A Glance at Singapore’s Taxation and Incentives Regimes

Introduction

Singapore has always been ranked among the most preferred countries for doing business. As from the end of October 2015 when World Bank released its annual Doing Business report, Singapore came out ahead on the annual ease of doing business measurement for the 10th year in a row.  Singapore’s strategic location makes it an Asia Gateway with convenient connection with all major Asian cities within just a seven hour flight, enabling Singapore to be an excellent springboard for business expansion in the region.

From a tax and fiscal perspective, Singapore has the following prominent advantages in attracting business investment:

  • low corporate tax rate with a relatively simple tax regime;
  • wide tax treaty and free-trade area networks; and
  • fiscal support for establishing regional or operational headquarters or trading, R&D or intellectual property platforms.

We have therefore summarized some key business and taxation related features of Singapore to provide insights about what makes Singapore a globally-preferred place for business from a taxation and incentives point of view.

The facts about Singapore

Singapore is the business hub of South-East Asia due to, amongst others, the following factors:

  • South-East Asia provides a population of 2.8 billion people within seven hours of Singapore.
  • South-East Asia is one of the world’s fastest growing regions, with an annual GDP in excess of US$2 trillion, and as a region it attracts more than US$ 100 billion in Foreign Direct Investment (FDI) per annum.
  • More than 7,000 foreign multinational groups operate in Singapore.
  • More than 60% of these operate regional functions out of Singapore.
  • Singapore attracts more than US$20 billion in FDI in high tech and service sectors.
  • Singapore has air and sea links to more than 50 countries and 140 cities, via 68 airlines that operate through Singapore International Airport.

Asian Business Leadership

Singapore is seen as an excellent location by multinational corporations for a number of reasons including the fact that it provides a very pro-business environment and pro-business government, it has a robust infrastructure; it is well established as a leading financial centre and intellectual property hub, as well as its strategic location at the epicentre of South-East Asia.

This means that:

  • In terms of economic performance, Singapore is often ranked first in the world as the city with the best investment potential and is among the top three in foreign trade and investment.
  • From a competitiveness and business environment perspective, Singapore is considered to be the world’s easiest place to do business and one of the top two most competitive countries in the world.  In this context, Singapore is regarded as Asia’s most “network ready” country.
  • Singapore has a well-established legal system (based on English common law)with established corporate and commercial processes and precedents.  On this basis Singapore is ranked second in the world, and first in Asia for having the best protection of intellectual property.  It is also considered to be the least bureaucratic place for doing business in Asia.

Singapore is also ranked number seven in the world and number one in Asia for having the least corruption in its economy, as well as being considered to be the most transparent country in Asia in terms of government process and accountability.

Singapore also has progressive labour regulations occupying the top position in BERI’s Labor Force Evaluation Measurement matrix, ranking in the top ten for Asian countries in terms of both the most motivated and skilled labour force and is considered to have the best labour/employer relations in Asia.

Singapore is also considered to be the best country to work in in Asia from an expatriate perspective and the Singaporean immigration laws encourage the recruitment of foreign business talent.

In addition to the diversified culture, excellent economic performance and competitively business environment, Singapore has established an attractive tax system and a tremendous amount of incentives to benefit the international business in Singapore.

Tax System

Tax is one of the top concerns for entrepreneursto run a business as it will direct affect a company’s net profit.  Compared with other countries in Asia, Singapore has a comparably friendly tax environment.

Tax environment

Singapore imposes income tax on a territorial basis.  This means that only income earned in Singapore, or income earned overseas but received in Singapore, is subject to Singaporean tax.  Group relief provisions were introduced in the 2003 assessment year while certain tax exemptions can apply for new business operations.  Corporate tax is currently imposed at the rate of 17%.  Significantly, capital gains are not taxed in Singapore.  The governing statutes are the Income Tax Act and the Economic Expansion Incentives (Relief from Income Tax) Act.

Companies have to furnish an estimate of taxable income within three months of the end of the financial year.  The income tax return must be filed by 30 November of the year of assessment.

