Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill

Order for Second Reading read.

12.54 pm

The Minister for Trade and Industry (Trade) (Mr Lim Hng Kiang): Mr Speaker, I beg to move, "That the Bill be now read a Second time."

The Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill 2018 puts into legal effect the income tax changes introduced in Budget 2017, as well as other amendments arising from the regular review of our tax incentive regime. Let me draw Members’ attention to the two key legislative changes contained in the Bill.

The first change is to exclude Intellectual Property Income from Pioneer Service Companies, and Development and Expansion Incentive. To encourage the use of intellectual property (IP) arising from taxpayer’s research and development (R&D) activities, the Minister for Finance had announced in Budget 2017 that an IP Development Incentive (IDI) will be introduced. Accordingly, IP income will be removed from the scope of the Pioneer Service Companies (PSCs) and Development and Expansion Incentive (DEI) schemes, which currently provide for tax exemption or concessionary tax rates respectively on income from qualifying activities, which may include IP income. Clauses 2, 5 and 9 amend sections 3 and 19M, and introduce section 19A to give legislative effect to this change.

The second change is to enhance the Integrated Investment Allowance (IIA). The IIA scheme provides additional allowance to a taxpayer who has incurred fixed capital expenditure on qualifying equipment used abroad by an overseas company for approved projects. Currently, to qualify for the allowance, the overseas company is required to use the qualifying equipment wholly for the approved projects. As announced in Budget 2017, this will be liberalised to only require the qualifying equipment to be primarily used for the approved project by the overseas company. In addition, the IIA scheme will be extended till 31 December 2022. Clauses 10 to 13 give legislative effect to this change.

The remaining legislative changes arising from our periodic review of the income tax system are either administrative or technical in nature.

Mr Speaker, the proposed changes to the Economic Expansion Incentives Act (EEIA) seek to encourage economic activities in Singapore. These changes also reflect the Government’s commitment to keep Singapore competitive and relevant as a place for investment as our external economic conditions change. Mr Speaker, Sir, I beg to move.

Question proposed.

Mr Speaker: Mr Thomas Chua.

12.58 pm

Mr Thomas Chua Kee Seng (Nominated Member): Mr Speaker, Sir, in Mandarin.

(In Mandarin): [Please refer to Vernacular Speech.] Mr Speaker, I support the amendment of the Economic Expansion Incentives Bill. Timely changes in tax incentives would enable Singapore to maintain its global competitiveness and attract even more multinational companies (MNCs) into Singapore to contribute to our national economy. Today, I would like to share my views regarding the proposed amendments from two perspectives – that of the business community, as well as of taxpayers.

MNCs and local enterprises are the two large engines which steer Singapore’s economic development. MNCs which come to Singapore, besides directly creating employment opportunities, also spur the development of related industries. Some local companies have leveraged the opportunities of collaborating with MNCs to improve the technology content of their products and services and have gradually become world-class companies. This win-win collaborative model is the outcome businesses look forward to most.

After going through the Bill, I would like to focus on one new content in particular: the new section 97ZHA states that after companies have successfully applied for the IIA, in the event that they fail to comply with any term or condition as specified, or the outcome indicators, not only will the tax incentive be terminated, the Government can also recover this particular investment allowance already given. This amendment is very timely.

Recently, the Government has mentioned many times that Government expenditure would steadily increase, and that we need to explore new sources of income and curb expenditure. One of the ways is to strengthen the supervision of tax incentives and guard against abuse. The amended Bill would enable stronger auditing and oversight of the tax incentives. This is good for our taxpayers. Also, I would like to ask the Minister if the current amendment to the Bill was spurred by an increase in the number of errant cases in recent years.

Of greater concern to businesses is that the value-add effect on local companies brought about by such tax incentives to attract foreign investment seems to have waned. Quite a number of businesses have told me that they miss the Local Industry Upgrading Programme (LIUP) which was phased out in 2010. The programme, extremely useful then in promoting win-win collaboration between foreign investors and local enterprises, continues to be well-regarded today.

In the earlier years, foreign companies which invested in the traditional sectors here could generate significant opportunities and value-add for related or supporting local companies both downstream and upstream and create direct and indirect employment opportunities for Singaporeans.

However, in recent years, most of the MNCs attracted to Singapore are in the emerging sectors which establish their regional headquarters or R&D centres here. The activities which can create value-add for local companies, such as product design, manufacturing, industry supply chain and distribution are, however, located in other countries in the region. It is no longer easy for local enterprises to take the local advantage in becoming service providers for the MNCs like before.

