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Tax measures for specific sectors

Extension of scope of the incentives for the asset and wealth management industry

At the Asian Financial Markets Forum early last year, Ms Jacqueline Loh, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore (MAS) acknowledged that asset managers in Singapore have facilitated a good portion of investment flows in Asia.

Based on the MAS’ 2020 Singapore Asset Management Survey, Singapore’s total assets under management (AUM) grew 17% in 2020 reaching $4.7 trillion, with 78% of the AUM sourced from outside Singapore and 68% invested in Asia Pacific (excluding Singapore). A key driver to Singapore’s AUM growth is the private equity and venture capital sectors, accounting for 54% and 49% growth in 2020, respectively.

Specified income from designated investments

The section 13D, 13O and 13U schemes provide exemption on specified income (SI) derived from designated investments (DI). In this Budget, the Government has proposed an enhancement to the DI list. Currently, investments in physical commodities fall within the DI list only if the following conditions are met:

  • The trading of the physical commodities must be incidental to the trading of the derivative commodity (incidental condition)
  • The trade volume of such physical commodities is capped at 15% of the total trade volume of the physical commodity and related commodity derivatives (the cap)
Extension of scope of the incentives for the Asset and Wealth Management industry

With effect from 19 February 2022, it is proposed that the DI list is enhanced to include investments in physical Investment Precious Metals (IPMs), subject to a cap of 5% of the total investment portfolio for a section 13D, 13O or 13U fund. The incidental condition will also be removed for investments in physical IPMs (i.e. it does not need to be incidental to the trading of the associated derivative). The MAS will provide further details by 31 May 2022.

While the above enhancement is welcomed, we expect that funds would face practical challenges in administering the cap of 5% of the total investment portfolio of the funds. Assuming the total investment portfolio refers to the value of the portfolio, the value would be driven by market forces and may fluctuate over time. For example, in the current market situation where gold prices are going up and public equity markets are down, the fund may inadvertently fail to meet the condition and end up deriving non-exempt income. In the case of offshore funds relying on the section 13D scheme, this may result in Singapore income tax filing requirements for them. We hope that practical issues such as this can be addressed as details are provided in due course.

Section 13D scheme

Many funds today are still set up outside Singapore due to the investors’ familiarity and preferences. In the case of private wealth structures, many of them may involve the use of foundations or other structures since they are established for multiple purposes including succession planning and charitable purposes. There are also products targeted at specific investor markets, in which case, the legal form of the fund may be one that is familiar to those investors, and which may not be in the form of companies or trusts. To encourage the management of these funds in Singapore, our tax incentive schemes should cater to the different structures or legal forms that may be set up according to the foreign law. In this regard, the section 13U scheme has been enhanced to apply to funds in any legal form. However, the section 13D scheme is limited to individuals, corporates or trust funds. This is probably a function of our incentive schemes which were designed many years ago when unique foreign structures (such as Luxembourg fonds commun de placement) were not yet prevalent. We hope the Government could revisit the types of entities that can benefit from our tax incentive schemes to ensure their relevance in the current environment. Such a move can also help increase the ability of Singapore fund managers to manage fund products distributed to a wider investor base.

Qualifying investor test under section 13D and 13O schemes

In Budget 2019, the Government introduced a waiver of qualifying investor test for retail unit trusts relying on the section 13D scheme for the initial period of two years of assessment, subject to certain conditions. However, even after the initial two-year period, there remains some practical difficulties in getting information on the investors, especially when these funds are distributed through external distributors. The same challenges apply for retail funds constituted in the form of variable capital companies (retail VCCs) enjoying section 13O scheme. We hope that the Government could consider extending the waiver of the 30/50 rule to retail VCCs as well and extending the waiver period to cover the entire fund life of the retail unit trusts or VCCs, to encourage more of such funds to set up in Singapore.

All in all, we remain optimistic that Singapore’s asset and wealth management industry will continue to soar in light of the Government’s commitment to continue to grow this industry.

Change in the basis of taxation for insurance companies as a result of FRS 117

Financial Reporting Standard (FRS) 117, effective from 1 January 2023, aims to increase transparency on the profitability of insurers in a consistent manner and significantly changes how insurers value and report their insurance contracts. FRS 117 replaces the existing FRS 104 on the accounting for insurance contracts.

As a result of the above changes, the basis of taxation has been uncertain. The announcement in Budget 2022 has confirmed that insurers are to adopt the MAS statutory returns as the basis of preparation of their annual tax computations effective from the Year of Assessment 2024. 

Currently, insurers are required to prepare their tax computations based on their Financial Statements (FS) prepared in accordance with FRS 104 and provide reconciliations from the FS to MAS statutory returns to the Inland Revenue Authority of Singapore (IRAS).

