Singapore

Foreign Direct Investment and Corporate Taxation:

Overview of the Singaporean Experience

Associate Professor Donghyun PARK, Economics Division, School of Humanities & Social Sciences, Nanyang Technological University, SINGAPORE 639798 [E-mail] [email protected] [Telephone] (65)6790-6130 [Fax] (65)6792-4217

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Abstract Foreign direct investment (FDI) has played a central role in Singapore’s remarkable economic success. Rapid growth of FDI is an integral element of economic globalization and governments around the world are competing vigorously with each other to attract FDI by offering fiscal incentives to foreign investors. In this paper, we examine the relationship between FDI and corporate taxation from the Singaporean perspective. Our main conclusion is that corporate taxation is definitely an important component of a package of factors that have made Singapore an attractive FDI destination. Furthermore, Singapore’s experience shows that lower corporate taxes will have a much greater impact on promoting FDI inflows if they are pursued with other pro-FDI policies rather than in isolation.

JEL codes: F21, H25 Keywords: FDI, corporate tax, Singapore

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1 Introduction

Singapore is a small Southeast Asian city-state that is one of the greatest economic

success stories of the postwar period. Rapid industrialization based on exports of

manufactured goods has transformed a typical poor developing country at its

independence in 1965 into one of the richest countries in the world today. A notable

structural characteristic of the Singaporean economy is its exceptionally high degree

of economic openness and internationalization. The Singaporean government has

always been an unequivocal champion of unimpeded cross-border flows of goods and

services, capital and labor. The remarkable transformation of Singapore is a powerful

testament to the potential benefits of globalization. Quite simply, the city-state could

not have achieved its economic miracle without extensive economic interaction with

the rest of the world. In particular, Singapore is heavily dependent on foreign trade

and the relative share of foreign trade in national output is consistently among the

highest in the world. Due to its limited population and talent pool, the city-state also

relies on foreign human resources to relieve shortages in a wide spectrum of skills,

from domestic maids to biotech scientists.

In addition to foreign trade and foreign labor, Singapore is exceptionally open to

foreign capital as well. Although affluent Singapore is now a major exporter of capital,

for our purposes we focus upon the role of foreign capital in the Singaporean

economy. In particular, long-term foreign capital in the form of foreign direct

investment (FDI) has played a pivotal role in the economic development and growth

of Singapore. The rapid growth of an export-oriented manufacturing sector which laid

the foundation for the city-state’s transformation was powered largely by foreign

multinational corporations (MNCs). While the Singaporean economy is a powerful

testament to the benefits of globalization, it is an even more powerful testament to the

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benefits of FDI. Perhaps to a larger extent than any other country in the world,

Singapore has relied on foreign MNCs to drive its own industrialization and growth.

What is beyond doubt is that Singapore’s unique ability to attract and retain FDI has

undoubtedly been a key ingredient of its economic success. Therefore, it is

worthwhile to investigate the determinants of Singapore’s FDI inflows.

In general, corporate taxes, or taxes imposed on corporate income, is an important

determinant of MNCs’ location decisions, just as individual income tax rates is an

important determinant of where a person decides to work and live. Theoretically,

other things equal, MNCs would prefer countries with lower corporate tax rates over

countries with higher rates. Many large MNCs are losing their national identity and

becoming truly multinational in the sense that they do not have a single dominant

home country. Such growing mobility of capital across borders poses threats to

governments insofar as this phenomenon threatens their capacity to collect taxes.

Concerns over fiscal competition between countries leading to ever lower tax rates

have given rise to notions such as fiscal dumping and race-to-the-bottom. While such

concerns tend to be exaggerated, it is undoubtedly true that a government’s ability to

raise corporate tax rates is more restricted in a world of mobile capital than in a world

of immobile capital. Although the actual impact of corporate taxation on FDI inflows

is uncertain, there is widespread perception among governments that an

internationally competitive corporate tax rate regime is vital for attracting FDI inflows.

While corporate taxes will almost certainly affect firms’ FDI decision-making, it is

worth remembering that there is a wide range of factors other than corporate taxes that

enter into the calculation as well. For example, China’s magnetic appeal as an FDI

destination is driven by a combination of lower labor costs and a potentially huge

domestic market. Political and social stability is another major determinant of FDI

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inflows. Quality of the labor force and physical infrastructure is yet another important

determinant. Inconsistent regulatory and policy regimes discourage foreign investors

– e.g. sudden and arbitrary reduction in electricity tariff rates that the regulator allows

utility companies to charge is likely to dampen foreign investment in the power

industry. The point here is that corporate taxes are but one element in a whole

package of factors that influence a company’s location decision. A country will not be

able to attract FDI solely on the basis of lower corporate taxes.

This paper is organized as follows. We first provide a brief overview of FDI and its

role in the Singaporean economy. We then review Singapore’s tax system, in

particular corporate taxes but other types of taxes as well. The next section covers

Singapore’s FDI policy regime, that is fiscal and other policies implemented by the

government to attract and retain FDI. In this section, we also discuss the Singaporean

government’s stance toward transfer pricing and tax avoidance by foreign MNCs. The

last section provides some concluding thought about the relationship between FDI and

corporate taxation in Singapore.

2 Foreign Direct Investment (FDI) in the Singaporean Economy

We have already pointed out the pivotal role of foreign direct investment (FDI) in

the Singaporean economy. In fact, along with the government or public sector, foreign

multinational corporations (MNCs) are one of the two main pillars of the economy.

The United States embassy uses the following rule of thumb in estimating the sources

of production in Singapore: 60% of goods and services are produced by the public

sector, 25% by foreign MNCs, and only 15% by the Singaporean private sector.1 That

is, foreign MNCs, which are especially prominent in the manufacturing sector,

account for around a quarter of Singapore’s national output. In fact, it would be

accurate to say that MNCs play a bigger role in Singapore than in almost any other

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economy in the world. The massive amount of foreign direct investment (FDI)

brought in by the MNCs has served as an engine of growth ever since the country’s

independence in 1965. Although both developed and developing economies compete

fiercely for FDI these days, Singapore adopted a liberal open-door policy toward

foreign investors long before it was fashionable to do so. The combination of a

strongly pro-FDI government and generally favorable environment meant that

Singapore has been and continues to be a highly attractive location for foreign capital.

Table 1 below clearly illustrates the magnetic appeal of Singapore for foreign

investors. Since Singapore’s population in 2004 was 4.3 million, of which 3.5 million

were citizens and permanent residents, per capita FDI inflows were over US$3,700

and almost US$4,600 if we exclude foreign residents. Singapore has consistently had

one of the world’s highest per capita FDI inflows for the last three decades. Table 2

below shows the importance of FDI in Singapore’s capital formation. Relative to the

rest of the world, investment by foreign companies has played a relatively larger role

in the total investment of Singapore.

[Insert Table 1 here]


Table 3 below shows the year-end stock of inward FDI as opposed to the flows of

inward FDI shown in Table 1. Again, the statistics unambiguously point toward the

critical role of FDI in the Singaporean economy. The huge stock of FDI indicates that

MNCs account for a substantial proportion of Singapore’s productive capacity. In

2004, the amount of inward FDI stock per capita was over US$37,000 and almost

US$46,000 if we exclude foreign residents. Table 4 below shows that the ratio of FDI

to national output was around 150% in 2004. By any measure, Singapore stands out as

a country with extraordinary success in attracting FDI.

