Transforming to seize opportunities

Double tax deduction for qualifying expenses incurred on retail bonds issuance

Budget 2021 proposes to extend the sunset clause for claiming a double tax deduction (DTD) for qualifying upfront expenditure on issue of retail bonds under the Singapore Exchange’s Seasoning Framework and Exempt Bond Issuer Framework, from 18 May 2021 to 31 December 2026.

Further, it is proposed that extension of the DTD will only apply to rated retail bonds (not all retail bonds) issued during the period 19 May 2021 to 31 December 2026.

In order for the issuer to be eligible for the DTD on qualifying issue expenses, the bonds issued would need to be rated by a credit rating agency. All other eligibility conditions under the tax concession for DTD remain the same.

The Monetary Authority of Singapore (MAS) will provide further details on the proposed changes by 31 May 2021.

The proposed amendment to provide a DTD on qualifying issuance costs for rated retail bonds seeks to encourage issuers to tap retail investors for funds. It also provides investors with greater transparency with regard to the credit worthiness of the issuers supported by an independent assessment from a credit rating agency.

Together with other measures such as the Temporary Bridging Loan Programme and the enhanced Enterprise Financing Scheme, we welcome the extension of the DTD scheme as many businesses and companies will continue to need credit access and such measures will further deepen the Singapore debt capital market. The restriction of the DTD scheme to rated retail bonds is also a prudent move as fixed income securities have gained popularity among retail investors.

The DTD scheme was first introduced in May 2016 alongside the MAS’s announcement of the prospectus exemptions for bonds offered under the Seasoning Framework or the Exempt Bond Issuer Framework. The retail bonds under the existing Seasoning Framework and Exempt Bond Issuer Framework could be issued without a credit rating if the other alternative conditions within the framework are satisfied.

Withholding tax exemptions for the financial services sector

To ensure the competitiveness of Singapore as a finance hub, there is a range of withholding tax (WHT) exemptions available. Some of these WHT exemptions which were scheduled to lapse on 31 March 2021 have been extended to 31 December 2026. A summary of the changes is set out in the table below.

Exemption	Scope and period of exemption
Payments made by banks, finance companies and certain approved entities	Banks, finance companies and certain approved entities do not need to withhold tax on all section 12(6) payments¹ made to all non-resident persons, where payments are made for its trade or business. For payments made to all non-resident persons, excluding permanent establishments in Singapore, the extended exemption will apply to payments: liable to be made to them during the period from 1 April 2011 to 31 December 2026 (both dates inclusive) under contracts that took effect before 1 April 2011. liable to be made under contracts which take effect during the period from 1 April 2011 to 31 December 2026 (both dates inclusive)². For payments made to permanent establishments in Singapore, the WHT exemption will apply to payments: liable to be made to them during the period from 17 February 2012 to 31 December 2026 (both dates inclusive) under contracts that took effect before 17 February 2012. liable to be made under contracts which take effect during the period from 17 February 2012 to 31 December 2026 (both dates inclusive)². Of course, permanent establishments in Singapore will continue to be assessed to tax on such payments unless such payments are specifically tax exempt.
Payments made for structured products	The WHT exemption for payments made to a non-individual, non-resident person (excluding any permanent establishment in Singapore) in respect of structured products offered by a financial institution in Singapore will be extended to cover payments made under a contract that takes effect during the period from 1 January 2007 to 31 December 2026 (both dates inclusive). All other conditions of the WHT exemption remain the same.
Payments for over-the-counter (OTC) financial derivatives	The WHT exemption for payments made to any non-resident person (excluding any permanent establishment in Singapore) in respect of OTC financial derivatives by a financial institution in Singapore will be extended to cover payments: made during the period from 20 May 2007 to 31 December 2026 (both dates inclusive) under contracts that took effect before 15 February 2007. made under contracts which take effect during the period from 15 February 2007 to 31 December 2026 (both dates inclusive)². All other conditions of the WHT exemption remain the same.

Exemption

Scope and period of exemption

Payments made by banks, finance companies and certain approved entities

Banks, finance companies and certain approved entities do not need to withhold tax on all section 12(6) payments¹ made to all non-resident persons, where payments are made for its trade or business.

For payments made to all non-resident persons, excluding permanent establishments in Singapore, the extended exemption will apply to payments:

liable to be made to them during the period from 1 April 2011 to 31 December 2026 (both dates inclusive) under contracts that took effect before 1 April 2011.
liable to be made under contracts which take effect during the period from 1 April 2011 to 31 December 2026 (both dates inclusive)².

For payments made to permanent establishments in Singapore, the WHT exemption will apply to payments:

liable to be made to them during the period from 17 February 2012 to 31 December 2026 (both dates inclusive) under contracts that took effect before 17 February 2012.
liable to be made under contracts which take effect during the period from 17 February 2012 to 31 December 2026 (both dates inclusive)².

