Regulation

Singapore: Boosting its IFC status in 2013


By S Sharma, Consultant, ATMD Bird & Bird LLP, Singapore (01/02/2013)

Singapore’s strategic location at the southern tip of the Malay Peninsula in South-East Asia, between the Indian Ocean and South China Sea, has positioned the country uniquely to facilitate and finance international trade and business. Over the years, Singapore has established itself as a leading international financial centre (IFC) and further measures are being taken in 2013 to boost Singapore’s standing as an IFC.

Financial Stability Assessment

The Monetary Authority of Singapore (MAS) announced on 8 January 2013 that Singapore will participate in the International Monetary Fund’s (IMF) Financial Sector Assessment Programme (FASP) this year. Singapore last participated in the FASP in 2004. Singapore will subject itself to a comprehensive and in-depth external assessment of its financial sector.

There are three components to the financial stability assessment, namely:

  •   an evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near term for the financial sector;
  •   an assessment of the authorities’ financial stability policy framework; and
  •   an assessment of the authorities’ capacity to manage and resolve a financial crisis should risks materialise.
An optional component is assessment of compliance with international financial sector standards. The IMF’s assessment team is scheduled to visit Singapore in April and May 2013. Such an assessment is expected to contribute to a deeper understanding of the stability and resilience of Singapore’s financial sector. Singapore will be assessed against international standards for the banking, insurance and securities sectors of the financial industry. Although the outcome of FASP 2013 remains to be seen, a favourable assessment from the IMF will enhance Singapore’s standing among other IFCs.

Tax Measures for the Financial Sector from Budget 2013

In his Budget Statement delivered in Parliament on 25 February 2013, Deputy Prime Minister and Minister for Finance, Mr Tharman Shanmugaratnam announced, among other tax measures for businesses, a corporate tax rebate for companies in general and several measures to enhance Singapore’s attractiveness as a global financial centre. Under its income tax laws, Singapore taxes income accruing in or derived from Singapore and income received in Singapore from outside Singapore. The Budget Statement gave broad outlines of certain tax changes for the financial sector, leaving further details of these tax changes to be released by the MAS by the end of June 2013.

Corporate Tax Rebate

To relieve business costs, a corporate tax rebate of 30 per cent, capped at S$30,000 per Year of Assessment, will be granted to companies and registered business trusts for three years, from Year of Assessment 2013 to Year of Assessment 2015. The prevailing corporate income tax rate in Singapore is 17 per cent. Non-resident companies with income that is subject to final withholding tax cannot claim the rebate for such income. Loss-making companies and companies whose income is exempted from tax would not benefit from the corporate tax rebate either.

 

Financial Sector Incentive (FSI) Scheme

The Financial Sector Incentive (FSI) scheme, which commenced almost 10 years ago, covers a broad range of activities carried out by banks, fund managers, brokerages and other financial institutions. There are 12 separate awards under the FSI scheme which grant concessionary tax rates of five per cent, 10 per cent and 12 per cent in respect of income from qualifying financial activities. These awards expire on 31 March 2013. The 12 award schemes are as follows:

  •   FSI - Standard Tier (FSI-ST) award for a concessionary tax rate of 12 per cent;
  •   FSI - Fund Management (FSI-FM) award for a concessionary tax rate of 10 per cent;
  •   FSI - Headquarter Services (FSI-HQ) award for a concessionary tax rate of  10 per cent;
  •   FSI - Bond Market (FSI-BM) award for a concessionary tax rate of five per cent;
  •   FSI - Equity Market (FSI-EM) award for a concessionary tax rate of five per cent;
  •   FSI - Credit Facilities Syndication (FSI-CFS) award for a concessionary tax rate of five per cent;
  •   FSI - Derivatives Market (FSI-DM) award for a concessionary tax rate of per cent – which comprises five sub-awards; and
  •   FSI – Islamic Finance (FSI-IF) award for a concessionary tax rate of five per cent;

With the exception of the FSI-IF award, the FSI scheme is renewed for a third five year period in respect of all the other 11 awards until 31 March 2018. For the FSI-IF award, the existing qualifying Islamic Finance activities will be re-incentivised under the FSI-ST award. This means that going forward such activities would be taxed at a less favourable tax rate of 12 per cent compared with the five per cent tax rate enjoyed previously. The changes to the FSI scheme take effect from 1 January 2014, with the exception of the change to the FSI-HQ award, which introduced an automatic exemption for withholding tax on interest and, which took effect from Budget Day, ie, 25 February 2013. Recipients of existing awards can continue with their awards till the end of the award tenure provided that they continue to meet the conditions under their awards.

