INDUSTRY SPECIFIC TAX INCENTIVES IN SINGAPORE
THE PURPOSE OF THIS ARTICLE IS TO PROVIDE AN OVERVIEW OF THE VARIOUS INDUSTRY-SPECIFIC AND INVESTMENT RELATED TAX INCENTIVES PROVIDED UNDER THE SINGAPORE INCOME TAX ACT AND ITS SUBSIDIARY LEGISLATIONS.
With a low headline corporate tax rate of 17%, generous tax exemptions for small and medium-sized companies, and industry-specific tax incentives, Singapore is well positioned to maintain its economic competitiveness in today’s global environment. The Government of Singapore provides a comprehensive package of tax concessions and incentives to businesses whose activities reflect the direction in which the state plans to steer economic development.
Tax Incentives For Financial Services Industry
Some of the key tax incentives include:
- Trading Income. Capital gains and income made by financial service companies trading investments for and on behalf of their non-resident clients are often tax-exempt both in the hands of the financial services company and in the hands of the non-resident client. The effect of this incentive is to make Singapore an attractive location for foreigners to base their investments on.
- Fee Income. Concessionary tax rates are levied on profits earned by financial services companies in respect of income earned billing clients for investment services rendered.
- Withholding tax exemption for Over-The-Counter (OTC) financial derivatives payments: Qualifying financial institutions enjoy withholding tax exemption on all payments made on qualifying OTC financial derivatives to persons who are neither Singapore residents nor permanent establishments in Singapore. The withholding tax exemption is set to expire in March 2021.
Tax Incentives for Banks
Liberalization of the Withholding Tax Exemption Regime for Banks: With effect from April 1 2011, interest and other qualifying payments that are made to all non-resident persons in relation to their trade or business will be granted a withholding tax exemption. The withholding tax exemption will be applicable to payments liable to be made between 1 April 2011 and 31 March 2021, for contracts which take effect before 1 April 2011; and payments liable to be made on contracts which take effect on or after 1 April 2011 to 31 March 2021. According to Budget 2012, the withholding tax exemption (which was previously not extended to permanent establishments) will also apply to permanent establishments in Singapore. This change will take effect for payments to be made from 17 Feb 2012 to 31 Mar 2021 (for contracts already in force before 17 Feb 2012); and all payments arising from contracts effective on or after 17 Feb 2012 to 31 Mar 2021. This exemption is applicable to:
- All banks licensed under the Banking Act or approved under the MAS Act,
- Finance companies licensed under the Finance Companies Act, and
- Approved financial institutions licensed under the Securities and Futures Act that engage in lending as part of their regulated activity of dealing in securities in Singapore
Tax Exemptions for Offshore Funds
An offshore fund that is managed by a Singapore-based fund manager is exempt from Singapore tax on specified income from designated investments, provided the offshore fund is a qualifying fund. Specified income refers to profits, gains, dividends and interest from designated investments. Designated investments include traditional investments such as stocks, shares, securities, bonds, deposits, futures contracts etc.
A qualifying fund is one that:
- Is not 100% beneficially owned by Singapore investors including Singapore resident individuals, Singapore resident corporate entities and Singapore-based permanent establishments of non-residents,
- Does not have a Singapore presence, and
- Can only be in the form of companies, trusts or individual accounts.
A qualifying investor also enjoys tax exemptions on income derived from qualifying funds. A qualifying investor is:
- An individual investor
- A bona fide non-resident non-individual investor that:
- does not have a Singapore presence or business activity (other than a fund manager), or
- has a Permanent Establishment in Singapore but does not use funds from its operation in Singapore to invest in the qualifying fund.
- Certain specified Singapore government entities
- A Singapore resident corporate investor that owns not more than 30% or 50% (if the fund has 10 or more investors) of the qualifying fund.