The adoption of a taxation basis using FRS 117 would have required substantial changes to the existing tax rules and a re-alignment of tax incentives under the Insurance Business Development scheme. The adoption of the MAS statutory returns is in line with the industry’s preference and will provide symmetry for tax and regulatory reporting.

Change in the basis of taxation for insurance companies as a result of FRS 117

Insurers are also familiar with the use of MAS statutory returns as historically, Singapore branches of foreign insurers who were granted exemption from preparing FS were able to file their tax returns using their MAS statutory returns. Participating funds of life insurers are taxed based on their MAS statutory returns rather than their FS.

While the adoption of the MAS statutory returns is preferred by the industry, insurers will likely face some challenges in the transition including:

  • deferred tax calculations for FRS 117 accounts purposes 
  • with further details to be released by the IRAS by 30 September 2022, insurers will have little time to evaluate and assess the financial impact from the change in basis 
  • potential transitional adjustments from the FS to MAS statutory returns
  • the tax treatment on investment income arising from the mandated implementation of FRS 109 which has been deferred for insurers until the implementation of FRS 117

Corporate amalgamation tax framework to cover licensed insurers

Corporate amalgamation tax framework to cover licensed insurers

The Minister extended the tax framework for corporate amalgamations under section 34C of the Income Tax Act 1947 (the tax framework) to licensed insurers in Singapore. The tax framework will be extended to cover amalgamation of Singapore-incorporated companies involving a scheme of transfer made on or after 1 November 2021, subject to certain conditions. Further details will be released by the IRAS by 31 October 2022.

Prior to the extension of the tax framework, there were no specific income tax rules for business transfers and ordinarily, an insurer under the scheme of transfer is treated as having made a transfer of all its assets and liabilities to the transferee. Such treatment requires a consideration of the nature of assets and liabilities the transferor currently has, and the corporate income tax consequence of the disposal treatment.

The tax framework provides tax neutrality for qualifying corporate amalgamations as if there is no cessation of the existing business. All risks and benefits that exist prior to the merger are transferred and vest in the amalgamated company. The extension of the tax framework to Singapore-incorporated insurance companies is welcome news as business consolidations and internal restructuring are trending in the current economic environment. This extension also supports the continuing development of Singapore as an Asian insurance centre.

Tax incentives for project and infrastructure finance extended to capture regional demand growth

To strengthen Singapore’s position as the region’s infrastructure financing hub amid continued regional growth, the following incentives in the Project and Infrastructure Finance scheme, which were due to expire on 31 December 2022, will be extended until 31 December 2025:

  • Exemption of qualifying income from qualifying project debt securities
  • Exemption of qualifying foreign-sourced income from qualifying offshore infrastructure projects/assets received by approved entities listed on the Singapore Exchange

The concessionary tax rate on qualifying income derived by an approved Infrastructure Trustee-Manager/Fund Management Company (ITMFM) will be allowed to lapse after 31 December 2022. Existing ITMFM scheme recipients will continue to enjoy the tax benefits for the remaining tenure of their existing awards.

The MAS will provide details by 31 May 2022.

Tax incentives for project and infrastructure finance

Approved Royalties Incentive extended and simplified for companies to continue leveraging new technologies

The Approved Royalties Incentive (ARI) encourages transfer of cutting edge technology and know-how to Singapore, by providing exemption or reduction in withholding tax on royalty payments made to access advanced technology and know-how. Due to expire on 31 December 2023, the ARI will now be extended to 31 December 2028 to continue encouraging companies to leverage new technologies and know-how to capture new growth opportunities.

In addition, the ARI will be simplified to cover classes of royalty agreements on an activity-set-based approach as opposed to approval on an individual agreement basis. This should greatly simplify compliance for the taxpayer. The Economic Development Board will provide more details by 30 June 2022.

Withholding tax exemptions extended

Broad-based withholding tax exemptions are granted for a specific period of time. This allows the Government to review their relevance and efficacy before deciding to extend the exemptions or to withdraw them.

Shipping and container leasing

Singapore is able to maintain its position as the top maritime centre despite the significant disruptions to global trade over the past two years. It needs to continue to develop and remain attractive in a post-pandemic world. This year, the Minister extended the following broad-based withholding tax exemptions for the shipping and container leasing sectors.

  Expiry date Extended date
Withholding tax exemption for container lease payments made to non-tax resident lessors under operating lease agreements 31 December 2022 Payments made under agreements entered into on or before 31 December 2027
Withholding tax exemption on ship and container lease payments made to non-tax resident lessors under finance lease (FL) for Maritime Sector Incentive (MSI) recipients 31 December 2023 Payments made under agreements entered into on or before 31 December 2028

The disruptions to the global supply chain caused by the pandemic and sharp rebound in demand has resulted in a staggering global shortage of available containers. This had a knock-on effect on the production and demand for new containers with prices of new containers rising sharply. The above extensions on withholding tax exemption for container lease payments to non-tax resident lessors will certainly alleviate the costs for businesses that rely on leasing such containers to deliver their goods.

