Singapore - Another Hong Kong?
by
Stuart Gray, June 2009
IMPORTANT
WARNING:
The contents of this report have been compiled
in good faith by Investorsoffshore.com to provide
assistance to investors, but do not constitute
investment advice or recommendations. Investors
should not rely upon the information given in
order to choose types or routes of investment
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taken reasonable care in researching and presenting
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Located
in South East Asia, Singapore is a highly developed
and successful free market economy which enjoys
an open and corruption-free environment, stable
prices, a low tax regime and a per capita GDP
equal to that of most parts of Western Europe.
Historical and Economic Overview
Although
most probably think of Singapore the city, the
Republic of Singapore is actually a 700 square
kilometre island sandwiched between Indonesia
and the tip of the Malay peninsula. The city was
founded as a British trading colony in 1819 and
formed an important strategic trading and naval
post within the British Empire in the 19th and
early 20th centuries.
After
the Second World War, decolonisation meant that
Singapore gravitated towards the Malaysian Federation,
which it joined in 1963. However, this was a short-lived
phase of the country’s history, and, two
years later, Singapore become an independent republic.
Subsequently, it has become one of the world's
most prosperous countries with strong international
trading links and one of the busiest international
ports.
Since
independence, Singapore has been a parliamentary
republic with a directly elected unicameral parliament.
As a legacy of its association with the former
British Empire, Singapore’s legal system
is based on English common law. Also, English
is one of the four official languages spoken on
the island, alongside Chinese, Malay and Tamil.
Approximately
three-quarters of Singapore’s population
of 4.65m (2009) are of Chinese origin but there
are significant minorities of Malaysians and Indians,
while the presence of the major global multinationals
in the city also ensures a sizeable army of expats
from Europe, North America and elsewhere around
the globe. Singapore’s currency is the Singapore
dollar, which has been appreciating against the
US dollar. In 2009, US$1 was worth S$1.41.
Singapore’s
economy has been heavily dependent on exports,
particularly in electronics and manufacturing
and it was hard hit by the slump in the technology
sector at the turn of the century. An outbreak
of Severe Acute Respiratory Syndrome in 2003 hampered
its recovery by curbing tourism and consumer spending.
However, fiscal stimulus, combined with low interest
rates, a surge in exports, and internal flexibility
led to vigorous recovery in 2004, with real GDP
rising by 8%, the economy's best performance since
2000. Real GDP growth averaged 7% between 2004
and 2007, but fell to 1.2% in 2008. The government
is playing down hopes of a speedy recovery..
The
government, led by Prime Minister Lee Hsien Loong
has also been actively putting in place investor-friendly
reforms in order to diversify the economy and
better insulate it against future troughs. It
is the government’s ambition to elevate
Singapore to the position of South East Asia’s
main financial services and investment hub, a
position currently occupied by Hong Kong.
Trading
Agreements
As a member of the Association of Southeast Asian
Nations (ASEAN), Singapore will benefit from participation
in world’s largest free trade area, with
China committed to reducing tariffs on certain
goods traded with the 10-nation group, which includes
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
the Philippines, Thailand and Vietnam. Japan and
South Korea will also participate in this tariff-cutting
process.
The
deal will trigger cutbacks in tariffs over a five
year period, commencing an enduring process of
economic integration in the region. Furthermore,
Singapore can be expected to benefit from an FTA
with China, which was signed in October, 2008.
The
first round of negotiations for a Free Trade Agreement
(FTA) between Singapore and Costa Rica took place
in April, 2009, focused on drawing up a package
of measures to liberalize trade in goods and services,
as well as looking at ways to simplify customs
procedures and promoting reciprocal investment.
Bilateral
trade between Singapore and South Korea almost
doubled in 2008 to reach USD25bn (GBP18bn) after
a Korea-Singapore Free Trade Agreement (KSFTA)
came into effect in 2006. It
has also been revealed that Korea's investments
in Singapore have increased by over USD800m (GBP570m)
in the three years since the FTA's introduction.
