Fund managers' wishlist for Budget

By Anuj Kagalwala, Tax Partner and Tan Hui Cheng, Tax Director at PwC Services LLP.

This article was contributed and first published in The Business Times on 1 February 2013.

Some key policy changes will allow Singapore to remain a relevant and attractive hub in Asia for funds

It is that time of year again when the Singapore government prepares the Budget for the coming year, which includes reviewing its financial and tax policies. While the global economic outlook continues to be uncertain, many analysts agree that most of Asia should enjoy relatively higher growth in 2013. This should continue to spur investment interest and attract new funds to this part of the world. Given the strong investment interest, the asset management industry in the region is poised for further growth in the coming years.

The Singapore government has been sensitive to the needs of the industry and has quickly responded with fine-tuning measures to facilitate its growth. However, we believe a few key policy changes, if made in the upcoming Budget announcement, will allow Singapore to remain a relevant and attractive hub in Asia for fund managers and funds. Delay in bringing about these changes carry the risk of making Singapore less attractive than other competing jurisdictions.

Use of investment entities by funds

It is commonplace for fund managers to set up separate investment entities (IEs) to hold different investments. This is done for a number of reasons, including the availability of more exit options and segregation of risks.

While the fund entities set up in Singapore can apply for income tax exemption, the tax exemption status does not automatically extend to the IEs held by the fund entities. Separate tax exemption applications have to be made for each IE. This leads to additional conditions to be met and additional resources to be expended by fund managers to apply for and comply with the requirements of the tax exemption schemes.

One obvious way to address the above issue would be to tie the conditions for the tax exemption to the fund entity in Singapore, without the need for the individual IEs to apply for tax exemption. However, this may appear to go against the policy objective of using tax incentives to encourage fund managers to set up or expand their existing operations in Singapore.

In this case, the government could consider tweaking the conditions of the tax exemption schemes to provide more flexibility to meet the commercial needs of fund managers, while not losing sight of this objective. The schemes should nonetheless be administered such that the individual IEs do not have to make separate applications. The existing conditions for the tax exemption schemes for funds can be tweaked for funds that use IEs as follows:

  • minimum level of assets under management by the fund management group in Singapore or globally;
  • minimum number of investment professionals in Singapore;
  • minimum local spending requirement;
  • minimum fund size.

Further, instead of imposing all requirements indicated on every application, our suggestion is to allow each applicant to choose to apply three out of the four stated conditions, for example.

Legal framework for fund companies

The other aspect of the Singapore framework which has been discussed at length is the lack of a tailored legal framework for funds set up as companies in Singapore. Singapore fund companies are set up as normal operating companies under the Singapore Companies Act.

The Singapore legal framework for companies does not have provisions modified to cater to the needs of fund companies, and present a number of issues.

  • Directors need to declare that the company is solvent before it redeems shares. Each time the fund needs to redeem shares from its investors, the directors of the fund company have to sign a declaration that the company is solvent. For this purpose, the company must be able to repay debts as they fall due, and its assets must be greater than its liabilities. It is common for funds to issue preference shares to investors (in addition to other instruments) to facilitate a return of capital. However, for accounting purposes, preference shares may be classified as liabilities under certain circumstances. This may sometimes result in one leg of the solvency test mentioned earlier not being met. There is also administrative inconvenience involved if the fund companies expect to have to meet frequent redemption requests by investors.
  • Information on shareholders (ie investors) and investments can be accessed by the public. Fund managers' primary concern with allowing public access to investor information relates to their ability to attract and retain quality investors. Allowing investor information to be confidential ensures that the fund and fund manager maintain their competitive advantage. Investors also do not want solicitation from third parties. This is a particularly important consideration for high net-worth individuals and families. Disclosure of investments similarly leads to concerns over their competitive advantage being made known to other fund managers.

The current legal framework thus creates a number of hurdles that fund managers using Singapore fund companies need to be aware of, and plan ahead lest they trip up. One suggestion is to introduce a legal framework for funds that builds on the existing company law framework, with modifications that cater for companies that are funds. Additional attractive features that may be considered include allowing for open-ended investment companies, migration of domiciliation of funds from other countries, and segregated cell companies' concept.

Given Singapore's strategic location in Asia and its reputation as a financial centre, there has been increased interest in setting up fund companies in Singapore. If a legal framework for fund companies were to be introduced, it would certainly help to facilitate the fund managers' decision to set up more funds here and to boost their operations as a result.

Lower concessionary tax rates for fund management companies

Lastly, we believe the concessionary tax rate of 10 per cent granted to fund managers need to be reviewed. It is no longer attractive in the context of the current corporate tax rate of 17 per cent, given the extent of compliance obligations and the conditions that the fund managers are expected to meet.

If the concessionary tax rate can be brought down to 5 per cent or even zero for income derived by fund managers, Singapore will present an even bigger draw for fund managers.

However, this should be tied to reasonable conditions and business and employee growth targets, which should be set taking into account current market conditions and the different operating models of different classes of fund managers (eg private equity and hedge fund managers).

With fund inflows to Asia expected to remain high, this presents a golden opportunity for Singapore to fine-tune its value proposition to the asset management industry, to enable it to grow further as a hub for asset management activities in Asia.