Therefore, our small and medium enterprises (SMEs) should step up venturing overseas, in line with the Government policy to encourage businesses to internationalise. They can then continue to service the MNCs which have established production bases in the region.

I also urge the Government agencies under the Ministry of Trade and Industry (MTI), namely, the Economic Development Board (EDB) and Enterprise Singapore (ESG), to continue to work closely with local industries. We hope that EDB, whilst continuing to attract high quality foreign investors into Singapore, would also make capability upgrading of local enterprises a key objective – to provide MNCs and local enterprises with a win-win collaborative model to become the driving force of Singapore’s future economic development.

Mr Speaker: Mr Louis Ng.

1.03 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, I stand in support of this Bill. It is encouraging that the Government continues to support companies through tax reliefs. However, I would like to seek some clarifications and offer some suggestions.

First, clause 2 of the Bill amends section 3 of the Act by inserting a new definition of "Intellectual Property Income". This is defined as "any intellectual property income prescribed by the Minister under section 102". Section 102 of the Act, amongst other things, empowers the Minister to make regulations that may be necessary or expedient for purposes of carrying out provisions of the Act.

Can the Minister clarify why the meaning of IP Income is not specifically defined within the Bill? What are the assessment criteria that will be considered by the Minister in prescribing a particular income as IP Income? Will this be based on quantitative or qualitative data?

The reason I am asking is because greater transparency and less ambiguity in the legislation itself will only enable Pioneer Service Companies and Development and Expansion Companies to better understand what constitutes IP Income and, correspondingly, whether their activities will fall under the tax incentive scheme.

I understand that EDB does publish guidelines from time to time on its website, such as guidelines related to the Pioneer Certificate Incentive (PC) and DEI. However, if the principle behind the Act and this Bill is to encourage companies to grow capabilities, develop high-value and substantive economic activities, through tax reliefs, then it is crucial for companies to have a clear understanding of what the parameters are for them to qualify for tax reliefs. A clear understanding will allow companies to better plan their business and growth strategies.

I raised a related point in 2016 during the previous iteration of the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill on the need to have clearer qualifying criteria for PC and DEI. Then, Minister Lim Hng Kiang replied that it is a balance between clarity, transparency and ensuring we remain flexible and responsive to the increasingly complex economic environment. I understand the Minister's point, but I have two follow-up queries.

One, I think responsiveness can be achieved through the mechanism of legislative amendments, which allows the Government to continually review the incentives and schemes to maintain their relevance. This possibly explains why we are legislating amendments to the Act via this Bill within a relatively short period of time from the last amendment in March 2016.

Two, flexibility may also be achieved through the actual operative provisions in the Bill, instead of relying on broad definitions of a key term. To my mind, it is a tenuous argument to rely on flexibility to justify why the definition of an important term, such as IP Income, should be left to the Minister to prescribe. Hence, will the Minister consider including a specific clear definition of IP Income within the Bill?

Second, can the Minister clarify how the amendments relating to the exclusion of IP income as stated in clause 5 of the Bill fit into the new IP regime administered by EDB, named IDI announced during the 2017 Singapore Budget?

I note that the Inland Revenue Authority of Singapore (IRAS) published a table stating that IDI incorporates the Organisation for Economic Cooperation and Development's (OECD's) Base Erosion and Profit Shifting reports (BEPS)-compliant modified nexus approach and it is meant to encourage the exploitation of IP arising from R&D activities. Can the Minister clarify how the IDI works in practice with the legislative amendments in this Bill?

On the point of BEPS, I understand from a Facebook feedback by Mr Gregg Fong that as a result of the BEPS framework, tax authorities globally have put in place more stringent rules to ensure taxpayers pay their fair share of taxes. Therefore, it is unwise to assume that tax incentives remain attractive for MNCs in this post-BEPS era, and now, more so than ever, tax incentives need to make business sense for MNCs and economic sense for Singapore.

In this context, the queries raised by Mr Fong are: how do these Bill amendments and the existing broader tax incentive schemes fit in with Singapore's broader strategic goals? Mr Fong pointed out that, historically, the initial intention of tax incentives was to attract top MNCs to invest in Singapore, and this worked very well. The tax incentives were then gradually tweaked as Singapore’s economy grew.

Can the Minister explain how the current amendments adjust the tax incentives such that they remain relevant and are aligned with Singapore's current strategic goals? And can the Minister clarify what these amendments will mean for companies which did invest and are continually investing in Singapore?

