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Speech By Mr Raymond Lim, 2nd Minister For Finance At The Committee Of Supply Debate 2006 In Parliament, 1 March 2006

01 Mar 2006

Mr Chairman, let me first thank Members for their comments and suggestions.

2. Our fiscal policies and measures are fundamentally geared towards creating an environment that is best for business and encouraging and beneficial for citizens to provide hope, opportunity and progress for the future.

Best for Business

3. First, let me address the issue of enhancing economic competitiveness. Our key fiscal strategies to do this are two-pronged. First, a competitive and efficient tax system, supported by targeted incentives and, second, a regulatory environment that is conducive for business.

A competitive and efficient tax system

4. On Singapore's tax regime, Dr Loo Choon Yong has raised two points and I will address them. One, as he said, we should lower further our corporate income tax rate. Our corporate income tax rate has been lowered quite significantly. If you look at it in 1986 it was 40%, today it is 20%. I think what you really want is a competitive CIT rate rather than the lowest headline rate. If you look at the recent study done by the Canadian think-tank, C.D. Howe, a cross-country study of 36 countries, and if you look at what is called the effective tax rate, which is the share of tax payable as a percentage of your pre-tax return on capital, Singapore is No. 1, ahead of Ireland and Hong Kong. So we are very competitive. It is not just the headline rate. But this is not something that is cast in stone. We constantly monitor this. We see what our competitors are doing and the aim, as I have just said, is not to have the lowest, not necessarily the lowest, but to have a corporate income tax rate that is competitive.

5. On estate duty, I take note that now there are not only six ways as enunciated by Straits Times but 42 ways to avoid it. This is something that we are looking at. Our starting point, our operating philosophy, has been that we want everybody to have an equal start in life and not to have undue advantage over inherited wealth through structural advantages like this. But again, we weigh this against all the arguments that you hear or read about and also debated in this Chamber, that many countries have abolished it, it might affect our aspiration to be a wealth management centre and, as was pointed out, you can get expert advice on how not to pay it. So we are looking at that and we hope to come to a conclusion by the next Budget.

6. One of our key economic strategies, and this relates to what Dr Ahmad brought up just now, is to develop Singapore as a centre for HQ activities. The Member may be pleased to note, because he mentioned that the response has been underwhelming, that actually it has been quite successful. With EDB, under their IHQ scheme, there are 350 companies under them. We have about 7,000 MNCs in Singapore and 4,000 of them locate their HQ activities in Singapore. The Approved Holding Company Scheme is to enhance and to make it more attractive. So to be an approved holding company, to begin with, you have got to qualify for the EDB HQ Scheme and the requirements there include how much fixed asset investments you are putting into Singapore, total business spending, the amount of jobs you generate. That is one. And, the business that you run should be an operating business, like a manufacturing business, for instance, and not one that simply deals with trading shares. So that is how you qualify the company for being a HQ company under the EDB scheme.

7. What we have done is to enhance this scheme. Because if you are an approved HQ company sometimes you might need to transfer or sell your shares in a subsidiary. So we put down two conditions, one that it should own 50% of the subsidiary, the other that the shares that you have, you should hold it for 18 months. The Member has suggested why not get rid of this 18- month holding period. There are good reasons for having 18 months. It is to ensure that you are not in the business of trading the shares. That is why you have this 18-month holding period. This is not something that we are inflexible on. If you do not qualify for whatever reasons, including if you are below the holding period, we will review on a case-by-case basis. It is not as though the door is shut.

8. Related to being the centre for HQ activities is our aim to become a knowledge hub and exchange. An important part of the knowledge exchange is to attract and retain talent. I think the Member has mentioned about the different remuneration schemes that companies are now coming up with in order to retain talent. We recognise this ? this is the reason we made it a matter of policy that remuneration in the form of employee share options or direct share award would qualify for tax deduction if actual outlay is incurred.

9. The Member has raised four questions. One is when a multinational corporation subsidiary in Singapore had incurred share-related cost under ESOP, is it tax deductible? The answer is yes, it is tax deductible. The two other questions, I think, are related. Treasury shares, we allow now. With treasury shares, what happens if, while holding the treasury shares, it goes up in value? Is it taxable? I think, the other issue that he raised, he said, what if you have excess treasury shares and then you sell the excess? All these things, you really have got to base on facts. You have to look at the details, but I can give you the principle involved here. The principle is that we would not tax it if the purchase of these treasury shares was not meant for trading. That means you treat the gains as capital. As a capital gain, we will not tax. But as I said, all these things turn on the details, on the facts of each individual case. That is the underlying principle.

10. Finally, he brought up the issue of what happens if you bought the shares at different times? How do you value these shares? Well, this is something that IRAS is now taking feedback on and they are working it out and they will issue a circular soon - the details on how to treat this.

A regulatory environment conducive for business

11. Let me now speak about maintaining a conducive and business friendly regulatory environment. Mr Lawrence Leow has asked if the Government is looking into lowering the age limit to promote entrepreneurship among the young, say, maybe lower it to below 18 years old.

12. Currently a person below 21 cannot set up a business independently as the minimum age to be a company director or business owner is tied to the age of contractual liability, which is currently 21. This is important as companies entering into contracts with directors and owners ought to have the assurance that the contracts are enforceable. The Member is right that jurisdictions, such as Australia, Hong Kong, the US and the UK, have reduced the age of contractual capacity to lower than 21. My Ministry, the Ministry of Finance, is studying the desirability of lowering the age of contractual capacity, which could then pave the way for lowering the minimum age to be a director or owner.

13. In this study, we will also look at other statutory constraints, like the ability to hold land, which may prevent a young person from entering into and conducting business in Singapore. The merits of lowering the age to below 21 years old must be weighed against possible risks to parties to enter into a commercial relationships with young directors and owners.