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

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ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT) BILL: Order for Second Reading read.

2.15 pm

The Minister of State for Trade and Industry (Dr Vivian Balakrishnan): 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. It will

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give legislative effect to three tax changes which were announced in the 2003 Budget Statement, refine the Pioneer Incentive, as well as remove and merge several existing tax incentives. It will also make some consequential amendments to the EEI Act.

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

Integrated Industrial Capital Allowance Incentive

The first tax change is the introduction of the Integrated Industrial Capital Allowance, or the IICA in short. Currently, capital allowances are granted only on plant or machinery that is used in a company's own trade or business in Singapore . We recognise that there is a growing trend for corporate groups to base their headquarters, marketing and other high value-added activities in Singapore , and have their regional subsidiaries perform other activities like manufacturing. To accommodate this business model, the IICA allows Singapore companies to claim capital allowance on equipment such as plant and machinery that is used by their wholly-owned subsidiaries outside Singapore .

The IICA will offer a seamless tax regime for companies that have manufacturing activities in the region, and encourage them to base their headquarter functions in Singapore , even as they internationalise and tap new markets.

Clause 23 of the Bill inserts a new Part XIIID in the EEI Act, comprising sections 97ZA to 97ZE, to give legislative effect to the IICA.

_R &D and IP Management Hub Scheme _

The second tax change is the introduction of the Research and Development and Intellectual Property Management Hub Scheme, or R&D and IP

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Management Hub Scheme in short. The objective is to increase the amount of funds for R&D activities conducted in or controlled from Singapore . These R&D activities will generate a healthy pipeline of intellectual property for commercialisation, contribute to a vibrant IP hub in Singapore and create economic value for our companies.

Under this scheme, an approved Singapore-based company is granted tax exemption for a period of five years for foreign-sourced royalties and interest income that are received in Singapore and channelled to R&D activities. At least 20% of the foreign-sourced income remitted to Singapore must be expended on R&D activities conducted in Singapore , and all the resulting intellectual property of these R&D projects shall be owned and commercialised in Singapore by the approved company.

The scheme encourages companies to fund and conduct their R&D activities in Singapore , as well as manage and exploit the IP rights here. This creates a sustainable cycle that reinforces both IP management and R&D activities in Singapore .

Clause 24 of the Bill inserts a new Part XIIIE in the EEI Act, comprising sections 97ZF to 97ZJ, to give legislative effect to the R&D and IP Management Hub Scheme.

Overseas Investment Incentive

The third tax change is the revision to the Overseas Investment Incentive, or the OII in short. Currently, the OII allows an approved Singapore company to deduct losses arising from the sale of shares or liquidation of an approved overseas investment against its income. The criteria for the scheme are stringent, given that the Government in effect underwrites

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part of the investment. This has resulted in low take-up and approval rates.

To enhance the relevance of the OII and encourage more companies to expand overseas, the scheme has now been revised to allow an eligible holding company to defer its tax payments (arising from its profitable operations in Singapore ) for two years, if its approved overseas investment incurs operating losses during the first three years of the investment. The deferred payment is proportionate to the Singapore tax impact of the overseas losses. This helps to provide temporary cash-flow relief when overseas ventures incur initial losses.

Clause 25 of the Bill inserts a new Part XIIIF in the EEI Act, comprising sections 97ZK to 97ZO, to give legislative effect to the revised OII.

Refinements to the Pioneer Incentive

I will now touch on the proposed refinements to the Pioneer Incentive to provide greater flexibility in the award of this incentive, as follows:

Firstly, to allow Pioneer Incentives to be awarded for a period of less than five years and up to a period of 10 years;

Secondly, to allow pioneer companies to undertake non-pioneer activities without prior approval of the Minister; and

Thirdly, to delegate the authority from the Minister to the Comptroller of Income Tax to adjust the profit margin criterion of non-pioneer trade downwards in certain circumstances.

These changes are reflected in clauses 3 to 5 of the Bill.

Repeal of tax incentives

Next, it is proposed that two obsolete tax incentives be scrapped, while seven

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overlapping incentives be streamlined and combined with other schemes. Thus, a total of nine tax incentives will be repealed. There are only a small number of existing companies on these schemes and they will be allowed to complete their current incentive period.

Clauses 8, 13, 17 and 21 of the Bill amend the EEI Act to provide for these changes.

Consequential amendments

Finally, as a result of the various changes to the tax incentives, consequential amendments will be made to the relevant sections of the EEI Act. These amendments provide for the following:

Firstly, deletion of the definition of terms relating to the discontinued tax incentives (ie, clauses 2, 10, 12, 14, 15, 18, 19, 20 and 28 of the Bill); and

Secondly, allowing tax incentives awarded before the new amendments to continue to have effect (ie, clause 29 of the Bill).

Consequential amendments will also be made to the EEI Act arising from changes to the Income Tax Act. These are to provide for the removal of the tax treatment that deems certain dividends as interest and expanding the definition of "concessionary income" under the provisions governing investment allowances. Clauses 6, 11, 18 and 22 of the Bill amend the relevant sections of the EEI Act to provide for these changes.

Conclusion

Mr Speaker, Sir, in summary, the above EEI Act amendments will enhance and streamline our tax incentive regime, make Singapore a more attractive investment destination, and encourage

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more Singapore-based companies to expand overseas.

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 Vivian Balakrishnan].

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