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Tables 5 and 6 give us some information about the nature of FDI inflows into

Singapore. Table 5 indicates that manufacturing, financial services and commerce are

the three main destination sectors for FDI. As pointed out earlier, FDI has been

especially instrumental in the development of a successful export-oriented

manufacturing sector. The importance of financial services and commerce as FDI

destinations is consistent with the importance of those two sectors in the Singaporean

economy. Table 6 indicates that Singapore’s FDI inflows are primarily from

developed countries – Western Europe, US and Japan – although the combined share

of those countries has fallen somewhat since 1985. Overall, Singapore is not too

dependent on any single country or region in terms of FDI inflows.



The natural question to ask is why is the Singaporean economy so heavily

dependent on MNCs and FDI?2 A big reason is that Singapore is a small city-state

with a limited captive domestic market so that nurturing infant industries and

companies with an active industrial policy was not a sensible strategy for economic

development and growth. That is, a Japan- or Korea type model of promoting specific

industries such as automobiles or steel and national champions such as Toyota or

Samsung with the aid of trade protectionism, directed credit and fiscal benefits could

not work in Singapore due to the small size of its domestic market. This meant that

there were no opportunities for learning-by-doing by producing first for a protected

domestic market before becoming internationally competitive and subsequently

exporting to external markets. Industrialization had to be necessarily export-oriented

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from the outset for a small city-state like Singapore.

The absence of a sizable domestic market does not in and of itself automatically rule

out an active group of private sector entrepreneurs and companies, as the counter-

example of Hong Kong and, to a lesser extent, Taiwan, clearly illustrate. The

difference between these two NIEs and Singapore is that whereas they could count on

a core pool of industrial entrepreneurs, many of them refugees from mainland China,

Singapore could not. Due to Singapore’s long trading tradition, its private sector

entrepreneurs were overwhelmingly traders rather than manufacturers. As such, they

tend to have short investment horizons that are inappropriate for manufacturing

investments typically characterized by long investment gestation periods. Of course,

even the absence of a core group of private-sector industrial entrepreneurs is not an

insurmountable obstacle if the government makes a concerted effort to promote such a

group, as the experience of Korea illustrates. However, the deliberate policy course

chosen by the Singaporean government was instead to become involved in production

itself, and attract MNCs and FDI, and the bundle of capital, technology, and

managerial and marketing expertise that they bring. At the time of independence, the

government wanted to industrialize as quickly as possible and it decided that relying

on MNCs was the most efficient means of doing so.

The overwhelming consensus is that FDI has been highly beneficial for the

Singaporean economy and indeed the country’s remarkable leap from the Third

World to the First World would not have been possible without FDI. More

specifically, FDI has accelerated the development of an export-oriented

manufacturing sector, which has served as the primary engine of engine growth,

before the economy diversified into financial services and other services. FDI has

made major contributions to exports, employment, skill creation, creation of local

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companies and business opportunities through dynamic linkage effects, and economic

growth. Empirical studies which examine the issue of the impact of FDI on the

Singaporean economy confirm a significant beneficial impact. For example, using a

panel data set covering ten major manufacturing industries for the period 1974-1995,

Thangavelu and Owyong (2003) find that FDI-intensive industries are the main

contributors to productivity growth in terms of export performance and economies of

scale as compared to the non-FDI intensive industries. In earlier studies, using data

from 1971-1993, Chan and Rahman (1997) find that a 1 percent increase in FDI raises

GDP by 0.19 percent, while Choy (1994), using data from 1966 to 1990, confirms that

inflows of foreign capital had a critical impact on the growth of the manufacturing

sector and the rapid expansion of exports and employment opportunities. The most

compelling evidence of the beneficial impact of FDI is that the Singaporean general

public has a largely positive attitude toward foreign capital, unlike in most countries.3

3 Singapore’s Tax Structure and Corporate Tax System

In this section we discuss Singapore’s overall tax structure and in particular the

corporate tax system. It is conceptually helpful to begin our discussion with some idea

of the relative size of Singapore’s government since government raise taxes to finance

their expenditures. The size of the government in Singapore, measured by the ratio of

government expenditures to GDP, is significantly lower than other countries of

similar income levels and has been decreasing over time. This ratio has ranged

between 14% and 20% during 1996-2005, averaging around 17%. The ratio of tax

revenues to GDP, another measure of the size of the government, also shows a similar

downward trend over time. The relatively small and decreasing size of the public

sector is a result of deliberate government policy over recent decades. Such trends are

also consistent with the country’s well-known extreme fiscal conservatism. Since

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1985, the government has usually run a budget surplus, which exceeded 10% of GDP

for seven consecutive years during 1989-1995. However, the slowdown of economic

growth since the Asian crisis of 1997-1998 has constrained the growth of government

revenues, which led to weaker fiscal positions. The government’s ingrained spending

restraint allows for a fairly low-tax fiscal regime.

Let us now take a closer look at the structure of the Singaporean government’s

revenues and expenditures to better understand the country’s fiscal realities. To do so,

we examine the government budget for fiscal year (FY) 2004, shown in Table 7

below. Total expenditures amounted to 29.22 billion Singapore dollars, which

represents 16.2% of 2004 GDP. The share of operating expenditures was 68.5% and

the share of development expenditures was 31.5%. Although not shown on the table,

social development, security and external relations, economic development and

government administration accounted for 44%, 37%, 13.4% and 5.6%, respectively,

of total government expenditures. The government ran a modest primary deficit of

S$1.41 billion, or 0.8% of GDP, although the overall budget deficit was even smaller.

The deficit is in line with the post-Asian crisis weakening of the fiscal position.


Since our primary interest lies in corporate taxes, let us now take a look at the

revenue side. Total operating revenues in FY 2004 amounted to S$27.81 billion,

which represents 15.4% of 2004 GDP. We should emphasize that the Singaporean

government’s total revenues tend to be substantially higher than its operating

revenues although the extent of the difference between the two is not known with any

measure of certainty. This is because budgetary figures are incomplete and less than

fully transparent for the government’s investment income and capital receipts, the two

main sources of non-operating revenues. According to the International Monetary

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Fund (2000), such incompleteness and lack of transparency prevents fiscal analysis on

a consolidated basis. Investment income is derived from the government’s massive

stock of assets whereas capital receipts are derived from the government’s ownership

of around 85% of Singapore’s land. Although Table 7 reports net investment income,

the figure is neither definitive nor comprehensive. Asher (2002) gives some idea of

the significance of non-operating revenues; he estimates that their share of total

revenues ranged between 26% and 39% during the period 1992-1999.

Income taxes, which consist of corporate income taxes and personal income taxes,

have consistently been the most important sources of operating revenues, typically

accounting for between 40% and 50% of such revenues. Corporate income taxes

usually account for between two-thirds and three-fourths of total income tax revenues.

Table 7 indicates that income taxes represented 41.86% of operating revenues in 2004.

Corporate income taxes and personal income taxes represented 66.24% and 33.76%

of income taxes in 2004. Corporate income taxes thus accounted for 27.72% of

operating revenues in that year. If we assume that non-operating revenues were

alternatively 25% and 35% of total revenues in 2004, corporate income taxes would

be around 21% and 18% of total revenues, respectively. Goods & services tax (GST)

– a tax on domestic consumption – and motor vehicle-related revenues – taxes and

permits to own vehicles – are major additional sources of revenues. Customs taxes are

relatively small due to Singapore’s highly liberal trade regime and excise taxes are

imposed primarily on alcohol and tobacco. Asset taxes refer to the property tax and

estate duty, while other taxes refer to stamp duty, betting taxes and foreign worker

levy.

