Research Paper on Tax Incentives in Singapore

1. INTRODUCTION 1. Tax Incentives for Investments in chapiter of with child(p) of gravid of capital of capital of capital of Singapore Tax inducements tole ordain been an constituent(a) slice of Singapores frugal development st considergy since the 1960s. For more than than 30 historic period, evaluate incentives have been used to attract enthronisations and create jobs. Now we argon the central point for contrary investment fundss, research and development and work in Asia. everyw here the years the governing has introduced a wide range of assess incentives for a balanced economic growth of the various channel empyreans.This paper analyses how these incentives calculate a part in attracting foreign enceinte inflows to enhance the m cardinaltary and industrial sectors in Singapore and their in force(p)ness in achieving our goals. 2. Purpose The point of this research is to gain an belowstanding of the levy incentives scene in Singapore, how it work and it effectiveness in achieving our draw of being a vibrant and big-chested global hub of knowledge-driven economy. 3. Our look for Questions for this StudyAs part of our research, the following questions were asked to right away us on our study What argon the impose income incentives open beneath the ITA, EEIA and DTA to attract foreign capital inflows? How effective are these measure incentives? 4. methodology We derived our information from books, online journals and other internet resources. 2. BACKGROUND 1. The Birth of the Income Tax Act, EEIA and DTA From a minuscule fishing is shore to a cosmopolitan country at heart a span of 44 years is what Singapore has become today, with per capita GDP follow to that of the leading(p) nations of Western Europe ( telephone exchange Intelligence Agency, 2008)1.As a mild island with limited, or rather, no resources to depend on, we have simply interpreted the humanity by surprise through the phenomenal economic growth that ha s taken place in a short period of time (Fordham, 1992)2. Our lone(prenominal) resources are fish and deepwater sea and despite all the limitations that we were faced with, we have secured a place in the world map as the leading financial, educational, services, manu incidenturing and research and development hub. Then, what is the clandestine of our achievements? is the question that arises in all our minds. aft(prenominal) being sepa consecrated from Malaya, the governments ambitious plans for the country to be industrially developed seemed too furthest-fetched especially with no natural resources to visit its own (Fordham, 1992). It did not, however, relent to the fact that achieving its goals is uncertain now with its given economic state. Its leaders knew at that time Singapore conducts to promote investment in new industries so that its goals layabout be achieved. Being under(a) developed and with no achievements or resources to call its own, it was a palpable fact that Singapore had to make radical changes to attract foreign investors,.This is when tax incentives were espy as a viable option to magnetize foreign capital inflows. The pre-existing Income Tax Act (1948) was evaluated to see how tax incentives could be structured to accomplish these asp viperirations. Along with this, in 1967, the sparing Expansion Incentives Act (EEIA) was eldest introduced to solidify the expansion and development programs that were being carried out by the Economic Development Board (Fordham, 1992). In early 1960s, Singapore recognised the need for a dynamic manufacturing sector and export policies to draw MNCs so that we could be used as a issue hindquarters to export goods worldwide.As a result of these get under ones skins, EEIA was introduced to grant tax benefits to manufacturing companies setting up production in pioneer areas in Singapore (Fordham, 1992). The development of international craftiness and multi national corporations has increase the is sue of double taxation. As a familiarity or individual looking beyond your own country for business opportunities and investments they would naturally be concerned with the problem of double taxation. Consequently they would essay to structure your operations at a minimum tax cost. This is where DTAs or tax treaties come into play 2.Incentives Available under ITA to Attract orthogonal Capital Inflows Singapore has always been main(prenominal)taining a competitive tax rate by being the lowest among the developed countries. Its purpose is to create an pull ahead business purlieu for economic expansion (Tan, 1996). consort to GuideMeSingapore, 2008, a sack up hepatic portal vein providing one-stop information on Singapores business environment to entrepreneurs, commented that Singapore is often cited as the leading example of countries that continues to reduce corporeal income tax rates and introduce various tax incentives to attract and intimidate global investments.This i s obvious in the