Budget Speech
PART III: STRATEGIES FOR GROWTH
Mr Speaker Sir,
Let me now set out the measures, especially tax measures,
that the Government will implement in this budget to support the
strategies for restructuring our economy.
Competitiveness and Flexibility
To enhance Singapore's economic competitiveness, the Government
will implement the ERC recommendations on restructuring taxes, on
exempting foreign income and domestic interest income from tax,
as well as on portable medical benefits.
Corporate and Personal Income Tax Rates
Last year, I reduced our corporate and top personal tax rates from
24.5% and 26% respectively to 22%. In my assessment, our present
rate of 22% is still competitive for now. Therefore, I will not
be reducing corporate and personal income tax rates further this
year. Nor, given the tight budget position, will I be giving any
rebates on these taxes. However, I reaffirm the Government's intention,
which I announced last year, to bring the tax rates down to 20%
by YA 2005.
Foreign Income
Over the years, the Government has received repeated requests to
exempt from tax foreign income remitted into Singapore. Until now,
we have resisted this proposal. We already have a comprehensive
network of double taxation agreements and unilateral tax credits,
under which we give credit for taxes paid on foreign income. We
may also exempt taxes on foreign income from specific overseas projects
under section 13(8) of the Income Tax Act. In practice, foreign
income which has been taxed elsewhere usually does not get taxed
again in Singapore.
We were also concerned that this exemption would
create a loophole, which could seriously erode our tax base. Individuals
and companies could avoid tax on their Singapore income by round-tripping
and transfer-pricing. This is difficult to detect.
Notwithstanding the Government's view that this was
not a problem, we have continued to receive feedback from the business
community, and now from the ERC, that taxation of foreign income
indeed poses difficulties to companies. Companies find the existing
tax credit system more cumbersome than an exemption system. As more
companies globalise and earn a larger share of their income from
overseas operations, this will be an increasing problem. Simplifying
and improving the tax treatment of foreign income will make us a
more attractive business hub and boost our services exports. Moreover,
other countries, for example, Germany, the Netherlands and Malaysia,
have shifted from the tax credit system, to exempting specific categories
of foreign income from tax.
I have therefore decided to exempt from tax all foreign
income in the form of dividends, branch profits and services income
from 1 June 2003 onwards. This will mean that about 90% of all remitted
foreign income will be tax exempt. The exemption will be available
to all taxpayers, whether individuals or companies, but it will
apply only to income earned from jurisdictions with headline tax
rates of at least 15%. All other foreign income will continue to
be subject to the existing tax credit system. This will curb round-tripping
and transfer-pricing while keeping our system simple. An alternative
would be to impose anti-avoidance rules, but that would be complex
to administer and burdensome to businesses. The IRAS will release
more details by May 2003.
Domestic Interest Income
The ERC also recommended that interest income sourced domestically
be exempted from tax. Our current practice of taxing domestic source
interest income encourages funds to be parked offshore in interest-bearing
deposits and instruments, thereby benefiting the financial and commercial
banking sectors of other countries.
I have therefore decided to exempt from tax interest
paid to individuals derived from standard domestic savings, current
and fixed deposits. This change will help retain domestic funds
in Singapore, and also attract back funds currently placed offshore.
The exemption will be implemented in two phases. Depositors
with POSBank already enjoy tax exemption on the interest from the
first $100,000 of their deposits. From YA 2004, in addition to this
tax exemption on POSBank deposits, I will exempt interest from amounts
exceeding the first $100,000 in each of the standard savings, current
and fixed deposit accounts of individuals. From YA 2006, the exemption
will be extended to the full amount of these deposits of individuals.
This two step process is necessary because under an agreement between
the Government and DBS Bank, depositors with POSBank enjoy the exclusive
right to tax exemption on interest from the first $100,000 of their
deposits until 31 December 2004.
This exemption will cost the Government $43
million. The IRAS will release more details by April 2003.
Portable Medical Benefits
As workers get older and change jobs more frequently, it becomes
more important for them to have portable medical benefits. This
will provide them with medical coverage not only when they are in
employment, but also when they are in between jobs. Furthermore,
if a worker develops a long term medical condition, without portable
medical benefits he will face difficulties finding another employer
willing to take him on and incur the expense of treating his medical
condition.
To address this problem, the ERC recommended that
the Portable Medical Benefits Scheme or the Transferable Medical
Insurance Scheme be developed.
