27 February 2018

The Minister for Finance, Mr Heng Swee Keat, delivered the Budget Statement for the Financial Year (“FY”) 2018 (“Budget 2018”) on 19 February 2018. A number of tax changes have been announced for the financial sector; and certain schemes and incentives have been extended and enhanced to encourage growth and development in the relevant sectors. The following are highlights of some of the tax changes announced in Budget 2018.

Tax framework for Singapore Variable Capital Companies (“S-VACCs”)

The Monetary Authority of Singapore (“MAS”) is studying the regulatory framework for S-VACCs to further develop and strengthen Singapore’s position as a hub for both fund management and fund domiciliation. An S-VACC is a new structure designed for collective investment schemes, and will accommodate a variety of traditional and alternative asset classes and investment strategies.

It was announced that a new tax framework for S-VACCs will be introduced to complement the S-VACC regulatory framework. Under the S-VACC tax framework, an S-VACC will effectively be treated as a company and a single entity for tax purposes, which helps clarify that a Singapore-resident S-VACC should be able to enjoy and rely on the various double tax treaties Singapore has entered into. The S-VACC is therefore likely to provide the same tax benefits as a private limited company in Singapore, but with the additional corporate and regulatory advantages under the S-VACC framework.

In addition, tax exemption under sections 13R and 13X of the Income Tax Act (“ITA”) (i.e. the Resident Fund Scheme and the Enhanced-Tier Fund Scheme respectively, which are the two main tax exemption schemes for fund management available for Singapore-based funds) will be extended to S-VACCs which are able to meet the usual conditions for such schemes. Further, the 10% concessionary tax rate under the Financial Sector Initiative - Fund Management (FSI-FM) scheme will be extended to approved fund managers managing an incentivised S-VACC. The existing goods and services tax (“GST”) remission for funds will be extended to incentivised S-VACCs too.

The S-VACC tax framework will take effect on or after the effective date of the S-VACC regulatory framework. The above announcements are helpful in making clear that the relevant tax exemption schemes and concessions for fund management in Singapore would also be extended to the S-VACC, which would thus make the S-VACC a preferred choice for fund vehicles in Singapore going forward after the regulatory framework is implemented.Further details are expected to be released by the MAS by October 2018. 

Enhanced-Tier Fund Scheme under section 13X of ITA extended to all fund vehicles

The Enhanced-Tier Fund Scheme currently only applies to entities structured as companies, limited partnerships and trusts. Going forward, the scheme will be extended to all fund vehicles constituted in all forms in order to cater for more diverse fund structures that meet the usual qualifying conditions. The change will take effect for new awards approved on or after 20 February 2018, and is a welcome expansion of the Enhanced-Tier Fund Scheme to recognise the different structures of funds (in particular offshore funds) that may be structured as vehicles that may not strictly be regarded as companies, limited partnerships or trusts.

Further details are expected to be released by MAS by May 2018.

Tax transparency treatment for REITs ETFs

A major concern with investments in Real Estate Investment Trusts Exchange-Traded Funds (“REITs ETFs”) has also been resolved. Previously, such REITs ETFs were subject to tax on distributions made by Singapore-listed real estate investment trusts (“S-REITs”), resulting in additional tax leakage which made such REITs ETFs unattractive.

In order to achieve parity in tax treatment for investors investing directly in S-REITs as compared to investing in REITs ETFs, the following tax treatment has been announced for REITs ETFs:

  •  Tax transparency treatment on the distributions received by REITs ETFs from S-REITs which are made out of the latter’s specified income (i.e. income eligible for tax transparency treatment by the S-REITs); 
  • Tax exemption on such REITs ETFs distributions received by individuals, except for individuals who derive any distribution through a partnership in Singapore or from the carrying on of a trade, business or profession; and 
  • A 10% concessionary tax rate on such REITs ETFs distributions received by qualifying non-resident non-individuals.

The above changes would help to significantly promote the development of the REITs ETFs market in Singapore by effectively providing the same tax treatment for investors investing directly in REITs as compared to REITs ETFs.

