Tax Notes International
February 25, 2008
by Linda L. Ng

News Analysis: Budget Boosts Singapore as Top Private Wealth Center

Singapore Minister for Finance Tharman Shanmugaratnam on February 15 delivered Singapore's fiscal 2008 budget.1 The budget enhances Singapore's allure as one of the top private wealth centers in the world by eliminating the estate duty. It also includes new measures to spur innovation and business competitiveness, such as tax incentives for research and development, stock options, financial services, and shipping. The government decided not to reduce corporate or individual tax rates this year in light of forecasts of strong headwinds for the local economy due to continuing global turbulence -- but it did leave the door open for future tax cuts.

Private Wealth

Singapore is now the world's number two private banking center with close to $300 billion (about 5 percent of the world total) in private banking assets under management, according to industry estimates. Although it still lags far behind the industry leader, Switzerland, which has $1.7 trillion in private banking assets under management, Singapore remarkably has grown from a minnow to a private banking giant (from about $50 billion in 1998 to $300 billion today) within a decade. Until recently, Europe was an important driver of Singapore's growth. But now it is also all of Asia -- primarily India, China, and Indonesia -- as well as Middle Eastern oil money. For example, Singapore has become increasingly popular among Chinese who fear that Hong Kong may be within the reach of the Chinese authorities, given that Hong Kong is now part of China.2

Singapore's attractive tax regime has been a key factor behind its success as a private banking center. Individuals generally are not taxed on capital gains or Singapore-source investment income, such as interest and dividends. Individuals also generally are exempt from tax on income from foreign sources.3 Moreover, despite pressure from the European Union, Singapore still refuses to adopt the EU savings tax directive.4

Before February 15, however, estate duty was a deterrent to wealthy people bringing their assets into Singapore. Singapore imposed estate duty on the value of immovable properties situated in Singapore and movable properties situated anywhere that were owned by individuals domiciled in Singapore, subject to specific exemption limits. For individuals who were not domiciled in Singapore at the time of death, Singapore imposed estate duty only on the value of their immovable property situated in Singapore, subject to specific exemption limits. The estate duty rates were relatively low -- 5 percent for the first SGD 12 million of dutiable assets and 10 percent on any excess.

However, the exemption limits were lopsided. The exemption limit for nonresidential assets was set at SGD 600,000, whereas the exemption limit for residential properties was SGD 9 million.5 That affected middle- and upper-middle-income estates disproportionately, as compared with wealthier ones.

Another problem was that the wealthy could easily avoid estate duty through creative estate planning. Moreover, critics of the estate duty argued that its removal would encourage wealthy individuals from all over Asia to bring their assets into Singapore, thus supporting the growth of the wealth management industry. The government also was aware that other jurisdictions, including Australia, Malaysia, New Zealand, and Hong Kong, had abolished estate duty in recent years.6

Consequently, after a long review, the government decided to remove estate duty from the Singapore tax system for deaths occurring on or after February 15 to make Singapore a more attractive place for Singaporeans and foreigners to invest and build up wealth. Tharman urged wealthy individuals to contribute to society and to take advantage of the philanthropy incentives announced last year.7

In addition, the government will introduce a tax incentive scheme for family-owned investment holding companies to strengthen Singapore as a wealth management hub. The scheme will allow those companies to enjoy the same scope of exemptions that individuals currently enjoy on Singapore and foreign-source investment income.8

The government's strong support of the private banking industry, however, comes at a price for the broader economy. Another key factor behind Singapore's success as a private banking center is its strict bank secrecy laws.9 Singapore also has used the fact that it is not on the OECD list of tax havens and has restrictive exchange of information provisions in its tax treaties to market itself as "the ultimate secrecy jurisdiction," according to the testimony of Jeffrey Owens, director of the OECD Centre for Tax Policy and Administration, before the U.S. Senate Finance Committee on Offshore Tax Evasion.10 That raises a major obstacle to the conclusion of a comprehensive income tax treaty between the United States and Singapore, because if a country has bank secrecy rules that would prevent or seriously inhibit the appropriate exchange of information under a tax treaty, the United States will not conclude a tax treaty with that country. In other words, the United States considers the need for appropriate exchange of information provisions to be a nonnegotiable treaty matter.11 (For related coverage, see Tax Notes Int'l, Sept. 17, 2007, p. 1077, Doc 2007-20627 [PDF <http://services.taxanalysts.com/taxbase/eps_pdf2007.nsf/Go?OpenAgent&20627&Login> ], or 2007 WTD 181-7 2007 WTD 181-7: Special Reports <http://services.taxanalysts.com/taxbase/tni3.nsf/86255f190073234e85255b580068db3a/
cfd7f2a5d38a33e08525735900827812?OpenDocument> .)

