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Singapore’s 2005 budget: tax implications for private equity house's portfolio firms07/06/2005. Source: Baker & McKenzie.
 Singapore’s 2005 Budget which was revealed on 18th February 2005 can be considered to be directed at fine-tuning and refinements, rather than making radical changes, says Baker & McKenzie.
Aspects of the proposed changes with potential implications for multinational corporations include:
Global Trader Program (With effect from Year of Assessment (YA) 2006)
To strengthen Singapore’s position as a logistics hub, the current tax concessions available under the Global Trader Programme (GTP) will be widened to include trades denominated in Singapore dollar transactions.
Currently, concessionary tax rates of either 5% or 10% generally apply to the income derived from qualifying transactions, including physical trading, commodity futures trading, and over-the-counter hedging transactions carried out in a currency other than Singapore dollars. The extension to trades in Singapore dollar transactions will encourage GTP companies that want to use the Singapore dollar as the transaction currency to carry out more trading activities in Singapore.
It will also add flexibility of choice for global traders under the program.This proposal is a continuation of measures taken in recent years to broaden Singapore’s tax incentives to include Singapore dollar denominated transactions.
Stamp Duty Relief (With effect from 18 February 2005)
Currently, one of the requirements for stamp duty relief on the transfer of assets, including shares and land, between associated companies is that the transferee company must either be incorporated in Singapore or a tax resident in Singapore. This requirement is to be removed.The proposal will give more flexibility to corporate groups when restructuring their Singapore operations.
Finance and Treasury Centre (With effect from 18 February 2005)
The current Finance and Treasury Centre (FTC) incentive is aimed at encouraging multinational corporations to use Singapore as a location for conducting treasury management activities for associated and related companies within the region. A concessionary tax rate of 10% is available to FTCs on income received from its offices and associated companies outside Singapore, for the provision of qualifying FTC services to them, and on the income from qualifying activities conducted on the FTC company’s own account.
The scope of the FTC will be enhanced in two ways. In the first instance, associated companies of the FTC which are in Singapore can qualify as approved network companies for the purposes of the incentive. In addition, the scope of the qualifying activities and services is extended to include transactions denominated in Singapore dollars.
The extension of these FTC incentives is in line with the introduction of the Financial Sector Incentive (FSI) scheme, under which counterparty and currency restrictions have generally been lifted.The proposal should reduce the compliance burden of separate accounting for Singapore dollar and transactions denominated in other currencies and should give greater flexibility to group funds management.
The proposal could provide an additional benefit in the sense that a Singapore network company may be entitled to a deduction with respect to expenses paid for the services provided by the FTC, at the tax effective rate of 20%, while the service income will be taxed for the Singapore FTC at the rate of 10%. It remains to be seen if measures will be introduced to minimise this revenue leakage from the government’s perspective. Finally, the proposal is likely to result in multinational corporations increasing their use of Singapore-based FTCs as intermediaries in funding their Singapore subsidiaries. One of the most valuable benefits of the FTC incentive is the withholding tax exemption granted for interest payment on loans from overseas related parties, where the funds from these loans are used to conduct qualifying FTC activities.
Expansion of Bonded Warehouse Scheme(With effect from 1 January 2006)
Under the current rules governing the Bonded Warehouse Scheme, warehouse operators must ensure that at least 80% of the goods imported and bonded, are re-exported.To grow the service sector and strengthen Singapore’s position as a logistics hub, this requirement will be lifted. Additionally measures will be introduced which will provide greater flexibility in storing and moving goods between pre-approved warehouses.
(With effect from YA 2006) To assist companies experiencing cash flow difficulties, current year unutilised capital allowances and trade losses will be allowed to be carried back for one year of assessment, preceding the year in which the capital allowances were granted or the trade losses were incurred. Although, the carry-back system is available to all businesses, the capital allowances and trade losses which can be utilised is capped at a maximum of S$100,000 and thus the maximum potential current refund will be S$20,000.
As such, the proposal will be of benefit mainly tor small to medium enterprises. It is unresolved as yet as to whether losses will be available to be carried back, only after the relevant tax return has been agreed with the IRAS. If this is the case, tax refunds may be delayed where loss recipient companies have a number of assessments which are not yet final. Additionally, the utilisation of the proposed carry-back system may affect both Singapore companies’ and the foreign parents of Singapore companies’ ability to claim relevant foreign tax credits.
Conclusion
On the whole, the Budget contained some proposals of benefit to multi-nationals. These proposals were balanced with other Budget announcements, with economic and social objectives aimed at other participants in the Singapore community and economy.
Edmund Leow - Tel: +65 6434 2530 - edmund.leow@bakernet.com. Nicole Ma - Tel: +65 6434 2575 - nicole.ma@bakernet.com.
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