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Second Reading Speech by Mrs Josephine Teo, Senior Minister of State for Finance and Transport, on the Income Tax (Amendment) Bill 2014

03 Nov 2014

Date: 03 November 2014
Venue: Parliament
Speaker: Mrs Josephine Teo
Madam Speaker, I beg to move, "That the Bill be now read a second time."

2. The Income Tax (Amendment) Bill 2014, or the Bill for short, covers income tax changes announced in the 2014 Budget Statement, as well as other changes arising from the periodic review of our income tax regime.

3. The draft Bill was released for a public consultation exercise from 4 to 24 July this year. MOF has evaluated all the feedback received and where relevant, accepted the suggestions.

4. Madam, the tax changes announced in the 2014 Budget Statement have already been debated in this House. Let me highlight the key changes.

5. First, the Productivity and Innovation Credit or PIC Scheme has been extended for three years till the Year of Assessment, or YA 2018 to provide more time for businesses to put in place productivity improvements. We have also introduced a PIC+ scheme to provide additional support to small and medium enterprises ("SMEs") which are making more substantial investments to transform their businesses. Under the PIC+ scheme, qualifying SMEs can enjoy a higher expenditure cap of $600,000 for each PIC qualifying activity per YA. This is 50 percent (or $200,000) more than the existing PIC cap of $400,000. Other enhancements have also been made to the PIC scheme.

6. From YA 2014, businesses can claim PIC benefits for training of seconded staff from other organizations, or persons working for them under centralised hiring arrangements. Such arrangements are quite common in the hotel and Food & Beverages industries, and occur when the hiring function of a group of companies is centralised in a single entity and employees are subsequently deployed to related entities within the group. The cost of training such staff are borne by the respective entities to which the employees are deployed or seconded, and should rightly be supported by PIC since they also improve business productivity. This change was made in response to industry feedback.

7. Second, the additional 50% tax deduction for R&D activities has been extended for ten years till YA 2025, and the scheme to allow writing down allowance for acquisition of Intellectual Property Rights has also been extended for five years till YA 2020.

8. In line with the definition used by the World Intellectual Property Organization, intellectual property rights must be creations out of intellectual activities and we have therefore added a negative list to exclude items which do not meet the definition. We will be excluding customer information and documentation on work processes, such as standard operating procedure manuals that do not contain any industrial know-how. However, documentation on work processes containing industrial information or techniques that will assist in the manufacturing or processing of goods or materials will continue to qualify for the writing down allowance under section 19B in the proposed legislation, provided that they relate to industrial know-how that can be legally protected. These are provided for in clauses 20 to 22 and 30 to 32.

9. Third, we will make clear that Additional Tier 1 hybrid instruments issued by Singapore-incorporated banks will be treated as debt for tax purposes. This means that distributions on such instruments will be deductible for issuers, and taxable in the hands of investors unless specifically exempted from tax. The change will help maintain a level-playing field for these banks as their distributions will be deductible, similar to the tax treatment accorded to banks incorporated in countries like the United Kingdom. These are provided for in clauses 6, 8 and 48.

10. Fourth, the quantum of parent relief, handicapped parent relief and other handicapped dependant-related reliefs will be increased from YA 2015 to provide greater recognition to individuals supporting their dependants. We will also allow sharing of the parent relief and handicapped parent relief among claimants according to a proportion agreed between the claimants. This is provided for in clause 45.

11. Madam, the Ministry of Finance regularly reviews and refines the income tax regime. I shall now outline other key changes arising from MOF’s periodic review of the tax regime.

12. First, we will introduce anti-abuse measures for the PIC scheme. IRAS has come across abusive arrangements aimed at artificially creating or inflating PIC claims, especially where cash payouts are involved. While such cases constitute a minority of PIC claims, additional measures are necessary and have been included in the Bill to tighten the qualifying conditions for PIC cash payouts, as well as to target abusive arrangements and the intermediaries who promote or facilitate such arrangements. These measures include:

(i) Requiring a PIC automation equipment to be in use before an application for PIC cash payout on the equipment can be made;

(ii) Strengthening the Comptroller’s powers to deny PIC benefits arising from PIC abusive arrangements; and

(iii) Imposing penalties on intermediaries who promote or facilitate PIC claims for such abusive arrangements.

These changes are elaborated in clauses 40 and 42. These changes are not expected to affect businesses making bona fide PIC claims, but seek to deter the small minority of businesses which attempt to make artificial or inflated PIC claims. IRAS will also continue to ensure timely disbursements to businesses for their legitimate claims.

13. The second amendment arising out of our regular and periodic review is to allow expenses incurred by a person for the purpose of complying with statutory and regulatory requirements of his business, to be tax deductible with effect from YA 2014. This promotes good corporate governance and voluntary compliance with statutory and regulatory requirements. The change is provided for in clauses 27 and 28 of the Bill.

14. Third, we will allow Supplementary Retirement Scheme ("SRS") members who have reached the retirement age to withdraw investments from their SRS accounts without the need to liquidate the investments. Currently, such SRS members can only make withdrawals in the form of cash. This necessitates the liquidation of SRS investments. To reduce transaction costs for SRS members, they will be allowed to withdraw their SRS investments by transferring them into another investment account, such as their personal Central Depository accounts, without the need for prior liquidation. Similar to cash withdrawn from the SRS accounts, the value of such SRS investments withdrawn will be brought to tax. Clauses 5, 53 and 57 provide for these.

15. Fourth, we will amend the Act to enable Singapore to ratify the Convention on Mutual Administrative Assistance in Tax Matters. This is a multilateral exchange of information treaty that Singapore signed in May 2013 to enhance Singapore’s international tax cooperation framework.

16. The changes will allow Singapore to be in a position to engage in spontaneous exchange of information ("EOI"), as well as administer group EOI requests, both of which are requirements under the Convention. Spontaneous EOI refers to an instance where IRAS, in the course of tax assessment, comes across information which it thinks is relevant to a foreign tax administration and transmits the information to that tax administration spontaneously on its own accord. Group EOI requests are requests for information on a group of persons where the persons are not individually identified, but can be identified as a group using certain unique characteristics. For example, a country may ask for information on its nationals who bought a certain product from a certain bank over a specified period. Such international cooperation measures are increasingly adopted by countries working together to combat cross-border tax evasion and our moves are in line with that of a responsible tax jurisdiction in the international community.

17. To harmonise our tax cooperation framework across all EOI instruments, we will also incorporate these two changes in other relevant arrangements such as Avoidance of Double Taxation Agreements. The changes are provided for in clauses 2 and 61 to 63.

18. The remaining legislative changes are mostly technical in nature or relate to improvements in tax administration.

19. Mdm Speaker, I beg to move.