By Lowtax Editorial
02 August, 2016
Located in South East Asia, Singapore is a highly developed and successful free market economy which enjoys an open and corruption-free environment, stable prices, a low tax regime and the sixth-highest per capita GDP in the world.
Historical And Economic Overview
Although most probably think of Singapore the city, the Republic of Singapore is actually a 700 square kilometer island sandwiched between Indonesia and the tip of the Malay peninsula. The city was founded as a British trading colony in 1819 and formed an important strategic trading and naval post within the British Empire in the 19th and early 20th centuries.
After the Second World War, decolonization meant that Singapore gravitated towards the Malaysian Federation, which it joined in 1963. However, this was a short-lived phase of the country's history, and, two years later, Singapore became an independent republic. Subsequently, it has become one of the world's most prosperous countries with strong international trading links and one of the busiest international ports.
Since independence, Singapore has been a parliamentary republic with a directly elected unicameral parliament. As a legacy of its association with the former British Empire, Singapore's legal system is based on English common law. Also, English is one of the four official languages spoken on the island, alongside Chinese, Malay and Tamil.
Approximately three-quarters of Singapore's population of 5.7m are of Chinese origin but there are significant minorities of Malaysians and Indians, while the presence of the major global multinationals in the city also ensures a sizeable army of expats from Europe, North America and elsewhere around the globe. Singapore's currency is the Singapore dollar, which was worth USD0.75 at the time of writing.
Singapore's economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector. Following a shallow recession in 2009, the economy surged in 2010 with growth of 14 percent. Since then economic growth has been much more muted, averaging about 3.3 percent since 2013. However, Singapore has attracted major investments in pharmaceuticals and medical technology production and will continue efforts to establish Singapore as Southeast Asia's financial and high-tech hub.
The Business and Financial Centre
In just over four decades, Singapore has established a thriving financial center of international repute, serving not only its domestic economy, but also the wider Asia Pacific region and in some instances, the world in 2015, Singapore was once again ranked by the World Bank as the number one jurisdiction in the world in terms of ease of doing business. Singapore's financial center offers a broad range of financial services including banking, insurance, investment banking and treasury services.
A key aspect of Singapore's financial center is its deep and liquid capital market. With one of the more well-established capital markets in Asia-Pacific, the Singapore Exchange is one of the main access points for managing Asian capital and investment exposure, and is Asia's most international exchange with more than 40 percent of companies listed on SGX originating outside of Singapore. Today, Singapore has grown to be the largest Real Estate Investment Trust market in Asia ex-Japan and also provides an extensive offering of investments in business trusts of shipping, aviation and infrastructure assets.
Singapore's bond market has also grown significantly. With an extensive range of both Singapore government securities and foreign corporate bonds available, Singapore offers fixed income investors a wide range of investment opportunities.
As one of the top four most active foreign exchange trading centers in the world, Singapore is also the second largest over-the-counter derivatives trading center in Asia, and a leading commodities derivatives trading hub.
With its key import and export links in Asia, and tax incentives for international and regional headquarters, Singapore has also become a good location for multinationals to locate their marketing, trading and distribution activities.
Furthermore, Singapore is an ideal place in which to locate an investment holding company with its extensive network of double tax avoidance treaties that reduce the rate of withholding tax on dividends remitted by foreign subsidiaries to Singaporean investment holding companies.
For resident individuals, Singapore's tax regime is fairly benign. Capital gains taxes are only levied in very limited circumstances, there are no gift taxes and estate duty was abolished in 2008. Personal income tax rates in Singapore are also relatively light: resident individuals are taxed at progressive rates up to 22 percent (increased from 20 percent in the 2015 Budget) on income accruing in or derived from Singapore.
From January 1, 2004, foreign income received or deemed received by a resident individual in Singapore is no longer subject to Singapore income tax, except if received through a partnership in Singapore.
A non-resident employee present in Singapore for more than 60 days but less than 183 days in a calendar year faces a 15 percent tax on gross employment income, or is taxed as a resident on that employment income, whichever is higher. For non-resident individuals withholding taxes are levied on Singapore-source income at varying rates; foreign-source income is untaxed whether remitted or not.
Non-resident individuals employed in Singapore for 60 days or less are exempt from tax on employment income. Other income derived in Singapore by non-residents is taxed at the corporate tax rate, with the exception of interest income derived from approved financial institutions in Singapore, which is tax-exempt.
GST was introduced in 1994 to allow Singapore to shift its reliance from direct taxes to indirect taxes. Since July 1, 2007, the rate of GST has been seven percent one of the lowest rates of consumption tax in the world. Singapore's GST is broad-based consumption tax levied on nearly all and services as well as imports.
A company is resident in Singapore if its central management and control of the business is exercised there. Singapore-resident companies are generally taxed on their worldwide income; non-resident companies are taxed on their Singapore-source income only, which can prove attractive to international holding and trading companies. However, non-resident companies do not benefit from double tax treaties signed by the Singapore government (see below).
The corporate income tax rate is 17 percent (decreased from 18 percent prior to 2010). There is a partial tax exemption on normal chargeable income of up to SGD300,000, as follows: 75 percent on the first SGD10,000 of income; then 50 percent on the next SGD290,000. This gives a total exemption of SGD152,500.
Singapore offers a wide array of tax incentive schemes, including for small and start-up companies.
