(5) REVENUE STRUCTURE FOR THE FUTURE

Mr Speaker Sir, the plans I have laid out for CPF and Workfare represent the Government’s commitment to address the dislocations caused by globalisation and ensure a continued sense of cohesion and financial security among Singaporeans. We are also making major new investments in our social and economic infrastructures. At the same time, we want to be able to reduce direct taxes to enhance our competitiveness. To do all this, we must therefore raise additional revenues. I will now map out our plans on the revenue front.

Reducing Direct Taxes

Restructuring the Corporate Income Tax System

We will make a significant move on corporate income tax in this Budget. The landscape is now more competitive than it was, even five years ago. Globally, corporate tax rates have come down to an average of 27% compared to 31% five years ago. Hong Kong's rate is currently at 17.5%, and could go down further. Ireland's is 12.5%. The emerging Eastern European economies have become serious competitors for global investment - Czech Republic is at 24%. Poland and Slovak Republic are at 19%. Hungary's is at 16%. Latvia and Lithuania are at 15%. The competition is heating up so quickly that even France is thinking of dropping its 33% tax rate to 20%.

As a broad based measure to help all companies and to keep Singapore attractive as a business location, I have decided to reduce the corporate tax rate by two percentage points, to 18%, with effect from YA2008. This will cost the Government $800 million a year. This corporate tax cut will bring Singapore more investments and more good jobs over time.

I will also do more to keep our tax regime relevant to new business structures and financial practices. Recognising that business borrowings are now taking various innovative and non-traditional forms, I will now allow all borrowing costs that are akin to interest to qualify as tax-deductible expenses, with effect from YA2008. Such tax deductible costs will include certain guarantee fees and bond discounts. This will cost the Government $110 million a year. IRAS will release further details on this change.

Making Singapore the Best Location to Start and Grow Companies

I spoke earlier about our intention to make Singapore the best location for companies to start, grow and globalise. Our tax regime for SMEs and start-ups is already attractive. We will make it more so.

I have decided to increase the Partial Tax Exemption threshold for companies from the current $100,000 to $300,000, with effect from YA2008. This will cost $150 million. All companies will enjoy this exemption, but it will benefit SMEs the most. This will mean that almost 80% of taxable companies in Singapore will pay tax at effective rates of less than 10%. It also means that a company with chargeable income of $500,000 will pay tax at an effective rate of 12.5%, equal to Ireland and significantly lower than comparable rates in Hong Kong.

I will also enhance our tax regime for start-ups. Start-ups currently enjoy full tax exemption on the first $100,000 of their chargeable income for each of their first three years of assessment between YA2005 and YA2009. I have decided to remove the YA2009 expiry date so that all start-ups will henceforth enjoy a full three years’ of exemption.

These moves, coupled with the reduction in corporate tax rate to 18%, will make Singapore one of the most competitive locations in the world for SMEs and start-ups.

We recognise that our SMEs will typically face greater difficulties in meeting the higher costs due to the CPF employer contribution increase. Therefore, I have decided to give them a rebate on their labour expenses for two years. In the first year, this will take the form of a 2% cash rebate on the first $40,000 of total employer and employee CPF contributions of a firm. On the next $40,000 of total CPF contributions, we will give a 1% rebate. These percentages will be halved in the second year. This rebate will effectively offset up to 45% of the additional CPF cost that SMEs face in the first year and cost the Government $100 million in total. Details can be found in Annex C.

Keeping our Personal Income Tax Regime Competitive

Personal income taxes have also been coming down worldwide, although not to the same extent as corporate taxes. We have gradually lowered our personal income tax rates, most recently with a two-percentage point cut to 20%. We aim to keep personal income taxes low. This will maximise the incentives for all Singaporeans to work hard and reap the rewards of their efforts. It will also help us to attract and keep both international and Singaporean talent here.

For most taxpayers, our personal income tax regime is already competitive, because our marginal tax rate schedule is highly progressive. Thus individuals with assessable incomes of up to half a million dollars pay less tax in Singapore than in Hong Kong. However, at the very top end, some other jurisdictions have lower effective tax rates than us. For attracting and keeping top talent, this is an issue. Therefore, we will continue to monitor the trends in personal income tax rates of competing locations. The changes to our NII framework will enable us to lower our rates further if necessary.