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1 Cover_layout_FINAL:Layout 1 19/2/2011 7:57 AM Page 1 TAX Singapore Budget 2011 B u d g e t "Budget 2011" is issued in summary form exclusively for the information of clients and staff of KPMG Advisory LLP, KPMG LLP and KPMG Services Pte Ltd. It should not be used or relied upon as a substitute for detailed advice or a basis for formulating business decisions. It should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. In such cases, specialist advice should be taken. Please note that the Budget proposals and other tax changes summarised in this document may be amended significantly before enactment KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Singapore. kpmg.com.sg

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3 Contents Corporate Tax 01 Enhancement of the Productivity and Innovation Credit Scheme 06 One-off Corporate Income Tax Rebate or SME Cash Grant 07 Foreign Tax Credit Pooling 09 Streamlining of Section 14B and Section 14K Tax Deduction Schemes 10 Pre-commencement Expenses 11 Extending Tax Deduction for Employee Equity-based Remuneration 12 Liberalisation of the Withholding Tax Exemption Regime for Banks 14 Extension of Captive Insurance Tax Incentive Scheme 15 Extension of Marine Hull and Liability Insurance Tax Incentive Scheme 16 Extension and Enhancement of Specialised Insurance Tax Incentive Scheme 17 Extension of Tax Incentive Schemes for Project Finance 19 Enhancement to the Tax Incentive Scheme for Trustee Company 20 Renewal of Tax Exemption Scheme for Income Derived from Structured Products 22 Withdrawal of Withholding Tax Exemption Scheme for Financial Guarantee Insurers 23 Maritime Sector Incentive 25 Enhancement of the Global Trader Programme 27 Enhancement of the Finance and Treasury Centre Incentive 28 Tax Benefits for Voluntary CPF Medisave Contributions to Self-Employed Persons 29 Special Employment Credit 30 Further Extension of Enhanced Tax Deduction on Donations Goods and Services Tax 31 Import GST Relief of Clinical Trial Materials and Extension of Approved Contract Manufacturer and Trader Scheme 32 Zero-Rating for Specialised Storage and Other Value-Added Services 33 GST Measures for the Marine Industry

4 Contents Personal Tax 35 Reduction in Personal Tax Rates 37 Personal Income Tax Rebate 38 Supplementary Retirement Scheme Contribution Cap 39 Exemption of Alimony and Maintenance Payments and Removal of Relief for Ex-Spouse CPF & Workfare 40 CPF Contribution Rate and Salary Ceiling 41 Top-Up to CPF Medisave Accounts 42 Special CPF Housing Grant 43 Workfare Special Bonus Stamp Duty 44 Grant of Stamp Duty Relief for A Company Converting into A Limited Liability Partnership 46 Removal of Most Fixed or Nominal Stamp Duties 48 Extension of Stamp Duty Remission in Excess of $50 to Cover Aborted Lease Contracts or Agreements Others 49 Growth Dividends 50 Child Development Credit 51 Edusave Top Up and Grants 52 Extension of Green Vehicle Rebate Scheme 53 Utilities-Save and Service and Conservancy Charges Rebates 54 Foreign Worker Levies 55 Excise Duties for Tobacco Products 56 Abolition of Radio and Television Licence Fees

5 Contents Appendices I. Singapore GDP Growth Rate II. III. IV. Collection of Income Tax, Goods & Services Tax, Stamp Duty, Property Tax and Other Duties Comparison of Effective Corporate Tax Rates of Selected Countries in Asia Pacific Comparison of Effective Personal Tax Rates of Selected Countries in Asia Pacific V. Survey of Indirect Taxes Levied in Selected Countries in Asia Pacific VI. VII. Global Statutory Corporate Income Tax Rates Tax Treaty Countries VIII. Salient Major Tax Changes in 2010 IX. Tax Incentives for R&D and Innovation X. Financial Sector Incentive Scheme XI. XII. Fund Vehicles Tax Exemption Scheme Glossary

6 Corporate Tax 01 Enhancement of the Productivity and Innovation Credit Scheme Present Position Currently, the Productivity and Innovation Credit (PIC) scheme provides enhanced tax deduction or allowance for qualifying expenditure incurred on each of the six qualifying activities along the innovation value chain: 1) Research and Development (R&D) 250% tax deduction for the first $300,000 of qualifying expenditure incurred on R&D done in Singapore per YA; 150% tax deduction for the balance qualifying expenditure incurred on R&D done in Singapore; and 100% tax deduction for the balance of all other R&D expenditure, including expenditure incurred on overseas R&D which is related to an existing trade or business. 2) Investments in Design 250% tax deduction for the first $300,000 of qualifying expenditure incurred on eligible design activities done in Singapore per YA; and 100% tax deduction for the balance expenditure. This tax incentive is administered by the DesignSingapore Council, and an application must be made to the DesignSingapore Council for the incentive. 3) Acquisition of Intellectual Property (IP) 250% allowance for the first $300,000 of qualifying expenditure incurred per YA; and 100% allowance for the balance expenditure. The taxpayer is required to own the legal and economic rights of the IP. 4) Registration of IP 250% tax deduction for the first $300,000 of qualifying expenditure incurred on the registration of patents, trademarks, designs and plant varieties per YA; and 100% tax deduction for the balance expenditure. 5) Investments in Automation 250% allowance or tax deduction for the first $300,000 of expenditure incurred on qualifying investments in automation per YA; and 100% allowance or tax deduction for the balance expenditure. Qualifying investments in automation is based on the list of automation equipment as prescribed in the Regulations Income Tax (Automation Equipment) Rules 2010.