Subject to conditions to be announced, the tax concessions for REITs ETFs will take effect on or after 1 July 2018, with a review date of 31 March 2020, in line with other tax concessions for S-REITs.

The Inland Revenue Authority of Singapore (“IRAS”) will begin accepting applications for tax transparency treatment on or after 1 April 2018.

Further details are expected to be released by MAS and IRAS by March 2018.

Extend QDS scheme and lapsing of QDS+ scheme

The Qualifying Debt Securities (“QDS”) scheme provides for withholding tax exemption on interest and other qualifying income paid by issuers of debt securities, along with tax exemptions on concessions on such income derived by holders of the debt securities, subject to the conditions of such scheme being met (including that the debt securities must be substantially arranged by financial institutions in Singapore).

To continue supporting the development of Singapore’s debt market, the QDS scheme will be extended for a further period of five years until 31 December 2023. The QDS scheme has proven highly successful in encouraging numerous issuances of debt securities from Singapore, including foreign issuers who have tapped the Singapore debt market.

The Qualifying Debt Securities Plus (“QDS+”) incentive scheme will however be allowed to lapse after 31 December 2018. The QDS+ scheme generally provides tax exemption for debt securities with tenures of at least 10 years (and which cannot have their tenure shortened to less than 10 years from the date of their issue except where the shortening of the tenure is a result of certain permitted early termination clauses) and for certain Islamic debt securities. Nevertheless, debt securities with tenures of at least 10 years and Islamic debt securities which meet the conditions for the QDS+ scheme which are issued on or before 31 December 2018 can continue to enjoy the tax concessions under the QDS+ scheme.

The non-renewal of the QDS+ scheme is likely due to the recognition that such scheme has not proven very popular in practice, given the relatively low number of issuances of long-term dated securities with tenures of at least 10 years and which do not have general call options or rights of redemption by the issuer for such period of 10 years (other than for a prescribed list of events).

Further details are expected to be released by MAS by May 2018.

Extend incentive scheme for Approved Special Purpose Vehicle (“ASPV”) engaged in asset securitisation transactions (“ASPV scheme”)

The ASPV scheme grants tax concessions to an ASPV engaged in asset securitisation transactions, including tax exemption on income derived by an ASPV from approved asset securitisation transactions, GST recovery on its qualifying business expenses at a fixed recovery rate and withholding tax exemption on payments to qualifying non-residents on over-the-counter financial derivatives in connection with an asset securitisation transaction.

To continue developing the structured debt market, the ASPV scheme will be extended for a further period of five years until 31 December 2023. The stamp duty remission on instruments relating to transfer of assets to the ASPV for approved asset securitisation transactions will however be allowed to lapse after 31 December 2018, and this is likely due to the recognition that most securitised assets in practice that are transferred to ASPVs under the ASPV scheme are unlikely to be subject to stamp duty in any event. All other conditions of the scheme remain the same. 

As the ASPV scheme is a useful scheme that has been used for asset securitisations in Singapore and in order to further promote the asset securitisation market locally, the extension of the ASPV scheme is to be welcomed.

Further details are expected to be released by MAS by May 2018.

Extend and enhance Financial Sector Incentive (“FSI”) scheme

The FSI scheme accords concessionary tax rates of 5%, 10%, 12% and 13.5% on income from qualifying banking and financial activities, headquarters and corporate services, fund management and investment advisory services performed by companies in Singapore approved under the scheme.

In order to further strengthen Singapore’s position as a leading financial centre and given the attractiveness of the FSI scheme to financial institutions in Singapore, the FSI scheme will be extended for a further period of five years until 31 December 2023. In addition, the scope of qualifying income under the scheme for trading in loans and their related collaterals is to be expanded to include collaterals that are prescribed infrastructure assets or projects. The change will apply to income derived on or after 1 January 2019 in respect of new and renewal awards approved on or after 1 June 2017.

All other conditions of the scheme remain the same.

Further details are expected to be released by MAS by May 2018.

