SINGAPORE: FISCAL INCENTIVES (SERVICES & MANUFACTURING INDUSTRIES)

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Introduction

The Government of Singapore provides a comprehensive package of tax concessions and incentives to businesses, the very nature of which reflects the direction in which the authorities are trying to steer economic development. Singapore is a densely populated country with a high standard of living, a shortage of land and a high cost, highly skilled labor force and accordingly the country comparative advantage lies in the development of high value, export-orientated service industries.

In Malaysia by contrast a surplus of land, a large labor pool and low labor costs have resulted in the development of a low value, labor intensive, export-orientated manufacturing economy. The result has been that labor-intensive components industries have moved to Malaysia whereas Singapore has seen the growth of industries engaged in computer-aided design & manufacturing, financial services, research & development and the production of computers & robots.

The government plays a key role in driving Singapore economic development through the granting of fiscal incentives. The allocation of an incentive depends primarily on such considerations as the amount of investment involved, the technical output, the export potential, the employment opportunities and the general conduciveness to Singapore economic activity.

Most of the incentives are granted under the Economic Expansion Incentives (Relief from Income Tax) Act and can be subdivided into 4 categories, incentives for manufacturing and service companies, incentives for financial services companies, incentives which are aimed at specific sectors of the economy and incentives which apply to all sectors of the economy.

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Pioneer Status

Pioneer status is traditionally given to high-tech companies which introduce high-tech skills to the economy. High-tech companies include business entities engaged in computer based information services, engineering services, technical services, the development or production of industrial designs and other computer related services. A company designated pioneer status is entitled to the following fiscal benefits:

• Profits are fully exempted from corporate income tax for a period of up to 15 years. The current rate of corporate income tax is 17% (18% in 2009).

• Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends, the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. In the case of Pioneer Status companies the shortfall is exempt from any further taxation.

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Development & Expansion Scheme Status

Development & Expansion scheme status has replaced the incentive known as post-pioneer status. It is available to companies whose pioneer status has expired and which are engaged in capital investment to upgrade or modernize production capacity. The investment must have significant economic spin offs.

A company designated development and expansion scheme status is entitled to the following fiscal benefits:

• Income relating to "qualifying activities" is subject to a corporate income tax rate of not more than 10%. "Non-qualifying activities" are taxed at the normal corporate income tax rate of 17%.

• Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. In the case of companies which hold Development & Expansion Scheme status the shortfall is exempt from any further taxation in so far as the shortfall is caused by tax free income from "qualifying" activities.

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Expansion Incentive

Expansion incentives are fiscal benefits aimed at encouraging companies to boost productivity through increased mechanization and automation. The incentive consists in exempting from taxation all income which exceeds the level of income earned prior to the expansion plan being put into operation. Expansion incentive certificates are available to growth orientated manufacturing and service companies including entities which have pioneer status.

A company granted an expansion incentive certificate is entitled to the following fiscal benefits:

• All income which exceeds the level of income earned prior to the expansion plan being put into operation is exempt from corporate income tax. The concession is available for a period of 10 years (extendable for a further 10 years in the case of service companies). The relief is usually (at the time of writing) granted to companies incurring expenditure of at least S$10m (US$5.7m) on the purchase of productive equipment used for the manufacture of "approved products".

• Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which hold "expansion incentive certificates" are exempt from any further taxation on the shortfall in so far as the shortfall results from the concessionary tax status granted.

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Export Incentives

The purpose of this incentive is to increase the value of exports through the provision of the following fiscal incentives:

• 90% (at the time of writing) of "qualifying" export income is exempt from corporate income tax. "Qualifying" export income refers to any annual increase in export income. The exemption period is 5-10 years in the case of companies engaged in the provision of services (with a provision for extension) and 3-15 years in the case of companies engaged in the production of manufacturing products.

• Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which hold "export incentive certificates" are exempt from any further taxation on the shortfall in so far as that shortfall is a direct result of the concessionary tax status granted.

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Investment Allowance Incentive

Investment allowance incentives entitle a corporation to set off against profits up to 50% of the cost of "qualifying" capital expenditure which has been incurred on the purchase of plant, machinery and factory buildings (excluding land) for the purpose of an "approved project" which involves either research & development, the provision of specialized engineering or technical services, the promotion of tourist industries (other than hotels) or the manufacture of any product. The allowance is in addition to the right of every corporation to annually depreciate the cost of a fixed asset and set off the amount of depreciation against taxable profits. In this respect investment allowances represent a form of double deduction. The allowance is granted as an alternative and not in addition to pioneer status and export incentives.

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Overseas Enterprise Incentives

Companies engaged in providing designated services to "approved" overseas projects are entitled to the following fiscal concessions:

• "Qualifying export services income" is taxed at the concessionary rate of 10% for a maximum initial period of 10 years. The recipients of the services cannot be Singaporean residents or companies with permanent establishments in Singapore. The company providing the service must at least be 50% owned by Singaporean citizens or permanent residents and must be incorporated and resident in Singapore for tax purposes.

• Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which have been granted "overseas enterprise incentives" are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary tax status.

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Double Deduction for R & D expenses

Certain "qualifying" R & D expenses can be deducted twice from profits for corporate income tax purposes. The incentive generally covers computer software, agro-technology, information industries and medical research and laboratory testing.

In the 2008 budget, it was announced that the government would:

"Increase the quantum of tax deduction for expenditure incurred on research and development (R&D) done in Singapore from 100% to 150%. This means that for every $100,000 of local R&D expenditure incurred, $150,000 may be claimed as a tax deduction."

This higher deduction was to be available from Year of Assessment (YA) 2009 to YA 2013.

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