Singapore. Singapore Singapore budget. Productivity and innovation credit and other tax benefits

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1 Singapore 2010 Singapore budget Last year, the Prime Minister formed the Economic Strategies Committee (ESC) and tasked it with developing and recommending strategies to grow Singapore as a leading global city in the heart of Asia, with the objective of enabling sustained economic growth, faster than other advanced economies, so as to provide opportunities for all. On 1 February 2010, the ESC announced its key recommendations which the Government accepted. The ESC s recommendations centred on improving skills, innovation and productivity as the basis for sustaining Singapore s economic growth, they painted an enormous tableau, and it was clear that all the Finance Minister could do in the Budget was to point the ship in the general direction by putting in place some of the fundamental strategies that would underpin the way forward, and be consistent with the conclusions drawn from the ESC report. The thrust of the initiatives announced aimed at the lower paid, the consolidation and growth of small and mediumsized enterprises, and a general upgrading of quality and productivity from the lowest levels up, through training and innovation. The introduction of a graduated property tax regime shifts some Government handout costs to the better off which, it was hinted, may be an increasing trend. Personal allowances that help those with ailing or aged dependents also got a lift. There were tweaks and extensions to incentives, with the maritime sector getting a slight edge over the rest this year. A summary of other tax changes proposed in the Singapore Budget is provided below. Details of our Budget analysis are available at Productivity and innovation credit and other tax benefits One of the major initiatives introduced was the Productivity and Innovation Credit (PIC) which allows businesses to claim a tax deduction for 250% for the first S$300,000 of qualifying expenditure incurred per year of assessment for each of the six activities listed below. Businesses which have at least three local employees (Singapore citizens and permanent residents who make Central Provident Fund contributions) are also given the option of converting up to S$300,000 of their PIC tax benefits into a non-taxable cash grant of up to S$21,000 per annum (calculated using an effective tax rate of 7%). The PIC will be available for five years starting from Year of Assessment (YA) However, the cash conversion option will only be available from YA 2011 to YA 2013, and will be reviewed after three years. The additional tax benefits other than the 250% deduction introduced in respect of each of the six activities are discussed below: 1. Research and development (R&D) done in Singapore A 150% deduction will also be allowed for qualifying expenditure in excess of S$300,000 on R&D done in Singapore. With the introduction of the PIC, the existing R&D Tax Allowance (RDA) and R&D Incentive for Start-up Enterprises (RISE) schemes will be phased out from YA 2011, with a transition period to allow businesses to claim unutilised RDA. 2. Design work done in Singapore Design-related expenditure is generally capital in nature and therefore not tax deductible unless incurred by design houses and institutions. As an incentive, businesses will be allowed to claim a 100% deduction for design-related expenditure in excess of S$300,000. This incentive will be administered by Design Singapore Council. Details will be released by May Acquisition of intellectual property (IP) In addition to the 250% deduction, businesses can now claim a 100% deduction for the balance of the qualifying expenditure instead of writing down those costs over five years. The list of qualifying IP is also expanded to include plant varieties. 4. Registration of IP Qualifying costs of more than S$300,000 incurred to register trademarks, designs and plant varieties will be allowed a 100% deduction. Previously, deductions were restricted to patent registration costs. 52 Asia Pacific Tax Notes