The Portable Medical Benefits Scheme will involve
additional contributions to the CPF Medisave account by employers.
To encourage employers and workers to switch to the new scheme,
I have decided to raise the tax exemption limit for additional Medisave
contributions for private sector employees from 1% of an employee's
monthly salary at present, to a lump-sum of $1,500 per employee
per year. This will take effect from YA 2004.
Presently, medical benefits are tax deductible expenses
for employers, up to a limit of 2% of payroll. From 1 April 2004,
employers who implement either of the new schemes will continue
to enjoy a 2% deduction limit. However, employers who do not implement
these schemes will only be allowed to deduct 1% of their total payroll
for medical expenses.
Entrepreneurship and Singapore Companies
Let me now take the House through what the Government plans to do
in response to the ERC's call to facilitate entrepreneurship in
Singapore.
Companies Act Amendments
Last October, the Government accepted all the recommendations of
the Company Legislation and Regulatory Framework Committee (CLRFC)
which aim to simplify business regulations, support entrepreneurship
and lower the cost of raising capital in Singapore. Let me highlight
three of the Committee's proposals.
New Business Vehicles
The Government will introduce two new business vehicles next year
to give businesses more options in structuring their business activities.
The Limited Partnership and Limited Liability Partnership structures
will be available to all businesses. They offer limited liability
to the partners, as well as the flexibility of being structured
as partnerships. Small businesses and start-ups may find these structures
useful for their business activities.
Company Secretaries
To lower business costs for private companies, the government will
remove the statutory requirement for private companies to appoint
professionally qualified company secretaries. Although a private
company must still appoint a company secretary to keep proper records,
it is free to choose between doing so internally and outsourcing
the job to professional company secretaries.
Audited Accounts
Audited accounts will no longer be required for dormant companies,
and for exempt private companies with small annual turnovers. This
will reduce compliance costs for small businesses, leaving them
to decide whether they need audited accounts. The annual turnover
threshold for exempt private companies will initially be set at
$2.5 million, and will be raised to $5 million after one year. I
have decided to make this change in two steps after taking in feedback
from both companies and audit firms.
The legislative changes to the
Companies Act will be made soon.
Concession for Enterprise Development
Some of the expenses incurred by businesses before trade revenue
is earned may not be eligible for tax deduction. With effect from
YA 2004, I have decided to regard the first day of the accounting
year in which a business earns its first dollar of trade revenue
as the point at which the business starts trading. Businesses will
benefit from tax deductions for all revenue expenses incurred during
that accounting year. If a business is able to prove that it has
started trading and incurred revenue expenses even earlier, it will
be allowed to deduct these expenses as well.
Revised Overseas Investment Incentive
Currently, the Overseas Investment Incentive allows an approved
company to deduct losses arising from the sale of shares or liquidation
of an approved overseas investment against its statutory income.
To help our companies expand overseas, I have decided to revamp
this incentive to allow an approved company to defer its income
taxes for two years if its approved overseas investment incurs operating
losses during the first three years of the investment. This will
affect all new investments made from 1 January 2004.
The details of the tax changes to foster entrepreneurship
are in Annex D.
Government Procedures and Rules
The ERC has underscored the importance of minimising Government
rules and regulations so as not to stifle entrepreneurship. The
Government has set up several channels to streamline and review
its procedures and rules to make them more pro-business.
The Pro-Enterprise Panel is a joint public- and private-sector
committee which frequently solicits feedback on rules and regulations
that can hinder entrepreneurs. Out of 500 suggestions received from
entrepreneurs over the past two years, 50% have been implemented
and regulations were either removed or relaxed.
A Rules Review Panel of five Permanent Secretaries
is currently overseeing an effort by all Ministries to review their
rules by the end of FY 2004, and thereafter every five years. One
outcome is that one-third of all required statutory declarations
have been removed.
12 government licences are due to be removed in FY
2003. This includes a hatchery licence administered by the Agri-Food
and Veterinary Authority. Currently, Singapore only has one hatchery
and it is already issued with a Farm Licence. Hence, it does not
make sense for the agency to duplicate its regulatory efforts. If
Members discover any other licences which seem redundant or meaningless,
please let me know about it.
As for those licences which are still needed, putting
them online allows us to reduce processing time and costs for entrepreneurs.
