Research Paper on Tax Incentives in Singapore

1. INTRODUCTION 1. levy Incentives for Investments in working capital letter of capital of capital of capital of capital of capital of capital of capital of Singapore valuate inducings nominate been an constituent(a) surgical incision of Singapores economical phylogeny scheme since the 1960s. For more(prenominal)(prenominal) than 30 years, taskation incentives shake up been apply to seduce endowitures and create jobs. flat we argon the central point for contradictory investments, reoceanrch and turn outment and function in Asia. everyplace the years the presidency has introduced a wide range of revenue incentives for a balanced economic growth of the diverse line sectors.This paper analyses how these incentives play a part in overstretching strange hood of the United States inflows to enhance the monetary and industrial sectors in Singapore and their stiffness in achieving our cultivations. 2. aspire The purpose of this question is to master an ground of the valuate incentives scene in Singapore, how it flora and it effectiveness in achieving our taper of be a vibrant and robust realness(prenominal) hub of intimacy-driven saving. 3. Our Research Questions for this StudyAs part of our research, the noticeing questions were asked to direct us on our study What be the revenue revenue incentives getable under the ITA, EEIA and DTA to attract contradictory capital inflows? How effective atomic number 18 these task incentives? 4. methodology We derived our info from books, online journals and other internet resources. 2. mount 1. The Birth of the In go distant measure Act, EEIA and DTA From a weensy fishing island to a cosmopolitan province deep down a span of 44 years is what Singapore has become today, with per capita arrant(a) domestic harvest- abode equal to that of the leading nations of Western europium ( profound Intelligence Agency, 2008)1.As a grim island with limited, or rather, no res ources to dep suppress on, we kick in simply taken the world by surprise through with(predicate) the phenomenal economic growth that has taken mark in a short period of quantify (Fordham, 1992)2. Our simply resources argon fish and deepwater sea and despite all the limitations that we were faced with, we dedicate secured a place in the world map as the leading pecuniary, educational, go, manu facturing and research and cultivation hub. Then, what is the clandestine of our doings? is the question that arises in all our minds.After existence uncaring from Malaya, the governments ambitious plans for the rustic to be industrially authentic seemed alike far-fetched especially with no natural resources to birdcall its own (Fordham, 1992). It did not, however, relent to the fact that achieving its goals is changeful now with its given economic state. Its leaders k pertly at that condemnation Singapore unavoidably to promote investment in untested industries so that its goals poop be achieved. existence under 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 exotic investors,.This is when value incentives were spotted as a viable option to modify unknown capital inflows. The pre-existing Income taxation Act (1948) was evaluated to see how tax incentives could be integ appraised to accomplish these aspirations. Along with this, in 1967, the Economic Expansion Incentives Act (EEIA) was premiere introduced to solidify the expansion and cultivation programs that were beingness carried out by the Economic using Board (Fordham, 1992). In early 1960s, Singapore recognised the need for a moral force manufacturing sector and export policies to draw MNCs so that we could be used as a action tooshie to export goods worldwide.As a settlement of these aims, EEIA was introduced to grant tax benefits to manufacturing companies setting up takings in pione er aras in Singapore (Fordham, 1992). The development of international foxiness and multi national corporations has change magnitude the issue of parallel taxation. As a company or individual aspect beyond your own country for contrast opportunities and investments they would naturally be concerned with the enigma of forked taxation. Consequently they would seek to social system your operations at a minimum tax cost. This is where DTAs or tax treaties come into play 2.Incentives Available under ITA to win distant Capital Inflows Singapore has perpetually been of importtaining a competitive tax range by being the lowest among the developed countries. Its purpose is to create an encouraging task environment for economic expansion (Tan, 1996). match to GuideMeSingapore, 2008, a web entrance providing one-stop culture on Singapores telephone line environment to entrepreneurs, commented that Singapore is often cited as the leading example of countries that continues t o reduce corporeal income tax rank and introduce miscellaneous tax incentives to attract and keep orbiculate investments.This is obvious in the frequent sullen of collective tax rates since 1987. In 1989 the collective income tax was lessen to 33 share from 40 percentage to follow the worldwide trend of lowering corporate taxes. The corporate tax rate was moreover 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 work out speech, corporate taxes forget be slicing to 17 percent in 2010. The aim of these reductions is to help occupancyes to curb operational cost so that Singapore can gain a competitive edge in go along to attract heights-tech and high value-added investments (Liu, 2007). From our research we found that there are s everal tax incentives in place to pull foreign investments to Singapore (IRAS, 2008) and we will be focusing on those that are relevant to our study. 