We now examine Singapore’s corporate tax system in greater detail. The tax year is

the calendar year ending 31 December, and each tax year is referred as the "Year of

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Assessment". Income is subject to tax on a preceding year basis – that is, income

earned in the financial year ended in 2004 will be taxed in the Year of Assessment

2005. Singapore generally imposes tax on a territorial basis – i.e. companies are

subject to tax on income derived in Singapore and on foreign income received in

Singapore regardless of whether the company is resident or non-resident. A company

is resident in Singapore if the control and management of the company is exercised in

Singapore. In general, the control and management of the company is taken to be the

place where the Board of Directors' meetings are held. Tax is only payable after an

assessment has been issued. Every company has to provide an estimate of its taxable

income within three months of the end of its accounting period. An estimated

assessment will then be raised and the tax assessed must be paid within one month,

unless arrangement is made to pay the tax in installments. Tax returns are due by 31

July each year for income earned in the accounting period ended in the preceding year

although further extensions of time may be granted on a case-by-case basis.

A company is taxed at a flat rate on its chargeable income. Table 8 below shows the

trends in the nominal corporate tax rate since 1986. The nominal rate of 40%

remained unchanged since independence in 1965 up to 1986. However, since 1986,

the corporate tax rate has followed a path of secular decline. The rate had fallen to

25.5% by 2001, and will fall further all the way down to 20% from 2005 onwards.

Furthermore, the government has offered various across-the-board corporate tax

rebates since 1997, such as a one-off tax rebate of 10% for year of assessment (YA)

1999. The secular decline in the corporate tax rate has not been accompanied by a

broadening of the tax base. If anything, the tax base has been slightly declining over

time due to progressively more generous corporate tax rebates. Table 9 below shows

the comprehensive list of tax rebates. For example, for YA2002, the first $10,000 of

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chargeable income was 75% exempt and the next $90,000 of chargeable income was

50% exempt, for a total of $52,500 of exempt income. Lower tax rates and more

rebates strongly suggest that the effective corporate tax burden in Singapore has been

declining. The intensifying international competition for FDI inflows is likely to have

had a substantial impact on both reduction of corporate tax rates and provision of

more tax rebates.



A notable aspect of Singapore’s corporate taxation system is that capital gains are

not taxable. A major recent development was the replacement of the imputation

system, under which tax assessed on a resident company in respect of its normal

chargeable income are passed on as tax credit to its shareholders upon distribution of

dividend, with the one-tier corporate tax system, which came into effect on 1st January

2003. Under the one-tier system, which applies to both resident and non-resident

companies, tax paid by a company on its normal chargeable income is final and all

dividends paid are exempt from tax in the hands of its shareholders. Also, the

Singaporean corporate tax system allows unutilized tax losses and capital allowances

to be carried forward indefinitely to offset future taxable income. Generally, plant and

equipment except motor vehicles qualify for accelerated depreciation at 33 1/3% per

year on a straight-line basis. Alternatively, a company may choose to claim an initial

allowance of 20% and annual allowances ranging from 6 years to 16 years on a

straight-line basis. A company in Singapore may face double taxation when the

overseas income is remitted into Singapore. However, a resident company is entitled

to the benefits conferred under the Avoidance of Double Taxation Agreements (DTA)

that Singapore has concluded. Singapore has entered into 51 comprehensive and 7

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limited DTAs worldwide. A DTA between Singapore and another country serves to

relieve double taxation of income earned in one country by a resident of the other

country. Singapore seeks to minimize double taxation by actively pursuing DTAs.

4 Singapore’s Foreign Direct Investment (FDI) Policies

Singapore’s remarkable success in attracting FDI inflows owes a great deal to the

deliberate and far-sighted strategic decision of the government to rely on FDI as an

engine of economic growth long before doing so became globally fashionable. In

view of this fact, it is hardly surprising that the Singaporean government has actively

pursued and is still actively pursuing a package of policies to attract foreign investors,

in particular large and well-established MNCs. While corporate taxes are only one

element of FDI, they are certainly an important element and countries that attract

significant FDI inflows tend to have internationally competitive corporate tax regimes.

Singapore is no exception in this regard and it enjoys a widespread perception among

MNCs as a low-tax country. This is especially true since the mid-1980s, when the

secular decline of corporate tax rates began. Table 10 below shows Singapore’s

corporate tax rates in comparison with selected countries. The table reproduces a 2005

study by the C.D. Howe Institute that compares the corporate income tax rates of 36

countries – all OECD countries as well as leading developing countries.4


The first column in Table 10 shows the nominal corporate income tax rate while the

second column shows the marginal effective tax rate on capital for large and medium-

sized companies. The latter is a more comprehensive and accurate measure of the tax

burden on companies. The countries are arranged in order of the effective tax rates,

from the highest to the lowest. Investment decisions are influenced not only by taxes

on corporate income, capital taxes, sales taxes on business inputs and other capital-

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related taxes. The marginal effective tax rate is a summary measure of the extent to

which taxes affect investment decisions. More specifically, it is the share of the pre-

tax return on capital that would be required to cover the taxes, leaving a residual to

cover the costs of debt and equity required to finance capital investments. Chen (2000)

provides a fuller explanation of the marginal effective tax rate. Table 10 shows that

Singapore’s corporate tax regime is highly competitive relative to other countries. In

fact, it has the lowest marginal effective tax rate on capital among the 36 countries,

even though six countries have lower nominal corporate income tax rates. Some

countries with high tax rates, most notably China, attract a lot of FDI, while some

countries with low tax rates, such as Turkey and Portugal, fail to attract significant

FDI. While corporate tax rates are certainly an important determinant of FDI, there

are may other factors that impinge upon FDI as well.

In terms of non-corporate taxes relevant to FDI, personal income taxes are

especially relevant since they influence the willingness of foreign executives and

professionals associated with FDI to locate to a particular country. Table 11 below

shows Singapore’s personal income tax rates for resident individuals for Year of

Assessment 2005. As we can see from Table 11, along with a highly competitive

corporate income tax regime, Singapore has a highly competitive personal income tax

regime. In fact, Singapore has the lowest personal income tax rates among Asia’s

major economies after Hong Kong. Furthermore, the government has been

aggressively cutting the rates in recent years. The top rate has fallen from 26% in

YA2002 to 22% in YA2003-2005 to 21% in YA2006, and is scheduled to fall further

to 20% from YA2007 onward. By way of comparison, Hong Kong’s current top-rate

personal income tax and corporate income tax stands at 16% and 17.5%, respectively.

In terms of major taxes other than income taxes, the goods and services tax (GST) rate,

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first introduced in 1994, was increased from 3% to 4% in 2003 and from 4% to 5% in

2004. The prevailing property tax rate for industrial, commercial and residential rental

properties stands at 10%. The overall tax burden on the Singaporean economy

compares favorably with most other major destinations for FDI.


Singapore does not have an explicit industrial policy. However, the combination of

various incentives and restrictions can amount to more or less an industrial policy.

Some incentives were implemented even before full independence was achieved in

1965. Although the fundamental objective of the incentives was to attract foreign

capital, they did not specifically discriminate in favor of foreign investment and

against domestic investment. Foreign companies benefited more in practice due to the

underdeveloped state of the domestic manufacturing sector in the country’s early

years. The Pioneer Industries Ordinance was passed in 1959, providing tax relief for

five years; this was subsequently extended to 10 years for some high-tech industries.

