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Singapore: Wealth Management

Banks, Stocks and Real Estate

Singapore is one of the world’s fastest growing private banking centres, as demonstrated by the many global banks that have set up offices there. The jurisdiction has strict banking secrecy laws, yet it aims for a transparent economy and complies with the requirements of the OECD “white list”. All banks operating in Singapore must be licensed by the Monetary Authority of Singapore, which is the jurisdiction’s central bank.

On December 1, 1999, the Stock Exchange of Singapore and the Singapore International Monetary Exchange merged to form the Singapore Stock Exchange (SGX). On November 23, 2000, it was the first Asia-Pacific exchange to be listed via a public offer and a private placement. The SGX’s stated aim is “to offer a highly trusted securities & derivatives marketplace for capital raising, risk transfer, trading, clearing and settlement”.

The SGX has forged a number of strategic alliances with other exchanges, including: a joint venture with the American Stock Exchange to promote Exchange Traded Funds; a securities co-trading link with the Australian Stock Exchange; an agreement with the Baltic Exchange for the provision of the Baltic Exchange’s benchmark prices for the settlement of Forward Freight Agreements; and a futures trading link with the Chicago Mercantile Exchange.

In October, 2010, the Australian stock exchange, ASX Limited (ASX), and the Singapore Exchange (SGX) announced that they had entered into an AUD8.4bn (US$8.35bn) merger implementation agreement.

In a joint statement, the two exchanges have said that their combination “will bring together the complementary businesses of two successful exchanges in the Asian time zone, with internationally recognised regulatory standards. The combination leverages the strengths of ASX through its listings, stock options and fixed income franchises, with SGX, the Asian gateway for international listings, equity futures and OTC clearing, to create the region’s pre-eminent exchange group.”

“The combined group,” they added, “will augment Australia’s financial market and funds management industry through direct participation in Asian growth, and increase ASX’s and SGX’s competitiveness in a changing global markets landscape. As proven platforms for raising capital and managing price risk for the resource sector, ASX and SGX will build on existing distribution and clearing capabilities, and intend to play an important role in establishing price discovery for global commodities in the Asia-Pacific.”

The combined group, with ASX-SGX Limited as its holding company, will have pro forma revenues of approximately US$1.1bn and pro forma earnings before interest and income tax of approximately US$700m, based on the audited financial statements of ASX and SGX for the financial year ended June 30, 2010.

It would, however, only be the second largest exchange in Asian. The Hong Kong Stock Exchange is expected to remain as Asia’s primary exchange, and is likely to remain so given its links to mainland China and its development of yuan-denominated business.

Nevertheless, ASX and SGX will still, it is said, offer access to over 2,700 listed companies from over 20 countries; to the world’s second largest cluster of companies in the resource sector (more than 900 listings); and to the largest real estate investment trust sector (over 80) and the largest number of exchange traded funds (over 100) in the Asia-Pacific.

It will also offer the world’s widest range of Asia-Pacific equity, fixed income and commodity derivatives with over 400 contracts from over 10 countries, including Australia, China, India and Japan, and covering a range of commodities including metals, energy and agricultural products.

In addition, it will have the Asia-Pacific’s largest and the world’s second largest base of institutional investors with combined assets under management of over US$2.3 trillion from existing superannuation, institutional and sovereign wealth funds.

With a global distribution network with over 90 securities market participant firms and over 170 derivatives market participant firms on a combined basis, it will possess leading exchange technology, including the proposed introduction of the world’s fastest trading platform.

Structured as a takeover of ASX by SGX, it is expected that the combined group’s chief executive officer and non-executive chairman will come from the latter, while ASX will only provide its deputy chairman. It is also reported that 40% of the holding company’s shareholders will be Singaporean, with 30% Australian and the remainder international investors.

In his 2006 budget, Lee Hsien Loong announced a range of tax and other initiatives aimed at spurring growth in the financial services and asset management industry. Among the measures designed to promote the development of Singapore as a financial centre were enhanced tax incentives for asset and wealth management, capital and treasury markets, and captive insurance.

With a view to encouraging the growth of financial services companies the Government grants the following categories of fiscal incentives:

  • Trading Income: Capital gains and income made by financial service companies trading investments for and on behalf of their non-resident clients are often tax exempt both in the hands of the financial services company and in the hands of the non-resident client. The effect of this incentive is to make Singapore an attractive location for foreigners to base their investments.
  • Fee Income: Concessionary tax rates are levied on profits earned by financial services companies in respect of income earned billing clients for investment services rendered. Profits distributed as dividends are also granted a concessionary tax status.

Bond Market

Debt market tax concessions have traditionally included:

  • A concessionary tax rate of 10% on interest income from holding qualifying debt securities arranged in Singapore.
  • Withholding tax exemption on interest from qualifying debt securities arranged in Singapore payable to non-residents.
  • Withholding tax exemption on swaps in relation to SGD bond issues. Issuers are automatically waived from the requirement under S45 of the Income Tax Act to withhold tax on interest paid on qualifying debt securities.