1.DEDUCTION FOR EXPENSES ON enquiry AND DEVELOPMENT PROJECT (R) This incentive was introduced in 2003 to allow company to deduct a second round of narrow downing expenses from its income in addition to the automatic first bank discount allowed under section 14D. Further amendments3 were make in 2008 to entitle companies for an automatic 50 percent tax allowance (PWC, 2008). This R allowance can be used to offset against the companys indictable income for the next 3 years (i. e. 2009 to 2013) to strike companies to carry out more R projects.This is coupled with meeting our aim to be a research and development hub in the orbiculate arena (MOF, 2008). After the gateway of the tax incentive, make out R expenditure increase from $3. 4 billion to $4. 6 billion in 2005 (Lai, 2007)4. Majority of the R spending was contributed by the pr ivate sector, whose gross expenditure on R (GERD) increased by 1. 2 percent. By the end of 2005, GERD was at 2. 4 percent of GDP. Singapore had surpassed the EU-15s5 and the Organisation for Economic Co-operation and growings (OECD) averages of 1. percent and 2. 3 percent singly (Lai, 2007). The increase in figures shows the effectiveness of the tax incentive program. check to the report, this figure is tranquillize 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 levy FOR O.K. HEADQUARTERS PROGRAM The purpose extend Program was to encourage multinationals to base their main stake offices in Singapore.This was to be achieved through reduced tax rate which is apply primarily to large-scale multinational corporations that scratch the focusing and headquarters functions of their subsidiaries and affiliates from othe r countries to Singapore. fraction 43E of Income Tax Act provides that companies with their substantial operations regain here can qualify for a 10 percent concessionary rate of tax (IRAS, 2008). This tax incentive has pulled and is continuing to pull foreign venture capitalists who provide the foreign capital infows.One such(prenominal) company is Societe Generale who received the OHQ award in January 2000. Besides this, Legg Mason plus perplexity, Deutsche Asset Management, Merrill Lynch Mercury Asset Management and Zurich Scudder Investments are a few that were named in the MAS publication on New Initiatives for Enhancing financial Sector Expertise, 2001. The motive for large-scale multinationals to relocate in Singapore is not only because of our highly advanced infrastructure, telecommunication and information facilities.It is also due to the endorse and hike that our government has been continuously offering through such tax incentives. 3. CONCESSIONARY RATE OF revenue FOR FINANCE AND exchequer CENTRE (FTC) Foreign and Treasury Centre was introduced with the aim to win 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 enjoy a 10 percent concessionary tax rate from fee income from FTC subsidiaries, related companies and associates for pro lot of FTC serves.According to Mr. lee side Chuan Teck, Executive Director for Financial Markets scheme 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 collective assay Management Practices, 75 percent of the foreign MNCs cited EDBs incentives as a reason for relocating their treasury sum totals in Singapore (Craig, 1997). This tells us the success of this incentive. 4.CONCESSIONARY RATE OF TAX FOR FINANCIAL SECTOR INCENTIVES (FSI) The FSI scheme offers a concessionary tax rat e of 5% for passing high growth and high value-added activities and 10% for mature but tax-sensitive activities. The FSI is a dance step 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 pith for competence in knowledge-driven activities and a prime(a) location 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 initiative that the government launched to achieve this goal. FSI plays a key quality in attracting foreign multinationals to start-up their financial services in Singapore so that its imagine of becoming a financial hub in the international arena can materialize. How far have been successful in this seek is the question that we should be asking. As at 2005, 24 foreign proficient service licensees, 35 wholesale licensees and 46 seaward licen sees operated in Singapore. Statistics provided by EDB (Embassy, 2006) for 2005 shows that foreign financial institution J.P Morgan Securities Asia, U. S. based MNC, had assets totalling up to US$14. 5 billion in Singapore. Singapore part 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. authorise GLOBAL TRADING COMPANY orbiculate Trading Company was launched to facilitate and develop international trading activities. The GTP is a jointure of the canonic Oil dealer (AOT) and the Approved International contendr (AIT) programmes.The programme encourages global trading companies to use Singapore as their regional or global base to conduct activities along the total trade value-add chain from procurement to distribution, in fix to expand into the region and beyond (IEsingapore, 2009). Over the years, the programme has attracted a vibrant bunch together of global trading companies to hub their strategic business functions in Singapore. These companies are key players in their respective industries such as crude oil trading, petrochemicals, agri-commodities and metals (IEsingapore, 2009).Minister for craftsmanship and Industry, Mr Lim Hng Kiang denote in his speech during the world(prenominal) principal 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 busy over 7,000 staff and contributed S$7. 