Under the Productivity and Innovation Credit (PIC) scheme, from years of assessment 2013 to 2018, businesses can take advantage of tax deductions of up to 400 percent on up to SGD400,000 of qualifying expenditure, or a 60 percent cash payout on up to SGD100,000 of qualifying expenditure each year. A similar PIC scheme is available for small businesses with a higher cap of SGD600,000 for assessment years 2015-2018.
Budget 2016 added to Singapores extensive list of tax incentives with a 250 percent tax deduction on wages and related expenses for companies sending their employees to volunteer and provide services, including secondments, to certain institutions.
Budget 2016 also extends the double tax deduction under the Internationalization Scheme by four years from April 1, 2016, to March 31, 2020. This covers qualifying expenses incurred for activities such as participation in overseas business development and investment study trips.
To support more mergers and acquisitions (M&As), it was proposed in Budget 2016 that the M&A allowance be increased to SGD40m of the value of a deal, instead of the current cap of SGD20m. The Budget also extended the Finance and Treasury Centre scheme, under which qualifying companies enjoy a concessionary eight percent income tax, until March 31, 2021.
Compared to many high-tax jurisdictions, anti-avoidance legislation is relatively thin on the ground in Singapore. However, there is a general anti-avoidance rule under Section 33 of the Income Tax Act. A guide to the GAAR was issued by IRAS in July 2016, explaining the three tests to determine whether the GAAR should apply. It includes examples on actionable avoidance arrangements, namely: the circular flow or round-tripping of funds; the creation of more than one entity for the sole purpose of obtaining a tax advantage; changes to the form of business entity for the sole purpose of obtaining a tax advantage; and the attribution of income that is not aligned with economic reality.
Singapore has also committed itself to implementing and developing tax measures aimed at preventing base erosion and profit shifting as recommended by the OECD as part of its BEPS project. One of the first actions by the Government in the area of BEPS was to draw up a bill legislating for country-by-country (CbC) transfer pricing reporting requirements for large companies based in Singapore. This draft bill was released in July 2016 and would require Singapore-headquartered multinational enterprises with global revenues exceeding SGD1.125bn (USD835m) to submit to the tax authority an annual CbC report containing information on their income, taxes paid, and other indicators of level of economic activities in every tax jurisdiction where they operate.
International Tax Agreements
Singapore currently has comprehensive tax treaties with more than 80 countries. Notable among these are treaties with Australia, Belgium, Canada, China, France, Germany, India, Italy, Japan, the Russian Federation, South Africa and the United Kingdom.
Final regulations and an e-Tax Guide regarding the US Foreign Account Tax Compliance Act (FATCA) requirements for financial institutions (FIs) in Singapore were issued in March 2015.
FATCA requires all FIs outside of the United States to submit regular information on financial accounts held by US persons to the US Internal Revenue Service, or otherwise face a 30 percent withholding tax on certain payments of US-sourced income.
To ease FATCA compliance for its FIs, Singapore concluded a Model 1 Intergovernmental Agreement (IGA) with the United States, which was signed on December 9, 2014, and entered into force on March 18, 2015. Model 1 IGAs provide for FIs outside the United States to report account information relating to US persons to their relevant domestic tax authority in Singapore's case, IRAS which, in turn, shares this information with the IRS.
In May 2014, Singapore was one of a number of countries which endorsed the Declaration on Automatic Exchange of Information in Tax Matters. The Declaration is a commitment to implement a new single global standard on automatic exchange of information. The standard obliges countries and jurisdictions to obtain financial information from their financial institutions and to exchange that information automatically with other jurisdictions on an annual basis.
Singapore amended its tax code to put in place the legislative framework to deal with group information requests with effect from November 28, 2014, and in July 2016, the Government published for consultation a draft legislative amendment that would enable Singapore to automatically exchange tax-related information with other countries under the OECD's Common Reporting Standard. Furthermore, the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters became effective in Singapore on May 1, 2016.
Also known as a Pte Ltd company, the Private Company Limited by Shares is the most common business structure used in Singapore. The company is a separate legal entity in its own right, and so shareholders are not liable for its debts. The maximum number of shareholders allowed is 50. Although 100 percent foreign ownership is permitted, at least one director must be a Singapore citizen, resident or employment pass holder.
A Pte Ltd company must register with the Accounting and Corporate Regulatory Authority (ACRA). The registration fee is SGD300, plus SGD15 for company name approval. Accounts must be audited annually and filed with ACRA. An annual tax return must be filed with both ACRA and IRAS within one month of the company's annual general meeting.
Other company formats available in Singapore include:
- Public limited company;
- Company limited by guarantee;
- Partnerships, including general partnerships, limited partnerships and limited liability partnerships;
- Business trust
- Sole proprietorship
Foreign companies can set up a branch office, subsidiary, or a representative office in Singapore.
According to Hawksford Singapore, a leading corporate services provider in Singapore which has been publishing local business formation statistics since 2010, there were 15,910 new business formations in the first quarter of 2016, an 8.7 percent increase on the number of new businesses formed in the corresponding period of 2015. The Private Limited Company remained the most popular company format in Q1, 2016, with 8,228 of these company types formed during the period.
Hawksford also observed a notable jump in the number of companies with foreign shareholdings, with the share of 100 percent foreign-owned companies rising from 24 percent in the fourth quarter of 2015 to 37 percent in the first quarter of 2016. Companies from the British Virgin Islands, Australia, Hong Kong, the United States, China, Japan and India had the most subsidiaries in Singapore. However, investors from India, China, Malaysia and Indonesia were the biggest investors in the city-state.
The top three industry sectors with the largest number of business formations remain wholesale trade, financial services, and head office and management consultancy.
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