The Industrial Expansion Ordinance was also passed in 1959, providing tax relief to

firms that increased production of approved goods.

To accelerate orientation toward exports, the Income Tax Amendment Act was

introduced in 1965, allowing tax cuts for market development expenditures and

double-tax deduction for expenses incurred in export promotion. The Economic

Expansion Incentives Act, passed in 1967, reduced corporate taxes on approved

manufactures and exports, lowered tax on royalties, licenses, technical assistance fees,

as well as contributions to research and development (R&D) costs to be paid to

overseas enterprises. Subsidized financing of exports became available in 1974 and

the Export Credit Insurance Corporation, with 50 per cent government participation,

was established in 1975. The Economic Development Board (EDB) and subsequently

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the Development Bank of Singapore (DBS) provided preferential loans and equity

participation. Government assistance was targeted toward industries favored by the

government. For example, the government has actively encouraged foreign companies

to locate their regional headquarters in Singapore through tax incentives and other

benefits. Also, after a severe recession in the mid-1980s, the focus of government

assistance shifted toward high-tech industries. Amendments to tax laws in 1978 and

1980 allowed a tax credit of up to 50 per cent for investments of firms that were not

eligible for pioneer status, and provided incentives for R&D, including double

taxation for R&D.

The main government vehicle for promoting FDI was the EDB, set up under the

Ministry of Finance in 1961.5 EDB enjoys a substantial degree of autonomy and

operational independence, and provides loans and equity financing, technical and

marketing assistance as well as industrial training schemes, including training of

unskilled workers. The board also holds joint industry training centers and institutes

of technology with foreign governments and firms. Agencies with roots in the EDB

include the Jurong Town Corporation (JTC), established in 1968 to provide key

physical infrastructure for industrial sites, such as buildings and cargo handling

facilities. Other agencies spun off from the EDB to support its objectives are DBS,

National Science and Technology Board (NSTB), Singapore Institute of Standards

and Trade Development Board (TDB), which provides trade information and assist

companies in their globalization efforts.

Most of the investment incentives developed over the years remain in place

although the industries targeted by the government have changed along with the

evolution of the Singaporean economy from a low-tech economy to a high-tech

economy. For example, at the present, industries of strategic high-priority interest to

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the government include pharmaceuticals, in particular biotechnology, and financial

services, in particular private banking. Furthermore, a wide range of new incentives

have been added over the years to promote FDI inflows. Broadly speaking, the

prevailing system of tax incentives is currently as follows: A pioneer industry is

eligible for a five-year income tax holiday and the Minister of Finance may offer a

concessionary tax rate of 10% for another five years. A group of industries are granted

investment allowances of up to 50 per cent for expenditures incurred on plant,

machinery, know-how, patent rights and factory buildings for approved projects, as

well as normal capital allowances. These industries were manufacturing, technical

services, construction, production of drinking water, engineering, consulting and

research services, computer-based information operations, industrial design

development and certain other services.

Burdensome regulations and performance requirements for FDI can offset a

generous package of tax incentives. However, in Singapore’s case, the restrictions and

regulations governing both the entry and operation of foreign enterprises and

personnel are minimal. Overall, foreign investors are subject to the same government

regulations as local investors, and both have a lot of freedom in pursuing their profit

objectives. In addition to the general absence of performance requirements, Singapore

has also signed a large number of avoidance of double taxation agreements, which we

have already discussed, as well as investment guarantee agreements, which mutually

protect nationals or companies of either country for a specific period against war and

non-commercial risks of expropriation and nationalization. In the event that

expropriation or nationalization occurs, the host government will compensate affected

foreign investors based on the market value of the properties concerned prior to

expropriation or nationalization. Let us now look at the Singaporean government’s

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regulations, or lack thereof, in four different areas relevant for foreign investors.

The four areas are the foreign exchange regime, equity ownership, performance

requirements and human resources. First, the foreign exchange regime is highly

liberal and freely allows repatriation of capital and remittance of profits, dividends,

interests, royalty payments and technical licensing fees, as well as the free importation

of goods and services for consumption, investment and production purposes. Second,

foreign participation is permitted in most sectors of the economy except for some

restrictions in the financial services, professional services and media sectors, and 100

per cent foreign equity ownership is readily permitted. Third, there are no

performance requirements for foreign investors such as domestic value-added content

and local sourcing of inputs, no restrictions on borrowing from the domestic capital

market, and no regulations and restrictions governing the transfer of technology.

Fourth, there are only minimal restrictions on the recruitment of foreign personnel;

employment passes are required but the government issues these quite liberally.

However, the government does encourage foreign companies to hire local managerial

and technical personnel.

We have seen that the Singaporean government’s investment incentives comparably

favorably with those of most countries and their impact is reinforced by the relative

absence of regulations and performance requirements. Let us now examine the actual

effectiveness of the investment incentives in promoting FDI inflows. Before we do so,

we should point out that in Singapore incentives are granted on a case-by-case basis

and can be tailored to particular firms, allowing for greater flexibility in promoting

FDI. Above all, published incentives are only an initial position in the negotiations for

desired investments and, as such, the actual incentives are even more generous than

the published incentives in some cases. Foreign companies in strategic sectors such as

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electronics and biotechnology have been able to negotiate firm-specific fiscal

incentive packages with fiscal authorities. Furthermore, in some cases such as wafer

chip fabrication plants, the EDB has provided manpower training at public expense

and take a significant equity stake in new ventures. The point here is that it is not

particularly illuminating to base studies of incentive effects on the published set of

incentives. Each negotiated investment contains a unique package of incentives, and

this package is confidential.

According to Blomqvist (2005), despite the pervasiveness of the investment

incentives, their actual effectiveness is subject to debate. It is possible that

Singapore’s economic structure would have evolved in a similar way even in the

absence of the selective measures. That is, the targeted industries which the

government promoted through investment incentives may have been the industries in

which Singapore had a natural comparative advantage to begin with. In the

Singaporean context, government’s effective provision of public goods such as strong

physical and institutional infrastructure and R&D support might have been more

important. In any case, Blomquist points out that there is still no consensus about the

effectiveness of Singapore’s selective incentives among researchers.

In terms of formal econometric analysis, one avenue for investigating the impact of

taxes and other investment-relevant factors on FDI is to use data from a cross-section

of countries. According to Chirinko and Meyer (1997), conservative estimates suggest

that a percentage-point in the effective tax rate on capital would cause capital

investment to fall by at least half a percentage point and, for some industries, by as

much as 1.7 percentage points. A recent analysis by de Mooij and Ederveen (2003)

based on many empirical studies shows that cross-border capital flows are highly

sensitive to tax rates – an increase of one percentage point in the corporate income tax

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rate causes the FDI stock to fall by more than 3 percent. In another study, using a

panel of bilateral FDI flows for 11 OECD countries over 1984-2000, Benassy-Quere,

Fontagne, and Lahreche-Revil (2003) find that tax differentials also play a significant

role in understanding foreign location decisions. Gropp and Kostial (2001) point out

that within the OECD countries with relatively high corporate tax rates have

experienced both high net outflows of FDI and a decline in corporate tax revenue.

Econometric analysis of a cross-section of countries tells us whether on average

countries with lower tax rates attract more FDI inflows. While this is a highly useful

and informative research program, we are more interested in econometric studies of

whether Singapore’s own tax rates have been a significant determinant of Singapore’s

own FDI inflows. This necessarily calls for a time-series analysis of Singaporean data.