7 Corporate Tax 02 Enhancement of the Productivity and Innovation Credit Scheme 6) Training 250% tax deduction for the first $300,000 of qualifying training expenditure incurred on all external training courses, and in-house training courses accredited by the Workforce Development Agency (WDA) and the Institute of Technical Education (ITE) incurred per YA; and 100% tax deduction for the balance expenditure. A combined expenditure cap of $600,000 is allowed for each of the qualifying activities for YA 2011 and YA Cash conversion option: An eligible business can elect to convert up to $300,000 of qualifying tax deductions or allowances into a cash payout of up to $21,000 for each YA. An eligible business means: sole proprietorship, partnership or company; and employs at least three local employees (i.e. Singaporeans or Singapore permanent residents with CPF contributions). Available from YA 2011 to YA Combined cap of up to $42,000 of cash payout for YA 2011 and YA Details of the current PIC scheme are outlined in the IRAS e-tax Guide on PIC. Proposed Change The PIC scheme is enhanced as follows: The quantum of tax deduction or allowance is increased to 400% of qualifying expenditure (currently 250%), for the first $400,000 spent on each qualifying activity (currently $300,000); The PIC benefit is made available to overseas R&D which is related to an existing trade or business, and not just R&D done in Singapore as is currently the case; Businesses are allowed to combine the $400,000 expenditure cap per YA for YA 2013 to YA 2015 into a new ceiling of $1,200,000 over the three years of assessment. Businesses are therefore able to claim a 400% tax deduction or allowance for the first $1,200,000 of expenditure on each activity that they incur for YA 2013, YA 2014 and YA 2015 combined; and Businesses can opt to receive, in lieu of tax deduction or allowance benefits, a cash payout of 30% of the first $100,000 of qualifying expenditure, capped at $30,000 (currently $21,000).

8 Corporate Tax 03 Enhancement of the Productivity and Innovation Credit Scheme With the above changes, the enhanced PIC scheme is as follows: 1) Research and Development 400% tax deduction for the first $400,000 of qualifying expenditure incurred on R&D done in Singapore or overseas R&D which is related to an existing trade or business per YA; 150% tax deduction for the balance qualifying expenditure incurred on R&D done in Singapore; and 100% tax deduction for the balance of all other R&D expenditure, including expenditure incurred on overseas R&D which is related to an existing trade or business. 2) Investments in Design 400% tax deduction for the first $400,000 of qualifying expenditure incurred on eligible design activities done in Singapore per YA; and 100% tax deduction for the balance expenditure. This tax incentive is administered by the DesignSingapore Council, and an application must be made to the DesignSingapore Council for the incentive. The DesignSingapore Council is expected to release more details by end March ) Acquisition of IP 400% allowance for the first $400,000 of qualifying expenditure incurred per YA; and 100% allowance for the balance expenditure. The requirement to own the legal and economic rights of the IP remains. 4) Registration of IP 400% tax deduction for the first $400,000 of qualifying expenditure incurred on the registration of patents, trademarks, designs and plant varieties per YA; and 100% tax deduction for the balance expenditure. 5) Investments in Automation 400% allowance or tax deduction for the first $400,000 of expenditure incurred on the equipment that are in the prescribed list of automation equipment per YA; and 100% allowance or tax deduction for the balance expenditure. 6) Training 400% tax deduction for the first $400,000 of qualifying training expenditure incurred on all external training courses, and in-house training courses accredited by the WDA and the ITE incurred per YA; and 100% tax deduction for the balance expenditure.

9 Corporate Tax 04 Enhancement of the Productivity and Innovation Credit Scheme For each qualifying activity, the following combined expenditure cap would apply: $800,000 for YA 2011 and YA 2012 $1,200,000 for YA 2013 to YA 2015 Cash conversion option: An eligible business can elect to convert 30% of up to $100,000 of qualifying expenditure into a non-taxable cash payout, amounting to $30,000 for each YA. An eligible business means: sole proprietorship, partnership or company; and employs at least three local employees (i.e. Singaporeans or Singapore permanent residents with CPF contributions). Available from YA 2011 to YA Combined cap of up to $60,000 of cash payout for YA 2011 and YA Cap of $30,000 of cash payout for YA IRAS is expected to release more details by end June Effective YA 2011 to YA 2015 Comments The enhanced PIC scheme has become an important carrot for all enterprises, both big and small, to spur their efforts to improve productivity and pursue pervasive innovation. Up to $400,000 of business spending on each qualifying activity qualifies for a maximum tax deduction of $1,600,000 ($400,000 x 400% tax deduction or allowance), or $272,000 of tax savings (based on prevailing corporate income tax rate of 17%), per activity. In order words, the Government effectively funds up to about two-thirds of the value of the qualifying investments. Businesses can take advantage of the enhanced PIC scheme as a powerful tool to reap tax savings. Businesses which pay little or no tax can also benefit from the increased cash payout of up to $30,000 per YA, in lieu of tax deductions or allowances. Further, the liberalisation of the combined annual expenditure caps will help a business that is planning a large investment in any one year to maximise their benefit from the full 400% tax deduction or allowance. There is something to cheer for innovative businesses which have lobbied for R&D tax concessions to be extended to R&D done abroad, especially when there is lack of expertise or facility for R&D to be done in Singapore. The R&D definition in the tax legislation is intended to encompass a broad range of innovative activities undertaken by businesses, big and small, in all industries, and not intended just for breakthrough or high technology R&D. Therefore, it is worth putting in some effort to identify R&D projects, as expenditure beyond $400,000 may still qualify for 150% tax deduction.