frequent lowering of embodied tax rates since 1987. In 1989 the corporal income tax was reduced to 33 pct from 40 per centum to follow the worldwide trend of lowering corporate taxes. The corporate tax rate was make headway lowered in 1990 to 31 percent to encourage multi-national companies (MNCs) to locate their treasury and financial operations here (Tan, 1996). From then on, corporate tax rate has been gradually decreasing.In 2004 corporate tax rate was reduced to 20 percent and with the release of the 2009 calculate speech, corporate taxes will be cut to 17 percent in 2010. The aim of these reductions is to help businesses to curb operational costs so that Singapore nominate gain a competitive edge in hold out to attract laid-back-tech and high value-added investments (Liu, 2007). From our research we found that there are several tax incentives in place to pull foreign investments to Singapore (IRAS, 2008) and we will be foc utilise on those that are re levant to our study. 1.price reduction FOR EXPENSES ON RESEARCH AND DEVELOPMENT PROJECT (R) This incentive was introduced in 2003 to throw overboard company to deduct a second round of answer expenses from its income in addition to the automatic first deduction allowed under section 14D. kick upst childs plays amendments3 were made in 2008 to entitle companies for an automatic 50 percent tax allowance (PWC, 2008). This R allowance can be used to equilibrise against the companys chargeable income for the next 3 years (i. e. 2009 to 2013) to cue companies to carry out more R projects.This is coupled with meeting our aim to be a research and development hub in the global range (MOF, 2008). After the introduction of the tax incentive, add R expenditure change magnitude from $3. 4 billion to $4. 6 billion in 2005 (Lai, 2007)4. Majority of the R spending was contributed by the private sector, whose gross expenditure on R (GERD) increased by 1. 2 percent. By the end of 2005, GERD w as at 2. 4 percent of GDP. Singapore had surpassed the EU-15s5 and the Organisation for Economic Co-operation and Developments (OECD) averages of 1. percent and 2. 3 percent respectively (Lai, 2007). The increase in figures shows the effectiveness of the tax incentive program. tally to the report, this figure is still lower compared to U. S (2. 7 percent) and Japan (3. 0 percent). Considering the fact that these countries are bigger in land and population size, our achievement is still commendable. 2. CONCESSIONARY RATE OF appraise FOR APPROVED plate PROGRAM The purpose Headquarters Program was to encourage multinationals to base their main back offices in Singapore.This was to be achieved through reduced tax rate which is applied primarily to big multinational corporations that relocate the management and home office functions of their subsidiaries and affiliates from other countries to Singapore. Section 43E of Income Tax Act provides that companies with their substantial ope rations located here can qualify for a 10 percent concessionary rate of tax (IRAS, 2008). This tax incentive has pulled and is continuing to pull foreign gauge capita totals who provide the foreign capital infows.One much(prenominal) company is Societe Generale who accepted the OHQ award in January 2000. Besides this, Legg Mason Asset Management, Deutsche Asset Management, Merrill kill Mercury Asset Management and Zurich Scudder Investments are a few that were named in the MAS publication on New Initiatives for Enhancing monetary Sector Expertise, 2001. The motive for large-scale multinationals to relocate in Singapore is not only because of our highly groundbreaking infrastructure, telecommunication and information facilities.It is also due to the carry and encouragement that our government has been continuously offering through such(prenominal) tax incentives. 3. CONCESSIONARY RATE OF TAX FOR FINANCE AND TREASURY CENTRE (FTC) Foreign and Treasury Centre was introduced with the aim to entice foreign corporations to use Singapore as a base for conducting treasury management activities for related companies in the region. Under this scheme, foreign companies can enthral a 10 percent concessionary tax rate from tumble income from FTC subsidiaries, related companies and associates for pro plenty of FTC services.According to Mr. Lee Chuan Teck, Executive Director for Financial Markets Strategy in MAS, by 2006 a total of 600 companies had chosen Singapore as their focal point to operate their financial services (MAS, 2006). According to the Survey on Corporate Risk Management Practices, 75 percent of the foreign MNCs cited EDBs incentives as a reason for relocating their treasury centres in Singapore (Craig, 1997). This tells us the success of this incentive. 