BizFile is a fully online system that cuts the time taken to incorporate
a company from a few days to a couple of hours. By July 2004, an
entrepreneur will be able to apply for many of the registrations
and licences required to start up a company through a single online
form on the eCitizen portal. From 1 March 2003, a new Government-wide
authentication system called SingPass, short for Singapore Personal
Access, will be made available to any individual who seeks to transact
with the Government online.
Public Sector Market-Testing
Apart from streamlining its rules, the Government will create more
opportunities for businesses. My Ministry is introducing market-testing
for non-core government services this year, beginning with new services.
Public sector agencies will be required to compare the cost of providing
the service in-house against the price quoted by private sector
vendors. If a private sector vendor can deliver the service more
cost-effectively, it will be engaged to do so.
Statutory Board Companies
In addition, the Government will progressively
stop providing services that the private sector can supply. Ministries
and statutory boards will no longer set up new companies, except
in strategic areas or where the private sector is not ready. The
Ministries have started a review of all their companies, to be completed
by this fiscal year. It will be repeated every three years to determine
which companies should be retained, and which should be divested.
We have so far identified a few dozen companies,
mostly small, which are non-strategic and can be divested within
the next few years. Two larger examples are Ascendas and PSB Corp.
Ascendas develops, markets and manages business parks in Asia, while
PSB Corp's core business is in testing, technology, consultancy
and training services. A third, smaller example is Hdbay, which
provides interior designing services and develops e-commerce applications.
It also accredits and recommends renovation contractors to homeowners.
Minister of State in Charge of Entrepreneurship
Strengthening the spirit of entrepreneurship is a long term effort,
involving not just policy changes, but also changes in mindsets
and culture. The ERC recommended that the Government designate a
Minister or Minister of State to work with the Entrepreneurship
21 Ministerial Committee, and be responsible for promoting and driving
the diverse initiatives to develop a more entrepreneurial Singapore.
The Government agrees. Mr Raymond Lim, Minister of State for Trade
and Industry, who chaired the Entrepreneurship and Internationalisation
Sub-Committee of the ERC, will take charge of the Government's efforts
to facilitate entrepreneurship in Singapore.
Manufacturing and Services
The Government will introduce a range of new or enhanced
measures to sustain the competitiveness of our manufacturing and
services sectors.
Intellectual Property
On manufacturing, the ERC recommended that we move beyond being
a production base, to become an innovative creator of products and
new business. On services, the ERC proposed that we focus on exportable
services, and develop new services like healthcare, education and
creative industries, in order to service the region. These are all
high value-added and knowledge-intensive activities. Investors in
these fields do not look for the cheapest location, but for the
country where their intellectual property (IP) enjoys the best protection,
and where the environment is most conducive to the creation of new
IP. This is an area where we enjoy a significant advantage over
our regional competitors.
We will build on this lead. We will continue
to build up and attract talents in R&D and in the creative fields.
The Ministry of Law is conducting a comprehensive review of our
current IP laws to support the growth of new industries, to take
into account technological advances, and to strengthen further IP
protection. To make Singapore a key node for developing, managing
and commercialising IP, I have also decided to introduce the following
tax measures:
Royalty Income
To encourage firms to hold their IP rights in Singapore, I have
decided to extend the Unilateral Tax Credit Scheme to royalties
remitted from all non-treaty countries. This will take effect from
YA 2004.
IP Acquisition
Companies can currently apply to EDB or IDA for writing-down allowances
over a five-year period for capital expenditure incurred in acquiring
intellectual property such as patents, copyrights and trademarks.
To increase Singapore's attractiveness as an international IP holding
location, I have decided that writing-down allowances will be granted
automatically, subject to the condition that the legal and economic
ownership of the IP lies with the Singapore entity. This will apply
to IP acquired on or after 1 November 2003.
Patenting Costs
To encourage more companies to patent their inventions and make
Singapore an attractive base for IP management, I have decided to
complement the Patent Application Fund Plus grant scheme with tax
deductions for the costs of patenting an invention. This will apply
to patenting costs incurred on or after 1 June 2003.
Foreign Income for R&D
To increase the stockpile of funds for R&D activities conducted
in Singapore or controlled from Singapore, I have decided to introduce
a new R&D incentive, which will be effective from 1 June 2003.
Companies under this incentive will be granted tax exemption on
foreign sourced royalties and interest income that are used for
R&D purposes.