10 Corporate Tax 05 Enhancement of the Productivity and Innovation Credit Scheme Businesses should consider appropriate measures to tap on the significant enhancements to the PIC scheme by identifying eligible activities and projects, recording the qualifying expenditure and maintaining necessary documentation to support the PIC claims as part of tax filing. Overall, the Government has indeed responded swiftly to industry feedback by liberalising the PIC scheme both on the quantum of tax benefits as well as the scope of coverage. This generous measure, coupled with the proposed top up of its investment in the National Productivity Fund and the National Research Fund of $1 billion each, will deliver long term economic benefits for Singapore, against a backdrop of inflation and rising wage costs.

11 Corporate Tax 06 One-off Corporate Income Tax Rebate or SME Cash Grant Present Position There is currently no corporate tax rebate. Proposed Change A new scheme would be introduced in recognition of significant cost pressures faced by businesses to allow corporate taxpayer to enjoy either a corporate tax rebate or a SME Cash Grant, whichever is higher. In this regard, all companies and registered business trusts (regardless of tax residency status and whether they enjoy a concessionary rate of tax) would be eligible for a corporate tax rebate of 20%, capped at $10,000. The 20% tax rebate, computed on the tax payable amount after deducting tax set-offs (e.g. double tax relief, unilateral tax credits and tax deducted at source), is not applicable to income of a non-resident company that is subject to final withholding tax. For small companies that may not have significant taxable income or may be loss making, a tax exempt SME Cash Grant amounting to 5% of the company s revenue for the YA 2011 (as declared in its tax returns) may be granted instead, subject to a cap of $5,000. To be eligible, the company must have made CPF contributions for at least one employee (including shareholders, directors who are employees) during the basis period of YA For companies which derive concessionary income and normal income, the corporate tax rebate would be computed based on the aggregate gross tax payable of both income while the SME Cash Grant would be computed based on the aggregate revenue. Eligible companies would automatically receive the higher of the corporate tax rebate or the SME Cash Grant when they file their YA 2011 tax return by the 30 November filing deadline. If both amounts are the same, the corporate tax rebate would apply. Companies with a subsequent additional tax assessment resulting in the corporate tax rebate being higher than its SME Cash Grant would have to refund the cash grant to the IRAS. Effective YA 2011 Comments The corporate tax rebate or SME Cash Grant would certainly relieve some cost pressures faced by Singapore businesses. However, the cash flow benefit is not immediate since the businesses have to wait till the submission of their income tax returns to enjoy the benefit. IRAS will release more details in April 2011.

12 Corporate Tax 07 Foreign Tax Credit Pooling Present Position Foreign-sourced income (foreign income) is subject to tax in Singapore when it is received or deemed received in Singapore. In respect of foreign tax suffered on foreign income, a Singapore tax resident taxpayer is eligible to claim a foreign tax credit (FTC) against his Singapore tax liability on this income (Sections 50 to 50B of the ITA). The amount of the FTC is restricted to the lower of the Singapore or foreign tax payable on the foreign income after permissible deductions under the ITA. FTC is calculated on a source-by-source and country-by-country basis. Consequently, any excess of the foreign tax paid over the Singapore tax payable (excess foreign tax) on a specific stream of remitted foreign income cannot be used to reduce the Singapore tax payable on other streams of remitted foreign income. Proposed Change A FTC pooling system would be introduced to support businesses that are globalising and earning a large share of their income overseas. It would provide businesses with greater flexibility in using their FTC, encourage remittances of foreign income back to Singapore by reducing the Singapore tax payable on such income, as well as simplify tax compliance. Under the FTC pooling system, FTC would be computed on a pooled basis (rather than on a source-by-source and country-by-country basis for each particular stream of remitted foreign income). The amount of the FTC granted would be based on the lower of the aggregate foreign taxes paid or the aggregate Singapore tax payable on the pooled foreign income. Resident taxpayers can elect to include their remitted foreign income in the FTC pool if the following conditions are satisfied: a) Foreign income tax is paid on the foreign income in the foreign jurisdiction from which the foreign income is remitted; b) The headline tax rate of the foreign jurisdiction from which the foreign income is remitted is at least 15% at the time the income is received in Singapore; and c) There is Singapore tax payable on the foreign income and the taxpayer is entitled to claim a FTC on the income under Sections 50 to 50B of the ITA. Effective YA 2012