 

Qualifying Debt Securities and Qualifying Debt Securities Plus Incentive Schemes

Presently, the Qualifying Debt Securities (QDS) scheme provides tax concessions on qualifying income from QDS, ie, debt securities substantially arranged by financial institutions in Singapore, as follows:

 

  •   10 per cent concessionary tax rate for qualifying companies and bodies or persons in Singapore; and
  • Tax exemption for qualifying non-residents and qualifying individuals.
The Qualifying Debt Securities Plus (QDS+) scheme grants tax exemption for all investors on qualifying income from QDS that are:

  • debt securities (excluding Singapore Government Securities) with an original maturity of at least 10 years; and
  • Islamic debt securities (sukuk), subject to the condition that any amount payable by the issuer to the investors of sukuk is not deductible against any income of the issuer accruing in or derived from Singapore.
In promoting further Singapore’s debt market, both the QDS scheme and the QDS+ scheme, which expire on 31 December 2013, are being extended for five years until 31 December 2018. For the QDS scheme, the earlier requirement that a QDS has to be ‘substantially arranged in Singapore’ is being rationalised to ease compliance for issuers, in respect of QDS issued from 1 January 2014 to 31 December 2018. Limiting the QDS which qualifies as being ‘substantially arranged in Singapore’, to a lead manager, arranger and/or distributor of the QDS to certain award holders, provides greater clarity to industry players and removes some areas of uncertainty. For the QDS+ scheme, this scheme will be refined to allow debt securities with standard termination clauses to qualify, subject to conditions. Other existing conditions of both schemes are unchanged. With these tax changes, the Singapore bond market is set to develop further as foreign companies are more likely to use their Singapore subsidiaries to issue bonds and more global and regional players may be attracted to Singapore.

Tax Incentive Scheme for Approved Special Purpose Vehicle Engaged in Securitisation Transactions

The period of this tax incentive for Approved Special Purpose Vehicles (ASPVs), which expires on 31 December 2013, has been extended for five years until 31 December 2018 with existing conditions continuing. An ASPV is granted the following tax concessions, which go beyond income tax:

 

  •   tax exemption on income derived from approved asset securitisation  transactions;
  •   recovery of goods and services tax (GST) on the ASPV’s business expenses at a fixed rate of 76 per cent;
  •   remission of stamp duties on the instrument of transfer of assets to the ASPV for approved asset securitisation  transactions; and
  •   tax exemption on payments to qualifying non-residents on over-the-counter financial derivatives in connection with an asset securitisation transaction.
This extension of the tax incentive through a multi-tax approach augurs well for an increase in such asset securitisation transactions.

Tax Exemption Scheme for Underwriting of Offshore Specialised Insurance Risks

This scheme, which expires on 31 August 2016, provides insurers and reinsurers with tax exemption on qualifying income derived from certain qualifying offshore specialised insurance lines, namely, terrorism risks, political risks, energy risks, aviation and aerospace risks and agricultural risks.

With effect from the Budget date of 25 February 2013, tax exemption will be extended to qualifying income derived from offshore Catastrophe Excess of Loss (CAT-XOL) reinsurance layers, ie, CAT-XOL reinsurance layers providing coverage for more than one risk arising from a single event and against natural perils. This change is made to encourage the underwriting of severe and volatile catastrophe risks from Singapore. With more natural disasters occurring around the world in recent years, the introduction of such an incentive is opportune. In terms of details of the incentive, it remains to be seen whether there are any qualifying conditions for the extended qualifying income, and if so, what these are, when the details are provided by the MAS by the end April 2013.

 

Tax Incentive Scheme for Offshore Insurance Broking Business

This scheme which expires on 31 March 2013, provides insurance and reinsurance brokers with a 10 per cent concessionary tax rate on fees and commissions derived from the provision of insurance broking and advisory services to clients that are not based in Singapore. The scheme will be extended for another five years until 31 March 2018. In essence, for insurance and reinsurance brokers, the new qualifying criteria from 1 April 2013 require that the risks be insured offshore.

In line with accelerating the development of the specialty insurance cluster in Singapore, a new five per cent tier award for the offshore specialty insurance broking business is being introduced. This is welcome. Under this new award, which also takes effect from 1 April 2013, insurance and reinsurance brokers can enjoy a five per cent concessionary tax rate on fees and commissions derived from the provision of qualifying specialty insurance broking and advisory services.

 

Tax Crimes as Predicate Offences under AML/CFT Legislation

Singapore’s regulation of the financial sector includes legislation on anti-money laundering (AML) and on countering the financing of terrorism (CFT). Financial institutions are required to maintain a stringent AML/CFT framework. This framework is subject to regulatory audits by the MAS, which does appreciate commercial realities.

In keeping with its commitments to the revised Financial Action Task Force (FATF) recommendations in 2012, Singapore is adopting the new FATF requirement to designate tax crimes as money-laundering predicate offences. The objectives of such designation are to discourage the entry of tax evasion monies into the financial system and to protect Singapore’s reputation as a trusted IFC. The scope of tax crimes to be designated covers wilful and fraudulent tax evasion, ie, offences which involve omissions, falsifications or fraudulent conduct perpetrated with the wilful intent to evade tax or to assist others in evading tax.

It is intended that the tax offences which are to be designated as predicate offences comprise both direct tax and indirect tax offences, to be comparable with offences designated by other major jurisdictions. The necessary legislative amendments are expected to be in place by June 2013, as the criminalisation of the laundering of proceeds from these tax crimes will be effective from 1 July 2013.

In the meantime, the MAS has amended its Notice 626 to Banks on Prevention of Money Laundering and Countering the Financing of Terrorism. Besides other changes, the prohibition on a bank in Singapore from entering into or continuing correspondent banking relations with a shell bank has been extended to cover correspondent banking relations with ‘those that do not have adequate controls against criminal activities or that are not effectively supervised by the relevant authorities’. The changes took effect from 23 January 2013.