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Reducing Corporate Income Tax
1.36 Reducing the corporate income tax rate from
24.5% to 20% is fundamental to strengthening our
competitiveness. The corporate income tax directly
reduces the income of a company operating in Singapore.
When companies compare the relative attractiveness
of investing in different countries, the corporate
income tax flows straight through to the bottom
line. If we set our tax rate too high, we make
it harder for companies to make money, expand
and create more jobs here.
1.37 Over the last 15 years, the worldwide trend
has been towards lower corporate and personal
income taxes. In addition, countries often offer
generous tax breaks, so that the effective tax
rate that their companies pay is much lower than
the nominal rate. For example, Germany reduced
its corporate income tax rate last year from 40%
to 25%; a huge 15 percentage point cut. In the
US, the corporate income tax rate is nominally
35%, but various provisions and loopholes reportedly
enable some corporations to reduce their effective
rate to only 11%. Ireland, one of our competitors
in Europe, plans to cut its already low rate to
a mere 12.5% next year, supposedly without any
tax breaks. Hong Kong's rate is only 16%. These
examples show just how fierce the competition
is. Unless we keep pace with our competitors,
we will inevitably lose investments and business.
1.38 In the past, we enhanced our competitive
position by granting tax incentives that reduced
or removed the corporate income tax on certain
qualifying companies. For example, Pioneer-status
companies enjoy a tax holiday for up to 10 years,
while companies granted investment allowances
may deduct up to twice their investment expenses
from their taxable income. But this strategy has
its limitations:
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i. |
Firstly, it is harder to pick winners in
a fast-changing economic environment. We
need to encourage enterprise across the
board, and not just in certain companies
or certain sectors.
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ii. |
Secondly, some sectors of the economy have
benefited more than others from tax incentives.
For example, our small and medium enterprises
(SMEs), most of them Singaporean-owned,
often find it hard to qualify for the tax
incentives.
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iii. |
Thirdly, our tax incentives are gradually
becoming less effective. Our tax treaty
partners are seeking to remove tax-sparing
provisions from the tax treaties. As a result,
the benefits that companies enjoy from our
tax incentives are taken away by the other
tax jurisdictions, defeating the purpose
of the incentive.
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1.39 The Government will be rationalising the
current system of tax incentives over the next
few months. Later on in my speech, I will describe
improvements to our tax incentives to encourage
the development of certain industries. But we
must complement these specific incentives with
an across-the-board reduction in the corporate
income tax rate, in order to make the tax burden
on businesses in general as light as possible,
and make it worthwhile for companies to grow and
create jobs here.
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