The extension of withholding tax exemption on ship lease payments to non tax-resident lessors under FL arrangements for MSI recipients will be very welcomed as it will provide further certainty to MSI recipients who may enter into FL arrangements with non-tax resident lessors as a cost-effective way of financing new builds or acquisitions.

Financial services sector

To ensure the continued competitiveness of Singapore as a finance hub, a range of withholding tax exemptions have been introduced for different financial institutions for payments made under different types of financial transactions. Some of these exemptions that were scheduled to lapse after 31 December 2022 have been extended to 31 December 2026. A summary of the changes is set out in the table below.

Exemption Changes
  • Payments made under cross currency swap transactions by Singapore swap counterparties to issuers of Singapore dollar debt securities
  • Interest payments on margin deposits made under all derivatives contracts by approved exchanges, approved clearing houses, members of approved exchanges and members of approved clearing houses
  • Specified payments made under securities lending or repurchase agreements by specified institutions
  • Payments made under interest rate or currency swap transactions by the MAS
Withholding tax exemption for the aforementioned payments will be extended till 31 December 2026. The extension will cover payments made under a contract or agreement that takes effect on or before 31 December 2026.
  • Payments made under interest rate or currency swap transactions by financial institutions
The withholding tax exemption will be allowed to lapse after 31 December 2022 as the intention is for such payments to be covered under the existing withholding tax exemption for payments on over-the-counter financial derivatives.

The MAS will provide any consequential details by 31 May 2022.

These withholding tax exemptions are important to keep Singapore at the forefront as a financial services hub in a competitive global climate.

There are a number of withholding tax exemptions for banking and capital markets that have different sunset and review dates, with exemptions granted for a variety of different financial payments. It may be cumbersome for a taxpayer to keep track of such dates. To further enhance Singapore’s position as a leading global financial hub and to simplify compliance, the Government can consider further rationalising the various withholding tax exemptions and at some point in the future, remove the withholding tax on interest and related payments by financial institutions operating in Singapore.

Aircraft leasing

The Government remains committed to preserving Singapore’s position as an international aviation hub, and supportive of growth of the industry players in the overall aviation ecosystem, including the aircraft lessors. The Aircraft Leasing Scheme (ALS), which offered concessionary rates of tax on qualifying income derived by approved aircraft lessors and approved aircraft investment managers as well as certain withholding tax exemptions, has been extended to 31 December 2027.

Taxpayers who want to take advantage of the concessionary tax rates under the ALS will no doubt have to carefully evaluate the potential impact of the proposed Minimum Effective Tax Rate (METR) and/or Global Anti-Base Erosion model rules before committing to the business expansion in Singapore.

Approved Foreign Loan scheme 

The Approved Foreign Loan scheme aims to encourage companies to invest in productive equipment for the purpose of conducting substantive activities in Singapore. Under the scheme, the withholding tax is exempted or is applied at a reduced rate on interest payments on loans taken to purchase the productive equipment. The scheme due to lapse after 31 December 2023 will be extended for five years till 31 December 2028.

International mediation and arbitration

To support Singapore’s development as an international mediation and arbitration hub, the income derived by non-tax resident mediators and arbitrators from work carried out in Singapore is exempt from tax. The exemption due to expire on 31 March 2022 will now be extended till 31 March 2023.

From 1 April 2023 to 31 December 2027, non-resident mediators and arbitrators can elect to subject their gross income to withholding tax at a concessionary 10% tax rate or at the applicable non-resident rate on their net income.

Integrated Investment Allowance to end this year

The Integrated Investment Allowance (IIA) scheme grants additional allowance (on top of the normal capital allowance claims) on capital expenditure incurred for qualifying productive equipment placed overseas for approved projects. The IIA will be allowed to lapse after 31 December 2022.

Get in touch

Chris Woo

Tax Leader, PwC Singapore

+65 9118 0811

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Anuj Kagalwala

Asset and Wealth Management Tax Leader, PwC Singapore

+65 9671 0613

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Elaine Ng

Transportation and Logistics Leader, PwC Singapore

+65 8223 1126

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Brendan Egan

Partner, Financial Services Tax, PwC Singapore

+65 9627 4720

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Tan Hui Cheng

Partner, Tax, PwC Singapore

+65 8338 5182

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Trevina Talina

Partner, Tax, PwC Singapore

+65 9639 4203

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Tan Tay Lek

Partner, Tax, PwC Singapore

+65 9179 2725

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