Prior to 1 Jan 2003, Singapore operated
a full imputation system for all companies where corporate
income was only subject to tax once at the shareholders'
level at their respective marginal income tax rates
(see the next Section for details of the imputation
system). However, the imputation system discouraged
companies with insufficient dividend franking credits
from distributing dividends. Furthermore, the system
was not well adapted to sophisticated business transactions,
such as share buy-backs and share borrowing and lending.
Complicated tax rules for these transactions had to
be crafted to meet tax avoidance concerns. This increased
compliance costs for companies.
The one-tier corporate taxation system
was introduced in Budget 2002 to replace the imputation
system. Under this system, corporate income is taxed
at the corporate level and this is a final tax. Singapore
dividends are tax exempt. The one-tier corporate taxation
system greatly simplifies the tax code and reduces cost
of compliance and administration for companies. It removes
current restrictions on the distribution of dividends
from capital gains and this could result in higher dividend
payouts for all shareholders. In addition, the one-tier
corporate taxation system has the desirable consequence
of allowing the unlimited flow-through of exempt dividends
to all tiers of shareholders, regardless of shareholding
level.
However, many companies will not
be able to make full use of the dividend franking credits
that they have accumulated by 1 Jan 2003. Therefore,
the government has allowed a 5-year transitional period
to enable companies with unutilised dividend franking
credits to pay franked dividends. During this period,
shareholders will still be able to receive dividends
with credits attached from such payouts by companies.
Companies that are still on the imputation system during
the transitional period will be allowed to flow exempt
dividends paid out of concessionary income to all tiers
of shareholders without restriction on shareholding
level. The transitional period will take effect from
1 Jan 2003 to 31 Dec 2007. Further details can be found
at the IRAS website.
