Corporate Taxes

2.56 We have also reduced our corporate tax rate significantly. Corporate taxes are coming down in many countries, particularly in Europe. Ireland has adopted a two-tier tax rate system: 12.5% for trading income, and 25% for non-trading income. Many Central and Eastern European economies, hungry for foreign investments, have flat taxes which are around 20%. Some are even lower – Slovakia and Poland have cut their rates to 19%, and Hungary has reduced its rate to 16%.

2.57 Our headline corporate tax rate at 20% is one of the lowest in the region, coupled with what is effectively only a 5% rate for the first $10,000 of chargeable income, and 10% for the next $90,000, as well as zero tax for start-ups for the first three years of incorporation. Even more importantly, our effective corporate tax rate is highly competitive. Recently, a Canadian think-tank, the C.D. Howe Institute, carried out a cross-country study of the effective tax rate, i.e. the tax payable as a percentage of the pre-tax return on capital. Of the 36 countries surveyed, Singapore had the lowest effective tax rate, even below Ireland and Hong Kong. Our effective tax rates for the manufacturing and services sectors are 5.8% and 6.6% respectively. For now, therefore, I see no need to reduce the corporate tax rate further.

2.58 Tax rates form just one part of a competitive tax infrastructure. Our wide network of Agreements for the Avoidance of Double Taxation (DTAs) also gives companies based in Singapore a strong advantage. We currently have 50 tax treaties, covering almost all our major economic partners. Last year, we secured favourable capital gains tax provisions from India under the Singapore-India DTA. Together with the Comprehensive Economic Cooperation Agreement (CECA) with India, this makes Singapore a very attractive springboard for investments into India. We are currently in negotiations with several other countries, including China, and will keep up efforts to expand and update our present network of tax treaties.

2.59 In Budget 2003, I introduced the foreign-sourced income tax exemption (or FSIE) regime to facilitate repatriation of income and investments into Singapore. Some companies which engaged in substantial economic activities overseas have found themselves unable to meet the qualifying rules for this tax exemption. To encourage companies to remit their foreign income, I will grant tax exemption on foreign income that is disqualified from the FSIE regime, if they are remitted under specific scenarios or circumstances. IRAS will be releasing details.

2.60 To facilitate share-based compensation schemes, I will grant deductions to employee stock options granted through treasury shares. As we move to a more flexible wage system, companies are increasingly linking employee remuneration to the performance of the company by granting stock options or direct share awards. In some cases, companies may incur costs to buy back their own shares which are then held as “treasury shares” before being used to fulfil the stock option or share award obligations. Since share-based compensation also forms a part of staff costs, I have decided to grant a tax deduction to companies that have incurred actual outlay for the employee stock options and other share-based compensations. This will take effect from Year of Assessment 2007.

2.61 To encourage more MNCs to locate their holding functions in Singapore, I have decided with immediate effect to exempt from tax any gains by approved holding companies on the disposal of shares in subsidiaries, if they own at least 50% of the shares for a period of not less than 18 months. Further details can be sought from the EDB who will administer this scheme.

2.62 We will also continue to provide more clarity and certainty in our tax rules. We have introduced an Advanced Ruling system with effect from 1 January this year, which allows taxpayers to seek binding rulings from IRAS.

2.63 We will provide businesses with more guidance on transfer pricing issues. Tax authorities around the world are stepping up efforts to combat companies’ efforts to shift profits through transfer pricing. As more of our companies expand overseas, they must be aware of these transfer pricing risks. To help them, IRAS will provide guidance on applying the arms-length principle, and assistance in resolving disputes with foreign tax authorities on transfer pricing issues. More details will be released by IRAS next week.

2.64 We will also rationalise the administrative conditions for businesses to claim Industrial Building Allowances (IBA). Details of these changes, to be implemented for buildings purchased on or after 1 January 2006 are summarised in Annex D.

2.65 To make our business environment more flexible, we introduced the Limited Liability Partnership (or LLP) business structure. To date, more than 1,000 LLPs have been formed. We have received suggestions to extend to these partnerships the incentive schemes that are currently available to companies. As a principle, we award tax incentives based on whether the business brings in new activities or creates new value for Singapore, regardless of its business structure. Hence I am prepared to allow tax incentives to be awarded also to partnerships. We will start on a scheme by scheme basis, and consider broader-based implementation after further study. This will help attract new investors and grow the financial and other industries.

2.66 To capture the true value-added of insurance services and reduce the business costs of general insurers, I am allowing them GST claims in two circumstances. First, insurers will be able to claim GST based on the tax fraction of the cash indemnities paid to non-GST registered policyholders under contracts that are subject to GST. Second, insurers will be allowed to claim GST on expenses incurred on their policyholders' passenger cars, for example, repairs. These changes will be effective from 1 January 2007 onwards.