Of course, permanent establishments in Singapore will continue to be assessed to tax on such payments unless such payments are specifically tax exempt.

Payments made for structured products

The WHT exemption for payments made to a non-individual, non-resident person (excluding any permanent establishment in Singapore) in respect of structured products offered by a financial institution in Singapore will be extended to cover payments made under a contract that takes effect during the period from 1 January 2007 to 31 December 2026 (both dates inclusive).

All other conditions of the WHT exemption remain the same.

Payments for over-the-counter (OTC) financial derivatives

The WHT exemption for payments made to any non-resident person (excluding any permanent establishment in Singapore) in respect of OTC financial derivatives by a financial institution in Singapore will be extended to cover payments:

made during the period from 20 May 2007 to 31 December 2026 (both dates inclusive) under contracts that took effect before 15 February 2007.
made under contracts which take effect during the period from 15 February 2007 to 31 December 2026 (both dates inclusive)².

All other conditions of the WHT exemption remain the same.

^{1 Section 12(6) of the Income Tax Act deems interest, commission, fee and any other payment made in connection with or relating to any loan or indebtedness, or income derived from loans as income derived from Singapore under prescribed circumstances as provided in that section. Payments falling within section 12(6) of the Income Tax Act made to persons not known to the payer to be a tax resident of Singapore are subject to WHT in Singapore.}

^{2 The exemption will apply to the entire duration of the contract, including payments that are made beyond 31 December 2026.}

In addition to the above, it was also announced that the longstanding WHT remission for section 12(6) payments made by banks in Singapore on interbank and inter-branch transactions will be legislated as a WHT exemption. Section 12(6) payments made by banks in Singapore for the purpose of their trade or business to their branches or head offices outside Singapore or another bank outside Singapore will be exempt from tax.

The exemption will apply to:

Payments that are made from 1 April 2021 to 31 December 2031 (both dates inclusive) for contracts that take effect before 1 April 2021.
Payments that are made under a contract that takes effect from 1 April 2021 to 31 December 2031 (both dates inclusive). The exemption will apply to the entire duration of the contract, including payments that are made after 31 December 2031.

The MAS will release further details of the above updates by 31 May 2021.

The extensions of these WHT exemptions are pivotal in maintaining Singapore as a financial services hub, in a competitive global climate where lending margins are thin and narrowing. The legislation of the WHT remission with a review date of 31 December 2031 in particular, is a positive move, signaling the Government's long term focus on making Singapore an attractive location for financial institutions.

That said, there are other existing WHT exemptions for the banking and capital markets that still have different qualifying periods and review dates, with exemptions granted for interest payments made to different categories of non-residents which are tied to specific transactions and conditions.

To further enhance Singapore’s position as a leading global financial centre in Asia, the Government could consider consolidating these various other WHT exemptions to simplify tax compliance, or better yet, move towards removing withholding tax on section 12(6) payments for Singapore's financial services industry.

Insurance Business Development - Specialised Insurance scheme to lapse

The Insurance Business Development - Specialised Insurance (IBD-SI) scheme, which is due to expire on 31 August 2021, has been allowed to lapse. The specialised insurers will now be incentivised under the IBD scheme, with concessionary tax rate of 10%.

The move was well anticipated and is in line with the MAS’ intention to streamline and simplify the IBD incentives announced in 2020.

The IBD-SI scheme was first introduced in 2006 to support the development of expertise and capacity in specialised business lines, covering risks related to areas such as terrorism, politics, natural catastrophes, agriculture, energy, aviation and aerospace.

Asset and wealth management industry

The asset and wealth management (AWM) sector is one of the key pillars of growth for Singapore. Singapore’s assets under management grew at 16% in 2019, up from $3.4 trillion in 2018 to $4 trillion. The industry is expected to continue thriving as Asia leads the way to a global recovery in 2021. As part of its drive to be a wealth management hub for the Asia Pacific, Singapore has been successful in attracting close to 300 global and regional private equity and venture capital managers as at end 2019.

Whilst Budget 2021 did not have any specific tax measures for the AWM industry, there were some announcements - particularly the Venture Debt for High-growth Enterprises and Equity Investments in Large Local Enterprises initiatives - that looked to be of potential interest. The AWM industry had high hopes that changes would be announced to improve the attractiveness of the tax incentives. In our view, there were some long pending suggestions from the industry which remain unaddressed. These include a revamp of the list of designated investments into a “negative list”, expansion of the offshore fund scheme (13CA scheme) to cover more legal forms and relaxing the 30/50 rule under the 13CA scheme and Singapore domiciled fund scheme (13R scheme) for the entire fund life of retail unit trusts and variable capital companies.

Nevertheless, the AWM sector has been a significant beneficiary of Government policies over the years and has grown to the significant size it is today. We remain optimistic that the Government will consider the feedback from the industry and in time to come address them.