Provision of Information and Digitised
Goods
I have decided to facilitate the flow of online information and
digitised goods by granting exemption on withholding tax for payments
made by end-users to non-resident persons. This will take effect
immediately.
Integrated Industrial Capital Allowance
Our manufacturing sector draws strength from its international linkages,
for example with Batam and Bintan. Corporate groups increasingly
split their activities across geographical boundaries. Marketing
or other high value-added activities are concentrated in the main
company, with other activities distributed to its regional subsidiaries.
To accommodate this business model, I have decided
to introduce an "Integrated Industrial Capital Allowance"
incentive from 1 March 2003. Under this incentive, companies will
be allowed to claim capital allowances on equipment that is used
by their subsidiaries outside Singapore.
Upfront Land Premium for Leased Land
I have explained earlier the importance of competitively priced
industrial land for attracting manufacturing investments. Currently,
tax deductions are granted for the upfront land premium paid by
a lessee in respect of a designated lease for the construction or
use of a building on JTC or HDB industrial land provided the lease
tenure is not more than 30 years. This restriction was imposed at
a time when it was unlikely for lessees to have upfront premium
scheme terms exceeding 30 years for an industrial land.
To encourage companies to undertake investments
in Singapore over longer periods, I have decided to extend the current
30-year lease tenure restriction to a 60-year limit with effect
from YA 2004.
Private Wealth Management
As we upgrade our manufacturing sector, we must also spur our services
sector to become our second engine of growth. In financial services,
the development of world-class trustee and custodian services in
Singapore is integral to Singapore's development as a wealth management
centre. To support this, I have decided to introduce the following
changes.
Firstly, I have decided to extend income tax exemption
to foreign trusts administered by all trust companies in Singapore,
and not just those administered by Approved Trustee Companies (ATCs)
from YA 2004.
Secondly, by 1 June 2003, the existing lists of designated
investments and specified income under the ATC scheme will be replaced
with an exclusion list.
Thirdly, to reduce compliance costs for trust companies
currently having to comply with different sets of conditions for
the purpose of income tax exemption for foreign trusts and the zero-rating
of trustee services provided to foreign trusts, I have decided to
align the set of conditions for both from 1 June 2003.
Lastly, the current GST relief provision in respect
of trustee services will be extended to trust administration services
provided by a Singapore trust company to a foreign trust of which
it is not the trustee from 1 June 2003.
Apart from improving the tax environment for trusts,
the government is conducting a comprehensive review of the Singapore
Trustees Act. We must bring our trust laws up to date so that they
are relevant to today's needs and supportive of financial sector
activity. This is critical in developing the trust industry. The
revised legislation will be tabled in FY 2003.
Approved Marine Hull and Liability
Insurer Scheme
The services provided by our transport and logistics industry account
for about 8% of GDP and establish Singapore as a leading centre
for global trade. With intensifying competition from lower-cost
regional centres and changing trade patterns towards Northeast Asia,
we must transform ourselves into a leading supply-chain management
hub.
The Approved Marine Hull and Liability Insurer
Scheme currently provides tax exemption for income derived by approved
marine hull and liability insurers from writing offshore marine
hull and liability insurance business for a period of 10 years.
To further encourage the development of marine insurance expertise
in Singapore, I have decided to extend the Approved Marine Hull
and Liability Insurer Scheme to also cover income derived from writing
onshore marine hull and liability insurance business with effect
from YA 2004.
Approved Third Party Logistics Company Scheme
Third party logistics companies generally undertake vendor-managed
inventory operations where they import and hold goods belonging
to foreign principals, and deliver the goods to local customers
only upon instruction by the foreign principal. In line with ERC
recommendations, I have decided to introduce a scheme whereby qualifying
companies can import goods belonging to them or to foreign principals
without payment of GST. Under the new scheme, these companies can
also move goods to their customers who are under the Major Exporter
Scheme, and other qualifying companies under the same scheme, without
charging GST. This scheme will be effective from 1 January 2004.
Improved Global Trader Programme
International trading is a highly mobile and tax-sensitive industry.
Although Singapore has flourished as a regional trade hub, we are
neither key producers nor consumers. Instead we have leveraged on
the presence of international trading companies to build up our
global reach. As countries around us develop their own infrastructure
and networks, Singapore will face stiffer competition.