13 Corporate Tax 08 Foreign Tax Credit Pooling Comments The introduction of the FTC pooling system is a positive development for Singapore resident taxpayers in reducing their Singapore tax costs on remitted foreign income. Singapore resident taxpayers have a choice between tax exemption under Section 13(8) of the ITA and a FTC under the FTC pooling system. This choice allows excess foreign tax paid on income that could enjoy tax exemption under Section 13(8) to be used to shelter Singapore tax payable on other foreign income (e.g. interest and royalties). The Singapore FTC pooling system is significantly simpler than the FTC pooling regimes in other jurisdictions, such as in the US. Doing away with the need to track foreign tax on a source-by-source and country-by-country basis is unlikely to simplify the tax compliance process in this area significantly since taxpayers should still be required to forward documentary proof (e.g. withholding tax receipts, letter from the foreign tax authority, or dividend vouchers) to show that the remitted foreign income has been subjected to tax in the foreign jurisdiction before FTC claims can be considered for pooling. IRAS will release further details by end June 2011.

14 Corporate Tax 09 Streamlining of Section 14B and Section 14K Tax Deduction Schemes Present Position The Section 14B scheme provides for a double tax deduction to be granted to an approved company or firm in respect of expenses which are eligible for deduction under Section 14 and are incurred for qualifying market development activities overseas. The Section 14K scheme provides for a double tax deduction to be granted to an approved company or firm in respect of expenses incurred on overseas investment development. The double tax deduction is granted irrespective of whether the expenses in question are eligible for deduction under Section 14. Both schemes are administered by IE Singapore and Singapore Tourism Board, where relevant. Proposed Change The Section 14B and 14K schemes would be merged into a single scheme and be simplified. The merged scheme would continue to be administered by IE Singapore and applications under the new scheme would be subject to a sunset clause of 31 March Effective Applications submitted and approved on or after 1 April Comments Given that the schemes share a common objective of assisting businesses to internationalise and expand overseas, the proposed merger of the schemes is a logical step in the Government s continuing effort to streamline the Singapore tax code and reduce the administrative burden of the taxpayer. While it is intended that the new scheme would be simplified to allow more businesses to benefit from the scheme, it remains to be seen whether the scheme would retain the Section 14 eligible expense test which currently exists under Section 14B but not under Section 14K. The introduction of the sunset clause is consistent with the Government s policy of reviewing its tax incentive schemes on a regular basis to ensure the effectiveness of the incentive in its current form. Further details are expected to be released by IE Singapore by 31 March 2011.

15 Corporate Tax 10 Pre-commencement Expenses Present Position Generally, expenses incurred prior to the date on which a business commences operation are not allowable for tax purposes. The date of commencement of the business is to be determined based on the specific facts and circumstances of each case. However, since YA 2004, under the concession for enterprise development (for ease of compliance and to provide certainty), the first day of the accounting year in which a business earns its first dollar of trade receipts is deemed as the date on which the business commences operations. Proposed Change The Government would allow businesses to claim pre-commencement revenue expenses incurred in the accounting year immediately preceding the accounting year in which they earn the first dollar of trade receipts. Such expenses would be claimable in the YA in which the business earns its first dollar of trade receipts. All other existing conditions of the current concession apply. Effective The change is effective from YA Businesses can claim pre-commencement revenue expenses incurred in YA 2011 in the YA 2012 tax return if the first dollar of trade receipts is earned in YA Comments The enhancement would be very beneficial and further facilitates the start up of new businesses in Singapore. As the existing conditions of the current concession continue to apply, companies assessed under Section 10E of the ITA would be excluded from the concession. IRAS will release further details by end June 2011.

16 Corporate Tax 11 Extending Tax Deduction for Employee Equity-based Remuneration Present Position Where a company incurs costs in buying back its own shares on the open market, or its parent company s shares from the parent company, to be held as treasury shares for purposes of granting employee stock options or direct share awards to its employees, a tax deduction is granted based on the actual outlay incurred by the employer. Proposed Change Tax deduction would be granted for costs incurred by a company which acquires its parent company s shares through a special purpose company (SPV) for fulfilling its obligations under its Employee Equity-based Remuneration (EEBR) scheme where: a) The SPV is set up as a company or a trust solely to administer the EEBR scheme for companies within the group; and b) The SPV acquires the parent company s shares from the parent company or the market and holds them in trust for the employees of the companies within the group for the EEBR scheme. The tax deduction is the lower of: a) The amount paid by the company to the SPV for the parent company s shares; or b) The cost incurred by the SPV to acquire the parent company s shares, less any amount paid by the employees for the parent company s shares. As before, no deduction would be allowed for costs incurred by the company in the purchase of its parent company s newly issued shares through a SPV. Effective YA 2012 Comments The proposed change provides flexibility for employers to have its EEBR scheme administered by a SPV and still claim a tax deduction for the actual costs incurred in granting the stock options or direct share awards. The MOF has clarified that the SPV need not be owned by the group. Also, in a situation where the cost incurred by the SPV in acquiring the parent company s shares is higher than the cost incurred by the parent company, the cost that would be deductible is likely to be restricted to the lower amount. Further details will be released by IRAS by end June 2011.