There may be some who argue that Singapore actually does not need a comprehensive income tax treaty with the United States because the government can unilaterally offset shortcomings by granting tax incentives. However, that argument is not entirely correct. Not all U.S. multinational enterprises considering Singapore as a potential location for investment qualify for tax incentives. Even if they do qualify, the incentive application process is time-consuming and costly in terms of advisory fees and resources. Incentives also cannot provide important treaty benefits such as mutual agreement procedures. Moreover, the absence of a treaty deters Singapore residents from investing in, and doing business with, the United States, and thus inhibits the development of an "external wing" for the Singapore economy.12

For example, U.S.-source dividends, interest, and royalties received by a Singapore resident -- to the extent that they are not effectively connected with the conduct of a trade or business within the United States -- generally are subject to the full 30 percent U.S. withholding tax rate under U.S. domestic tax law because a reduced treaty rate is not available.13

In a different regard, Singapore's refusal to adopt the EU savings tax directive is a stumbling block in its negotiations with the European Union for a partnership and cooperation agreement. Such a deal is seen as a building block toward a broader free trade agreement between the European Union and the Association of Southeast Asian Nations. However, no progress can be made unless the government amends Singapore's Constitution to allow it to collect taxes on behalf of foreign countries.14

In light of those considerations, it might be useful for the government to re-evaluate the overall costs and benefits of promoting the private banking sector.

Benefits for Business

R&D

The fiscal 2008 budget also includes a trio of tax incentives to make Singapore a competitive place for companies, big and small, to conduct R&D. First, the government will increase tax deductions for R&D done in Singapore from 100 percent to 150 percent. For example, for every SGD 100,000 of local R&D spending, a company will be able to deduct SGD 150,000 from its taxable income. Second, the government will introduce a broad-based tax allowance to promote innovation among companies in Singapore, especially small and medium-size enterprises. Companies will be granted R&D tax allowances each year, up to an amount equal to 50 percent of the first $300,000 of their chargeable income. Third, the government will introduce an incentive for high-tech start-ups that will allow them to convert immediately their losses into a cash grant of up to SGD 20,250 for each of their first three years of assessment.15

Start-Ups

The government will liberalize the start-up tax exemption scheme to allow the tax exemption for start-ups as long as there is at least one individual shareholder with at least a 10 percent shareholding.16

Stock Options and Share Awards

The government will improve and bring the various employee equity-based incentive schemes under one new umbrella incentive scheme, the Employee Remuneration Incentive Scheme (ERIS). Under ERIS, there will be three different tiers of incentives:

* ERIS (All Corporations), formerly known as the Company Employee Equity-based Remuneration Scheme;
* ERIS (SMEs), formerly known as the Entrepreneurial Employee Equity-based Remuneration Scheme; and
* a new incentive tier for start-ups, known as ERIS (Start-Ups). ERIS (Start-Ups) will allow qualifying employees of qualifying start-up companies to enjoy a personal income tax exemption for 75 percent of qualifying gains from employee stock option or employee share ownership plans, up to a limit of SGD 10 million of qualifying gains over 10 years.

Gains from qualifying stock options or share awards are eligible for only one tier of ERIS, and the company must satisfy the qualifying conditions for the tier.17

Furniture and Fittings

The government will grant an allowance for expenditures on fixtures, fittings, and installations, except those relating to structural works or expansion of space, up to a maximum amount of SGD 150,000 every three years per business entity.18

Financial Services

The government views Islamic finance as a promising area for growth. Thus, it will introduce a 5 percent concessionary tax rate for income derived from qualifying Shariah-compliant activities, specifically in the areas of lending, fund management, insurance, and reinsurance. It also will extend the tax exemption granted to nonresidents and resident individuals on income from qualifying debt securities to all investors of qualifying sukuks (Islamic bonds), including resident nonindividual investors.

To further develop Singapore as a premier insurance center, the government will introduce a tax incentive scheme for licensed insurance and reinsurance brokers. They will be taxed at a concessionary rate of 10 percent on income they derive from offering insurance broking and advisory services to offshore clients.

The government also will enhance other financial sector tax incentives related to project finance, qualifying debt securities, and asset securitization transactions, and extend the financial sector incentive scheme for another five years.19

Maritime Hub

The government also will provide a concessionary tax rate of 5 percent or 10 percent for income from leasing of containers under the maritime finance incentive and will enhance other shipping incentives.20

Foreign Tax Credit

To eliminate double taxation of companies that venture abroad, the government will extend the unilateral tax credit to all foreign-source income that companies earn in countries with which Singapore does not yet have an agreement for the avoidance of double taxation.21

Foreign Talent

To help businesses attract talent from around the world, the government will extend the further tax deduction scheme, which allows for a further tax deduction for relocation and recruitment expenses, for another five years -- until 2013. It also will refine the not-ordinarily-resident scheme for individuals with regional work responsibilities so that it will cover not only salary, but also benefits in kind.22

