Second Reading Speech by Mrs Lim Hwee Hwa, Minister of State for Finance, on The Income Tax (Amendment) Bill 2006 at The Parliament, 23 Jan 200723 Jan 2007
Mr Speaker, Sir, I beg to move, "That the Bill now be read a second time".
2. The Income Tax (Amendment) Bill comprises two groups of amendments to the Income Tax Act. The first provides for the income tax changes announced in the Budget Statement in February 2006. The second group covers other amendments to the Income Tax Act arising from ongoing reviews to improve our income tax framework.
3. The Income Tax (Amendment) Bill was released for public consultation from June to July 2006. The draft Bill has been revised to incorporate a number of suggestions from businesses and members of the public.
TAX CHANGES FROM 2006 BUDGET STATEMENT
4. Let me first highlight the key tax policy changes that were announced in the 2006 Budget Statement.
(a) Maritime Finance Incentive (MFI) scheme
5. The Maritime Finance Incentive or MFI scheme was introduced to nurture the growth of ship financing activity so as to enhance Singapore's position as a maritime hub. Under this scheme, tax exemption will be granted on the qualifying incomes of Approved Ship Investment Enterprises, with a concessionary tax rate of 10% for Approved Ship Investment Managers. The MFI scheme is introduced by clauses 2, 10, 35, and 44(f) of the Bill.
(b) Tax treatment of prescribed Islamic financing arrangements
6. To promote Islamic finance in Singapore, the tax treatment of prescribed Shariah-compliant financing arrangements entered into by a financial institution on or after 17th February 2006 will be harmonised with conventional financing arrangements to ensure a level playing field. Clause 21 of the Bill provides for these changes.
(c) Writing down allowances for the cost of acquisition of intellectual property rights
7. To boost Singapore's attractiveness as an intellectual property hub, writing down allowances will be extended to companies which have acquired or will be acquiring the exclusive or substantial economic rights to approved intellectual properties in the window period running from 17th February 2006 to 31 Oct 2008, subject to conditions.
8. The Income Tax Act will also be amended to allow companies to claim writing down allowances for the full cost of acquiring an intellectual property on or before 31st October 2008 even if the payments for the acquisition were made on a staggered or instalment basis. The enhancements to the rules for claiming writing down allowances are covered under Clause 16 of the Bill.
(d) Tax deduction for treasury shares for employee stock option and share award obligations
9. With effect from the year of assessment 2007, companies will be able to deduct against their income, the cost incurred in the purchase of treasury shares which are used to fulfil obligations on employee stock options and share awards. Clauses 11 and 12 of the Bill provide for these enhancements.
(e) Enhancement of the tax exemption scheme for foreign-owned funds
10. Currently, the tax exemption scheme for foreign-owned funds is limited to funds which are not tax resident in Singapore. To further support the growth in our asset and wealth management industries, tax exemption will be extended to foreign-owned funds which are resident in Singapore and approved during the period from 17th February 2006 to 16th February 2011. This enhancement is reflected under Clause 10 of the Bill.
OFF-BUDGET TAX CHANGES
11. I shall now deal with the other tax policy changes which require amendments to the Income Tax Act. Our existing tax policies and incentive schemes are reviewed regularly to ensure that they remain relevant. Let me highlight three major changes to our incentives and policies that arose from these ongoing reviews.
(f) Penalty for failure to file an income tax return
12. Currently, the penalty for not filing an income tax return is significantly less severe than the penalty for under-declaring income. This creates an incentive for taxpayers to avoid taxation by not submitting their income tax returns. To discourage this practice, a penalty of double the amount of tax undercharged will be introduced for the failure to file a tax return in respect of any year of assessment within 3 years from the filing deadline.
13. I would like to clarify to Members that the new penalty will only be imposed on taxpayers who without any reasonable excuse fail to file their returns in a timely fashion, and is not targeted at taxpayers with valid reasons for late filings. The penalty is introduced by Clauses 39, 40, 41, and 42 of the Bill.
(g) Enhancement of Parenthood Tax Rebate (PTR) for parents of legitimized and adopted children
14. The Parenthood Tax Rebate was introduced as part of the Marriage and Parenthood Package announced in August 2004 to married parents for their second, third, or fourth child born to them or legally adopted on or after 1st January 2004. My ministry has reviewed the Rebate and will be making the following enhancements:
15. Firstly, to further promote the importance of an intact family, the Rebate will be extended to the natural parents of an illegitimate child born on or after 1st January 2004 if they marry before the child reaches 6 years of age.
16. Secondly, for parents of an adopted child, the child's qualifying age for the parents to receive the Rebate will be streamlined from the current age of 21 years to 6 years with effect 1st January 2006. This means that parents who adopt a child on or after 1st January 2006 will qualify for PTR if the child is below 6 years old at the point of adoption.
17. The changes to the Parenthood Tax Rebate Scheme are reflected under Clause 29 of the Bill.
(h) Adoption of the Financial Reporting Standard 39 for accounting purposes
18. I will be introducing a new section to institute the tax treatment arising from companies' adoption of the Financial Reporting Standard 39 which relates to Financial Instruments: Recognition & Measurement; or FRS 39 for short. With FRS 39, companies will now have to reflect most of their financial assets and liabilities at market values in their financial statements. To minimise the tax adjustments arising from the adoption, the income tax treatment of financial assets and liabilities has been changed so as to be more in line with the accounting treatment. This new section is provided by Clause 21 of the Bill. Members may wish to note that IRAS has already issued a circular on 30th December 2005 to explain the changes in detail.
19. Finally, 19 other off-Budget changes have been incorporated in this Bill. As many of them are technical in nature, or relate to improvements in tax administration, I will not put Members through the details of the remaining changes.
20. Mr Speaker, Sir, I beg to move.