Also, do the existing tax incentive schemes and these amendments ensure fair employment opportunities for Singaporeans in managerial positions? Can the Minister provide data over the past three years on the relationship between the number of foreign MNCs with a regional office in Singapore which are enjoying such tax incentives and the percentage of Singaporeans in managerial positions in these MNCs?

Mr Fong clarified that this query is not coming from a place of an anti-foreigner sentiment, but it is taking a practical approach as, logically, MNCs would enjoy significant costs savings, from such tax incentive schemes and general manpower costs savings, if they are able to upskill Singaporeans over a period of time and transfer these skills from expatriate foreigners to Singaporeans.

Third, on a broader practical level, how do these legislative amendments and various schemes and incentives from Government agencies, such as EDB and the Standards, Productivity and Innovation Board (SPRING) Singapore, all work together from the perspective of an SME which wishes to take advantage of these available tools?

From the Minister's reply in 2016, I understand that for the current PC Incentive scheme, between 2011 and 2015, only two out of 71 PCs were awarded to SMEs, of which only one was a local SME. The explanation then was that PC application requires companies to commit to economic contributions of a substantive scale. Hence, it is natural that bigger companies qualify.

Keeping in mind that the principle behind this Bill and the Act is to put in place tax incentives to encourage innovation, I wish to ask whether there are ways in which our SMEs can benefit from these amendments. Smaller companies are able to respond and react to market conditions and remain agile and flexible. Thus, it appears that SMEs, by their very nature, are better placed to embrace innovation and position their businesses to adapt to changes rapidly, in line with the principles of the Bill. If we are structuring the tax incentives to largely allow for bigger companies to meet the criteria, can the Minister clarify how this is in line with the principles of the Bill? Sir, notwithstanding the above clarifications and suggestions for the Minister's consideration, I support the Bill.

Mr Speaker: Mr Azmoon Ahmad.

1.10 pm

Mr Azmoon Ahmad (Nominated Member): Mr Speaker, good afternoon, and to all hon Members.

The Economic Expansion Incentives Act, which was introduced by the Government in recent years, was meant to encourage companies to continue introducing high value-added activities in Singapore. As mentioned by Minister Lim Hng Kiang, between 2011 and 2015, similar companies had been awarded final certificates, of which, only two were SMEs, which is of concern to me.

The overarching objective of such incentive schemes was not just to serve as an encouragement to the targeted industries and companies, but also to encourage companies to stay relevant in this fast-changing knowledge-based and technology-driven economy and being able to provide economic value to Singapore.

The technologies developed should be able to make them more competitive and simultaneously create new higher value-added skilled jobs for our local workforce. This will, in turn, enable the workforce to move upstream, thereby creating higher value at work and increase productivity. This symbiotic relationship between the industry and the Government is highly commendable.

The proposed six amendments to the Economic Expansion Act are reasonable in my opinion. The removal of the prescribed IP Income from the tax incentives scheme of both Pioneer Service Companies and Development and Expansion Companies under Part III section 19A and Part IIIB section 19M are questionable. However, I believe it is apt as Singapore's economic landscape has moved from a labour-intensive to a knowledge-intensive one, with a high skills-based platform.

Thus, after many years of investing and working with the industry, it is reasonable to expect that IP should be one of the main activities of the affected companies. Thus, it is also reasonable to consider income from IP as a source of revenue in the current context in Singapore.

While this change may be able to get absorbed by larger companies like the PSCs and larger-sized SMEs, I am very concerned over smaller ones which have not been able to capitalise on incentive schemes. I believe there are pockets of local SMEs which are stuck in their business activities in the old and traditional way. While they may not be seen as high-tech, but they do serve the need of the larger Singapore labour workforce by providing jobs. Thus, I would like to suggest that the incentive as previously prescribed should be extended to the smaller SMEs and perhaps, more should be done to assist them to move up the ladder in implementing technology in their business activities. As an example, I would like to highlight the cleaning industry and the small public works contractor industry.

Mr Speaker, disruptions seem to be a constant parameter in our lives. Smaller SMEs are hardest hit with the constant disruption which is prevailing at smaller intervals, from financial technology (fintech) to augment the reality. Smaller SMEs find it harder to cope as they do not have the muscle and capacity to spend in R&D work, less IP work. And when they do, it will be a strain on their business operations. Hence, the extension of the prevailing scheme to smaller SMEs will go a long way. I plead with the Government to consider and review this. With that, Mr Speaker, notwithstanding the suggestion I made, I support the Bill.

Mr Speaker: Minister Lim Hng Kiang.

