Edmund Leow, Stephanie Magnus, Dawn Quek and Alice Ho examine how Singapore is setting itself apart from other IFCs.
Singapore is located at the Southern tip of the Malay Peninsula, one degree north of the equator. It is located in the middle of South East Asia, and is one of the most advanced and developed countries in Asia. Singapore was a former British colony and became an independent republic in 1965.
Singapore’s legal system is based largely upon English common law and jurisprudence, as modified by local case law and statues. Singapore’s courts are independent and efficient and the Singapore Court of Appeal is the highest judicial authority with its decisions binding on all lower courts. Singapore is also a regional centre for alternative dispute resolution and is a popular location for arbitration and mediation.
Singapore has one of the highest per capital income in Asia, and Singapore also has a very high standard of living. According to Singapore government statistics, Singapore’s GDP at current market prices is about SG$303.652 billion for 2010. It has a total population of 5.077 million, of which approximately 3.772 million are Singapore citizens and Singapore permanent residents. Singapore has a highly skilled and qualified workforce and the standard of literacy and education in Singapore is one of the highest in Asia. There are currently four universities and five polytechnics in Singapore.
Singapore as a Major International Financial Centre
In today’s climate, the success of a financial centre is built not only on its infrastructure but also on the integrity of its laws and financial systems and the compatibility of the same with international standards. Singapore is known and selected as a location of choice for a wide range of financial market players because of its ‘clean’ reputation and the credibility offered by the strong legal and regulatory framework.
The regulatory regime in Singapore in respect of financial institutions is streamlined, and the chief financial regulator, the Monetary Authority of Singapore (MAS), oversees and regulates most financial market players, including banks, finance companies, insurance companies and insurance intermediaries, trust companies, financial advisers, fund management companies, money remittance houses and other capital market intermediaries and their activities. The MAS also regulates the offering and sale of financial products with some areas of co-regulation with other bodies such as the Singapore Exchange (in respect of listed products) and the International Enterprise (in respect of certain derivatives).
The regulatory regime is also transparent, with laws and regulations available to the public. Further, industry feedback is considered and reviewed by the MAS. Any new proposed amendments to the regulatory regime are typically preceded by a public consultation process where interested parties are consulted on the proposed changes before they are implemented. That English is the working language in Singapore makes it easier for international players to understand the regime and to communicate with regulators, and lowers the regulatory barriers to entry.
The compatibility of Singapore’s regulatory requirements with global standards enhances Singapore’s attraction as an international financial centre. An example is Singapore’s anti-money laundering or counter terrorism financing (AML/CFT) regime. Singapore is a member of the Financial Action Task Force and its AML/CFT legislation is aligned with international standards. Singapore has a robust regulatory supervision and enforcement regime on AML/CFT. Financial institutions in Singapore are required by the MAS to have in place a stringent AML/CFT framework, which is subject to regulatory audits. That said, the MAS implements its requirements with an appreciation of commercial practicalities. The MAS’ AML/CFT requirements uses a risk-based approach, evaluating the money laundering and terrorism financing risks of each type of financial institution by taking into account its business activities; types of customers, products and services; its geographical areas of operation, as well as the quality of the institution’s internal risk management systems and processes in mitigating the risks. The MAS has also recently announced that the AML rules will be amended to include tax evasion as a predicate offence.
As an international financial centre, the stability of the financial infrastructure is important. From the lessons learned from the global economic crisis, the MAS has sought to exceed global practices, particularly in the area of capital adequacy, to ensure a stable banking environment. Recently, the MAS announced that Singapore-incorporated banks will meet capital adequacy requirements that are higher than the Basel III global capital standards. From 1 January 2015, MAS will require Singapore-incorporated banks to meet a minimum Common Equity Tier 1 (‘CET1’) capital adequacy ratio (‘CAR’) of 6.5 per cent, Tier 1 CAR of eight per cent and Total CAR of 10 per cent from 1 January 2015. These standards are higher than the Basel III minimum requirements of 4.5 per cent, six per cent and eight per cent for CET1 CAR, Tier 1 CAR and Total CAR, respectively. The MAS considers that capital requirements on Singapore-incorporated banks must be set higher than the Basel III minimum requirements in order to sufficiently buffer against stress conditions because each of the Singapore-incorporated banks is systemically-important in Singapore and has a substantial retail presence. The capital adequacy requirements will be implemented in stages over three years. The stringent capital adequacy requirements will further enhance Singapore’s reputational advantage as a financial centre. It is interesting to note that all three home-grown Singapore brands have been rated by Global Finance as among the top 50 world’s safest banks.
