Singapore: Wealth Management
In September, 2010, Singapore was tipped in a PricewaterhouseCoopers (PwC) report to beat Hong Kong in the asset management sector.
PwC expects “to see a general shift of the world’s largest clusters from developed to emerging and developing nations as the centre of global economic gravity continues to shift towards these countries.”
It forecasts that “the existing large clusters in New York, London and Boston will be joined by Singapore, which may become the leading cluster in the Asian region. Tighter regulation and higher taxes are currently working against clusters in the United States and Europe but the key factor will be the increase in public and private capital available in Asia – which will fuel growth in asset management in the region.”
In its analysis, it expects the existing asset management clusters of Hong Kong and Singapore to both grow rapidly. It says that “both locations offer less burdensome tax regimes than their western counterparts and have ‘well-regulated but moderate’ regulatory structures.”
However, in its view, “there can only be one dominant regional centre in Asia. This is because of the enormous benefits accruing from knowledge spillovers and labour force specialisation in this industry. At present, we see the competition to be the regional asset management centre between Hong Kong and Singapore.”
“In the first half of 2010,” it says, “Hong Kong out-performed Singapore in attracting start up asset management funds with 65% of Asian fund launches during the period occurring in Hong Kong. However, with the Singaporean government actively promoting the city as a global centre for asset management and with a higher existing value of assets under management, Singapore is well-placed to compete with Hong Kong going forward.”
It concludes that “while Hong Kong’s proximity to China allows it access to the growing Chinese market, it will also be competing with other financial centres within China, such as Beijing, for a majority share of the Chinese asset management market. As a more independent cluster in close proximity to Indonesia, Malaysia and Thailand, we expect Singapore to attract the internationally footloose capital and become the second largest global asset management cluster by 2025.”
Therefore, by 2040, “the three largest clusters by value of assets under management are projected to be New York, Singapore and London. Despite growth in Asian markets, New York is projected to retain its position as the dominant asset management cluster.”
Singapore is emerging as the most popular Asian location amongst hedge fund managers for fund start ups, and in June 2006, Singapore Exchange Ltd (SGX) announced that it would accept listings of hedge funds from the end of that month.
Although eligible hedge funds were listed, however, there was to be no trading in their units on SGX. Typically, issue and redemption takes place in the over-the-counter market.
The new listing rules for hedge funds had the following key features:
A hedge fund must:
- Be authorised or recognised under section 286 or 287 of the Securities and Futures Act; or be offered only to institutions and/or accredited investors.
- Have a minimum asset size of at least SGD20 million (at the time the new rules were introduced) or US$20 million for Singapore and foreign currency denominated funds respectively.
Under additional rules:
Fund managers are required to have in place an independent risk management function.
The investment management team of a hedge fund is expected to have at least one principal with a minimum of five years relevant investment management experience.
A hedge fund will announce its net asset value per unit, as soon as practicable after each month end, but in any event no later than seven business days.
In addition, a fund must immediately announce any material change relating to its operations, including but not limited to, any change in its investment manager, custodian, administrator or independent auditor.
The factor that has appeared to spur hedge fund growth in Singapore is the relatively short time taken to register a fund in the city-state, an issue identified by hedge fund managers as the most crucial.
Fund management companies have traditionally been entitled to the following fiscal concessions:
- Fee income received by fund management companies in respect of services rendered are exempt from corporate income tax for a period of 5 years provided the fund management company manages an asset portfolio with a value in excess of SGD5m (at the time of writing). The exemption period can be 10 years if the fund managers can make suitably strong commitments to significantly increase their level of fund management activities in Singapore. The exemption is granted by the monetary authority of Singapore on a case by case basis.
- 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 standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies engaged in fund management 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.
Regulatory changes introduced in 2004 meant that international fund managers are no longer required to maintain a physical presence in the territory, and are permitted to make their funds available via private banks.
The number of hedge funds in Singapore grew from just eight in 2001 to more than 50 in 2004. However, accounting firm PricewaterhouseCoopers warned that future growth in the industry would be stifled unless the government made key changes to tax legislation.
The firm called on the government to address the rule requiring at least 80% of investments in foreign hedge funds to have originated from overseas in order for them to qualify for tax exemption.
"They probably have to relook at the 80-20 rule," observed Deepak Kaul, Manager, Corporate Tax Services, PwC. He added: "I think the easiest thing is to do is to relax the imposition of the 80-20 rule, maybe make it applicable over a period of time. In which case then, even fund managers who are not meeting the 80-20 rule initially will be incentivised to actually start up in Singapore."
Singapore's Prime Minister Lee Hsien Loong responded by announcing in his 2005 budget that start-up fund managers would be given a 12-month grace period to meet the requirement that 80% of share capital must come from foreign investors to qualify for a 10% tax rate on fee income.
The 80-20 rule was rescinded by the Monetary Authority of Singapore (MAS) in August 2007, and the requirements for benefiting from the aforementioned tax exemption were significantly loosened.
The other aspect of hedge fund taxation that industry participants called for to be changed was the level of the 10% tax, considered somewhat high by many. By cutting this levy to 5%, observers believed that Singapore would be able to continue to carve out a niche as a centre for the management of Indian, Japanese and Korean-based funds, in addition to capturing some of the growing interest in specialist Islamic hedge funds.
In his 2005 budget speech, Lee Hsien Loong announced that foreign non-individual investors would be encouraged to invest in the Singapore property market with a proposed reduction in the withholding tax on REIT distributions to 10% from 20%, for a period of five years. Additionally, to attract more REIT listings, the government wants to waive stamp duty on the instruments of transfer of Singapore properties into REITs to be listed, or already listed on the SGX, for a five-year period.
In his Budget Speech for the Financial Year 2009, which was delivered in Parliament on Thursday, January 22, 2009, Minister for Finance, Tharman Shanmugaratnam announced that the tax exemption schemes for foreign investors and qualifying resident funds, and tax incentive schemes for approved trustee companies and financial sector incentive companies would be enhanced by expanding the list of specified income and designated investment.
In May, 2010, the Monetary Authority of Singapore (MAS) – the jurisdiction’s central bank – said in a statement that it is to review its rules for the fund management industry. The review will include hedge funds, fund managers, and investment managers.
The review will include a re-examination of how investment and alternative fund managers interact with their investors and stakeholders. The MAS emphasized, however, that it remains committed to efforts to develop Singapore as a key alternative investment and fund management hub.
The MAS believes the review “is essential for the long-term and sustainable growth” of the industry.
The city state’s hedge fund industry is the second largest in Asia. Growth in the sector has been promoted through tax breaks and incentives offered to foreign companies setting up business there, as well as light or, in some cases, no regulation – particularly for hedge funds with 30 or fewer professional investors that qualify under MAS guidelines. Those regulations that are in place for such hedge funds relate to money-laundering and local rules relating to securities and futures trading, which require hedge funds to be sure of their clients’ financial awareness.