Tax Exemptions for Onshore Funds
In 2006, the Singapore government introduced the Singapore Resident Fund Scheme, under which the above-mentioned tax exemption scheme for offshore funds was extended to funds constituted in Singapore as well, subject to the following conditions:
- The fund vehicle must only be a company,
- The fund must be constituted in Singapore and have its administration performed in Singapore, and
- The fund must be approved by the MAS.
This scheme has boosted the fund management industry in Singapore as it offers an additional advantage of Singapore’s extensive treaty network that helps to reduce tax liability in treaty countries that the fund invests in.
Enhanced Tier Fund Management Scheme
With effect 1 April 2009 to 31 March 2014, an enhanced tier has been introduced to the existing fund management incentives for funds with a minimum size of S$50 million, at the point of application, amongst other conditions. Under the enhanced tier there will are no restrictions imposed on the residency status of the fund vehicles as well as that of investors. The enhanced tier also applies to funds that are constituted in the form of Limited Partnerships. Additionally, the 30% or 50% investment limit imposed on resident non-individual investors has been lifted for funds that come under this enhanced tier.
Concessionary Tax Rate for Fund Managers
Under the Financial Sector Incentive Scheme for Fund Managers, fund managers in Singapore are taxed at a concessionary rate of 10% on fee income, subject to certain conditions and MAS approval. This scheme applies to fund managers who employ at least three fund management or investment advisory professionals. The professionals’ basic monthly income must exceed S$3,500.
Tax Incentives for Global Trading Companies
Under the Global Trader Scheme, an approved global trading company is granted concessionary tax rates of 5%-10% for 5-10 years on qualifying offshore trade incomes, depending on the company’s turnover and business spending. Global Trader status is typically granted only to well-established players in their respective industries with a proven track record of international trade, procurement and transportation of qualifying products. The following derivative instruments qualify under the GTP scheme:
- Exchange-traded and over-the- counter (OTC) commodity derivatives in a commodity which is in the approved GTP company’s list of approved commodities; and
- Exchange-traded and OTC freight derivatives.
Derivative instruments such as interest-rate swaps and forex derivatives are not covered under the GTP. According to the 2011 Budget, the existing list of qualifying derivative instruments under the GTP will be expanded to include all derivative instruments. This enhancement will apply to income from qualifying trades in the new qualifying derivative instruments, derived by a GTP company from Year of Assessment 2012. A sunset clause will be introduced for the GTP scheme viz. 31 March 2021. Companies can be approved as a GTP company or GTP (Structured Commodity Finance) company on or before 31 March 2021. The GTP company can enjoy the benefits under the various enhancements during their award tenure of up to five years.
Tax Incentives for Shipping & Maritime Industry
The Maritime and Port Authority of Singapore (MPA) has developed a number of incentive schemes to encourage shipping companies to grow and enhance their business further. The Maritime Sector Incentive (MSI) outlines incentives for companies engaged in international shipping operations, maritime (ship or container) leasing, shipping support services.
Maritime Sector Incentive (MSI) scheme
- Maritime Sector Incentive – Approved International Shipping Enterprise (MSI-AIS) Award: International shipping companies that have established worldwide networks, a strong track record, and are committed to expanding their shipping operations in Singapore are eligible for a tax exemption on qualifying shipping income for either a 10-year renewable period; or a 5-year non-renewable period, with the option of graduating to the 10-year renewable award at the end of the 5-year period.
- Maritime Sector Incentive – Maritime Leasing (MSI-ML) Award: Entities with a strong track record that exhibit a commitment to expand shipping and container financing operations in Singapore can choose to apply for the MSI-ML award on or before 31 May 2016. Under the MSI-ML award, Ship or container leasing companies, funds, business trusts or partnerships can enjoy tax concessions for up to 5 years on their qualifying leasing income. Furthermore, an approved manager of the asset-owning entity can enjoy a concessionary tax rate of 10% on its qualifying management income.