One problem with such a time-series study is that many foreign firms enjoy firm-

specific fiscal incentive packages rather than the published set of incentives.

Moreover, Singapore’s overall business environment, which is only partially

dependent on tax rates and fiscal incentives, is highly conducive to FDI inflows. In

any case, unfortunately, there are very few Singapore-specific econometric studies of

the impact of corporate tax rates on FDI. Koe (2004) uses the methodology of

Slemrod (1990) and annual time-series data for 1980-2000 to econometrically

investigate the effect of the corporate income tax rate as well as some other variables

including exchange rate and labor cost on FDI inflows into Singapore. Her main

finding is that FDI inflows are negatively related to the corporate tax rate at the 95%

level of significance. A one percentage point reduction in corporate tax rate increases

the ratio of FDI to GDP by 1.26%. In an earlier study on the inflows of FDI from six

industrialized countries into Singapore and three other East Asian economies, Chen

(1995) uses a seemingly unrelated regression model for pooled data from 1972-1989.

22

His results suggest that changes in Singapore’s taxation environment do not affect

FDI inflows.

5 Singapore’s Policy Toward Transfer Pricing

Transfer pricing refers to the over-pricing of imports and/or under-pricing of exports

between affiliated companies of a multinational company (MNC) in different

countries for the purpose of transferring revenues or profits out of a country in order

to evade taxes. MNCs thus try to reduce their overall tax burden by reporting most of

their profits in a low-tax country even though the actual profits are earned in a high

tax country. A 2002 study by Trade Research Institute, a US consultancy, found

American MNCs buying tweezers for US$4,896 and plastic buckets for $973.

Transfer pricing can have a serious adverse impact on tax revenues. For example,

Bartelsman and Beetsma (2003) examine 16 OECD economies over two decades and

estimate that if a government were to raise its corporate tax rate by one percentage

point, more than 70% of its expected revenues would fail to materialize, because

reported profits disappear to other countries. This is not because the higher tax rate

reduces economic activity and therefore the tax base. It is instead due to transfer

pricing – the company reports the profits elsewhere. Soh (2005) provides a clear and

comprehensive review of Singapore’s current policy regime towards transfer pricing.

Although there is no legislation specifically dedicated to transfer pricing in Singapore,

two provisions in the Singapore Income Tax Act (SITA) are relevant to transfer

pricing and these have been used by the Inland Revenue Authority of Singapore

(IRAS) to adjust transfer prices.

First, section 33 of the SITA enables the IRAS to disregard or vary an arrangement

if its purpose is to: (1) alter the incidence of tax payable, (2) relieve any person from

liability to pay tax or to make a return, or (3) reduce or avoid any liability imposed.

23

The power to vary or disregard arrangements allows the IRAS to make appropriate

adjustments. Such adjustments include the re-computation of gains or profits to

counter any tax advantage obtained. But section 33 does not apply if the arrangement

was carried out for bona fide commercial reasons and did not have, as one of its

primary purposes, the avoidance or reduction of tax. In determining whether there is

tax avoidance, some of the items relevant for the IRAS include: (1) the imposition of

various transactions to fit within the provisions of the law to obtain a reduction in tax,

(2) artificiality, and (3) transfer prices.

In addition, section 53(2A) of the SITA enables the IRAS to assess a non-resident

person and charge any tax due to a resident person if: (1) in a business carried on

between a non-resident and a resident person, or (2) it appears that owing to the close

connection between two, or substantial control exercised by the non-resident person,

the course of business is arranged such that the resident person derives less than

expected ordinary profits. If the profits of the non-resident person cannot be readily

estimated, the IRAS has the power to charge the non-resident (in the name of the

resident person) on a fair and reasonable percentage of the turnover of the business

done. Furthermore, as noted earlier, Singapore has entered into a large number of

double tax treaties. In many of these treaties, there are provisions under the

"Associated Enterprises" article that contain language similar to that of the arm's-

length principle found in article 9 of the OECD Model Tax Convention. Therefore,

transactions of Singapore taxpayers with related parties in relevant treaty partner

countries are to be conducted in accordance to the arm's-length principle. Legislation

and treaties aside, the IRAS has advised taxpayers to follow the arm's-length principle

and the OECD Transfer Pricing Guidelines when determining their transfer prices. In

24

adjusting transfer prices, IRAS officials often refer to the OECD Guidelines for

rationale and justification.

Although Singapore does not have penalties specific to transfer pricing, general tax

penalties may be applicable for transfer pricing adjustments. In such situations, the

IRAS has the authority to impose penalties from 100% of the tax undercharged (for an

incorrect return) to 400% of the tax undercharged (for serious fraudulent tax evasion),

as well as possibly, an imprisonment term. But in practice, tax penalties of greater

than 300% are rare. IRAS queries and audit activity, in the context of related-party

dealings, target the following types of transactions: (1) provision of intra-group

services from Singapore-based regional headquarters to subsidiaries in the region, (2)

to a lesser extent, sales or purchases of products. Upon commencement of a query, the

IRAS will normally request information concerning: (1) the allocation rationale and

allocation methodology for intra-group service costs, and the associated mark-up on

these costs, (2) the benefits received, particularly when the Singapore taxpayer is the

recipient and payee for the services, (3) the method used to determine transfer prices,

and (4) differences in pricing in comparison with the prices charged or paid to

uncontrolled parties. At the present, transfer pricing challenges on transactions

involving intellectual property, interest payments, guarantee fees, and financial sector

trading are less common.

Recently, the authorities have begun to pay greater attention to transfer pricing. We

can attribute this to two main factors. First, many of Singapore's larger trading

partners and Asian neighbors have substantially strengthened their transfer pricing

requirements in recent years. Besides main trading partners such as the US, Japan, and

Australia, which traditionally have strict transfer pricing requirements, new Asian

converts to tougher transfer pricing requirements include China, India, Thailand,

25

Malaysia, and Taiwan. It is possible that such developments may have caused

Singapore taxpayers with cross-border transactions to err on the side of caution by

imputing more income to countries with stricter transfer pricing requirements and

penalties. This is potentially harmful for Singapore's tax revenues. Second, there is a

view among some quarters that detailed transfer pricing guidelines provide more

certainty to large multinationals which are considering relocating part of their

operations to Singapore. Greater certainty of income and returns could facilitate their

investment decision. Moreover, many large potential investors have also inquired

about whether advance pricing agreements (APAs) are possible. While currently

possible, the APA process in Singapore is widely perceived to be restricted by the

lack of detailed transfer pricing guidance. Once such guidance is in place, it is hoped

that APA guidelines will follow.

6 Singapore’s Overall Environment for FDI

While low corporate tax rates and other fiscal incentives are certainly an important

determinant of FDI, and Singapore has a very generous fiscal regime for foreign

companies, it would be a serious mistake to ignore the many other factors that have

made Singapore into a popular low-risk high-return FDI destination. The benefits of

generous fiscal incentives for foreign investors can be easily offset by critical

weaknesses such as political and social instability, poor physical and financial

infrastructure, and inadequate human resources. We have earlier seen that a country

which has recently attracted enormous amounts of FDI – China – has relatively high

effective corporate tax rates. China’s seemingly infinite pool of manpower and

potentially huge domestic market more than compensate for its relative absence of

fiscal incentives. What is remarkable about Singapore is that generous fiscal

incentives are complemented by a wide range of other factors to create one of the

26

most favorable overall environments for foreign companies to do their business. This

is to some extent the result of deliberate government policy which was based on a

holistic approach to promoting FDI inflows. Singapore’s non-fiscal advantages for

foreign investors include strategic location, physical and financial infrastructure,

human resources, and political and social stability and good governance. Chia (2000,

1998) provides a good overview of Singapore’s overall investment climate for foreign

companies. We look at each of these strengths in more detail.

