Budget 2008 sets out strategies to help Singaporeans cope with inflation, create a top quality economy, build a resilient community and share the nation’s surpluses with Singaporeans through growth dividends and various top ups.

Although the Minister has opted to keep corporate tax, personal tax (except for a one-off tax rebate of 20%, capped at $2,000), goods and services tax, and surprisingly even tobacco and liquor taxes unchanged, he has not neglected the financial sector and the maritime sectors which traditionally have been the main beneficiaries of past budgets. 

This paper discusses the major tax proposals that will impact businesses.  Below is a summary of the main corporate tax changes outlined in Budget 2008:

No Change in Corporate Income Tax Rates

The Minister explained that Singapore’s current corporate tax regime is already competitive given the current corporate tax rate of 18% coupled with the enhanced partial tax exemption of up to $300,000 of taxable income.  Moreover, Singapore does not compete with other countries for foreign investment solely on corporate income tax rates.  Increasingly her competitive advantage lies in her world-class infrastructure, political stability and sound financial system.  A clear testimony to this is the top ranking given to Singapore in a recent survey in March 2008 by a UK-based human resource consultancy firm, ECA International on living standards in 254 international locations. In the same survey, Hong Kong was ranked 15th.

Based on the current corporate tax rate, Singapore is clearly one of the lowest tax regimes in Asia, matched only by Hong Kong.  Although Hong Kong has confirmed in its recent Budget on 27 February 2008  that its corporate rate will go down to 16.5%, companies will still pay higher taxes in Hong Kong for taxable income up to S$1,830,000, due to the absence of partial tax exemption in Hong Kong. Singapore’s comprehensive tax treaty network with almost 60 countries to-date and her wide-ranging tax incentives (with concessionary tax rates of 10%, 5% or even 0%) are further advantages that Singapore enjoys over Hong Kong.  With the abolishment of estate duty in Singapore for deaths occurring on or after 15 February 2008, Hong Kong is likely to lose its edge in the area of wealth management, in so far as estate duty is concerned.

R&D Tax Initiatives

In lieu of a corporate tax rate cut, the Minister introduced 2 new incentives (R&D tax allowance and R&D incentive for start-up enterprises) as well as enhanced an existing incentive (tax deduction for R&D expenditure) in an attempt to “make Singapore one of the most competitive places for companies, big and small, to do R&D.”  It is not only the profitable companies that stand to reap immediate benefits from the new R&D allowance (capped at 50% of the first $300,000 of taxable income) and the enhanced tax deduction (150% compared to 100% previously) for R&D undertaken in Singapore, either done in-house or outsourced to an R&D organization, and whether or not incurred in relation to a company’s existing trade.  Qualifying start-up companies can surrender their tax losses for a maximum cash grant of $20,250 (based on 9% of up to $225,000 of tax losses) for the first 3 years where they do not generate taxable profits.  Although the losses can only be encashed based on half the prevailing corporate tax rate, it is still a better alternative than carrying forward such losses for utilization against future profits unless such future taxable profits are substantial and the firm is not cash-strapped. 

Enhancement of Full Tax Exemption for Start-Up Companies

Singapore’s current start-up tax exemption scheme for eligible companies since the Year of Assessment 2005 has now been liberalised. Under this scheme, the first $100,000 of taxable income of a qualifying new company will be tax exempt for the first three years of assessment from the date of incorporation. Previously, one of the requirements is that all shareholders of the company must be individuals before the company can avail itself of the exemption. This condition will now be relaxed from the Year of Assessment 2009 to allow companies with corporate shareholders to participate, so long as they have at least one individual shareholder holding at least 10% of the total number of issued ordinary shares throughout the basis period relating to the claim.  New start-up companies will benefit as it is likely to be easier for them to obtain equity funding from corporations and venture capitalists.

New Fixtures and Fittings Incentive

A special allowance is now introduced for fixtures and fittings whereby companies incurring such expenditure can now write off such an allowance over 3 years, up to a cap of $150,000 every 3 years per business entity.  SMEs will be the main beneficiaries given the low qualifying cap.  Whilst expenses relating to structural works and expansion of space continue to be excluded from capital allowance claims, this new allowance is expected to cover most renovations undertaken by SMEs in the services sector, e.g. costs incurred in upgrading the interior design of their premises. 

Extension of Unilateral Tax Credit

Unilateral tax credit will now be extended to all Singapore residents on all types of foreign income that are received in Singapore from non-treaty countries. Previously, certain income such as interest or management fees are excluded from the list of qualifying income and this leads to potential double taxation on the same income, i.e. such income which are already subject to tax in a foreign non-treaty country could still be subject to tax when remitted to Singapore.

Maritime Sector

To develop the maritime hub, the current Maritime Finance Incentive which provides a concessionary tax rate of either 5% or 10% will be enhanced to include leasing of containers.  Partnerships are also allowed to enjoy the MFI scheme with effect from 1 April 2008.

Financial Sector

To ensure that the financial sector incentives remain relevant in the light of developments in the global financial scene, steps were also taken to enhance the various financial incentives.  These were targeted to promote the various activities such as Islamic finance, debt market, project finance , asset securitization, insurance & re-insurance broking activities, wealth management. 

Conclusion

In a nutshell, the above corporate tax measures are significant and should help Singapore to entrench herself in the “top league of global cities”.