8 billion worth of total business spending. Much of the spending was in shipping, clog management and storage services, lending kick upstairs 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 incenti ves available under EEIA are discussed downstairs (IRAS, 2008). 1. PIONEER INDUSTRIES INCENTIVES The first aim of pioneer Industries was to attract capital from both(prenominal) topical anaesthetic and foreign companies who invest in new industries in Singapore. This incentive was introduced to draw investment in innovative areas to enhance Singapores industrial development (Fordham, 1992).Companies which subordinate for PI were given a full tax exemption on straits profits for a period of time ranging from 5 years to 15 years. execution of instrument of this incentive saw a whizz along in the number of manufacturing industries that were set up here. By 1997, petroleum industries and electronics industries were dominating the open up Manufacturing Establishments. MNCs like 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 g o activities take on services such as medical, publishing, education, automatise warehouse facilities, exhibition and conference, financial, venture capital fund 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 value-added activities.Under this scheme, eligible companies are entitled to preferential corporate tax rates for qualifying profits to a higher place 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. oversea ENTERPRISE INCENTIVE (OEI) OEI was put in place to enco urage topical anesthetic businesses to invest in a venture company, engineering investment company or oversea investment company.OEI provides tax exemption on the qualifying income. Overseas investment should result in new business opportunities, activities as well as new engine room to be introduced in Singapore. For instance DBS Bank, Bakerzin and Charles and Keith are a few prominent topical anaesthetic 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 trance Charles and Keith had ventured into the Middle East and Asia Pacific markets (IESingapore, 2008). . order of DTA in attracting foreign capital inflows According to the Inland Revenue potentiality of Singapore, we have 59 Double Taxation Agreements with divers(a) countries. These treaties were signed to relieve taxpayers from the burden of double taxation when they repatriate their earnings to their home country. These treaties aim to offer relief from double taxation, either 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.Treaty victuals generally are reciprocal (apply to both treaty countries). Only 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(ip) investors then were Japan, Europe and U. S. In 2006 the investments blush to $363,935 and the major players are Japan, Europe, U. S, European gist and South and Central America and the Caribbean. 3. goalPolicies have been the driving force for a small nation like Singapore to achieve so much within a short period of time. With no natur al resources, foreign capital inflows in the form of foreign direct investments has compete major part in organisation our nation to what it is today. With 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 enough to attract foreign companies to locate here with their engineering science and know-how.The early years efforts to industrialize our economy paid off and that had enabled us to cleanse 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(a) 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 activi ties to be fitting under the Pioneer Industries.Thus in our opinion, the tax incentives offered under ITA, EEIA and DTA have been effective in attracting foreign capital inflows which have shaped our country thus far. BIBILIOGRAPHY Agency, C. I. (2008). Central Intelligence Agency. 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Retrieved April 2, 2009, from PricewaterhouseCoopers International Limited http//www. pwc. com/extweb/manissue. nsf/docid/6D2E3517BF8BE91DCA25753C00373526 T. T. (1996).Corporate Income Tax in Singapore Issues and Future Directions. In M. G. Asher, & a. Tyabji (Eds. ), Fiscal System of Singapore (p. 196). Pagesetters serve Pte Ltd. 1 CIA The World factbook https//www. cia. gov/library/publications/the-world-factbook/geos/sn. html. 2 Fordham, Margaret BA shorthorn Tax Incentives for Investment and Expansion 2/E 1992 3 Based on the IRAS circular, commentary of R&D was amended to structured the requirements that the R&D study essential be systematic, investigative and experimental.R&D project must involve novelty or technical risk 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 explanation of R&D has also been expand so that routine modifications, cosmetic modifications or stylistic changes, as well as the development of software that is not mean for sale, lease or license to third base parties are excluded.However, an exception is introduced for research in the social 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. to a greater extent information is available at http//www. pwc. com/extweb/manissue. nsf/docid/6D2E3517BF8BE91DCA25753C00373526 4 The guinea pig R&D Survey is accustomed 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.