17 Corporate Tax 12 Liberalisation of the Withholding Tax Exemption Regime for Banks Present Position Generally, payments which fall under Section 12(6) of the ITA are subject to Singapore withholding tax (WHT) when made to a non-resident. Payments which fall within Section 12(6) includes interest, commission, fee or any other payments which are made in connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness which are:- borne directly or indirectly by a person resident in Singapore or a permanent establishment (PE) in Singapore except in respect of any business carried on outside Singapore through a PE outside Singapore or any immovable property situated outside Singapore; or Deductible against any income accruing in or derived from Singapore. Section 12(6) also covers income derived from loans where the funds provided by such loans are brought into or used in Singapore. Notwithstanding, by virtue of a Ministerial remission under Section 92(2) of ITA, interbank / interbranch payments made by approved banks to overseas banks and branches which fall under Section 12(6) of ITA are exempted from WHT. The remission covers the period from 1 January 1972 onwards until further notice. Proposed Change The WHT exemption is enhanced to cover:- Section 12(6) payments made to all non-resident persons (excluding PE in Singapore) if the payments are made for trade or business purposes; Entities covered would be expanded to include:- Banks licensed under the Banking Act or approved under the MAS Act; Finance companies licensed under the Finance Companies Act; and Approved financial institutions licensed under the Securities and Futures Act that engage in lending as part of their regulated activity of dealing in securities in Singapore. A sunset clause of 31 March 2021 would also be introduced for the enhanced scope of WHT exemption (see details below). MAS would release further details of the changes by end March Effective The enhanced WHT exemption would be applicable for:- Payments liable to be made during the period from 1 April 2011 to 31 March 2021 (both dates inclusive) on contracts which take effect before 1 April 2011; and Payments liable to be made on contracts which take effect on or after 1 April 2011 to 31 March 2021 (both dates inclusive).

18 Corporate Tax 13 Liberalisation of the Withholding Tax Exemption Regime for Banks Comments The enhancement would further strengthen Singapore s position as a regional funding centre and enable it to compete more effectively with other regional funding centres such as Hong Kong. Currently, Hong Kong does not have a WHT regime on interest payments. For approved banks in Singapore, the enhancement of the WHT exemption to cover all Section 12(6) payments made to all non-residents would provide a number of benefits including:- Access to more diversified funding sources; Potential access to cheaper funding due to lower WHT burden; and In view of the voluminous transactions generally undertaken by financial institutions, the enhancement would alleviate the administrative burden in complying with the WHT requirements for Section 12(6) payments. For entities such as finance companies that do not enjoy the current withholding remission under Section 92(2) of the ITA, the enhancement in the WHT exemption would be a welcome move. Such entities are indirectly disadvantaged under the current WHT exemption. The enhancement would align the WHT exemption on interest payments for these entities with that for approved banks and thus increase the competitiveness of these companies in their fund-raising activities. It is not entirely clear what types of interest payments would be regarded by the IRAS to be interest payments made by financial institutions for the purpose of their trade or business. We hope that further clarification would be released by the MAS in due course.

19 Corporate Tax 14 Extension of Captive Insurance Tax Incentive Scheme Present Position Currently, approved captive insurers are exempt from tax on qualifying income derived from offshore insurance business for a period not exceeding ten years, with qualifying window approval period from 17 February 2006 to 16 February Proposed Change It is proposed that the scheme would be extended up to 31 March An award renewal framework would also be introduced with effect from 19 February Effective Further details pertaining to the proposed changes are expected to be released by the MAS by end of April Comments The proposed extension of the tax exemption scheme would help in attracting more multinational companies to continue to use Singapore as a location for their captive insurers, and this would further strengthen Singapore s position as a leading insurance hub in the region. As most captive insurers would typically insure offshore risks, the bulk of the approved captive insurer s income would likely qualify for tax exemption in Singapore under the incentive. The introduction of the award renewal framework would also allow the authorities to review the eligibility of the incentive recipients. This could also mean that the criteria for renewal for the incentive may be different from those for the initial award.

20 Corporate Tax 15 Extension of Marine Hull and Liability Insurance Tax Incentive Scheme Present Position Currently, approved marine hull and liability insurers are exempt from tax on qualifying income from marine hull and liability insurance business for a period not exceeding ten years. There is currently no sunset clause for the tax incentive. Proposed Change It is proposed that the following changes would be made to the tax exemption scheme: The scheme would be subject to a sunset clause of 31 March A review mechanism would be put in place to determine whether the incentive would be further extended after 31 March 2016; and An award renewal framework would also be introduced with effect from 19 February Effective Further details pertaining to the proposed changes are expected to be released by the MAS by end of April Comments The tax exemption scheme was introduced since YA 1999 and mainly covered the insurer s underwriting income derived from accepting offshore marine hull and liability business. With effect from YA 2004, the incentive scheme was expanded to also cover income from underwriting of onshore risks. The introduction of the sunset clause would enable the authorities to review the incentive for its continued relevance to the marine industry in Singapore s rapidly changing business environment. This is in line with the recent trends whereby sunset clauses are being introduced for various tax incentives, including the tax incentive scheme for offshore insurance business for which a sunset clause was also introduced in the Budget The introduction of the award renewal framework would also allow the authorities to review the eligibility of the incentive recipients. This could also mean that the criteria for renewal for the incentive may be subject to review and revision by the authorities.