The Global Trader Programme (GTP) now offers
a 10% concessionary tax rate on all qualifying trade income. I have
decided to enhance and expand the GTP with immediate effect. Under
the enhanced scheme, an approved global trading company would be
granted concessionary tax rates of 5% and 10% on qualifying offshore
trade incomes, depending on the company's turnover and business
spending. In addition, the GTP will be expanded to include high-growth,
medium-sized trading companies. This will give a further boost to
Singapore's status as an international trading centre.
Tax Holiday for the Singapore Commodity Exchange
The Singapore Commodity Exchange (SICOM) has developed into a global
rubber futures trading centre. In order to compete with other emerging
exchanges in the region, SICOM must continue to improve on its facilities
and strengthen its financial reserves. I have therefore decided
to grant another five-year tax holiday to SICOM, with effect from
YA 2004.
Submarine Cable Capacity
To encourage telecommunications operators to provide international
connectivity, I have decided to exempt from withholding tax payments
for the use of capacity on submarine cables operated by non-resident
persons, with immediate effect. I have also decided that payments
for the purchase of Indefeasible Rights of Use on submarine cable
system will be granted a writing-down allowance over its useful
life with effect from YA 2004.
Ministerial Committee on Services
The issues involved in growing our services sector cut across various
Government agencies. Given that it is impractical to designate a
single agency to resolve diverse economic and social objectives,
the Government agrees with the ERC recommendation to set up a Ministerial
Committee on Services, which I will chair, to coordinate policy
and make the necessary trade-offs.
The details of the tax changes to promote manufacturing
and services can be found in Annex E.
Human Capital
Since the quality of our human capital underlies the success of
all other restructuring efforts, the Government will introduce a
number of measures to upgrade our human capital.
Continuing Education and Training Agency
In future, workers will to have to change jobs more often, and to
upgrade their skills continuously to keep pace with economic restructuring.
To help them, the Government will put in place a comprehensive continuing
education and training (CET) framework, focused on enhancing the
employability and competitiveness of our workforce.
The Government will establish a statutory board under
the Ministry of Manpower to enhance the development and promotion
of continuing education and training for adults. The statutory board
will coordinate CET and employment assistance efforts by working
closely with various economic agencies, as well as the private and
people sectors.
The statutory board will build up professional
capabilities to strengthen the curriculum design and delivery of
adult education and training, and promote the upgrading of all segments
of the workforce. It will also drive industry-focused workforce
development programmes and oversee the training and placement of
unemployed workers. Its mission is to bring greater coherence and
coordination to the CET effort, and ensure that our resources committed
to workforce training and employment assistance are effectively
spent.
Course Fee Relief
Since 1986, resident taxpayers have been able to claim tax relief
for approved courses related to their employment or courses that
result in academic or professional qualifications. The ERC has recommended
raising the course fee relief from the current $2,500. The Government
agrees that lifelong learning and training to maintain employability
is becoming more important in today's volatile and uncertain economic
environment. I have therefore decided to increase the course fee
relief to $3,500. This will cost the Government an additional $6.4
million per year.
At the same time, the Government has reviewed the
conditions for claiming course fee relief. Seminars and conferences
are becoming increasingly necessary to upgrade oneself. I have therefore
decided to expand the scope of the relief to include seminars and
conferences.
Secondly, people may need to retrain not just for
their present jobs, but to prepare for possible career shifts. I
am therefore extending the relief to courses that are not directly
related to one's current profession. To qualify for the relief,
the applicant has to establish that the course resulted in a career
switch to a relevant job within a period of two years.
Resident taxpayers who complete courses, seminars
or conferences starting from 1 January 2003 will enjoy the enhanced
course fee relief.
Overseas Talent Recruitment
The Double Tax Deduction (DTD) for Overseas Talent Recruitment Scheme
introduced in 1998 allows employers to claim a further tax deduction
for approved relocation and recruitment expenses incurred in the
hiring of top talent from abroad. The scheme helps offset the extra
cost that companies bear to employ such persons.
The decision to relocate is often easier if the individuals
are able to bring their families with them. To encourage employers
to support the additional cost of relocating top talent with their
families, I will increase the deduction limit for the employer from
$15,000 to $25,000 for P1 employment pass holders, and from $5,000
to $15,000 for P2 employment pass holders. I will also increase
the cap for tax deduction from $150,000 to $275,000 for employers.
These changes will take effect for expenses
incurred from today. Further details can be found at Annex
F.
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