Tax
For
resident individuals, Singapore’s tax regime
is fairly benign. Capital gains taxes are only
levied in very limited circumstances, there are
no gift taxes and estate duty was abolished in
2008. Personal income tax rates in Singapore are
also relatively light: resident individuals are
taxed at progressive rates up to 20% (reduced
from 22% in 2006) on income accruing in or derived
from Singapore.
From
January 1st 2004, foreign income received or deemed
received by a resident individual in Singapore
was no longer subject to Singapore income tax,
except if received through a partnership in Singapore.
A
non-resident employee present in Singapore for
more than 60 days but less than 183 days in a
calendar year faces a 15% tax on gross employment
income, or is taxed as a resident on that employment
income, whichever is higher.
Non-resident
individuals employed in Singapore for 60 days
or less are exempt from tax on employment income.
Other income derived in Singapore by non-residents
is taxed at the corporate tax rate, with the exception
of interest income derived from approved financial
institutions in Singapore, which is tax-exempt.
Corporate
tax stands at 18%, but this will be reduced to
17% in 2010. The 2009 budget offered a range of
stimulus measures to assist business:
- Unutilized
trade losses and capital allowance for YA 2009
and YA2010 can be carried back to set off against
Assessable Income of three immediately preceding
YAs up to a limit of SGD200,000;
-
Businesses that incur qualifying Renovation
and Refurbishment expenses in the basis periods
for YA 2010 and YA 2011 can deduct such expenses
in one year instead of over three years, subject
to the cap of SGD150,000 for each relevant three-year
period;
-
Companies Limited by Guarantee (CLGs) will be
allowed to qualify for the tax exemption scheme
for new start-up companies effective from YA2010;
-
A new tax framework for qualifying amalgamations
will be introduced;
-
An accelerated write-down of capital allowance
(CA) will be allowed on plant and machinery
acquired in the basis periods for YA 2010 and
YA 2011. CA is computed based on 75% of the
capital expenditure for the first YA and 25%
of the capital expenditure for the second YA.
Under the Block Transfer Scheme (BTS), withholding
tax (WHT) exemption can be granted in respect
of interest payable on a loan taken by a shipping
enterprise from a lender outside Singapore to
acquire a Singapore-flagged ship. This WHT exemption
is for ships registered with the Singapore Registry
of Ships (SRS) on any date from January 1, 2009
to December 31, 2013;
-
The tax exemption schemes for foreign investors
and qualifying resident funds, tax incentive
schemes for approved trustee companies and financial
sector incentive companies will be enhanced
by expanding the list of specified income and
designated investment;
-
The tax deduction for collective impairment
provisions made by banks, merchant banks or
finance companies under MAS Notices 612, 811
and 1005 will be extended for a further three
years, subject to conditions.
Singapore
currently has tax treaties with 55 countries.
Notable among these are treaties with Australia,
Belgium, Canada, China, France, Germany (awaiting
ratification as of May 2005), India, Italy, Japan,
the Russian Federation, South Africa and the United
Kingdom. Limited treaties have also been signed
with Bahrain, Chile, Hong Kong, Oman, Saudi Arabia,
the United Arab Emirates and the United States.
Agreements
in place between Singapore and Chile, Hong Kong,
Oman, Saudi Arabia and the US cover only international
air-transport or shipping operations. Treaties
with Slovak Republic, Oman, and Libya are in progress.
Social
contributions to the CFP (Central Provident Fund)
in 2005 amounted to 36% of gross salary (16% from
the employer and 20% from the employee), but they
are optional for non-permanent residents.
For
non-resident individuals withholding taxes are
levied on Singapore-source income at varying rates;
foreign-source income is untaxed whether remitted
or not.
In
his February 2005 budget, Prime Minister and Minister
for Finance, Lee Hsien Loong announced a series
of new tax incentives designed to boost the city’s
wealth management industry.
Singapore
is well advanced with e-filing for tax returns:
the Inland Revenue Authority announced that at
the close of Singapore's e-Filing deadline on
April 18, 2009, around 962,000 taxpayers e-filed
their tax returns, setting a new record of a 91%
e-filing rate. This
is an increase of 4% compared to last year’s
87%. More than 1,059,000 taxpayers filed their
returns, making up a 90% filing rate.
