Singapore – more tax benefits for both businesses and households

Finance Minister, Tharman Shanmugaratnam, delivered Singapore’s budget statement for the 2011/12 fiscal year on February 18, and announced tax benefits to households and businesses totalling some SGD 13bn (USD 10.2bn).

Shanmugaratnam said that the government’s long-term aim is to raise incomes by 30% in real terms over the next ten years by growing the economy, and helping businesses to invest, restructure and developing skills, while also introducing measures to expand support for lower and middle-income Singaporeans. He pointed out that Singapore’s economy had done exceptionally well in the past year. After two weak years in 2008 and 2009, when growth was close to zero, its gross domestic product (GDP) grew by a record 14.5% in 2010, and is forecast to grow by up to 6% this year. Due to the improved economic growth, the originally expected budget deficit of SGD 3.0bn, or 1% of GDP, in 2010/11, has been transformed into a much lower deficit of SGD 0.3bn, or only 0.1% of GDP.

Shanmugaratnam was therefore able to announce that, in 2011/12, companies will receive a 20% income tax rebate, capped at SGD 10,000, or a small and medium-sized enterprises (SME) cash grant of 5% of a company’s revenue, capped at SGD 5,000. Companies will automatically receive the higher of the tax rebate or the grant when Inland Revenue Authority of Singapore assesses 2011/12 tax returns.

To further encourage pervasive innovation and raise productivity efforts, the productivity and innovation credit (PIC) scheme will be simplified and enhanced. The amount of tax deduction or allowance will be increased to 400% (from 250%) of research and development (R&D) expenditure, for the first SGD 400,000 (increased from SGD 300,000) spent on each qualifying activity.

PIC benefits will also be made available to R&D made abroad; businesses will be allowed to combine the SGD400,000 expenditure cap per year for 2013 to 2015 into a new ceiling of SGD 1.2m over the three years; and there will be an enhanced cash conversion option where taxpayers can opt to receive, in lieu of tax deduction benefits, a cash payout of 30% of the first SGD100,000 of qualifying expenditure, up to a maximum of SGD 30,000.

In addition, Shanmugaratnam is to simplify and reduce the taxation of foreign income, so as to support companies that are globalised and earning a larger share of their income overseas. Foreign tax credit (FTC) pooling is to be introduced to give businesses greater flexibility in their claim of FTCs, reduce their Singapore taxes payable on remitted foreign income (FI), as well as to simplify tax compliance.

Under the FTC pooling system, FTC is to be computed on a pooled basis, rather than on a source-by-source and country-by-country basis for each particular stream of income. The amount of FTC to be granted will be based on the lower of the pooled foreign taxes paid on the FI and the pooled Singapore tax payable on such FI. This will take effect from the 2012 assessment year.

Shanmugaratnam then said that, while Singapore is making good progress to becoming a location of choice in Asia for global companies as well as a launch-pad for Asian enterprises to globalize, he has made other tax changes in strategic business sectors to enhance its overall competitiveness as such a hub.

For example, to facilitate access to a wider range of funding sources for their lending business and strengthen Singapore’s position as a regional funding centre, enhancements will be made to the withholding tax exemption (WHT) exemption regime for banks, finance companies and investment banks with effect from April 1, 2011. WHT exemption will be granted on interest payments made to all non-resident persons (including funding from non-bank sources, such as hedge funds and insurers).

With effect from June 1, 2011, existing maritime incentives will be streamlined and enhanced. New tax benefits, such as certainty of WHT exemption for interest payments on loans to build or buy ships, will be introduced to further entrench international ship operators and encourage the growth of the shipping-related services sector in Singapore.

There will also be a package of individual income tax benefits for all Singaporeans. All resident individual taxpayers will be given a one-off personal income tax rebate of 20%, capped at SGD 2,000 per taxpayer, in 2011/12, and a new personal income tax rate structure will take effect from 2012/13. Marginal tax rates will be reduced for the first SGD 120,000 of chargeable income. While all taxpayers benefit, middle-income earners will enjoy the largest percentage reduction in taxes under the new rates. Shanmugaratnam disclosed that the government will continue to review Singapore’s top personal income tax rate, but saw no pressing competitive need for it to be reduced at present. After factoring in the various tax and other measures announced in his budget, he still expected a basic fiscal deficit of only SGD 2.2bn, or about 0.7% of GDP, in 2011/12.