Reuters
January 22, 2007
SINGAPORE
By Mia Shanley
SINGAPORE'S plan to trim its 20 percent corporate tax rate by at
least one percentage point this year reflects a need to retain its
competitive edge against rivals such as Hong Kong, analysts said on
Monday, Jan 22.
And it could also be an attempt to soften the blow that companies
would feel from any increase in employers' social security
contributions, something mooted by the government as it tries to
head off grumbles about a growing income gap, they said.
Lee Kuan Yew, the country's founding prime minister, told reporters
over the weekend that Singapore planned to trim its corporate tax
rate to stay competitive, a move that would cost the state up to
S$500 million (US$325 million) in revenue.
The island-state lured an impressive $31.9 billion in foreign
direct investment in 2006, nearly half the $70 billion that China
attracted, a United Nations survey showed this month.
But it fell short of the $41.4 billion that long-time financial and
manufacturing rival Hong Kong won last year with its 17.5 percent
corporate tax rate.
"Hong Kong is benefiting from the China listings and it has a huge
hinterland that Singapore doesn't have," said Chua Hak Bin, an
economist at Citigroup, referring to the sometimes huge stock
market share sales by mainland firms in the Hong Kong market.
A recent survey that ranked the world's freest economies put
Singapore just behind Hong Kong, which topped the list due to its
low taxes and flexible labour market.
Singapore-listed companies surged on news of the planned tax cut,
with the benchmark Straits Times Index posting its biggest rise in
about seven months on Monday.
The government will provide full details in its budget announcement
on Feb. 15.
Owi Kek Hean, head of tax services at accountancy firm KPMG, said
the government had to ensure the climate was favourable to
businesses and investors.
But Singapore ranks 18th globally in terms of having the lowest
corporate taxes and was already well placed vis-a-vis Hong
Kong.
"Singapore has an edge," Owi said. "It has the infrastructure, the
social environment and the quality of life. Tax is just one of the
many factors that investors look at."
SWEETENER
Lower corporate taxes in Singapore may take some of the heat off
Singapore-based companies should they be required to contribute
more to their employees' pension schemes, known as the Central
Provident Fund (CPF), as suggested by Prime Minister Lee Hsien
Loong in a New Year's Eve message.
"It looks like they are going to raise the CPF contribution and
they felt obliged to sweeten the pie a bit for the companies," said
David Cohen, an economist at Action Economics.
Singapore -- the wealthiest nation in Asia ex-Japan in per capita
terms -- has come under pressure for a widening in the income gap
and has promised measures to help the nation's poor by building a
stronger safety net.
The proposed increase in pension contributions would help cushion
the blow that low- and middle-income earners especially may feel
from a planned increase in the goods and services tax (GST) to 7
percent from 5 percent.
The government can afford to take some of the pain itself.
On balance, Deutsche Bank said in a research note, the changes
would be "net positive" for government revenues.
Every percentage point increase in GST would raise revenue
by around S$750 million while every percentage point cut in
corporate taxes would reduce revenue by about S$370 million, based
on fiscal 2005/06 data, the report said.