Investment
Sectors:
Property
Singapore
is emerging as a genuine player in the real estate
finance market that is developing across the Asia-Pacific
region. In 2005, a report by Standard & Poor's
Ratings Services noted that Singapore, with over
US$1 billion in capital raised since 2002, was
increasingly being seen as a key player in the
region’s REIT and securitised real estate
market arena.
Real
estate investment trusts (REITs) are in the main
publicly traded companies that own and, in most
cases, actively manage income-generating commercial
real estate. Generally speaking, the majority
of a firm's income is passed onto investors without
taxation at the corporate level. In Singapore,
REIT dividends are tax-free provided more than
90% of the firm's income is distributed to investors.
Most of the city's many listed REITS have chosen
to do this.
According
to S&P, the marriage of tax benefits with
factors such as a highly-skilled and educated
workforce, clear legal system and ’AAA’
rating has made Singapore the preferred location
to list shares for many regional real estate owners.
Keen
to encourage foreign interest in the domestic
REIT scene, in his 2005 budget speech Prime Minister
Lee announced that foreign non-individual investors
would be encouraged to invest in the Singapore
property market with a cut in the withholding
tax on REIT distributions to 10% from 20%, for
a period of five years. Additionally, to attract
more REIT listings, the government wants to waive
stamp duty on the instruments of transfer of Singapore
properties into REITs to be listed, or already
listed on the Singapore Exchange, for a five-year
period.
The
sector was looking decidedly wobbly in 2009, however,
with Moody's putting it on negative watch.
Funds
Regulatory
changes made by the Singapore authorities have
lured many international fund managers to relocate
their operations to the city. New Star International
Investment Products, which expanded its operations
from Hong Kong to Singapore in 2005, is an example
of the calibre of fund firms being attracted to
the city. Singapore‘s regulatory changes
have meant that international fund managers are
no longer required to maintain a physical presence
in the territory, and are permitted to make their
funds available via private banks.
While
Japan and Hong Kong dominate the region’s
hedge fund management arena, Singapore is emerging
as one of the most popular Asian locations amongst
hedge fund managers for fund start ups.
Nonetheless,
the growth potential is there, and Singapore seems
to be rapidly ascending the hedge fund ladder
due in large part to the relatively uncomplicated
registration process, an issue identified by hedge
fund managers as crucial when deciding where to
set up. While fund registration in Singapore may
take around two weeks, in Hong Kong it can take
several months. As a result, Singapore has managed
to attract interest from some major American funds
including the likes of Tudor, Everest and Moon
Capital.
Also,
under changes designed to help foster growth in
the financial services sector, Prime Minister
Lee announced in February 2005 that start-up fund
managers would be given a 12-month grace period
to meet the requirement that 80% of share capital
must come from foreign investors to qualify for
a 10% tax rate on fee income, which also helped
to win over the global hedge fund community.
There
are thriving securities trading markets: in October,
2008, the Singapore Exchange Limited (SGX) announced
that both its derivatives and Exchange Traded
Funds (ETF) markets set new trading records in
September 2008. SGX’s derivatives market
saw record volumes for both the July-September
2008 quarter and the month of September 2008,
while SGX-listed ETFs set records for both the
value and volume traded in September.
“We
are pleased that customers are finding value in
using our market access products, including futures
contracts and ETFs. In particular, SGX has both
futures contracts and ETFs traded on indices covering
the Singapore, India and Taiwan markets, offering
further trading opportunities. Our products enable
investors to capitalise on investment opportunities
and actively manage risks, even in challenging
markets,” said Mr Chew Sutat, SGX Executive
Vice President & Head of Market Development.
A
record 17,369,505 contracts were traded in the
July-September 2008 quarter, a 17% increase over
the 14,831,554 contracts in the previous record
set in the quarter of January-March 2008.