Rationalise withholding tax (“WHT”) exemptions for financial sector

Given the range of WHT exemptions for the financial sector which apply to different financial institutions for payments made under different types of financial transactions and as part of the Government’s process to continually review tax concessions to ensure their relevance and usefulness, a review date of 31 December 2022 will be introduced for the WHT exemptions for the following payments:

  • Payments made under cross currency swap transactions made by Singapore swap counterparties to issuers of Singapore dollar debt securities; 
  • Payments made under interest rate or currency swap transactions by financial institutions;
  • Payments made under interest rate or currency swap transactions by MAS; and
  • Specified payments made under securities lending or repurchase agreements by specified institutions.

The following WHT exemptions will also be legislated, along with a review date of 31 December 2022:

  • Interest on margin deposits paid by members of approved exchanges for transactions in futures; and 
  • Interest on margin deposits paid by members of approved exchanges for spot foreign exchange transactions (other than those involving Singapore dollar).

This change will take effect for payments under agreements entered into on or after 20 February 2018.

Unless the WHT exemptions above are extended, they will cease to apply to payments that are liable to be made under agreements entered into on or after 1 January 2023. WHT exemptions will continue to apply to payments that are liable to be made on or after 1 January 2023, under agreements entered into on or before 31 December 2022.

All other conditions of the schemes remain the same.

The WHT exemptions for the following payments will be withdrawn for payments under agreements entered into on or after 1 January 2019:

  • Interest from approved Asian Dollar Bonds; and 
  • Payments made under over-the-counter financial derivative transactions by companies with FSI-Derivatives Market awards that were approved on or before 19 May 2007.

Further details are expected to be released by MAS by May 2018.

Tax changes to support and encourage innovation

The following tax changes are in the pipeline to support and encourage innovation:

  • Enhance tax deduction for qualifying expenditure on qualifying research and development (“R&D”) projects performed in Singapore

Businesses that have incurred qualifying expenditure on qualifying R&D projects performed in Singapore can currently claim 150% tax deduction for staff costs and consumables incurred and 100% tax deduction for other qualifying expenditure. Consistent with the Government’s stated intention to foster innovation and promote R&D activity in Singapore, the tax deduction for staff costs and consumables incurred on qualifying R&D projects performed in Singapore will be increased from 150% to 250%. All other conditions of the scheme remain unchanged. This change will take effect from Year of Assessment (“YA”) 2019 to YA2025.

  • Enhance tax deduction for costs on protecting intellectual property (“IP”)

Currently, businesses incurring qualifying IP registration costs can claim 100% tax deduction on such costs. The scheme, which is scheduled to lapse after YA2020, will be extended till YA2025. Further, the tax deduction will be enhanced to 200% for the first S$100,000 of qualifying IP registration costs incurred for each YA. This change will take effect from YA2019 to YA2025.

  • Enhance tax deduction for costs on IP in-licensing

To support businesses to buy and use new solutions, the tax deduction for qualifying IP in-licensing costs will be enhanced from 100% to 200% for the first S$100,000 of qualifying IP in-licensing costs incurred for each YA. Such costs include payments made by a qualifying person to publicly funded research performers or other businesses, but exclude related party licensing payments, or payments for IP where any allowance was previously made to that person. This change will take effect from YA2019 to YA2025.

Extend tax deduction for certain financial institutions under section 14I of ITA

The tax deduction available under section 14I of the ITA for impairment and loss allowances made in respect of non-credit-impaired financial instruments will be extended to promote the overall robustness and stability of the Singapore financial system.

The tax deduction will be extended till YA2024 (for banks and qualifying finance companies with December financial year end (“FYE”)) or YA2025 (for banks and qualifying finance companies with non-December FYE).

All other conditions of the scheme remain the same.

Further details are expected to be released by MAS by May 2018. 

Extend IBD-IBB scheme and lapsing of IBD- SIBB scheme

The Insurance Business Development - Insurance Broking Business (“IBD-IBB”) scheme will be extended till 31 December 2023 to further strengthen Singapore’s position as a leading insurance and reinsurance centre. All conditions of the IBD-IBB scheme remain the same.