4.CONCESSIONARY RATE OF TAX FOR FINANCIAL empyrean INCENTIVES (FSI) The FSI scheme offers a concessionary tax rate of 5% for qualifying high growth and high value-added activities and 10% for mature but tax-sensitive activities. The FSI is a sum of money designed to invite the front and back offices of multinational financial groups to Singapore so as to meet our overall goal to be a leading centre for competence in knowledge-driven activities and a choice muddle for company headquarters with responsibilities for product and capability charters (Geeta, 2002). Singapores vision is to be a pre-eminent financial centre in Asia.Technopreneurship 21 is the hatchway that the government launched to achieve this goal. FSI plays a key role in attracting foreign multinationals to start-up their financial services in Singapore so that its dream of comme il faut a financial hub in the international arena can materialize. How far have been successful in this attempt is the question that we should be asking. As at 2005, 24 foreign full service licensees, 35 sell licensees and 46 offshore licensees operated in Singapore. Statistics provided by EDB (Embassy, 2006) for 2005 shows that fore ign financial establishment J.P Morgan Securities Asia, U. S. based MNC, had assets totalling up to US$14. 5 billion in Singapore. Singapore Department of Statistics reported that the financial and insurance services sector had generated US$49,223 of Foreign Direct Investments in 2003. That is 34 percent of the total FDI for that year (Embassy, 2006). 5. APPROVED GLOBAL TRADING COMPANY world(prenominal) barter Company was launched to facilitate and develop international trading activities. The GTP is a conjugation of the Approved Oil Trader (AOT) and the Approved world-wide Trader (AIT) architectural plans.The programme encourages global trading companies to use Singapore as their regional or global base to conduct activities along the total trade value-add range of mountains from procurement to distribution, in order to expand into the region and beyond (IEsingapore, 2009). over the years, the programme has attracted a vibrant cluster of global trading companies to hub thei r strategical business functions in Singapore. These companies are key players in their respective industries such as oil trading, petrochemicals, agri-commodities and metals (IEsingapore, 2009).Minister for Trade and Industry, Mr Lim Hng Kiang announced in his speech during the Global Trader Networking Cocktail 2008 that in 2007, offshore trade by companies under IE Singapores Global Trader Programme, GTP, grew more than 30% to reach over US$465 billion. These companies employed over 7,000 stave and contributed S$7. 8 billion worth of total business spending. overmuch of the spending was in shipping, freight management and storage services, lending further testimony to Singapores strengths as a logistics and auxiliary services hub.From a modest start of 25 companies in 1989, there are currently more than 230 companies under the GTP (MTI, 2008) . 3. Incentives Available under EEIA Tax incentives available under EEIA are discussed below (IRAS, 2008). 1. PIONEER INDUSTRIES INCENTIVE S The first aim of initiate Industries was to attract capital from both local and foreign companies who invest in new industries in Singapore. This incentive was introduced to draw investment in advanced areas to enhance Singapores industrial development (Fordham, 1992).Companies which qualified for PI were given a full tax exemption on qualifying profits for a period of time ranging from 5 years to 15 years. Implementation of this incentive saw a surge in the procedure of manufacturing industries that were set up here. By 1997, petroleum industries and electronics industries were dominating the Pioneer Manufacturing Establishments. MNCs standardised Exxon, Shell Sumitomo, Seagate, Hewlett-Packard and Compaq were already located here then contributing a total of S$117,104 million of foreign equity investment in Singapore (H H, 1997).As at 2004, the qualifying activities include services such as medical, publishing, education, automated warehousing facilities, exhibition and conf erence, financial, act capital investment firm activity and so on (H H, 1997). 2. DEVELOPMENT AND EXPANSION INCENTIVE (DEI) This incentive is granted mainly to manufacturing and service industries that are engaged in capital investment to upgrade or modernize production capacity. The purpose of this incentive is to encourage greater growth and attract more companies to move into higher(prenominal) value-added activities.Under this scheme, eligible companies are entitled to preferential corporate tax rates for qualifying profits above a pre-determined base for a specific period (SPRING Singapore, 2008). According to the statistics collated by Ministry for Trade and Industry, the total investment by foreign companies in Singapore in development projects increased from$6,608 in 1997 to $17,187 in 2007. 