The widely held notion that Singapore has no natural resources whatsoever is not

strictly true. A quick look at a world map informs us that Singapore is blessed with an

extraordinarily strategic location, around the narrow Malacca Straits which connect

the sea lanes of Northeast Asia with those of Europe and the Middle East on the other.

Oil from the Persian Gulf to energy-hungry China, Japan and Korea is but just one

example of the staggering amount of international trade that passes through the Straits.

Singapore’s location astride major sea and air routes and in the heart of Southeast

Asia – an economically dynamic region rich in natural resources – gives it a

significant locational advantage in trade and investment. Singapore’s highly liberal

trade regime has further reinforced its natural locational advantage and turned it into

Southeast Asia’s undisputed trade hub, which, in turn, facilitates the export and

import activities of foreign firms locating in Singapore. In addition, Singapore’s time-

zone advantage, straddling East Asia and Western Europe, enables its financial

markets and institutions to perform transactions with Japan, Europe and the US within

its working hours.

Singapore had reinforced and exploited its strategic geographical location through

large investments in physical infrastructure. Comprehensive air and sea transport and

telecommunications link the city-state with the rest of the world. The domestic land

27

transportation network is also well-developed and efficiently connects the airport and

sea port to the business and financial districts. Singapore’s airport and sea port are

world-class facilities that are consistently ranked as among the best in the world. Its

advanced telecommunications infrastructure facilitates business transactions with the

outside world. Singapore has achieved world-class status in information and

communications technology (ICT), while the government has ensured a reliable

supply of power and water. Industrial estates, business parks and science parks

provide ready access to land and factory/office space and industrial, commercial and

research facilities and amenities. The provision of these estates reduces the capital

investment requirements of foreign investors, enables quick start-ups, and promotes

external economies of industrial clustering. Singapore is a major Asia-Pacific

financial center, and its well-developed financial markets, large inflows of capital, and

abundance of national savings all contribute to the low cost of capital.

Singapore, being a city-state, has a very limited population base – only 3,200,000

citizens and 300,000 permanent residents in 2004. The government’s human resource

policy focuses on improving the productivity of the labor force through education and

training. Singapore has adopted one of the most liberal immigration regimes in the

world in order to expand its quantity as well as enhancing its quality. While generally

liberal, the immigration regime is selective in that it discriminates in favor of highly

skilled professionals, who are actively recruited for both the public and private sectors,

and against unskilled workers, for whom employers must pay a payroll tax. In any

case, foreign workers make up around 20% of Singapore’s workforce and along with

their dependants, a similar proportion of the total population of 4,300,000 in 2004. In

terms of education, the government emphasizes technical and vocational education

below tertiary level to provide a growing pool of technically competent workers,

28

along with rapid expansion of engineering, business and computer science education

at the tertiary level. Around forty percent of polytechnic and university graduates are

trained in engineering and other technical disciplines.

Another major selling point of Singapore for foreign investors is its well-known

socio-political stability and good governance. Political stability and an honest and

effective political leadership and government have always been key elements in

Singapore’s favorable business environment. These positive factors significantly

reduce the cost of doing business in the city-state. World Economic Forum (WEF)

and Institute for Management Development (IMD) consistently rank the Singaporean

government as the best in the world in terms of promoting the country’s

competitiveness and creating a positive business environment. The government is

keenly aware that social cohesion and consensus is central to effective policy

implementation, and actively consults the general public before undertaking major

policies. The defining characteristic of the Singaporean government and bureaucracy

is economic rationality, with the ultimate objective of promoting economic growth.

While explicit income redistribution programs are limited, public housing and

education are substantially subsidized. More importantly, rapid economic growth has

virtually wiped out poverty and contributed to upward social mobility. An especially

relevant element of Singapore’s socio-political stability for foreign investors is its

peaceful industrial relations and virtual absence of labor disputes. A tripartite National

Wages Council, comprising representatives for workers, employers and government,

provides annual guidelines for orderly wage increases.

A pro-business government policy environment and high-quality civil service

complements Singapore’s excellent infrastructure and public capital. The Singaporean

government is noted for efficiency, competence and honesty. A remuneration system

29

of paying relatively high salaries to civil servants attracts a constant stream of talented

individuals to work for the government. This is in marked contrast to most countries

where governments have a difficult attracting and retaining talent. The government’s

strict adherence to sound monetary and fiscal policies has created a stable

macroeconomic environment for investors. In addition, the Singaporean government

takes pro-active microeconomic measures to help businesses through agencies such as

the Economic Development Board (EDB) and Jurong Town Corporation (JTC). The

government also sets the broad directions for the economy.6

World-class infrastructure and world-class government combine to offer a highly

favorable environment for doing business. Singapore is consistently ranked among the

most competitive countries in the world terms of providing a sound business

environment. According to the World Competitiveness Yearbook (WCY) 2005 by the

Institute for Management Development (IMD), which ranks nations’ business

environments by analyzing their ability to provide an environment in which

enterprises can compete effectively, in 2005 Singapore ranked 3rd among the sample

of 60 major industrialized and emerging economies. That is, in 2005 Singapore was

second only to the U.S. and Hong Kong in providing a positive overall environment

for corporate activity. 7 In terms of location attractiveness for different sectors,

Singapore scored particularly well in manufacturing, research and development, and

services and management. Table 12 below compares the overall competitiveness of

Singapore in 2004 and 2005 to that of selected industrial and regional economies in

WCY 2005. Singapore also consistently ranks near the top in other leading

international competitiveness surveys such as the World Economic Forum’s Global

Competitiveness Report (GCR). According to GCR 2005, Singapore ranked 6th in

2005 and 7th in 2004 among the sample of 117 developed and developing countries.

30

Furthermore, Singapore ranked 2nd out of 157 countries, after only Hong Kong, in the

2006 Index of Economic Freedom compiled by the Heritage Foundation. There is

quite a clear consensus that Singapore is a great place for business.


7 Current Policy Agenda on Corporate Taxation and Concluding Remarks

In response to a short-term recession and a more long-term slowdown in growth

momentum since the Asian crisis, the Singaporean government set up an Economic

Review Committee (ERC) in December 2001. The committee comprised members

from both the government and private sector, and completed its work in February

2003. The committee’s central objective was to review Singapore’s economic

development strategy and design a blueprint to restructure the economy to enhance its

international competitiveness. Among the committee’s seven sub-committees, of

particular interest to us is the sub-committee on taxation, CPF, Wages and Land.8 The

sub-committee’s final report and recommendations contain the strategic directions for

future changes in Singapore’s taxation system.9 Some of the changes have already

been implemented.

The primary strategic thrust of the sub-committee’s policy recommendations is to

reduce taxes on income (direct taxes) to encourage investment and work, and making

up for the resulting fall in government revenues by increasing taxes on consumption

(indirect taxes). The sub-committee recommends reductions in both corporate and

personal income tax rates. Most interestingly, in connection with corporate income

taxes, the sub-committee mentions the trend toward lower income tax rates in other

developed countries such as Australia and the UK, and the adverse impact of this

trend on Singapore’s attractiveness as a FDI destination. The implicit suggestion is

that, as low as Singapore’s corporate income taxes already are relative to other

31

developed countries, the country should continue to compete actively and

aggressively in the face of growing tax competition. Equally interesting for our

purposes is the sub-committee’s rationale behind its proposed personal income tax

reduction. In the knowledge-based economy, human capital is the key to business

success and companies are locating high-value activities in countries where top

managers and highly-skilled professionals are willing to live and work. In other words,

Singapore should cut personal income taxes in order to attract high-quality individuals

in order to attract high-quality foreign companies.