For
the month of September, a total of 6,483,272 contracts
were traded. This is nearly 11% higher than the
previous record of 5,842,187 contracts traded
in July 2008, and a 68% increase over the 3,854,634
million contracts traded in September 2007.
Also
in September 2008, the yen-denominated SGX Nikkei
225 Index Futures contract reached a new monthly
record of 3,064,898 contracts traded – surpassing
by 18% the previous record of 2,603,567 contracts
set in August 2007.
In
fact, the total volume of 46,619,152 contracts
traded in the futures and options market in the
first nine months of 2008 has already exceeded
the total volume for the full year of 2007. SGX’s
key Asian equity derivatives registered particularly
strong performances.
“Our
attractiveness lies in our Asian Gateway strategy
of providing a one-stop, pan-Asian equity derivatives
product range. We offer the transparency of a
listed platform, the credit risk management function
of a central clearing house, and the enhanced
capital efficiency offered via cross-margining
capabilities all at one exchange. This is complemented
by our contract specifications enhancements as
well as our efforts to grow our customer base,
especially targeting algorithmic and proprietary
trading firms both in the region and globally,”
added Mr Chew.
Islamic
Banking
Singapore
is intent on becoming an Islamic banking hub,
particularly in the area of wealth management.
Although it faces some challenges, including the
creation of a designated regulatory system, there
are almost 270 million Muslims right on Singapore‘s
doorstep in the Islamic states of Malaysia and
Indonesia. The city has also attracted interest
from Middle Eastern investors.
While
Singapore has its work cut out catching up with
more established Islamic banking centres such
as Labuan and the United Arab Emirates, Prime
Minister Lee made a start in the 2005 budget by
announcing new rules abolishing double taxation
for Shariah-compliant property transactions. The
budget also granted Islamic bonds the same concessionary
tax treatment as those given to conventional financing.
In
early 2009, the Monetary Authority of Singapore
(MAS) announced the completion of its sukuk (Islamic
bond) issuance facility, which will provide Shariah-compliant
regulatory assets.
Speaking
at the signing ceremony held at Singapore’s
monetary authority, Heng Swee Keat, Managing Director,
MAS, said: “Today’s signing ceremony
marks a further milestone in our developmental
efforts. This sukuk is the Shariah-compliant equivalent
of Singapore Government Securities (SGS), and
is of the highest credit standing. The sukuk will
be given equal regulatory treatment as SGS, such
as qualifying as an asset in the computation of
capital and liquidity requirements, and as eligible
collateral for tapping MAS’s liquidity.
MAS is committed to the facility, issuing to meet
the needs of financial institutions that are carrying
out or plan to carry out Shariah-compliant activities
in Singapore, as this will strengthen their ability
to meet their capital and liquidity requirements”.
V.
Shankar, Group Management Committee member, Standard
Chartered Bank, spoke about the unique structure
of the programme at the signing ceremony. He said:
“The size, maturity and pricing of each
issuance will be determined in line with the investor
requirements and the prevailing market conditions.
Thus it will be a demand driven issuance to satisfy
the needs of the investors."
Mr
Shankar congratulated MAS for being the first
central bank of a non-Muslim majority jurisdiction
to come up with an ongoing local currency sukuk
issuance programme. He added: "I hope this
will become an important building block for the
promotion of Islamic banking in Singapore."
Abdulla
Hasan Saif, Chairman of Islamic Bank of Asia,
said: "Not only will this initiative bolster
Singapore’s efforts in becoming a leading
Islamic financial centre, it may very well become
a case study for other countries with similar
financial sector requirements and aspirations.
The Islamic Bank of Asia is looking forward to
utilising the programme for regulatory requirements,
to facilitate the development of a range of Sing-dollar,
Shariah-compliant products that will cater to
our customers' needs."
Abdulla
Hasan Saif announced at the signing ceremony that
IB Asia will be placing an order for the sukuk
shortly, making Islamic Bank Asia the programme’s
first investor.
The
MAS also announced Singapore-based banks may enter
into Murabaha interbank placements and offer Ijarah
Wal Iqtina financing with immediate effect.