21 Corporate Tax 16 Extension and Enhancement of Specialised Insurance Tax Incentive Scheme Present Position Approved specialised insurers are exempt from tax on qualifying income derived from offshore insurance business for a period not exceeding five years, with qualifying window approval period from 1 September 2006 to 31 August The specialised insurance businesses relate to the underwriting of Terrorism, Political, Energy and Aviation and Aerospace risks. Proposed Change It is proposed that the scheme would be extended for five years up to 31 August 2016 and the scheme would also be expanded to cover agriculture insurance. Further, incentive recipients would also be subject to an award renewal framework. Effective The proposed enhancement of the scheme would take effect from 19 February 2011, and further details pertaining to the proposed changes are expected to be released by the MAS by end of April Comments The proposed extension and enhancement of the tax exemption scheme would help in continuing to incentivise the industry players underwriting special risks and attract specialised insurers to Singapore to underwrite offshore risks. This would further enhance the growth and sophistication of the insurance industry in Singapore and consolidate Singapore s position as a regional hub for insurance businesses. The expansion in scope of the incentive to cover agriculture insurance would also be timely as insurers respond to increasing natural calamities and market risks relating to agricultural products.

22 Corporate Tax 17 Extension of Tax Incentive Schemes for Project Finance Present Position During the year 2006, a package of tax incentive schemes (original expiry date is 31 December 2008), was introduced by the Government to catalyse the growth of the project finance industry through Singapore s capital markets and this includes:- tax exemption on qualifying income derived by investors from qualifying project debt securities (QPDS); tax exemption on foreign-sourced interest income received by qualifying entities listed on the Singapore Exchange Limited from offshore qualifying infrastructure projects/assets; remission of stamp duties payable on the instrument of transfer relating to qualifying infrastructure projects/assets (including shares in companies undertaking such projects); concessionary income tax rate of 5% on income derived by a Financial Sector Incentive (Project Finance) (FSI-PF) company from:- arranging, underwriting or distributing any QPDS; arranging or underwriting any qualifying project loan; providing project finance advisory services in connection with transactions relating to any prescribed project/asset. In order to further enhance Singapore s position as a premier offshore infrastructure financing hub, the tax incentive schemes for project finance were subsequently extended by the Government during the year 2008 for another 3 years (i.e. till 31 December 2011) and expanded to include the following,:- concessionary tax rate of 10% for a period of up to 10 years, on qualifying income derived by:- an approved trustee manager of a qualifying registered business trust from providing services in such capacity in respect of qualifying offshore infrastructure projects/assets; an approved fund management company from managing a qualifying infrastructure fund in respect of qualifying offshore infrastructure projects/assets. Proposed Change With the exception of the FSI-PF scheme, it is proposed that the sunset clause for the existing package of tax incentive schemes for project finance be extended till 31 March The FSI-PF scheme would lapse on 31 December Thereafter, taxpayers would have to apply for the Financial Sector Incentive (Credit Facilities Syndication) (FSI-CFS) and/or Financial Sector Incentive (Bond Market) (FSI-BM) schemes if they wish to avail themselves to similar tax benefits provided under the FSI-PF scheme. Effective The extension of the tax incentive schemes for project finance (excluding the FSI-PF scheme) would commence from 1 January 2012.

23 Corporate Tax 18 Extension of Tax Incentive Schemes for Project Finance Comments Given the recent strong economic showing by some of the developing nations in the Asia Pacific region, the potential surge in infrastructure related projects in these countries could well be the impetus to further develop the project finance industry. With the extension, players in the project finance industry would now have more upfront certainty in terms of the duration in which they would be enjoying preferential tax treatment. The current proposal by the Government to allow the FSI-PF scheme to lapse on its expiry date of 31 December 2011 could help to reduce the complexity of the Financial Sector Incentive (Enhanced Tier) scheme. Nonetheless, the scope of the qualifying activities under the FSI-PF scheme is not entirely covered by the FSI-CFS and FSI-BM schemes. As such, it remains to be seen if the FSI-CFS and FSI-BM schemes would be enhanced to include the qualifying activities currently provided under the FSI-PF scheme. Further details pertaining to the proposed changes would be released by the MAS by end of April 2011.

