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BUDGET 2008: BUSINESSES (COMMENTARY) – S’pore sharpens new edge in rivalry with Hong Kong

Battle could go beyond taxes to areas like innovation and pacts with other countries

BOTH Hong Kong and Singapore have the advantage of proximity and to a certain extent, blood relationship to China.

However, as close as they seem ethnically where their majority populations are concerned, they could also not be more different in terms of their commercial views of the world.

With Singapore inflation now hitting a 25-year high at the end of last year, and expected to rise to as high as 5.5 per cent this year, the questions over Singapore’s competitiveness in the regional and global market place has many businesses concerned.

Strictly from a commercial perspective, both are equally affected by the external factors which are driving up global prices and so it may be fair to say that Singapore’s current inflationary woes are not limited solely to the island.

So how does Singapore stack up against Hong Kong and do the recent budget changes in Singapore enhance our position?

Key thrust

While the 2008 budget announcement by Finance Minister Tharman Shanmugaratnam was limited in terms of tax changes for big business, the minister announced incentives to signal that innovation would be a key thrust of Singapore’s economic progress. Many measures were clearly also targeted at encouraging innovative thinking in small and medium enterprises.

Indeed, the message is that developing new and leading-edge products will be a key focus for strengthening Singapore’s position as one of the leading knowledge hubs in Asia.

Hong Kong has yet to introduce enhanced tax incentives for R&D.

In terms of tax rates, Hong Kong’s standard rate of corporate income tax of 17.5 per cent compares favourably to Singapore’s standard rate of corporate income tax of 18 per cent. However, once Singapore’s broad network of tax incentives and partial exemptions are taken into consideration, Singapore’s effective tax rate is significantly lower than Hong Kong’s.

With the Hong Kong government having announced an impending one per cent cut to 16.5 per cent however, the differential can become insignificant.

However, tax rates are not the only factor for investors.

On the international tax front, Singapore has negotiated almost 60 double-tax agreements with most of its major trading partners throughout the world, including the majority of its Asian trading partners and, in particular, the major growth engines of China and India.

On the other hand, Hong Kong has negotiated only three double-tax agreements, including treaties with China and Thailand. Even these treaties are comparable to the benefits negotiated by Singapore with these jurisdictions.

Accordingly, when it comes to a ‘one-stop’ shop for investment in Asia-Pacific, Singapore remains attractive as the first port of call for foreign multinationals.

In Singapore, the standard rate of Goods and Services Tax (GST) has been 7 per cent since July 2007. There is no VAT or GST in Hong Kong.

One apparent advantage that Hong Kong has over Singapore is therefore the absence of an indirect tax regime similar to Singapore’s GST. So far, the Hong Kong government has been forced to defer the introduction of such a tax from the business community and the populace at large.

It is worthwhile noting that GST in Singapore is a tax on the final consumer, a cost which finds its way into the final price of goods and services which contributes to overall inflation.

In the area of individual taxes, while Singaporean residents did not receive the highly anticipated 2 per cent cut in top-tier tax rates, what they received was bittersweet. There was a 20 per cent rebate, but this is capped at $2,000.

Singapore’s personal tax regime may not be viewed as being as competitive as Hong Kong’s in terms of attracting high-income talent. As the table above shows, the effective tax rate for most senior executives remains more competitive for executives working in Hong Kong.

However, while the numbers speak for themselves, there are other non-tax factors such as air quality and housing costs which may sway in Singapore’s favour.One area where there was some cheer this time in Singapore was the long-awaited abolishment of Singapore estate duty.

This tax, which is essentially a ‘tax on the handing down of wealth’ finally came through after some years on many pre-Budget wish-lists.

The promotion of Singapore as a wealth management hub also saw the introduction of a tax incentive scheme for family-owned investment holding companies, allowing them to enjoy increased exemptions. This announcement should be an added boon to the wealth management industry in Singapore which will now find it far easier to attract wealthy foreigners to Singapore’s shores in competition with Hong Kong which abolished its estate duty back in 2005.

The most apt description, then, for Singapore Budget 2008 is that while still aimed at ensuring Singapore’s longer term competitiveness, was largely a bread and butter Budget for Singaporeans.

Nothing earth-shaking was announced for corporate Singapore.

However, the message remains that the government will focus on what it believes is right for the long-term growth of the country as always, while caring for the vulnerable, came through.

The writer is head of tax services at KPMG in Singapore. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in Singapore

 

Source: Business Times 16 Feb 08

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