Selected tax incentives in Singapore

In response to enquiries, this article provides a quick overview of the common tax incentives provided in the Income Tax Act and the Economic Expansion Incentives (Relief from Income Tax) Act, which are examinable in Paper P6 (SGP).

Tax incentives under the Income Tax Act

  • Land Intensification Allowance (Section 18C)
  • Headquarters tax incentives (Section 43E)
  • Global trader programme (Section 43P)

Tax incentives under the Economic Expansion Incentives (Relief from Income Tax) Act

  • Pioneer industries (Sections 4 to 15)
  • Pioneer service companies (Sections 16 to 19)
  • Development and expansion incentive (Sections 19I to 19M)
  • Investment Allowance (Sections 66 to 74)

Apart from knowing the specific tax reliefs that each incentive offers and the authorities administering each scheme, candidates are expected to know the minimum qualifying conditions and how the tax computations for these special concessionary rates differ from those of the general trading company subject to the prevailing corporate tax rate.

A brief discussion of these seven incentives, with emphasis on the special tax reliefs and the qualifying conditions, is provided below:

Land Intensification Allowance

The Land Intensification Allowance (LIA) was introduced in Budget 2010 to focus on promoting land productivity among industrial users. It is only available to businesses in industrial sectors that have large land takes and low gross plot ratios (GPRs). Eligible businesses must apply to the Singapore Economic Development Board (EDB), which is administering the scheme and will consider applications for the period from 1 July 2010 to 30 June 2015.  

Under the LIA incentive, allowance is provided for the following qualifying capital expenditure incurred on or after 23 February 2010 up to the date of completion of the construction or renovation/extension of an approved building or structure:

  • Cost of feasibility studies on the layout of the building or structure.
  • Design fees of the building or structure.
  • Cost of preparing plans for obtaining approval for the building or structure.
  • Piling, construction and renovation/extension costs.
  • Demolition costs of an existing building or structure.
  • Legal and other professional fees in relation to the approved construction or approved renovation/extension.
  • Stamp duties payable in respect of title of the building or structure.

A qualifying building must be built on land that is zoned as Business 1 or Business 2 (excluding Business 1 White or Business 2 White zones) under the Urban Redevelopment Authority (URA) Master Plan as at the date the development application is made to the URA.

The principal activities of the user of an approved LIA building or structure must fall within one of the following qualifying activities:

  • Food, beverages and tobacco.
  • Printing and recorded media.
  • Manufacture of coke, refined petroleum products, petrochemicals and petrochemical products and other chemicals.
  • Manufacture of pharmaceuticals and biological products.
  • Manufacture of computers, semiconductor devices, communications equipment, etc.
  • Land transport.
  • Aerospace.
  • Marine and offshore engineering.
  • Medical technology.
  • Machinery and systems.
  • Other manufacturing industries.

Also, the building or structure must meet the GPR benchmark for the relevant specified industry sector, ranging from 0.33 to 2.45.

The person incurring the qualifying capital expenditure will be able to claim an initial allowance (IA) of 25% and an annual allowance (AA) of 5% and will be able to fully claim the qualifying capital expenditure in 15 years.

The IA is granted in the year of assessment (YA) relating to the basis period in which the capital expenditure is incurred. Typically, this happens during the construction or renovation/extension stage.

The AA will be granted provided the following conditions are met:

  • The construction/renovation/extension works have been completed.
  • The completed building or structure meets the relevant GPR benchmark.
  • At least 80% of the total floor area of the building or structure is in use by a single user for carrying out the qualifying activity. If less than 80% of the total floor area is used by the single user for the qualifying activity, AA will not be granted for the YA relating to that basis period.

If the completed building or structure fails to meet the relevant GPR benchmark, the IA and/or AA will be recovered through re-assessment of preceding tax years.

If an approved LIA building ceases permanently to be used or ceases permanently to be used for approved qualifying activities at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, no more AAs will be granted to the taxpayer from the YA relating to the basis period during which the permanent disuse occurs and the LIA incentive shall be terminated with effect from that YA.

If the predominant use of the approved LIA building changes from a qualifying activity to a different qualifying activity at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, the EDB must be notified and, where approval is granted for the change in use, the taxpayer shall be allowed to continue the claim of LIA under the new qualifying activity.

When the approved LIA building is sold/transferred at any time when there is still a balance of qualifying capital expenditure remaining to be claimed, or after the qualifying capital expenditure has been fully claimed, any balance of the qualifying capital expenditure still remaining will be disregarded and there will not be any balancing adjustment on the seller of the building.

Where there is insufficient income in any YA to absorb the IA or AA, the unutilised LIA can, subject to the taxpayer meeting certain prevailing conditions, be:

  • transferred to related companies under the Group Relief System
  • carried back to set off against past income under the Carry-Back Relief System, or
  • carried forward to set off against the future income.