In addition to lower tax rates, the sub-committee also recommends a number of

other reforms to the corporate tax system. The introduction of group relief would

allow corporate groups to offset the losses of one company against the taxable profits

of another company within the same group. The group relief gives companies the

flexibility to start new activities through subsidiaries and encourages innovative

activities. Another recommendation, already implemented as discussed earlier in

Section 3, is the replacement of the full-imputation system with a cone-tier corporate

system, which encourages the use of Singapore as a hub for holding companies and

promotes the effectiveness of group relief. Yet another recommendation is to retain

the current system of taxing foreign source income but liberalize the conditions for

granting foreign tax credits so as to more effectively prevent double-taxation. A

number of measures other than lower rates also lighten the tax burden on individuals.

In conclusion, we have seen that Singapore has been exceptionally successful in

attracting FDI and FDI, in turn, has played a critical role in Singapore’s overall

economic success. Singapore’s internationally highly competitive fiscal incentive

regime has undoubtedly played a major role in promoting FDI into the city-state.

While fiscal incentives are not the only determinant of FDI, they are almost certainly

32

a significant determinant, and there is no reason to expect why Singapore should be

an exception in this regard. However, we must be careful not to attribute too much of

Singapore’s success to low corporate taxes and other fiscal incentives. The overall

business environment of a country depends not only on the tax burdens faced by

companies but on a whole host of other factors as well. China’s relatively high

effective corporate tax rate does not seem to have a noticeable deterrent effect on the

massive inflow of foreign capital into that country. In Singapore’s case, there is a

wide range of factors other than fiscal incentives which help to create one of the

world’s most business-friendly environments. These non-fiscal factors are partly the

result of the government’s holistic approach to attracting FDI and include strategic

location, physical and financial infrastructure, human resources, and political and

social stability and good governance. The most definitive policy lesson we can draw

from Singapore’s FDI experience is that lower corporate taxes will have a much

greater impact on promoting FDI inflows if they are part of holistic package of fiscal

and non-fiscal policies.

At the same time, we should point out that Singapore has pursued and continues to

pursue aggressive fiscal incentive policies as a means of promoting FDI in spite of all

its other advantages as an FDI destination. In particular, Singapore’s continuous

reduction of corporate income tax rates since 1987 seems to be a strategic policy

response to the growing international competition for FDI. Likewise, the absence of

corporate tax cuts prior to 1987 probably reflects the relative absence of such

competition in that period. There are two possible explanations for the post-1987

trend of lower corporate tax rates. One is that lower taxes are indeed one of the most

important, if not the most important, determinant of Singapore’s FDI inflows. The

hallmark of the Singaporean government is economic rationality and it is unlikely to

33

provide incentives unless they are sufficiently useful. In this connection, an important

feature of Singapore’s fiscal incentives is the post-incentive evaluation of investment

projects. 10 A second and more plausible explanation for the secular decline in

corporate tax rates is that those rates have powerful signaling effects. That is,

although what is relevant for companies is the effective tax rates they face, which is

only partially dependent on corporate tax rates, corporate tax rates are highly visible

and widely known. As such, reducing them can serve as a loud and clear signal of the

government’s commitment to lower the costs of doing business in Singapore. Finally,

whatever the motivation behind the corporate tax cuts, in the future, possible

multilateral agreements about international tax competition will restrict Singapore’s

ability to pursue aggressive fiscal incentive policies.

34

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36

Table 1 FDI Inflows into Selected Countries and Regions, 1985-2004

Country or Region 1985- 1995*

2001 2002 2003 2004

Singapore 4,529 14,122 5,822 9,331 16,060

Japan 642 6,241 9,239 6,324 7,816

China 11,715 46,878 52,743 53,505 60,630

Malaysia 2,924 554 3,203 2,473 4,624

Southeast Asia 11,708 18,758 14,507 17,364 25,662

Asia and Oceania 31,609 108,688 92,042 101,424 147,611

Developing Economies 49,868 217,845 155,528 166,337 233,227

World 182,438 825,925 716,128 632,599 648,146

Source: World Investment Report 2005, UNCTAD Unit: Millions of US dollars

* Annual average

37

Table 2 FDI Inflows as Percentage of Gross Fixed Capital Formation, 1985-2004

Country or Region 1985- 1995*

2001 2002 2003 2004

Singapore 32.9 55.5 25.6 41.7 62.7

Japan - 0.6 1.0 0.6 0.7

China 6.0 10.5 10.4 8.6 8.2

Malaysia 13.8 2.5 14.5 10.8 19.1

Southeast Asia 9.3 14.0 9.7 9.9 14.2

Asia and Oceania 4.4 9.9 7.7 7.3 9.1

Developing Economies 4.6 12.9 9.5 8.8 10.5

World 3.8 12.0 10.6 8.3 7.5

Source: World Investment Report 2005, UNCTAD * Annual average

38

Table 3 FDI Stocks in Selected Countries and Regions, 1980-2004

Country or Region 1980 1990 2000 2003 2004

Singapore 6,203 30,468 112,571 144,363 160,422

Japan 3,270 9,850 50,322 89,729 96,984

China 1,074 20,691 193,348 228,371 245,467

Malaysia 5,169 10,318 52,747 41,667 46,291

Southeast Asia 19,771 63,171 263,365 298,343 323,588

Asia and Oceania 52,083 186,479 1,068,663 1,135,345 1,282,964

Developing Economies 132,044 364,057 1,734,543 2,001,203 2,225,994

World 530,244 1,785,264 6,148,284 8,731,240 9,732,233

Source: World Investment Report 2005, UNCTAD Unit: Millions of US dollars

39

Table 4 FDI Stock as Percentage of Gross Domestic Product in

Selected Countries and Regions, 1980-2004


Singapore 52.9 83.1 123.1 160.2 150.2

Japan 1.8 6.6 5.8 7.8 7.9

China 0.5 5.8 17.9 16.2 14.9

Malaysia 20.7 23.4 58.6 40.4 39.3

Southeast Asia 10.3 18.7 43.0 40.8 38.2

Asia and Oceania 4.0 8.7 26.9 24.0 23.2

Developing Economies 5.4 9.8 26.2 27.8 26.4

World 5.0 8.4 18.3 22.0 21.7

Source: World Investment Report 2005, UNCTAD

40

Table 5 Percentage of FDI Stocks by Sector, 1970-2003

Sector 1970 1985 2001 2002 2003

Manufacturing 44.6 47.2 37.2 36.8 37.3

Financial Services 25.2 32.8 35.6 34.0 34.3

Commerce 19.9 13.8 14.9 16.0 15.7

Others* 10.3 6.2 12.3 13.2 12.7

Source: Singapore Department of Statistics * Others include transport, storage & communications, business services, real estate and construction.