Singapore has a very favourable tax regime for individuals and corporates. Singapore has a territorial system of taxation. Income tax is imposed on Singapore sourced income and, with certain exceptions, foreign sourced income received in Singapore. Currently, the corporate income tax rate is 17 per cent. Generally, resident individuals are taxed mainly on Singapore sourced business and employment income. There are exemptions for certain Singapore sourced investment income (including interest from Singapore bank accounts) of resident individuals and broad exemptions for resident individuals on foreign sourced income. The income tax rates for resident individuals are based on a progressive rates ranging from 3.5 per cent to 20 per cent.
Non-resident individuals are generally taxed at 20 per cent on Singapore soured income and are taxed at the higher of a flat rate of 15 per cent or the rates for residents on their employment income sourced in Singapore. Foreigners who set up bank accounts in Singapore and have no other nexus with Singapore are also generally not subject to Singapore income tax.
There is no capital gains tax in Singapore. Gains arising from the disposal of any investments or assets of a company, which are of a capital nature, will not be subject to any Singapore tax.
Singapore does not have any gift or donation taxes and does not impose inheritance or estate taxes.
Singapore currently has 68 comprehensive double taxation agreements (DTAs) with other countries. Most of the treaties reduce the rate of withholding tax on interest and royalties significantly, and, in some cases, to zero. It should also be noted that the DTAs are bilateral agreements between Singapore and the other countries. As such, the provisions of the DTAs may differ as each DTA is individually negotiated.
Tax Transparency and Exchange of Information
Singapore has also incorporated the enhanced OECD standard for the exchange of information for tax purposes in many of its DTAs. Apart from these measures, banks and trust companies in Singapore are generally required to observe banking and trust secrecy rules and are not allowed to disclose the details of their customers to the authorities unless the proper domestic procedures for the exchange of information are followed. Frivolous and non-specific requests and fishing expeditions are not entertained.
Tax Exemptions and Incentives
The Singapore Government and the MAS are aggressively promoting the financial services industry including the private banking and trust industry in Singapore. The Government and the MAS have introduced many measures to develop this industry and to attract foreign players in the industry to establish operations in Singapore. Some of these include the Financial Sector Incentives (FSI), which provide for concessionary tax rates to approved financial institutions on their income from a wide range of activities including, acting as bond market intermediaries, equity market intermediaries, derivatives market intermediaries, credit facilities syndication, fund management, lending and other related activities, trust administration, custodial services, treasury services, headquarter services, etc. The 2011 Budget saw the extension of the withholding tax exemption for banks so that all payments of interests and other qualifying payments made by banks and similar financial institutions to non-residents are exempt from withholding tax where such payments are for trade or business purposes.
Use of Trusts
Trust structures are commonly used in Singapore and Singapore trust law is based largely on English law, as modified by the Singapore Trustees Act. Therefore from a tax perspective, there is relative certainty as to how the various parties are treated. The same source principles of taxation would apply to trusts. Oftentimes, the trust assets may be held by the trustees via an underlying company. In such cases, it is important to ensure that the underlying company does not have any Singapore sourced income or foreign sourced income received in Singapore that does not qualify for tax exemption.
There is a tax exemption scheme for ‘foreign trusts’, which covers specified income from designated investments of trusts with foreign settlors and beneficiaries that are administered by a Singapore trust company.
There is also a limited tax exemption scheme for certain income of a ‘locally administered trust’ where the settlor or any of the beneficiaries are Singapore persons. The income of a trust is assessed on the trustee. (However, in certain cases, the trust is treated as tax transparent.) A trustee's statutory income in a year of assessment is the income of the preceding year and is calculated in the same manner as that of any other taxable entity. Expenses wholly and exclusively incurred for the production of trust income is also deductible against the income. Currently, the applicable tax rate for trust income is 17 per cent. Generally, beneficiaries are not subject to tax on undistributed income of the trust unless it is clear that such income is attributable to them. The taxation of beneficiaries on income attributable or distributed to them differs depending on whether the trustees carried on a trade or business. In the case where the Singapore administered trust had no underlying trust income taxable in Singapore, there are generally no Singapore tax consequences when the beneficiaries receive distributions from the trust.
Registered business trusts, unit trusts and real estate investment trusts are also assessed to tax under different rules.
Singapore is an increasingly attractive location for philanthropic and not-for-profit organisations. Registered charities are exempt from income tax and certain property tax in Singapore. A charity may be more commonly set up as a trust or a company limited by guarantee. There are regulatory concessions for charities which are privately-funded, and for international charitable organisations which meet certain economic criteria. Taxpayers can claim attractive tax deductions (up to 2.5 times) on donations to Singapore registered charities that are approved as Institutions of a Public Character (IPCs).
Edmund Leow, Stephanie Magnus, Dawn Quek and Alice Ho, Baker & McKenzie, Wong&Leow, Singapore