Headquarters tax incentives

Generally, for a foreign company planning to locate its regional headquarters company in Singapore, the most relevant tax incentives in Singapore would be the Regional Headquarters Award (RHA) and the International Headquarters Award (IHA), both administered by the EDB.

Companies with RHA status pay a lower corporate tax rate of 15% for three years plus a potential further two years on incremental qualifying income, if the prescribed conditions are satisfied. If the applicant company satisfies all the minimum requirements by the third year of the incentive period, it will enjoy the 15% concessionary tax rate on qualifying income for an additional two years.

The applicant company must satisfy all of the following minimum requirements by the milestone indicated and maintain these until the end of the incentive period:

  • A paid-up capital of $0.2m and $0.5m by the end of Year 1 and Year 3 of the incentive period respectively.
  • Three headquarters services to network entities in three countries outside Singapore by the end of Year 1. Network entities refer to any entity within the group, including subsidiaries, sister companies, branches, joint ventures and representative offices as well as to franchises.
  • 75% skilled staff throughout the incentive period. Skilled employment refers to at least an NTC2 Certificate qualification.
  • An additional 10 professionals in Singapore by the end of Year 3, where ‘professionals’ refers to at least a diploma qualification.
  • An average remuneration per worker of $100,000 per annum for the top five executive designations by the end of Year 3.
  • An additional $2m in annual total business spending in Singapore by the end of Year 3. Total business spending refers to total operating costs minus the costs of work subcontracted outside Singapore, royalties and know-how fees paid overseas, raw materials, components and packaging.
  • An additional $3m in total business spending cumulatively for the first three years of the incentive period.

Substantially better tax incentives in the form of lower tax rates of either 10% or 5% are possible with the IHA but, to achieve this award, applicants are expected to substantially exceed the criteria listed for the RHA.

Global trader programme

The global trader programme (GTP) is an incentive scheme that aims to boost Singapore’s position as the preferred regional base for the trading operations of global traders. Administered by the International Enterprise Singapore, it is a merger of the previous approved oil traders and approved international traders schemes on 11 June 2001. The GTP allows companies that are part of the programme to benefit from a 10% or 5% concessionary tax rate on their qualifying trade income for a five-year renewable period.

Furthermore, the Singapore Government announced that high-growth medium-sized international trading companies that are keen to choose Singapore as their regional base for trading activities can be considered for the concessionary tax rate for an initial, non-renewable three-year period. During this period, the companies can establish and develop their regional or global trading network, with Singapore as their base. Once the companies are able to demonstrate sustainable growth projections that are in line with the requirements of the GTP, they can apply to join for the five-year renewable GTP scheme after the initial three-year period.

To qualify for the GTP incentive, it must satisfy the following conditions:

  • It is a well established international company (large or medium-sized) and carries out international trading, procurement, distribution and transportation of qualifying commodities and products.
  • It intends to use Singapore as its regional base for its principal offshore trading activities, business activities and support functions, including:
    - general and administrative management control
    - business and investment planning and coordination
    - financial control and treasury functions
    - market development and planning
    - logistics management, including warehousing and freight services.
  • It is a bona fide company with a global network and good track record.
  • It can ensure that it will:
    - principally conduct substantial offshore trading activities
    - incur a significant amount of local business spending in Singapore
    - employ a substantial number of experienced trading professionals in Singapore
    - make significant use of Singapore’s banking and financial services and its ancillary services (eg trade and logistics services, trade institutes and trade arbitration services, etc)
    - impart manpower training and aid in the development of trading expertise in Singapore.

In addition, the applicant company will be required to meet certain benchmark criteria in relation to:

  • minimum annual turnover
  • minimum annual local business spending, and
  • minimum employment of trading professionals (involved in either procurement/sourcing, sales and marketing, or risk management), these may include senior management and can be either locals or expatriates.

If the company does not meet these benchmark criteria, on application it will be required to show that it can commit to these benchmarks for its projected incentive period.

The following products and commodities are currently allowed under the GTP:

  • Energy commodities and products.
  • Agricultural commodities and bulk edible products.
  • Building and industrial materials.
  • Consumer products.
  • Industrial products.
  • Machinery components.
  • Minerals.
  • Electronic and electrical products.
  • Carbon credits.

This list is periodically reviewed and updated by the authorities.

Pioneer industries and pioneer service companies

Administered by the EDB, both the pioneer industries and pioneer service companies essentially enjoy the same tax benefits whereby the income derived from the pioneer trade will be wholly exempt from tax during the tax relief period.  

The difference is that the pioneer industries cater to the manufacturing sector, whereas the pioneer service companies cater to the service sector.

The duration of the tax relief period will depend on the nature and extent of the investments involved and will be granted for a period of five to 15 years from the production day (in the case of a pioneer product) or the commencement day (in the case of a pioneer service). The production day signifies the start of the tax relief period when marketable quantities of the product are produced, and this date can be amended to commence either earlier or later on application to the Minister.