41

Table 6 Percentage of FDI Stocks by Source Country and Region, 1970-2003


Western Europe 34.5 30.4 39.3 40.2 42.6

United States 18.4 26.7 16.7 14.9 15.4

Japan 8.2 14.1 13.5 14.1 13.5

Other Asia* 32.6 18.5 9.9 9.7 9.1

Others 6.3 10.3 20.6 21.1 19.4

Source: Singapore Department of Statistics * Major Asian FDI sources other than Japan are the other newly industrialized economies (NIEs), especially Hong Kong and Taiwan, and other ASEAN countries, especially Malaysia.

42

Table 7 Singapore Government’s Budget for Fiscal Year (FY) 2004

Budget Category Amount

OPERATING REVENUE 27.81

Corporate Income Tax 7.71

Personal Income Tax 3.93

Asset Taxes 2.09

Customs & Excise Taxes 2.00

Goods & Service Tax 3.70

Motor Vehicle Related Taxes 1.37

Vehicle Quota Premium 1.49

Other Taxes 3.36

Other Fees & Charges 1.99

Others 0.17

TOTAL EXPENDITURE 29.22

Operating Expenditure 20.49

Development Expenditure 8.73

PRIMARY SURPLUS/(DEFICIT) (1.41)

SPECIAL TRANSFERS 1.71

NET INVESTMENT INCOME 2.68

OVERALL BUDGET

SURPLUS/(DEFICIT) (0.44)

Unit: Billions of Singapore dollars Source: Singapore Ministry of Finance

43

Table 8 Singapore’s Nominal Corporate Income Tax Rate

Year of Assessment Tax Rate

1965-1986 40%

1987-1989 33%

1990 32%

1991-1992 31%

1993 30%

1994-1996 27%

1997-2000 26%

2001 25.5%

2002 24.5%

2003-2004 22%

2005 onwards 20%

Source: Internal Revenue Authority of Singapore (IRAS)

44

Table 9 List of Singapore’s Corporate Income Tax Rebates

Year of Assessment Tax Rebate

1965-1996

1997-2000 YA 1999: One-off tax rebate of $10% (excluding tax on Singapore dividend and tax on income subject to the final withholding tax).

2001

Tax rebate: - 50% on first tax payable of $25,500 - 5% on balance of tax payable in excess of $25,500 (i.e. gross tax - $25,500) - Exclude tax on Singapore dividend and tax on income subject to final withholding tax

2002

Partial Tax Exemption Exempt income: - First $ 10,000 @ 75% = $ 7,500 - Next $ 90,000 @ 50% = $45,000 $100,000 $52,500 Tax rebate: - 5% of tax payable (exclude tax on Singapore dividend and tax on income subject to final withholding tax)

2003-2004 Exempt income per YA 2002 but without 5% tax rebate

2005 onwards

Exempt income per YA 2002 but without 5% tax rebate. Full Tax Exemption for new companies: Full tax exemption can be granted on normal chargeable income (excluding Singapore franked dividends) of a qualifying company up to $100,000, for any of its first three consecutive YAs that falls within YA 2005 to YA 2009. The first YA refers to the YA relating to the basis period during which the company is incorporated. To qualify for the tax exemption for a relevant YA under the new scheme, a company must – a) be a company incorporated in Singapore b) be a tax resident in Singapore for that YA c) have no more than 20 shareholders throughout the basis

period relating to that YA; and d) have all shareholders who are individuals throughout the

basis period relating to that YA. Any company that does not meet the qualifying conditions for any of its first three consecutive YAs falling within YA 2005 to YA 2009 would still be eligible for partial tax exemption.


45

Table 10 Nominal Corporate Income Tax Rates and Marginal Effective Tax Rates

in Selected Countries, 2005

Country Corporate Income Tax Rate

Effective Tax Rate

Country Corporate Income Tax

Rate

Effective Tax Rate

China 24% 45.8% Luxembourg 30.4% 21.9%

Canada 34.3% 39% U.K. 30% 21.7%

Brazil 34.6% 38.5% Belgium 34% 21.4%

U.S. 39.2% 37.7% Poland 19% 20.2%

Germany 38.4% 36.9% Denmark 30% 19.8%

Italy 39.4% 36.2% Austria 25% 19.4%

Russia 22% 34.5% Hungary 16% 18.2%

Japan 41.9% 33.6% Czech Republic

26% 17.7%

France 35.4% 33.3% Switzerland 22% 17%

Korea 27.5% 30.8% Mexico 30% 16.7%

New Zealand

33% 29.3% Ireland 12.5% 13.7%

Greece 32% 29.3% Portugal 27.5% 13.5%

Spain 35% 27.3% Sweden 28% 12.1%

Norway 28% 25.1% Iceland 18% 12.1%

Netherlands 31.5% 25% Slovak Republic

19% 9.1%

India 33% 24.3% Hong Kong 17.5% 8.1%

Australia 30% 24.1% Turkey 30% 6.4%

Finland 26% 22.9% Singapore 20% 6.2%

Source: C.D. Howe Institute Note: The marginal effective tax rate is the tax paid as a percentage of the pre-tax return to capital, based on the assumption that the after-tax rate of return is sufficient to cover the cost of equity and debt finance provided by international lenders.

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Table 11 Singapore’s Personal Income Tax Rates for Resident Individuals

Year of Assessment 2005

Chargeable Income

Tax Rate %

Tax $

On the first 20,000 0 0

On the next 10,000 4 400

On the first 30,000 400

On the next 10,000 6 600

On the first 40,000 1,000

On the next 40,000 9 3,600

On the first 80,000 4,600

On the next 80,000 15 12,000

On the first 160,000 16,600

On the next 160,000 19 30,400

On the first 320,000 47,000

On the next 320,000 22


47

Table 12 Overall Competitiveness Ranking in 2005 and 2004

Country 2005 Rank 2004 Rank

Singapore 3 2

USA 1 1

Germany 23 21

France 30 30

United Kingdom 22 22

Japan 21 23

Korea 29 35

Hong Kong 2 6

Taiwan 11 12

China 31 24

Philippines 49 52

Thailand 27 29

Malaysia 28 16

Indonesia 59 58

Source: World Competitiveness Yearbook 2005, Institute for Management Development

48

Endnotes 1 See, for example, Peebles and Wilson (1996). 2 See Huff (1995), Lim et al. (1988), and Mirza (1986) and for detailed treatments of this issue. 3 See, for example, Lim and Pang (1991) for an extended discussion. 4 The report is ‘The 2005 Tax Competitiveness Report: Unleashing the Canadian Tiger’ a C.D. Howe

Institute Commentary released in September 2005 and written by Jack M. Mintz. 5 See Blomqvist (2005), Daquila (2005) and Low et al. (1993) for a fuller discussion of EDB’s role. The EDB website is www.sedb.com. 6 Ermisch and Huff (1998) and Huff (1995a, b) explain the Singaporean development model in detail. 7 The overall ranking is a composite of rankings in 8 areas: domestic economy, internationalization, government, finance, infrastructure, management, science & technology, and human resources. 8 CPF refers to Central Provident Fund, Singapore’s mandatory savings system whereby both the employer and employee contribute a certain percentage of their wages into the employee’s savings account. As of January 2006, the employer’s and employee’s contribution was 16% and 20% of wages, respectively, up to ceiling of 6,000 Singapore dollars. 9 The sub-committee’s full final report can be accessed from the Singapore Ministry of Trade and Industry’s website, www.mti.gov.sg 10 Please refer to Asher (2002), who points out that EDB does not provide sufficient information about such evaluation.

Singapore

Documents

foreign mncs

benefits of fdi

foreign labor

role of foreign capital

lower corporate taxes

longterm foreign capital

rapid growth of fdi

corporate income