1.15 pm

Mr Lim Hng Kiang: Mr Speaker, I thank Mr Thomas Chua, Mr Louis Ng and Mr Azmoon Ahmad for their support of the Bill.

As all three of them mentioned, these amendments are very important, and we have to see how these amendments fit in with our overall strategic goal for Singapore, which is to encourage companies to continue to undertake investment, expand their capabilities and create new jobs. To do so, our economic agencies require a suite of tools to engage our companies and, therefore, our Government regularly reviews our incentives and schemes, be it tax incentives or non-tax incentives, to ensure that they continue to be relevant and effective as our economic and operating environment continues to evolve.

To be in line with international standards and, in particular, to align ourselves with BEPS guidelines, this Bill will, therefore, amend the legislation to exclude IP income from PSC and DEI companies. Companies that are committed to undertake substantive economic investments and create good job opportunities in Singapore can continue to benefit from the PSC and DEI schemes.

Meanwhile, we will continue to encourage the use of IPs arising from a taxpayer’s R&D activities under the new IDI. Taxpayers can apply for IDI regardless of whether they are currently on PSC and DEI or not. As for IDI itself, the Government is currently in consultation with companies and the incentive will be legislated in the Income Tax Act consequently.

Secondly, in response to Mr Louis Ng’s point about the definition of IP Income, I agree that companies need clarity to plan their businesses and to execute their growth strategies. In this regard, the Government has proactively reached out to the companies and consulted them on the draft legislation. This, among other things, includes the definition of IP Income, which will be made clear in the subsidiary legislation. As I mentioned in the earlier debate in 2016, it is better and more effective for us to define IP Income in the subsidiary legislation than in the main legislation so that the objective is still achieved. You have transparency, clarity and, at the same time, you have more responsiveness and flexibility by doing so in subsidiary legislation.

So, these amendments in this Bill will help to provide our companies that have invested in or are continuing to invest in Singapore with more certainty. This is because our incentives have been reviewed by the international community and they meet international tax standards ahead of many other countries and jurisdictions, which are still in the midst of reviewing their tax regimes. We remain committed to being a competitive location for anchoring substantive economic activities and will continue to monitor global developments.

On Mr Louis Ng’s point about fair employment practices, we support that and we agree that companies recognise the commercial value of having such practices in place. This is because by hiring fairly and based on merit, companies would have access to a wider talent pool and reap the benefits from increased productivity. The Singapore Government, of course, helps our companies to develop the career of Singaporeans in their employment. In our engagements with companies, we work with them to develop training and career development programmes for their employees, for example, the SkillsFuture Leadership Development Initiative (LDI) is one such schemes that employers registered or incorporated in Singapore can leverage to create and enhance in-house leadership development programmes. These programmes, which are company-centric and sector-specific, can also be implemented through collaborations with external training providers.

Mr Thomas Chua has accurately pointed out the value of having both MNCs and local enterprises in our ecosystem to drive our economic growth. Mr Louis Ng and Mr Azmoon Ahmad have asked how SMEs can benefit from these amendments. In general, our tax incentives, including the ones in EEIA, are open to application by all companies, regardless of size, as long as they are able to commit to making significant contributions to our economy. In this instance, with the liberalisation of IIA, SMEs can enjoy more flexibility in their business arrangements with their foreign counterparts.

I would also like to clarify one of the points that Mr Thomas Chua mentioned regarding LIUP. I would like to clarify that LIUP was not phased out but was rather subsumed under the Partnerships for Capability Transformation (PACT) scheme. As Members would remember, the LIUP scheme essentially caters to the relationship of our local SMEs who are suppliers to the multinational or the large companies. But we think the relationship can go beyond that of just a supplier relationship and, therefore, we have expanded the LIUP scheme to the PACT scheme which encompasses different forms of collaborations and partnerships, beyond just a supplier relationship.

The second point that Mr Thomas Chua mentioned about the new section 97ZHA, it has always been our practice that if the companies do not adequately meet up to their commitments set out in the incentives, we will withdraw the incentives and recover the incentives made to them. So, this is nothing new. This section is just to regularise our practice. The Government will continue to recover the IIA awarded if the company fails any conditions or breaches the legislative amendments. I would like to highlight that there are no errant cases in the last five years for IIA and the current amendments are, therefore, not reactionary in nature, but are being made for legislative clarity.

Mr Speaker, the Government will continue to review our incentives and schemes regularly to ensure that they remain relevant and support capability development and the needs of companies. Mr Speaker, Sir, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Lim Hng Kiang.]

Bill considered in Committee; reported without amendment; read a Third time and passed.