A Goods and Services Tax (GST) of 7% is imposed on the supply of goods and services in Singapore and on the importation of goods into Singapore.  Relief for GST on imports may be granted under certain conditions.  Exports and international services are zero-rated.  The taxable value of imported goods is calculated based on the CIF value of the goods plus commission, other incidental charges and all payable customs duties.

Tax and International Trade

Singapore’s tax treaty network

Singapore has comprehensive Double Taxation Agreements (“DTAs”) with more than 60 countries including China, Sweden, Italy, Australia, Japan, India and Thailand.  Singapore also has limited treaties with seven countries including the USA. Furthermore, Singapore currently has treaties with eleven nations which are signed but not yet ratified.

The newly signed DTA with China ranks Singapore as one of the most favourable countries for Chinese investment in respect of withholding tax rates, on par with Hong Kong in most categories.  It is considered that China will likely look at anti-avoidance issues such as treaty shopping in reviewing international arrangements, thus the use of Singapore as a regional hub with genuine business substance will effectively manage these risks while reducing tax costs under Singapore tax incentives (see next page).

Singapore’s FTA network

With Singapore’s Free Trade Agreement network, Singapore-based exporters and investors stand to enjoy a myriad of benefits like tariff concessions, preferential access to certain sectors, faster entry into markets and intellectual property (IP) protection.  Singapore's trade architecture consists of 18 FTAs designed to position Singapore as an integrated manufacturing centre in this region; promote research & development in a knowledge-based economy and drive the services hub.  FTAs help to reduce or eliminate barriers in trade by either immediate or gradual elimination of tariffs.

Incentives

Besides the friendly tax system, Singapore offers a tremendous amount of incentives to attract and benefit the international business community. In the following pages, we have summarised the various incentives provided by Singapore government on investment and intellectual property aspects.

Investment Incentives

Singaporean Economic Development Board has established a wide range of incentives to encourage investment in Singapore.  Thetable below is a summary which intendeds to provide the reader with a flavour of the current incentive opportunities and should not be relied on without seeking appropriate advice specific to a company’s circumstances.

Intellectual Property Incentives

Singapore also provides a number of incentives for intellectual property development, ownership and management.  These incentives include:

  • An Approved Royalties Incentive, which provides a reduced withholding tax of 0% or 5% on outbound royalty payments to access advanced technology and know-how;
  • A Section 19B write-down allowance for IP acquisition, which provides an automatic five-year write-down if legal and economic intellectual property rights are acquired by a Singaporean registered and resident entity; and
  • A Section 19C write-down allowance for R&D cost-sharing, providing a one-year write-down for R&D cost-sharing payments.

In addition, a range of tax deductions and enhanced tax deductions (of up to 400%) are available under the Production and Innovation Credit (“PIC”) Scheme for qualifying R&D expenditure that is approved by the Economic Development Board.  The PIC scheme was introduced by the Finance Minister during Singapore Budget 2010 and subsequently enhanced during Singapore Budgets 2011 and 2012.  The PIC scheme supports investments in Innovation and Productivity by Singapore taxpayers.  Particularly, businesses can enjoy huge tax savings in the form of cash payouts and/or tax deductions when they invest in any of the following six productivity improvement activities:

  • Acquisition or leasing of PIC Automation Equipment;
  • Training of employees;
  • Acquisition of Intellectual Property Rights;
  • Registration of patents, trademarks, designs and plant varieties;
  • Research and development activities; and
  • Investment in approved design projects.

Summary

Various tax and transfer pricing models can be adopted when determining the appropriate business operating model for the Asia Pacific region, involving Singapore.  The most common and tax-efficient of these is the centralised business-hub / principal structure.  In identifying an appropriate location for a centralised business-hub or principal-entity it is important to ensure that a range of key attributes can be met in that jurisdiction.  Some of these features include:

  • Low corporate tax rates
  • Little or no restrictions on foreign exchange / cash repatriation
  • Geographic proximity to key customers / markets
  • Extensive Double Taxation Avoidance Agreement network
  • Extensive Free Trade Agreement networks
  • Access to existing high-quality business talents and infrastructure
  • Access to competent professional personnel and attractive location for expatriate personnel
Singapore ranks favourably in all of the above attributes, as compared to other locations in the Asia Pacific region. 
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