24 Corporate Tax 19 Enhancement to the Tax Incentive Scheme for Trustee Company Present Position Under Section 43J of the ITA, trustee companies approved under the scheme can enjoy a concessionary tax rate of 10% on income derived from the provision of qualifying trustee and custodian services, trust management and administration services. Currently, approved companies for the incentive can enjoy the 10% concessionary tax rate with no pre-determined expiry date. Proposed Change To streamline the scheme and align the administration of the incentive with other tax incentive schemes, the Government has proposed the following changes to the scheme:- A sunset clause of 31 March 2016 would be introduced; Recipients of the scheme approved on or after 1 April 2011 would be offered a 10-year award tenure; All existing recipients of the scheme would automatically transit to the new framework on 1 April With the transition, they would enjoy the benefits provided by the scheme for a period of 10-year up till 31 March 2021; The list of qualifying activities would be expanded to include the provision of trustee and custodian services in respect of the issue of units of foreign Collective Investment Schemes and foreign Business Trusts with effect from 1 April Effective 1 April 2011 Comments The introduction of the sunset clause and 10-year award tenure is consistent with the Government s policy of reviewing its tax incentives on a regular basis to ensure their effectiveness in their current form. In 2010, the scope of qualifying activities under the FSI-ST scheme was expanded to include certain prescribed services rendered in respect of foreign Collective Investment Schemes and foreign Business Trusts. The current proposal to expand the scope for Section 43J to include foreign Collective Investment Schemes and foreign Business Trusts is consistent with the above expansion of the FSI-ST scheme. This liberalisation of Section 43J would certainly be welcomed by industry players.

25 Corporate Tax 20 Renewal of Tax Exemption Scheme for Income Derived from Structured Products Present Position Currently, Section 13(1)(zj) of the ITA provides for tax exemption in respect of any income from any structured product offered by a financial institution derived from Singapore by:- a) an individual, except where such income is derived through a partnership in Singapore or is derived from the carrying on of a trade, business or profession; b) a non-resident person (not being an individual) if:- it does not, by itself or in association with others, carry on a business in Singapore, or does not have any permanent establishment (PE) in Singapore; and the contract in respect of the structured product between the non-resident person and the financial institution takes effect during the period from 1 January 2007 to 31 December 2011 (both dates inclusive) and, if such contract is renewed or extended, the period for which it is renewed or extended commences before 1 January c) a non-resident person (not being an individual nor a PE in Singapore) who carries on any operation in Singapore through a PE in Singapore if :- the funds used by that person to invest in the structured product are not obtained from Singapore operation; and the contract in respect of the structured product between the non-resident person and the financial institution takes effect during the period from 1 January 2007 to 31 December 2011 (both dates inclusive) and, if such contract is renewed or extended, the period for which it is renewed or extended commences before 1 January Proposed Change The existing tax exemption scheme for income derived from structured products by non-resident non-individuals would be extended to 31 March There is no change to the current tax exemption for income derived from structured products by individuals. Effective 1 January 2012 to 31 March 2017 Comments The history of structured products actually dates back several decades when they were largely offered to institutions. As investors become more sophisticated and financial markets become more complex, structured products may be a popular investment choice for offshore investment fund. Such structured products are also purchased by high-net-worth investors as part of their investment portfolios and are often held through investment vehicles. In 2007, the scope of Section 13(1)(zj) of the ITA was enhanced to include non-resident non-individuals to address the withholding tax concerns on the income derived by non-resident non-individuals from structured products offered by a financial institution in Singapore.

26 Corporate Tax 21 Renewal of Tax Exemption Scheme for Income Derived from Structured Products The extension of the exemption scheme to 31 March 2017 would certainly be a welcome move as it would continue to negate the tax cost of non-resident non-individuals investing in structured products offered by the financial institutions in Singapore. This move is significant and would encourage the growth of financial and wealth management activities in Singapore.

27 Corporate Tax 22 Withdrawal of Withholding Tax Exemption Scheme for Financial Guarantee Insurers Present Position Currently, claim payments under financial guarantee insurance policies made by licensed financial guarantee insurers to non-resident beneficiaries are exempt from withholding tax. Proposed Change It is proposed that the scheme would be discontinued from 19 February Effective 19 February 2011 Comments The scheme was introduced in 2000 to provide tax exemption for claim payments made to non-resident beneficiaries under financial guarantee insurance policies. Such claim payments could attract withholding tax where they constitute performance payments under the financial guarantee insurance policy owing to the default of a financial obligation relating to a loan or indebtedness. The scheme was proposed to be discontinued as it is assessed to be no longer relevant due to its limited application since the scheme s inception in 2000.

