tax. This 80% rule is imposed to encourage charitable organisations to spend most of their income on charitable causes, and discourage them from accumulating large surpluses.

When a charity receives a donation in kind, other than donation of securities, the value of the donation in kind is included in the computation of the 80% spending rule at the time of donation. With effect from 1st April 2003, only the net proceeds from the disposal of these donations in kind will be included in the computation of the 80% spending rule at the time of disposal. Clause 9 amends the Act to provide for this change.

Valuation of units in listed unit trusts donated to approved Institutions of a Public Character (IPCs)

Clauses 30(g), (k) and (l) amend the Act to clarify that the value of listed unit trusts donated to approved IPCs shall be the price of such units in the open market at the last transaction of such units, as at the date of the donation.

Finally, Mr Deputy Speaker, other tax policy changes that have been incorporated in this Bill include:

(i) Clarification on the treatment of further tax deductions under the group relief scheme (clauses 12, 14 and 15(b));

(ii) Introduction of the requirement to apportion donations among income subject to tax at different tax rates (clauses 30(a), (b) and (j));

(iii) Changes in conditions to claim of industrial building allowance (clauses 19(a) and 20);

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(iv) Introduction of tax exemption for Bareboat Charter-In ships (clause 4(b));

(v) Removal of tax treatment that deems certain dividends as interest (clauses 4(a), 5, 6, 8 and 15(b));

(vi) Removal of Approved Credit Rating Agency Incentive (clause 38);

(vii) Amendments consequential to the implementation of one-tier corporate tax system (clauses 42 and 43);

(viii) Withdrawal of Hotel Refurbishment Scheme (clause 15(a)); and

(ix) Withdrawal of Double Child Relief (clause 51).

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. - [Mr Lim Hng Kiang].

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