3. OVERSEAS ENTERPRISE INCENTIVE (OEI) OEI was put in place to encourage local businesses to invest in a venture company, engine room investment company or overseas investment company .OEI provides tax exemption on the qualifying income. Overseas investment should result in new business opportunities, activities as easily as new technology to be introduced in Singapore. For instance DBS Bank, Bakerzin and Charles and Keith are a few big local bred companies which have ventured overseas. DBS Bank, Singapores local bank, has ventured into countries like Thailand, Hong Kong, India, Japan, U. S and many more (IESingapore, 2008). Bakerzin has franchises in KL, Jakarta, Shanghai and US while Charles and Keith had ventured into the heart and soul East and Asia Pacific markets (IESingapore, 2008). . Effect of DTA in attracting foreign capital inflows According to the Inland Revenue Authority of Singapore, we have 59 Double taxation Agreements with various countries. These treaties were signed to relieve taxpayers from the burden of double taxation when they deport their earnings to their home country. These treaties aim to offer relief from double taxation, each by way of tax credit, tax exemption or a reduced tax rate. These reduced rates and exemptions vary among countries and specific items of income. accord provisions generally are reciprocal (apply to both treaty countries). scarce Singapore tax residents and tax residents of the treaty country can enjoy the benefits of a DTA. Signing of these treaties has resulted in increased foreign investments from countries such as Europe, U. S. and Japan. In 1996 the total foreign investments was $125,274. The major investors then were Japan, Europe and U. S. In 2006 the investments rose to $363,935 and the major players are Japan, Europe, U. S, European Union and South and Central America and the Caribbean. 3. CONCLUSIONPolicies have been the driving force for a small nation like Singapore to achieve so much within a short period of time. With no natural resources, foreign capital inflows in the form of foreign direct investments has played major part in shaping our nation to what it is today. Wi th less to offer, tax incentives are one of the key reasons that had attracted many foreign companies creating a pool of foreign capital inflows. Our research on the various tax incentives has showed us that, indeed, they were effective passable to attract foreign companies to locate here with their technology and know-how.The early years efforts to industrialize our economy paid off and that had enabled us to improve our air and seaport facilities, telecommunication, information technology, warehousing and logistics facilities. Tax incentives have been working in the background and today these are some of our achievements (www. sedb. govs. sg) Now as we move towards being knowledge based economy with technopreneurial goals, our tax incentives have been further enhanced through the R deductions and allowing more activities to be qualified under the Pioneer Industries.Thus in our opinion, the tax incentives offered under ITA, EEIA and DTA have been effective in attracting foreign ca pital inflows which have shaped our country frankincense far. BIBILIOGRAPHY Agency, C. I. (2008). Central Intelligence Agency. Retrieved exhibit 28, 2009, from CIA www. cia. gov Craig, F. (1997). Survey of Coporate Risk Management Practices 1997. Retrieved April 3, 2009, from Singapore Foreign Exchange Market Committee http//www. sfemc. org/annual_report/Tansformation_AR_1997_-b. pdf D. J. (1996, December).Learning from Singapore channel to Non-agonised Budgeting. Asian Journal of Public Administration . E. o. (2006, January). 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Pagesetters Services Pte Ltd. 1 CIA The World factbook https//www. cia. gov/library/publications/the-world-factbook/geos/sn. html. 2 Fordham, Margaret BA Durham Tax Incentives for Investment and Expansion 2/E 1992 3 ground on the IRAS circular, definition of R&D was amended to incorporate the requirements that the R&D study must be systematic, investigative and experimental.R&D project must involve novelty or technical jeopardy and be undertaken with the object of acquiring new knowledge or using the results of the study for the production or improvement of materials, devices, products, produce or processes. The list of specifically excluded activities in the definition of R&D has also been spread out so that routine modifications, cosmetic modi fications or stylistic changes, as well as the development of software that is not intended for sale, lease or license to third parties are excluded.However, an exception is introduced for research in the accessible sciences and humanities and for software development that is undertaken wholly or mainly to support a qualifying R&D project. In these cases, the expenditure can be included as part of the qualifying R&D project expenditure. More information is available at http//www. pwc. com/extweb/manissue. nsf/docid/6D2E3517BF8BE91DCA25753C00373526 4 The National R&D Survey is attached as Annex 2 5 The European Union-15 comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and United Kingdom.