28 Corporate Tax 23 Maritime Sector Incentive Present Position The maritime sector currently has tax exemptions and incentives made available to them under: Section 13A of the ITA whereby income derived from the operations of Singapore registered ships and income from the uplift (excluding transhipment) from Singapore by foreign-flagged ships are exempted from tax AIS scheme whereby qualifying income derived from the operations of foreign-flagged ships are exempted from tax Maritime Finance Incentive (MFI) whereby qualifying income derived from leasing of ships or containers and managing an approved shipping or container investment enterprise are exempted from tax or subject to concessionary rate of tax (5% or 10% depending on the type of activities) Approved Shipping and Logistics (ASL) scheme whereby incremental qualifying income derived by approved ship agencies, ship management companies, freight forwarders and logistics operators are subject to concessionary tax rate of 10% Ship broking and Forward Freight Agreement (FFA) trading incentive whereby incremental qualifying income derived by approved ship brokers and approved FFA traders are subject to concessionary tax rate of 10% Currently, interest payments made to non-singapore tax residents for financing of ship acquisitions are subject to withholding tax unless specific exemptions are applied for and granted or the block transfer scheme under the Singapore Registry of Ships applies. Proposed Change The existing tax exemptions and incentives would be streamlined and consolidated under the new Maritime Sector Incentive (MSI) which has three broad categories: a) International Shipping Operations, b) Maritime (Ship or Container) Leasing, and c) Supporting Shipping Services. The entities currently enjoying tax exemptions under Section 13A of the ITA and AIS scheme would transit to the category of International Shipping Operations. The entities currently under the MFI scheme would transit to the category of Maritime (Ship or Container) Leasing while the entities currently under the ASL scheme and the FFA trading incentive would transit to the category of Supporting Shipping Services. The transition would be automatic and the entities would enjoy the same benefits as under the existing tax exemptions and schemes. For entities under the International Shipping Operations category and approved ship lessors under the Maritime (Ship or Container) Leasing category, automatic withholding tax exemption on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase or construction of both Singapore and foreign-flagged ships (applicable only to approved ship operators) would be granted, subject to conditions being met. Under the International Shipping Operations category, a new award would be introduced for qualifying entry players. Once approved, the entity would be granted the same tax benefits as the existing AIS scheme but for a non-renewable incentive period of 5 years.

29 Corporate Tax 24 Maritime Sector Incentive Under the Supporting Shipping Services category, the qualifying support shipping services are extended to include qualifying corporate services. The new award under the three categories of the MSI would be subject to a sunset clause of 31 May Effective 1 June 2011 Comments The automatic withholding tax exemption on qualifying payments made in relation to qualifying loans obtained to finance acquisition and construction of ships would certainly bring cheers to the maritime industry where financing is common. This would bring certainty to costs of financing as opposed to the existing general situation of having approval for exemption from withholding tax granted on a case-by-case basis. Whilst what constitute qualifying payments, qualifying loans and the attached conditions are not known yet, it is important that they are consistent, if not simplified, with the current conditions that the industry would otherwise have to comply with in their exemption application in order to truly enhance the existing maritime tax incentives. The non-renewal 5-year incentive period for the new award for qualifying entry players under the International Shipping Operations category as well as the sunset clause set could however dampen the excitement of the maritime industry players. As the capital investment involved is generally substantial, the short incentive period may not sufficiently incentivise the players to set up their operations in Singapore. To solidify Singapore s position as an international maritime centre, it is vital that the award application process is expedient (near hassle free!) in order to achieve the desired results. It is understood that these players may apply for the conventional maritime tax incentives after the expiration of the incentive. Finally, the consolidation of the existing exemptions and incentives into the MSI and the classification into three broad categories at the same time would provide the Government with a clearer picture of contributions from the different segments of the maritime industry. This would enable the Government to enhance and/or introduce more targeted incentives for the respective business segments in future. Further details pertaining to the proposed changes are expected to be released by the MPA by end May 2011.

30 Corporate Tax 25 Enhancement of the Global Trader Programme Present Position The Global Trader Programme (GTP) is an initiative by the IE Singapore to facilitate and develop international trading activities in Singapore. Currently, a concessionary tax rate of 5% or 10% applies to income derived by an approved GTP company from qualifying trades in the following qualifying derivative instruments: exchange-traded and over-the-counter (OTC) commodity derivatives in a commodity which is in the approved GTP company s list of approved commodities; and exchange-traded and OTC freight derivatives. GTP does not presently cover derivative instruments such as interest-rate swaps and forex derivatives. The GTP does not have a sunset clause at the scheme level, and the various enhancements to the GTP have sunset clauses ending at different times. As part of the incentive award, GTP companies could enjoy the following: 5% or 10% concessionary tax rate on qualifying income derived between 27 February 2009 and 31 December 2013 from (a) commodity futures trading on any exchange; and (b) trading in exchange-traded freight derivatives on any exchange; and 5% concessionary tax rate on qualifying income derived by GTP companies between 24 May 2007 and 23 May 2017 from qualifying transactions in liquefied natural gas (LNG). A GTP (Structured Commodity Finance) company approved during the period 21 May 2010 to 20 May 2015 could enjoy a concessionary tax rate of 5% or 10% on qualifying income derived from carrying out structured commodity financing activities. Proposed Change The existing list of qualifying derivative instruments under the GTP would be expanded to cover all derivative instruments, including interest-rate swaps and forex derivatives. Hence, income from qualifying trades in all derivative instruments derived by a GTP company would enjoy the GTP concessionary tax rate. A sunset clause of 31 March 2021 would be introduced for the GTP. There would also be an alignment to the common sunset clause of 31 March 2021 at the scheme level for the existing GTP enhancements. Hence, companies could be approved as a GTP company or GTP (Structured Commodity Finance) company on or before 31 March The GTP companies could enjoy the benefits under the various enhancements during their award tenure of up to five years. Effective YA 2012