Other Tax Measures

Other tax changes include the rationalization of excise duties for liquor, reductions in vehicle additional registration fees and road taxes, and changes to the tax on private diesel cars.23

All resident individuals will receive a 20 percent tax rebate, capped at SGD 2,000, because of last year's strong budget surplus.24

Future Tax Cuts

The government decided not to reduce corporate or individual tax rates this year. Tharman said the current 18 percent corporate income tax rate, after the enhancements to the partial tax exemption scheme last year, is still competitive. Singapore's personal income tax regime, which is highly progressive and has a top marginal rate of 20 percent for resident individuals, also is one of the most competitive in the world. The government's decision is not surprising in light of the weak outlook for 2008 because of a possible U.S. recession and a slowdown in other major economies such as China and India.

Tharman, however, left the door open for future tax cuts. The government will reassess options for the corporate and personal income tax and will lower rates further should it become necessary, after it amends the Singapore Constitution to revise the framework for drawing investment income from reserves.25

Linda L. Ng is with Asia-Pacific Tax Group,
White & Case LLP in Tokyo.

FOOTNOTES

1 The full text of the budget statement was available, as of February 18, 2008, at http://www.singaporebudget.gov.sg/speech_toc/downloads/index.html.

2 See Assif Shameen, "Private banking: New money settles in Singapore," The Financial Times, December 5, 2007, available at http://www.ft.com/cms/s/2/7297857a-a220-11dc-a13b-0000779fd2ac.html Wayne Arnold, "Singapore Makes a Pitch to Draw the Wealthy," The New York Times, April 26, 2007, available at http://www.nytimes.com/2007/04/26/business/worldbusiness/
26singapore.html?_r=1&adxnnl=1&oref=slogin&pagewanted=1&adxnnlx=1203163489-+PVkJ9KxAROqQCQIlSlTjA.

3 Singapore Income Tax Act, section 13. However, the exemption for foreign-source income does not apply to resident individuals who receive income through a partnership in Singapore.

4 See Reuters, "EU in tax avoidance talks with S'pore, Macau, HK," The Business Times, Jan. 22, 2008; Vladimir Guevarra, "Singapore Stance On Bk Secrecy Puts EU Trade Deal In Doubt," Dow Jones Newswires, Oct. 13, 2007.

5 Singapore Estate Duty Act, sections 5, 11(2), 14(4), 14(8), and the Fifth Schedule.

6 See Budget Statement 2006, paragraphs 2.72-2.73, available at http://www.mof.gov.sg/budget_2006/budget_speech/subsection6.4.html; Budget Statement 2008, paragraphs 4.71-4.75.

7 See Budget Statement 2008, paragraph 4.76-4.77; Annex B-4.

8 See Budget Statement 2008, paragraph 4.64; Annex B-3.

9 See Shameen and Arnold, supra note 2.

10 See "Written Testimony of Jeffrey Owens, Director, OECD Centre for Tax Policy and Administration before Senate Finance Committee on Offshore Tax Evasion," May 3, 2007, p. 15, available at http://www.senate.gov/~finance/hearings/testimony/2007test/050307testjo.pdf.

11 See "Testimony of Treasury International Tax Counsel John Harrington before the Senate Committee on Foreign Relations on Pending Income Tax Agreements," July 17, 2007, available at http://www.treas.gov/press/releases/hp494.htm.

12 See Singapore Ministry of Finance, "Key Initiative 2: Forging Ahead to a First World Economy -- Building the External Wing," available at http://www.mof.gov.sg/aboutus_initiatives/building.html.

13 U.S. Internal Revenue Code sections 871, 881, 1441, and 1442.

14 See Vladimir Guevarra, supra note 4; Constitution of the Republic of Singapore, Article 143.

15 See Budget Statement 2008, paragraphs 4.39-4.44; Annex B-2.

16 See Budget Statement 2008, paragraph 4.58; Annex B-3.

17 See Budget Statement 2008, paragraphs 4.59-4.61; Annex B-3.

18 See Budget Statement 2008, paragraph 4.62; Annex B-3.

19 See Budget Statement 2008, paragraphs 4.63-4.66; Annex B-3.

20 See Budget Statement 2008, paragraph 4.67; Annex B-3.

21 See Budget Statement 2008, paragraph 4.68; Annex B-3.

22 See Budget Statement 2008, paragraphs 4.69-4.70; Annex B-3.

23 See Budget Statement 2008, paragraphs 4.82-4.86; Annex B-5.

24 See Budget Statement 2008, paragraph 4.81; Annex B-3.

25 See Budget Statement 2008, paragraphs 1.9, 1.10, 4.57, and 4.80.

END OF FOOTNOTES