An industry may be declared as a pioneer industry or a product declared as a pioneer product if:

  • it is in the public interest
  • the current industry is not of sufficient scale, and
  • there are favourable prospects for development of the industry.

For services, a company may be approved as a 'pioneer service company' if it intends to engage in any of the following qualifying activities:

  • Engineering or technical services, including laboratory, consultancy and research and development activities.
  • Computer-based information and other computer-related services.
  • Development or production of any industrial design.
  • Or other prescribed services or activities.

The pioneer enterprise or pioneer service company is not allowed to carry on a separate trade or business during the relief period unless special permission is granted by the Minister. Where special permission has been granted, the following rules would have to be observed:

  1. Separate accounts must be maintained in respect of the separate trade.
  2. Where a loss is incurred in respect of the separate trade, the loss is to be set-off against the pioneer profits unless the comptroller is satisfied that the loss was not incurred to obtain a tax advantage as provided under the following circumstances:
    - where the loss incurred was due to depressed sale prices arising from recession, poor market conditions, exceptionally strong competition and substandard products
    - where the extent of the loss is reasonable, and direct expenses have been properly charged to both the pioneer and separate trades, and appropriate and reasonable bases are used in apportioning indirect expenses between the pioneer and separate trades
    - where the separate trade was already in a loss position before the commencement of the pioneer trade.
  3. Where the profits from the separate trade are less than 5% of the gross sales of the separate trade, the statutory income of that source shall be deemed to be 5% and the pioneer profits will be abated accordingly. A lower rate may be specified by the Minister after considering the following factors:
    - Importance of the separate trade to the pioneer enterprise
    - Size of turnover of the separate trade
    - Whether the separate trade is a new or established activity
    - Profit margins of the separate trade in the past
    - Whether profit margins of the separate trade follow market trends for that industry.
  4. Where the separate trade is incidental to the pioneer trade, the income or loss will be deemed as part of the pioneer trade.

Development and expansion incentive

The development and expansion incentive (DEI) was introduced in the Year of Assessment 1997 to replace the post-pioneer incentive, which was found to be too restrictive.

Also administered by the EDB, a qualifying company, including a company that has not previously been granted pioneer incentive, may be taxed at a reduced rate of not less than 5% on 'expansion income' during the tax relief period. Expansion income is defined as income from qualifying activities that exceeds its base profit determined by the average annual income for the three years immediately preceding the tax relief period. In the computation of the expansion income, capital allowance shall be taken into account, notwithstanding that no claim was made.

The initial tax relief period may be granted for a period not exceeding 10 years, and this may be extended for up to five years at a time, subject to a maximum total period of 20 years.

To qualify, a company must be engaged in the manufacturing or increased manufacturing of any product from any industry that would be of economic benefit to Singapore or the same qualifying activities as pioneer service companies, reproduced below:

  • Engineering or technical services, including laboratory, consultancy and research and development activities.
  • Computer-based information and other computer-related services.
  • Development or production of any industrial design.
  • Or other prescribed services or activities.

Investment allowance

Administered by the EDB, the investment allowance is an incentive that can be enjoyed by a company that intends to carry on an approved project and incur fixed capital expenditure for that project.

The approved projects under the Act include the following activities:

  • Manufacture or increased manufacture of any product.
  • Provision of specialised engineering or technical services.
  • Research and development.
  • Construction operations.
  • Reduction of the consumption of water.
  • Any qualifying activity prescribed for the pioneer service incentive.
  • Promotion of the tourist industry (other than the building of a hotel) in Singapore.
  • Operation of any space satellite.
  • Provision of maintenance, repair and overhaul services to any aircraft.
  • Improving energy efficiency.

Fixed capital expenditure means capital expenditure to be incurred on an approved project by a company on the following items that are used for carrying out the project:

  • Factory building (excluding land) in Singapore.
  • Acquisition of know-how or patent rights.
  • New productive equipment to be used in Singapore.
  • Approved second-hand productive equipment to be used in Singapore.

In order to be eligible for investment allowances, the fixed capital expenditure must be incurred within the qualifying period of not more than five years.

The investment allowance is granted based on a specified percentage, not exceeding 100% of the fixed capital expenditure. It is granted in addition to the normal capital allowance and deducted from chargeable income. The amount of chargeable income so abated is exempt from tax. Any unutilised investment allowances can be carried forward indefinitely to be utilised against subsequent years’ chargeable income without the need to satisfy any conditions, including the shareholding test or the business continuity test.

However, the asset in respect of which an investment allowance has been given cannot be sold, leased or disposed off within the qualifying period, or within two years after the end of the qualifying period, without the prior approval of the Minister. If not, the investment allowances previously granted will be recovered.

Written by a member of the Paper P6 examining team