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The statement that Singapore does not have a capital gains tax is always followed by a string of caveats.
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By CHRIS WOO
15 February 2011
The statement that Singapore does not have a capital gains tax is always followed by a string of caveats. Any taxpayer disposing a large asset that is assumed to be a capital asset may be in for a rude shock. The taxpayer will invariably be asked to demonstrate that the gain is not from a trade or business, or of an income nature. What follows can often be a host of correspondences with the Inland Revenue Authority of Singapore (IRAS), which can sometimes go on for years, with each side trading case law precedents and ‘badges and trade’ features. For some, this can be a source of aggravation and uncertainty.
The situation is becoming less palatable to foreign businesses that simply want to know where they stand. The sale of assets (including shares) is often a commercial reality necessitated by restructuring, refinancing, fund-raising for ventures, or divestment of a non-core business or a stake in a failed venture.
While some effort has been made to specifically exempt gains from the sale of investments, they relate mainly to incentives to promote the fund management industry. There are various criteria to be met, but they can be meaningless for a manufacturing group for example.
The global financial crisis has added pressure on investors to seek greater certainty of tax treatment. A potential 17 per cent tax on disposal by a Singapore holding company casts serious doubt on the choice of locating one’s holding company in Singapore.
Changing ‘taxscape’
If uncertainty on the tax treatment of gains for holding companies persists, Singapore may lose its hub status for such companies. Competition from Hong Kong, which already has a good treaty with China, is ever present. The soon-to-be ratified tax treaty between Hong Kong and Indonesia may also offer an alternative investment platform for investors to set up shop in Indonesia. Hong Kong is in the process of concluding more tax treaties with Malaysia and Saudi Arabia, and in due course, may become the preferred destination for investors.
Despite mounting pressure for holding companies to prove economic and legal substance (ie to employ real people and have substantial economic activity) before they can enjoy lower withholding taxes on dividend or interest inflows, many still structure their investments through entities outside Singapore. These destinations include the British Virgin Islands, the Cayman Islands, Mauritius and Guernsey. This is because of the uncertainty over the tax treatment in Singapore of such gains.
Helping the investor
The 2011 Budget should provide clarity and certainty. Companies incorporated in Singapore to hold investments in and outside the Republic should not be taxed in Singapore on gains derived from any subsequent sale of investments, subject to certain criteria.
Such a measure will help maintain Singapore’s attractiveness to investors. It can lead to spin-off benefits for other areas of the economy as well. Tax leakage, if any, will also be minimal. Similar measures in developed countries such as the Netherlands have been a major draw for investors.
Guidelines that provide certainty will encourage investors to establish an international or regional company in Singapore to oversee group investments. They will send a clear message that Singapore is serious about wooing holding companies, and can also augment other incentives given by the Economic Development Board to entice multinationals to locate certain corporate functions in Singapore.
The guidelines should ensure that investors incorporate in Singapore for reasons other than tax benefits. They should require substance that is demonstrable by certain measurable standards.
Singapore’s guidelines could be similar to the Dutch rules and perhaps require additional profits to be recognised in Singapore.
Chris Woo is a partner at PricewaterhouseCoopers Services. He leads a tax team on mergers and acquisitions advisory.