Ijarah
Wal Iqtina financing is a kind of hire purchase
agreement between the bank and the customer whereby
the bank 'rents out' equipment or other assets
to its client for a fixed lease period, after
which ownership is trasnferred to the client.
These
changes will enable Singapore's financial institutions
offering Islamic finance a wider range of instruments
in their management of liquidity and in their
matching of assets and liabilities and have been
made after detailed consultation with the industry.
In a statement MAS vowed to “continue to
work closely with the industry to ensure that
our regulatory and tax framework, and other necessary
infrastructure and conditions are in place to
foster good risk management and the further growth
of Islamic finance in Singapore.”
Living
in Singapore:
Residence
Under
Singapore’s Global Investor Programme foreign
investors with substantial capital and good entrepreneurial
track records may apply for permanent residence.
Foreigners who have net personal assets of at
least S$20 million and who place at least S$5
million of financial assets with a financial institution
regulated by the Monetary Authority of Singapore
(MAS) may apply for permanent residence under
the Financial Investor Scheme. Applications can
be obtained from MAS-regulated institutions or
the Financial Investor Scheme Secretariat of the
Financial Centre Development Department.
Also,
persons born in Hong Kong or who can show proof
that they have or used to have rights of abode
in Hong Kong may also apply for in-principle approval
for permanent residence.
The
fee for an Entry Permit in 2005 was S$100 and
the fee for a Re-Entry Permit was S$10 per year.
For foreigners requiring a visa, the visa fee
is was S$20 per issue. Processing time for an
application is around 3 months.
Lifestyle
and Cost of Living
Singapore’s
tropical climate ensures that temperatures are
hot the year round. With two monsoon seasons from
December to March and from June to September,
the climate is also very humid and in the heat
of the city those from chillier European or North
American climes may find the atmosphere somewhat
oppressive. Nevertheless, Singapore is a modern,
cosmopolitan and vibrant city where various far
eastern cultures mix harmoniously with western
influences.
According
to a survey conducted by Mercer in 2003 the cost
of living in Singapore is not as prohibitive as
one might expect, and the city emerged as a considerably
less expensive place to live than Hong Kong or
Beijing. This survey, which compared the cost
of 200 items including housing, food, clothing
and household goods, transport and entertainment
placed Singapore 32nd in a ranking of 144 cities.
Renting
and Buying Property
However,
Singapore’s limited land availability means
that the real estate stock has to be carefully
managed. Naturally this makes property quite expensive
to both rent and buy.
The
need for Singapore to manage land development
means that foreigners face restrictions when buying
certain types of property on the island, such
as vacant land, ‘landed properties’
or bungalows, semi-detached and terrace houses.
In these cases, foreign buyers need to apply for
approval from the Singapore Land Authority for
permission to buy.
Once
a buyer has identified a property, they can pay
1% of the purchase price in exchange for the Option
to Purchase. Option to Purchase is usually prepared
by the seller's solicitor or property agent. The
buyer then has 14 days to decide whether to proceed
with the purchase. If the option is exercised,
an additional 9% of the purchase price is passed
to the seller's solicitor. Alternatively, buyers
can bypass this procedure and ask their realtor
to prepare the Offer to Purchase. The latest ruling
by the MAS entitles buyers to borrow up to 80%
of the valuation or purchase price, whichever
is lower.
Bank
accounts
To
open an account in Singapore will requires copies
of one’s passport, an employer's letter,
and a statement from a bank in the applicant’s
home country. Most of the major banks in the world
are represented in the city and there is an extensive
network of automated teller machines (ATMs) as
well as a cashless payment system called NETS.
Most banks open from 9.30 am to 3 pm on weekdays
and 9.30 am to 11.30 am on Saturdays.
Conclusion
So,
in conclusion, Singapore maintains its reputation
as a culturally diverse, democratic and business-friendly
location which welcomes input from investors from
around the globe. A rising star in the world of
alternative investment, Singapore is quickly becoming
the regional location of choice for new hedge
fund start-ups, while Islamic banking and wealth
management are also making their mark upon the
city.
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