Angela Nicolson on the tax incentives and financial vehicles that are keeping Singapore at the front of the pack internationally.
Singapore’s government has focused its attention on providing tax incentives to businesses in these difficult economic times. Early signs are that these incentives are effective and helping to lead the way to Singapore’s recovery. Various industries have benefitted from these tax incentives but none more than the funds management industry. This industry is a particular focus for the Singapore government as it continues its long-term objective to encourage its financial services industry, especially in relation to attracting high net worth individuals.
Corporate Tax Rate
The corporate rate of tax has been reduced from 18 per cent to 17 per cent. This lower rate, coupled with the territorial and remittance based tax system, various tax incentives (including 75 per cent exemption on the first SGD10,000 and 50 per cent exemption on the next SGD290,000), 60 double tax treaties and various free trade agreements, make Singapore a very attractive jurisdiction. The rate is now very close to the current Hong Kong tax rate of 16.5 per cent.
Exemption for Remittance of Foreign Source Income
As mentioned above, Singapore has a territorial and remittance based system of taxation. This means that only Singapore-sourced income and foreign-sourced income that is actually remitted into Singapore is taxable. However, most foreign-sourced dividends, branch profits and service income are still exempt even if remitted to Singapore where the company is a Singapore resident company and the headline rate of tax in the country from which the foreign income has been paid is at least 15 per cent. Note, however, that the headline rate includes both the relevant company tax rate and the dividend withholding tax rate.
In an active move to further encourage the remittance of foreign sourced income into Singapore all foreign income earned prior to 22 January 2009 and remitted between 22 January 2009 and 21 January 2010 will be exempt from tax in Singapore. It is hoped that this exemption will either be extended or retained on a permanent basis.
To note, in respect of Singapore resident individuals, foreign sourced income (other than partnership income) is always exempt from tax in Singapore, even when it is remitted back to Singapore.
Limited Partnership (LP) legislation was passed in late 2008 and provides another alternative vehicle that is both cost effective and flexible when compared to the Singapore Company. Both LPs and Limited Liability Partnerships (which were introduced several years ago) are good alternatives to the Singapore non-resident company. There are some significant advantages of the Singapore LP over other jurisdictions including the ability of the Limited Partner to withdraw its contribution if certain conditions are satisfied.
A Singapore LP has to have at least one limited partner and one general partner. There is no requirement for any of the partners to be resident in Singapore. A local manager is required to be appointed if all the general partners are not resident in Singapore.
The general partner is responsible for the day-to-day management and operation of the LP and has liability for the debts and obligations of the LP to the extent that the LP cannot pay those liabilities. The general partner can be an individual, but the use of a corporation can minimise the effects of unlimited liability.
It is important that the limited partners do not take part in the management of the LP as if they do they could lose their limited liability status and be treated as general partners.
For tax purposes, the Singapore LP is treated as a partnership and is not taxed at the LP level. The normal Singapore tax rules apply i.e. as only Singapore sourced income and foreign income that is remitted into Singapore is taxable at the partner level.
The Singapore LP structure is considered especially suitable for private equity and fund management business as it allows passive investors to invest and obtain limited liability.
In April 2009, the Monetary Authority of Singapore issued a circular providing detail of the Enhanced Tier Fund Tax Incentive Scheme (the Scheme), which applies to funds of a minimum size of SGD50m. The Scheme provides tax exemption for the investment fund itself. There is also a 10 per cent concessionary tax rate for approved fund managers, with an even lower rate of 5 per cent for Shari’a-compliant activities.
Given the suitability of LPs to this type of business, it has been viewed favourably that the Circular also announced that fund vehicles can now be set up as LPs. The incentive conditions are applied at the partnership level rather than the level of each partner, potentially making it easier to satisfy all the conditions to be granted the tax exemption. It is widely held that allowing the use of LPs will save both time and money for foreign fund management groups who wish to set up operations in Singapore. As such, Singapore is well placed to take advantage of the improving world economy and attract such foreign funds to Singapore.
Taxation Information Exchange Agreements (TIEAs)
Singapore, along with many other countries, has been targeted by the Organisation for Economic Cooperation and Development (OECD) to comply with their Article 26 in relation to the exchange of taxation information. Singapore currently has 60 double tax treaties (with the notable exception that it does not have a double tax treaty with the United States of America) but a lot of these treaties are quite old and have been negotiated using an earlier model of Article 26.
Singapore has agreed to progressively renegotiate its current double tax treaties to allow for this standard Article 26 clause or to actually enter into separate TIEAs. Singapore has currently signed (but not yet ratified) the following TIEAs:
In addition, New Zealand has negotiated new double tax treaties that incorporate the new standard clause on the exchange of tax information, as well as enhancing current double tax treaty provisions, including lowering the withholding tax rates on dividends, interest and royalties.
Singapore has ensured through its domestic taxation laws that the request for tax information from foreign governments is handled in a consistent manner and that ‘fishing expeditions’ are not entertained. Various safeguards have been put into place, including requiring a High Court Order before the Singapore tax authorities have the power to request information from either banks or trust companies. To apply for a High Court Order there must be a written authorisation given by the Attorney-General. The High Court Order will not be issued if deemed contrary to public interest or if the information is protected by legal privilege.
It is generally considered that Singapore’s approach is a well-considered balance between the new international standards on the exchange of taxation information and the taxpayer’s need for confidentiality and certainty.
Angela Nicolson, General Manager, Asiaciti Trust Singapore Pte Ltd, Singapore