3.27 To strengthen our financial sector and promote enterprise development, I have decided to introduce the following tax incentives.

Strengthening the Financial Sector

3.28 The financial industry is a key sector of our economy, and a major basis for Singapore to be a business hub. The current range of financial sector incentives is sufficiently broad to promote high value-added activities. We have already made good progress in attracting global and regional financial activities.

3.29 However, financial sector activities are highly mobile. As global tax competition intensifies and drives tax rates down, we need to provide more incentives to attract and anchor cutting-edge activities to Singapore. We should therefore streamline and update our existing incentives to keep them relevant and effective.

3.30 I will therefore enhance the tax incentives for the wealth- and asset-management industries to encourage more funds to be managed out of Singapore. There will be enhanced incentives to promote the growth of the derivatives market and bolster Singapore's position as Asia's treasury hub outside Japan. Changes will be made to broaden and deepen our equity capital market. I have also decided to introduce concessionary tax treatment for special reserves set up by general insurance companies for underwriting certain offshore risks. This will enhance Singapore's competitiveness as an insurance centre.

3.31 Some of the existing financial sector incentives will be merged into an umbrella Financial Sector Incentive scheme. This will simplify the tax system and enable high-growth and high value-added financial activities to enjoy concessionary tax rates.

Promoting Enterprise Development

Improved Development and Expansion Incentive

3.32 Tax incentives have long been an important instrument for Singapore's economic development strategy. In particular, the Pioneer Incentive, which rewards companies with tax exemption on all qualifying income, has become a brand name in its own right. Later, we introduced the Post-Pioneer Incentive to further anchor these companies to Singapore. In 1996, this was replaced by the Development and Expansion Incentive (DEI).

3.33 I have decided to reduce the minimum tax rate under the DEI from 10% to 5% with effect from today. This will give our economic agencies greater flexibility in administering the DEI, make it easier for companies to comply with the scheme, and provide greater certainty for companies when they invest in Singapore.

Enhanced Deduction for Research and Development Expenses

3.34 Currently, we grant tax deductions for R&D expenses only for R&D that is conducted in-house, or else outsourced to approved R&D organisations that conduct their research in Singapore. This is to build up R&D capabilities locally. However, companies in today's networked world harness ideas and talent from all over the world. Furthermore, as the ERC Sub-Committee noted, companies carrying out R&D are increasingly collaborating with offshore affiliates or the R&D outfits of other companies.

3.35 I have therefore decided to liberalise the tax deductions for expenses incurred for R&D that leads to the ownership of intellectual property in Singapore. With effect from YA 2003, single tax deduction will be granted for expenses incurred on R&D outsourced to any R&D organisation, whether local or overseas. The scope of further tax deduction for R&D expenses will also be extended to all services companies.

Approved International Shipping Enterprise Scheme

3.36 The transport and logistics industry is an important sector in our economy, accounting for about 8% of GDP. It anchors Singapore as a leading physical hub port for global trade. This is due to a combination of factors: extensive connectivity, effective use of information-technology and a pro-business environment. Nevertheless, competition is intensifying, not only from the leading maritime centres of the world, but also from lower-cost newcomers.

3.37 As part of an integrated approach to sustain Singapore as a competitive, efficient and value-adding logistics centre, we will transform ourselves into a leading supply-chain management hub. We will go beyond providing excellent physical port infrastructure, such as cargo handling and terminal services, to become the nerve centre for the "mind and management" driving global transport and logistics activities.

3.38 To attract these shipping leaders, I have decided to extend the Approved International Shipping Enterprise Scheme and enhance its attractiveness for international shipping companies. The scope of the scheme will be expanded and its eligibility criteria streamlined with effect from YA 2003.

Other Incentives

3.39 Apart from the above measures, I will also introduce the following tax incentives:

3.40 The details of these tax incentives are at Annex 5.