LIM GEK KHIM and CHONG LEE SIANG discuss the tax initiatives which make Singapore a regional headquarters hotspot.
Singapore can stake its claim as the location of choice for multinational companies seeking to set up regional headquarters, owing in large part to its business-friendly tax policies. The Republic has all the ingredients to make it an excellent choice as a nerve centre for companies with operations in the Asia Pacific.
There is a strong info-communications infrastructure, a stable political climate, a pool of skilled professionals and a strategic location. Its favourable tax policies also boost Singapore’s allure as a launch pad for investments into the region.
We take a look at some of these tax trump cards which enhance Singapore’s attractiveness as a regional holding and headquarters location for multinational companies.
Low corporate tax rate
Singapore has been steadily reducing its corporate tax rate to enhance competitiveness. At 20 per cent, Singapore’s headline corporate tax rate is one of the lowest in the region, after Hong Kong. The tax rate is further reduced if a company qualifies for tax incentives.
Absence of capital gains tax
Singapore does not tax capital gains. This provides a viable exit strategy which is crucial to the planning of an overseas expansion strategy.
To provide even more certainty on this, the Government announced in this year’s Budget an initiative to exempt from tax gains on disposal of shares in subsidiaries that have been held for at least 18 months by approved holding companies.
One-tier corporate tax
The introduction of the one-tier corporate tax system in 2003 removed a tax impediment that previously required dividends to be franked. The removal of this tax obstacle allows Singapore-based holding companies or headquarters to repatriate capital gains from divestments to their home countries without any
Singapore tax leakage.
Foreign income exemption
Singapore adopts a territorial basis of taxation. Foreign-sourced income is taxed only when it is repatriated back into Singapore. In addition, tax is not levied on foreign-sourced dividends remitted back into Singapore provided the dividends are received from a country with a headline corporate tax rate of at least 15 per cent, some tax was paid in that country (such as withholding tax paid on the dividends or income tax paid on the profits out of which the dividends were paid) and the exemption is beneficial to the Singapore company.
If tax was not paid in the foreign country as a result of a tax incentive for carrying out substantive economic activities in that foreign country, specified documents need to be submitted to qualify for a tax concession to treat the tax-paid condition as met.
Singapore-based holding companies or headquarters can therefore generally repatriate dividends from their directly held foreign subsidiaries to Singapore free of Singapore tax. Those whose foreign subsidiaries are engaged in substantive economic activities but are unable to meet the qualifying conditions for this tax exemption may apply for a specific exemption.
Singapore regional holding companies or headquarters may also use their foreign-sourced income received outside Singapore to onward pay dividends to their offshore shareholders without triggering Singapore tax on the foreign-sourced income if the offshore income is not received in Singapore prior to payment of dividends.
Wide tax treaty network
Regional headquarters here can tap Singapore’s extensive tax treaty network with over 50 countries to benefit from the reduced withholding taxes on dividends, interest and royalties. Companies heavily involved in cross-border deals will find this useful to mitigate double taxation.
Regional HQ incentive
To encourage multinational companies to set up their regional headquarters here, the Economic Development Board offers the Regional Headquarters (RHQ) and the International Headquarters (IHQ) incentives. Companies which are conferred the RHQ status enjoy a concessionary tax rate of 15 per cent for qualifying income arising from headquarters activities and operations carried out from Singapore. Those awarded IHQ status enjoy even further attractive tax rates of between zero and 10 per cent.
Not Ordinarily Resident scheme
To attract talent to relocate to Singapore, the NOR scheme was introduced in 2002. Individuals exercising employment in Singapore but whose duties are regional, requiring them to spend at least 90 days a year outside Singapore may apply for the NOR scheme for their Singapore employment income to be taxed on a time-apportionment basis for up to five years of assessment. This is subject to a minimum threshold tax rate of 10 per cent.
Employees who travel extensively can benefit from this scheme to reduce their personal Singapore income tax if specified conditions are satisfied. For those on tax equalisation, this scheme will help to reduce the operating costs of the regional headquarters company.
Writing-down allowance for IP
Regional headquarters which use Singapore as an international IP holding location may claim WDA for the cost of acquisition of the IP. This WDA is applicable to IP acquisition costs incurred in the five years from Nov 1, 2003.
Advance Pricing Arrangements
On the surface, APAs may not appear to be an important feature. However, the transfer pricing guidelines issued by the Inland Revenue Authority of Singapore in February this year that set out the procedures for applying for APAs and Mutual Agreement Procedure facilities provide good guidance to multinational companies on how they can take advantage of these facilities to avoid double taxation. This is an important consideration for regional headquarters, given that transfer pricing is one of the most important tax issues facing multinational companies today.
Proactive regulators and agencies
Last but not least is the readiness of our regulators and promoting agencies to regularly adapt and improve the tax framework and incentives to promote Singapore as a relevant regional headquarters location for multinational companies. Many countries in the region are in the race to be the choice regional holding or headquarters location. In the face of such competition, the responsiveness of our Government will be key to ensuring that Singapore continues to stay ahead in the race to be the preferred regional headquarters hub.
Lim Gek Khim is a director of tax and Chong Lee Siang is a tax partner at Ernst & Young