- Maritime Sector Incentive – Shipping-Related Support Services (MSI-SSS) Award: An approved MSI-SSS company can enjoy a concessionary tax rate of 10% on the incremental income derived from the provision of the following qualifying approved shipping-related support services for a period of 5 years:
- Shipbroking;
- Forward freight agreement (FFA) trading;
- Ship management;
- Ship agency;
- Freight forwarding and logistics services; and
- Corporate services rendered to qualifying approved related parties who are carrying on the business of shipping–related activities
- Withholding tax exemptions:
- Entities under the International Shipping Operations category of MSI will, subject to conditions, enjoy automatic withholding tax exemption on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase or construction of both Singapore-flagged and foreign-flagged ships, without having to apply for such exemption on a case-by-case basis during the period from 1 June 2011 to 31 May 2016. The entities that qualify for this exemption include:
- MSI-Shipping Enterprise (Singapore Registry of Ships) (MSI-SRS);
- MSI-Approved International Shipping Enterprise (MSI-AIS) companies; and
- MSI-Maritime Leasing (Ship) [MSI-ML(Ship)] entities.
- Qualifying entities will, subject to conditions, enjoy automatic withholding tax exemption on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase of qualifying containers and intermodal equipment during the period from 17 Feb 2012 to 31 May 2016. The entities that qualify for this exemption include those that are awarded the following status under the MSI-Maritime Leasing (Container) award:
- MSI-ACIE; and
- MSI-ACIE (Local ASPV).
Tax incentives for Tourism Industry
Tax deduction for Inbound Tourism Promotion: Approved companies, subject to satisfying certain eligibility criteria, can deduct twice the amount of qualifying expenditure incurred in participating in overseas fairs or missions, from their taxable income.
Tax deduction for Participation in Local Trade Exhibitions: Approved companies, subject to satisfying certain eligibility criteria, can deduct from their taxable income, twice the amount of qualifying expenditure incurred in participating in international trade-oriented exhibitions that are held in Singapore.
Tax Incentive for Event Organizers
Event-organizing Singapore companies that can bring mega events to Singapore are eligible for a 10% concessionary tax rate on the income derived from mega events.
Tax Incentives for eCommerce Industry
To develop Singapore as an e-commerce hub, well-established e-commerce companies are eligible for a reduced tax rate of 10% for a period of five years on the income derived from e-commerce transactions with parties outside Singapore.
Tax Incentives for Approved Ventures
Income derived from approved investments of approved venture companies is eligible for a reduced tax rate of 0%-10% for a period as approved by authorities.
Tax Incentives for Insurance Companies
The Singapore government has introduced two specific schemes in order to encourage companies to use Singapore as their regional or global headquarters base.
- Regional Headquarters Award: Under the (RHQ) Award, qualifying companies can enjoy a concessionary tax rate of 15% for five (3+2) years on incremental qualifying income from abroad, instead of the regular Singapore corporate tax rate of 17%. In other words, if the applicant company satisfies all the minimum requirements by the third year of the incentive period, it will enjoy the 15% concessionary tax rate for an additional 2 years on qualifying income. This scheme applies to all companies that have their Asia-Pacific headquarters in Singapore.
- International Headquarters Award: This tax incentive scheme is open to all entities that have set up a company in Singapore in order to carry out their headquarters activities. More specifically, companies that commit to exceeding the minimum requirements of the Regional Headquarters Award, can enjoy an even lower concessionary tax rate ranging from 5% to 15% on incremental income from qualifying activities.
Tax Incentive for Processing Services Company
Qualifying processing services companies are taxed at a concessionary rate of 5% on income derived from the provision of prescribed services to financial institutes. The tax break is given for a period of 5-10 years.
Tax Incentive for Legal Firms
Approved law firms in Singapore will enjoy a 10% concessionary tax rate on incremental income from qualifying international legal services for 5 years. The incentive is valid from 1 April 2010 to 31 March 2015. This will include all legal services connected to land and goods outside Singapore, and intangible legal services provided to overseas clients. Furthermore, approved law firms can avail of a 50% tax exemption on incremental qualifying income derived from international arbitration cases heard in Singapore.