To streamline and simplify the insurance tax incentives, the Insurance Business Development – Specialised Insurance Broking Business (“IBD- SIBB”) scheme will be allowed to lapse after 31 March 2018. With the lapsing of the IBD-SIBB scheme, specialty insurance broking and advisory services will be incentivised under the IBD-IBB scheme, at a concessionary tax rate of 10%.

Further details are expected to be released by MAS by May 2018.

Extend tax exemption on income derived by primary dealers from trading in SGS

To strengthen the primary dealer network and encourage trading in Singapore Government Securities (“SGS”), the tax exemption on income derived by primary dealers from trading in SGS will be extended till 31 December 2023.

Further details are expected to be released by MAS by May 2018.

Extend the Investment Allowance (“IA”) scheme to include qualifying investment in submarine cable systems landing in Singapore

The IA scheme in respect of productive equipment will be extended to capital expenditure incurred on newly-constructed strategic submarine cable systems landing in Singapore, subject to qualifying conditions. All other conditions of the IA scheme apply, except for the following which will be permitted:

  •  The submarine cable systems can be used outside Singapore; and
  •  The submarine cable systems, on which IA has been granted, can be leased out under the indefeasible rights of use arrangements.

This change will take effect for capital expenditure incurred between 20 February 2018 and 31 December 2023, inclusive of both dates.

Review date for WHT exemption on container lease payments made to non-resident lessors

WHT exemption is currently allowed on lease payments made to non-resident lessors (excluding permanent establishments in Singapore) for the use of qualifying containers for the carriage of goods by sea. To ensure the relevance of the scheme is periodically reviewed, a review date of 31 December 2022 will be introduced. Hence, unless the scheme is extended, such payments accruing to a non-resident lessor under any lease or agreement entered into on or after 1 January 2023 in respect of the use of a qualifying container for the carriage of goods by sea will be subject to WHT.

Enhance Double Tax Deduction for Internationalisation (“DTDi”) scheme

Under the DTDi scheme, businesses are allowed tax deduction of 200% on qualifying market expansion and investment development expenses, subject to approval from International Enterprise Singapore (“IE Singapore”) or the Singapore Tourism Board (“STB”). No prior approval is needed from IE Singapore or STB for tax deduction on the first S$100,000 of qualifying expenses incurred on certain categorise of activities for each YA.

The S$100,000 expenditure cap for claims without prior approval from IE Singapore or STB will be raised to S$150,000 per YA. All other conditions of the scheme remain the same. This change will apply to qualifying expenses incurred on or after YA2019.

Further details are expected to be released by IE Singapore and STB by April 2018.

Adjust Start-Up Tax Exemption (“SUTE”) scheme

The tax exemption under the SUTE scheme will be adjusted as follows:

  • 75% exemption (currently 100% exemption) on the first S$100,000 of normal chargeable income; and
  •  50% exemption on the next S$100,000 (currently S$200,000) of normal chargeable income.

All other conditions of the SUTE scheme remain unchanged.

This change will take effect on or after YA2020 for all qualifying companies under the scheme. If a qualifying company’s first YA is 2019, the current SUTE parameters will apply in YA2019 while the new parameters will apply in YAs 2020 and 2021.

Adjust Partial Tax Exemption (“PTE”) scheme

The tax exemption under the PTE scheme will be adjusted as follows:

  •  75% exemption on the first S$10,000 of normal chargeable income; and
  •  50% exemption on the next S$190,000 (currently S$290,000) of normal chargeable income.

All other conditions of the scheme remain unchanged.

This change will take effect on or after YA2020 for all companies (except those that qualify for the SUTE scheme) and bodies of persons.

Tax changes to encourage donations

  • Extend the 250% tax deduction for qualifying donations

The 250% tax deduction for qualifying donations will be extended for donations made on or before 31 December 2021. All other conditions of the scheme remain the same. 

