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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]
[Insert Table 2 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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[Insert Table 3 here]
[Insert Table 4 here]
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.
[Insert Table 5 here]
[Insert Table 6 here]
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.
[Insert Table 7 here]
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.
[Insert Table 8 here]
[Insert Table 9 here]
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
[Insert Table 10 here]
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.
[Insert Table 11 here]
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
21
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.
[Insert Table 12 here]
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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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
Country or Region 1980 1990 2000 2003 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
Country or Region 1970 1985 2001 2002 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
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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)
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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.
Source: Internal Revenue Authority of Singapore (IRAS)
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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
Source: Internal Revenue Authority of Singapore (IRAS)
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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
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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.