Foreign Securities Companies

Companies which deal in foreign securities have traditionally been entitled to various fiscal concessions. The rate of corporate income tax payable depends on the nature of the activity. For example:

  • A corporate income tax rate of 10% is payable on income earned from providing advice to and buying and selling foreign securities on behalf of non-residents.
  • Income earned from arranging and underwriting initial public offerings of foreign currency denominated shares on the Singapore stock exchange and from transactions in respect of the same are exempt from corporate income tax.
  • Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which deal in foreign securities on behalf of non-residents are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.
  • Commodity derivatives: Under this scheme, a concessionary tax rate of 5% will be granted for income derived from qualifying activities undertaken by a financial institution granted Commodity Derivatives Traders (CDT) status.

Financial Services Processing Companies

To promote Singapore as the hub for high value-added processing activities, a tax incentive scheme for Qualifying Processing Services Company ("QPC") was introduced in 2004.

This scheme aimed at encouraging companies which undertake high value-added processing services supporting financial institutions to set up their operations in Singapore. Under this scheme, a QPC would be granted concessionary tax rate of 5% on income derived from the provision of the prescribed processing services, which are in support of financial activities such as Treasury and Securities, Asset Management, Private Banking, Wholesale Banking and Retail Banking.

Examples of core processing services which are eligible under the scheme are settlement and reconciliation, cash management, product control, securities borrowing/lending processing, portfolio valuation, etc. In addition, ancillary services such as risk management, IT processing, financial control, compliance and legal, and management information and reporting, which are in support of the core processing services, may also be eligible under the incentive.

Credit Rating Agencies

With a view to encouraging the growth of companies which provide credit rating services on foreign securities such companies have traditionally been entitled to the following fiscal concessions:

  • Profits are subject to an indefinite 10% concessionary tax rate.
  • Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which deal in foreign securities on behalf of non-residents are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.

R&D Expenses (Financial Products Research)

This incentive, which was designed to encourage financial institutions in Singapore to develop new and innovative financial products, has traditionally allowed double tax deduction for expenses such as the cost of R& D personnel, legal expenses, training costs and consultancy fees. The Innovation in Financial Technology & Infrastructure Grant (ITIG) Scheme, introduced in 2004 (now named the Further Deduction for R&D Expenses Scheme), was launched to encourage innovation in technology and/or infrastructure in financial services. The scheme was designed to target Singapore-registered companies, and offer grants for qualifying expenses with respect to innovation in financial technology and/or infrastructure activity in Singapore.

Approved Trustee & Custodian Companies

The Tax Incentive Scheme for Approved Trustee Companies has traditionally been aimed at encouraging the development of reputable trustee companies and banks to offer international trust administration and custodian services in Singapore, as well as to complement the growth of the fund management industry in Singapore. Under the scheme, an Approved Trustee Companies (ATC) would be granted a 10% concessionary rate on income derived from the following:

  • Trustee or custodian services in respect of a foreign trust created in writing, i.e. where both the settlor and beneficiaries of the trust are not residents or citizens of Singapore (and, if a company, not incorporated in Singapore or controlled by persons who are residents or citizens of Singapore);
  • Trustee or custodian services for or on behalf of a unit trust which is not owned or controlled by Singapore residents or citizens, and whose funds are invested in "designated investments";
  • Trustee or custodian services in respect of foreign bond or loan stock issues (e.g., monitoring loan covenants, administering loan repayments);
  • Custodian services for foreign currency denominated stocks and shares issued by companies not incorporated and not resident in Singapore; and
  • Provision of trust management or administration services to foreign trusts of which it is not the trustee, including the setting up and administration of eligible investment holding companies for such trusts.

Offshore Insurance Business

To encourage insurance companies, in particular professional reinsurers and captives to set up operations in Singapore to write offshore business, a concessionary tax rate of 10 per cent has traditionally been granted to insurance companies on income derived from:

  • Underwriting profits of offshore insurance business; and
  • Non-Singapore sourced dividends, realised capital gains and interest including interest on Asian Currency Unit (ACU) deposits, derived from investing offshore premium income and shareholders' funds used to support the offshore insurance business.

The Tax Exemption Scheme for Marine Hull & Liability Insurance Business aims to encourage all general direct insurance and reinsurance companies (including P&I clubs) in Singapore to tap the insurance potential of the shipping communities in the Asia Pacific region. It provides tax exemptions for income derived from underwriting profits of marine hull and liability business, as well as non-Singapore dividends, realised capital gains and interest, including Asian Currency Unit (ACU) deposits, derived from investing premium income from offshore marine hull & liability insurance business and shareholders' funds used to support the marine hull & liability insurance business.

Singapore's 2006 budget gave tax exemption to captive insurance companies for a period of 10 years on specified types of income; the exemption will be available until 2011.

Real Estate

With more than US$3bn of commercial property sales in Q3 2010, Singapore ranked third in the Asia Pacific region after Japan and Australia. Q1 had seen a comparable level of activity, although Q2 was lower.

Altogether, it's clear that the Singapore commercial property market is back to full health after problems in 2008 and 2009. A new business development, the Marina Bay Financial Centre, has helped to boost Singapore's image as a regional business centre.

There is considerable over-supply of commercial space at present, after completions in 2008 and 2009 failed to find immediate tenants, particularly in the retail sector, where a number of new malls came on the market in 2009.

A study issued by consultancy DTZ in August, 2010, says that Singapore's commercial properties offer highly attractive returns, and the firm expects that rents will show strong growth in the next five years.

 

 

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