  • Extend the Business and IPC Partnership Scheme (“BIPS”)

This scheme, under which businesses that support their staff to volunteer and provide services to Institutions of Public Character receive a 250% tax deduction on associated costs incurred, will be extended for three years until 31 December 2021.

Corporate tax rebate

The corporate income tax (“CIT”) rebate will be enhanced and extended for the following YAs:

  • For YA2018: The CIT rebate will be enhanced to 40% of tax payable, with enhanced cap at S$15,000. 
  • For YA2019: The CIT rebate will be extended to YA2019 at a rate of 20% of tax payable, capped at S$10,000.

GST changes

  • GST on imported services

Currently, GST is not applicable on imported services provided by an overseas supplier which does not have an establishment in Singapore. GST on imported services will be introduced on or after 1 January 2020. This change will ensure that imported and local services are accorded the same GST treatment.

Business to Business (“B2B”) imported services will be taxed via a reverse charge mechanism. Under the reverse charge mechanism, the local business customer will be required to account for GST to IRAS on the services it imports, and can in turn claim such GST as input tax, subject to the applicable GST input tax recovery rules. Only businesses that make GST-exempt supplies, or do not make GST-taxable supplies need to apply the reverse charge mechanism. The majority of businesses that make GST-taxable supplies and would ordinarily be allowed a full input tax credit on the services provided to them would thus not be affected by the reverse charge mechanism.

As for Business to Customer (“B2C”) imported services, such services will be taxed via an Overseas Vendor Registration mode. This requires overseas suppliers and electronic marketplace operators making significant supplies of digital services to local consumers to register for GST in Singapore.

IRAS is seeking feedback on the draft e-Tax Guides titled “GST: Taxing imported services by way of reverse charge” (“Reverse Charge Draft Guide”) and “GST: Taxing imported services by way of an overseas vendor registration regime” (“Overseas Vendor Registration Draft Guide”) (collectively, “Draft Guides”), from 20 February 2018 to 20 March 2018. The Draft Guides are available from the IRAS website www.iras.gov.sg.

In particular, the Overseas Vendor Registration Draft Guide provides that suppliers belonging outside Singapore with a global turnover exceeding S$1 million and making B2C supplies of digital services to customers in Singapore exceeding S$100,000 are required to register, charge and account for GST. Under certain conditions, a local or overseas operator of electronic marketplaces may also be regarded as the supplier of services made by suppliers through such marketplaces, in which case such operators (and not the suppliers) may be required to register, charge and account for GST on these supplies.

  • Change in GST rate

The Government plans to raise the GST rate by two percentage points, from 7% to 9%, sometime in the period from 2021 to 2025.

Other tax change

  • New carbon tax

A carbon tax will be levied on the total emissions of facilities producing 25,000 tonnes or more of greenhouse gas emissions in a year. The carbon tax will be applied uniformly to all sectors without exemption. The first payment will be in 2020, based on emissions in 2019. The carbon tax will be S$5 per tonne of greenhouse gas emissions in the first instance, from 2019 to 2023. The carbon tax rate will be reviewed by 2023 and will be increased to a rate of between S$10 and S$15 per tonne of emissions by 2030. Carbon tax will not be levied on petrol, diesel and compressed natural gas (“CNG”), which are already subject to excise duties. There will be no change to the excise duties for petrol, diesel and CNG at this point in time.

  • Buyer’s Stamp Duty (“BSD”)

The top marginal BSD rate for residential properties will be raised from 3% to 4%. Previously, BSD rates for residential properties range between 1% and 3%. The new top marginal rate of 4% will apply to the portion of residential property value which is in excess of S$1 million. This change will apply to all residential properties acquired from 20 February 2018. The BSD rates for non-residential properties remain unchanged at 1% to 3%.

The applicable Additional Buyer’s Stamp Duty (ABSD) rates on residential properties remain the same, and would continue to be payable (where applicable) in addition to the BSD.

Reference materials

The Budget Speech for FY2018 is available from the Budget 2018 website www.singaporebudget.gov.sg.

 

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