Tax Incentive for R&D, Innovation & Product Development Activities
- Development and Expansion Incentive (DEI): The DEI encourages Singapore-based companies to move into high value-addition business activities, expand their operations in the country, and procure advanced machinery and equipment by offering a reduced tax in the range of 5%-10% on incremental income derived from qualifying activities.
- Investment Allowance: Companies may claim capital allowance on plant and equipment used overseas in connection with their trade or business, subject to meeting certain conditions. Budget 2012 saw the introduction of a new Integrated Investment Allowance Scheme that will provide an additional allowance on fixed capital expenditure incurred for productive equipment placed overseas on approved projects with effect from YA 2013.
- Pioneer Incentive Scheme: Companies from the manufacturing or services sector that engage in activities that raise overall industry standards may be eligible for full corporate tax exemption on qualifying profits for up to 15 years.
- Productivity and Innovation Credit (PIC) Scheme: The PIC scheme is a tax benefit scheme that was first introduced in 2010 to encourage companies to engage in innovative and productive activities. Under the scheme, businesses can enjoy up to 400% deduction or allowances on up to $400,000 of expenditure incurred in each of the following qualifying innovative activities. The qualifying activities include Research & Development; Intellectual Property registration; Intellectual Property acquisition; Design activities, Automation through technology or software; and training of employees. Note businesses will be allowed to combine the $400,000 expenditure cap per year for YA 2013 to YA 2015 into a new ceiling of $1,200,000 over the three years. Businesses with a low taxable income can choose to convert up to S$300,000 of the tax deductions and allowances credited to them into a cash grant, up to a maximum of S$21,000 each year. Businesses can also exercise an option to convert up to S$100,000 of their expenditure into a non-taxable cash payout at a conversion rate of 30%. The cash payout rate will be increased from 30% to 60% for up to S$100,000 of qualifying expenditure from YA 2013 to YA 2015. Earlier the PIC benefits were applicable only to R&D activities performed in Singapore. However, effective YA 2011 PIC benefits will also extend to R&D done overseas.
Other Incentives
- Ease in GST compliance for businesses that support the maritime industry: With effect from 1 July 2010, the GST zero-rating will be expanded to include pleasure and recreational ships that are wholly used for international travel. Additionally, it will apply to all goods (including stores and merchandises) supplied for use on board or installation on a qualifying ship, regardless of whether the ship calls on a port outside Singapore. Zero rating of GST also extends to the transport of goods or passengers via a ship to or from international waters, regardless of whether the ship calls on a port outside Singapore.
- Established international shipping companies with worldwide networks and a good track record, once approved, are exempt from tax on income from the operation of their ships outside of Singapore for a period of 10 years.
- With effect from 17 Feb 2012, payers making bareboat, voyage and time charter payments to non-residents for the use of ships will no longer have to withhold tax.
- Under the Block Transfer Scheme (BTS), withholding tax exemption can be granted in respect of interest payable on a loan taken by a shipping enterprise from a lender outside Singapore to acquire a Singapore-flagged ship. This withholding tax exemption is for ships registered with the Singapore Registry of Ships (SRS) on any date from 1 Jan 2009 to 31 Dec 2013.
- Qualifying ship operators and ship lessors can avail of a tax exemption on gains derived from:
- Disposal of vessels registered with the Singapore Registry of Ships (SRS) and vessels owned or operated under the MSI-AIS award;
- The sale of vessels which would subsequently be leased back to shipping companies;
- The sale of 100% shareholding in a Special Purpose Company (SPC) that owns a vessel registered with SRS or a vessel under the MSI-AIS award;
- The disposal of vessels under construction and new building contracts; and
- Gains from the disposal of foreign vessels.