2 5. Automation through technology or software Businesses that incur qualifying expenditure of more than S$300,000 on automation equipment will continue to be allowed a 100% capital allowance in the year of expenditure. The current list of qualifying automation equipment will be updated and expanded in due course. 6. Training of employees Qualifying employee training expenses of more than S$300,000 will continue to be deductible. Mergers and acquisitions allowance and stamp duty remission Interest costs for borrowings taken by a Singapore company to purchase the shares of another are not tax deductible as the attributable dividend income is exempt. Instead of allowing an interest deduction, a new allowance for mergers and acquisitions (M&As) was introduced for qualifying M&As executed between 1 April 2010 and 31 March The allowance is 5% of the value of the acquisition, subject to a cap of S$5 million for all qualifying deals executed in a year of assessment, and will be written down equally over five years. In addition, stamp duty on the transfer of unlisted shares for qualifying M&A deals executed between 1 April 2010 and 31 March 2015 will be waived. This remission is capped at S$200,000 of stamp duty per year. The Inland Revenue Authority of Singapore (IRAS) will release details on the above by June Introduction of the land intensification allowance A land intensification allowance (LIA) will be introduced from 1 July 2010 to encourage the efficient use of land capacity. It replaces the existing industrial building allowance rules and will apply to qualifying capital expenditure incurred on the construction of qualifying buildings or structures in specified zones, where users are in the following industry sectors: 1. Pharmaceuticals 2. Petrochemicals 3. Petroleum 4. Specialties 5. Other chemicals 6. Semiconductor-wafer fabrication 7. Aerospace 8. Marine and offshore engineering 9. Solar cell manufacturing In line with the objective of encouraging land intensification, the buildings or structures must also meet the gross plot ratio (i.e. the ratio of gross floor area to site area) benchmarks set for each industry sector. Qualifying businesses will be allowed to claim initial and annual allowances of 25% and 5% respectively. The LIA will be in place for five years and will be subject to approval by the Economic Development Board of Singapore (EDB). Further details will be released by the EDB/Jurong Town Council by June Industrial building allowances will be phased out for capital expenditure incurred after 22 February 2010 except in specified scenarios where the taxpayer had committed to the capital expenditure on or before 22 February The IRAS will issue more details on this in April Financial services Financial sector incentives 1. Qualifying base The requirement for Financial Sector Incentive-Standard Tier (FSI-ST) companies to perform complex qualifying base calculations will be removed and all income from qualifying activities will be taxed at a higher concessionary tax rate of 12% with effect from 1 January The list of qualifying activities under the FSI scheme will also be updated. The Monetary Authority of Singapore (MAS) will release further details on this by April Futures members of Singapore Exchange Limited and members of Singapore Commodity Exchange Limited From 1 January 2011, the tax incentives for these members will be subsumed under the FSI, which will provide a 12% concessionary tax rate on qualifying income and remove the requirement to transact on prescribed exchanges and with specified counterparties. New applicants must meet the FSI qualifying criteria. Existing members will be allowed to transit into the FSI without being subject to additional commitments if they notify the MAS by 31 July 2010 of their intention to do so. They will however, be subject to the FSI qualifying criteria when they renew their FSI status in December The MAS will release details by April Real estate investment trusts The following concessions will be renewed up to 31 March 2015: 1. The 10% concessionary rate of withholding tax on distributions by a real estate investment trust (REIT) to a non-resident, non-individual out of income that has been accorded tax transparency treatment. 2. Waiver of stamp duty on the transfer of Singapore immovable property to a REIT. Asia Pacific Tax Notes 53

3 3. Waiver of stamp duty on the transfer of 100% of the issued share capital of a Singapore-incorporated company that holds immovable property situated outside Singapore to a REIT. 4. Waiver of Goods and Services Tax (GST) to allow REITs to claim input tax on their business expenses. In addition, a sunset date of 31 March 2015 has been introduced for the tax exemption under section 13(12) of the Income Tax Act for foreign-sourced income derived by REITs or their wholly-owned Singapore subsidiary companies. Unlisted REITs will also have up to six months (previously one month) from the transfer of property to list, in order to qualify for the stamp duty waiver. Offshore insurance business Singapore-based insurers or reinsurers enjoy an indefinite 10% concessionary tax rate on profits derived from insuring and reinsuring offshore risks or from carrying on offshore life business. From 1 April 2010, the incentive will be awarded for a period of 10 years. Also, a sunset date of 31 March 2015 will be introduced and new applicants (other than captive insurers) will be required to meet new headcount criteria. Existing insurers will be given until 31 March 2013 to meet those criteria. More details will be released by the MAS by April Other changes Other changes relating to the financial services sector include: 1. The Approved Start-up Fund Manager Scheme expired on 17 February 2010 and was not renewed. 2. The GST remission which allows listed registered business trusts in the sectors of infrastructure, ship leasing and aircraft leasing to claim GST incurred on their business expenses has been extended to 31 March Maritime and transport 1. Ship-brokers and forward freight agreement traders A new incentive has been introduced for companies which engage solely in ship-broking activities and forward freight agreement trading. The incentive provides for a 10% concessionary tax rate on brokerage income for five years and is subject to approval from the Maritime Port Authority of Singapore (MPA). Applications must be made between 1 April 2010 and 31 March The MPA will release further details by March Ship management From 22 February 2010, income derived by a ship management company from managing ships owned by special purpose companies that are exempt under sections 13A or 13F of the Income Tax Act are exempt from tax. The MPA will release further details by March Maritime Finance Incentive This incentive has been extended to 31 March However, applicants approved after 28 February 2011 will have an incentive period of not more than five years. 4. Aircraft rotables Investment allowances, which provide for an additional 50% capital allowance claim, for aircraft rotables has been re-introduced from 1 April 2010 to 31 March The non-swapping condition requiring qualifying maintenance, repair and overhaul companies to track specific rotables has also been removed. The EDB will release details by March GST zero-rating for the marine industry From 1 July 2010, the scope of qualifying ship will be expanded to include pleasure and recreational ships (including private yachts) that are used wholly for international travel regardless of whether they call in at a port outside Singapore. This will effectively enable the zero-rating of GST to be extended to the supply of all goods (including stores and merchandise) for use on board, or installation in, a qualifying ship and the transport of goods or passengers by ship to or from international waters. The IRAS will release further details by June Personal tax Tax deduction for angel investors This long-awaited incentive allows individual angel investors who commit a minimum of S$100,000 of equity to a qualifying start-up enterprise in a year to claim a 50% tax deduction for the investment at the end of a two-year holding period. The deduction is subject to a S$500,000 investment limit each year. More details will be announced by SPRING Singapore in July Personal tax reliefs The following enhancements were proposed: 1. Spouse relief Wife relief is renamed to spouse relief and extended to working wives. 2. Parent relief This is increased from S$5,000 to S$7,000 for taxpayers living with their aged dependants, and from S$3,500 to S$5,500 for taxpayers who are not. 3. Handicapped parent relief This is increased from S$8,000 to S$11,000 for taxpayers living with their dependants, and from S$6,500 to S$8,000 for taxpayers who are not. 54 Asia Pacific Tax Notes

4 4. Qualifying income threshold The threshold for the above reliefs and for qualifying child relief, handicapped child relief, working mother s child relief and handicapped spouse/sibling relief, are increased from S$2,000 to S$4,000, or removed altogether if the dependants are handicapped. The above changes are effective from YA In addition, with effect from YA 2011, the qualifying income threshold for the relief for cash top-ups to the Central Provident Fund accounts of a spouse or siblings is removed and course fees relief is increased from S$3,500 to S$5,500. GST 1. From 1 October 2010, approved GST-registered businesses will be allowed to defer their import GST for at least one month. In order to qualify for the scheme, businesses must have a good compliance record and file their GST returns on a monthly basis. The IRAS will release further details by March From 1 January 2011, the time of supply rules will be simplified to allow businesses to account for GST at the earlier of (a) when a tax invoice issued and (b) when payment is received. Details will be announced by May Other changes Other changes proposed in the Budget include: 1. Law practices The development and expansion incentive will be extended to law practices providing international legal services. Approved law practices will enjoy a 10% concessionary tax rate on incremental income derived from these services for five years. The incentive is valid from 1 April 2010 to 31 March The law practices must be registered in Singapore as a company or as a branch of a foreign company to qualify. More details will be released by the Ministry of Law and the EDB in March Donations The 250% tax deduction for donations to Institutions of a Public Character and other approved recipients has been extended for another year, to donations made between 1 January 2010 and 31 December Non-resident public entertainers The withholding tax rate applicable to payments to non-resident entertainers has been reduced from 15% to 10% with immediate effect. This change will remain in effect until 31 December Property tax Property tax has been restructured to provide progressive rates of property tax for owneroccupied properties. 5. Liquor duties The duty-free allowance for bottled liquor has been increased to allow travellers to purchase an additional litre of duty-free wine or beer in lieu of one litre of duty-free spirits from 1 April Asia Pacific Tax Notes 55

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