To maintain Singapore’s relevance as a financial hub, some of the concessions that were scheduled to lapse in the next couple of years have been extended to 2028 with certain enhancements.
The extensions and expansions to the various tax schemes signal the Government’s continued focus on strengthening Singapore as an attractive location for financial institutions. In view of the international tax developments such as the Global Anti-Base Erosion Rules (GloBE) rules under Base Erosion and Profit Shifting (BEPS) 2.0, the Government has been in consultation with various industry groups. As tax incentives remain a key fiscal tool to attract business and foreign investments, it is expected that the incentives will continue to stay as they remain relevant for investors or financial institutions which are not subject to the GloBE rules.
Considering that the financial institutions affected by GloBE rules may not continue their Financial Sector Incentive (FSI) status, to ensure that the Qualifying Debt Securities (QDS) Scheme continues to be relevant, it has been delinked from the FSI Scheme. The QDS Scheme condition will focus on the debt securities being substantially arranged in Singapore by financial institutions with the relevant licence instead.
While we welcome the tax changes announced in this Budget, it may also be useful to review other transactional tax aspects e.g. refining the Goods and Services Tax (GST) remission for certain fund structures and making suitable adjustments to encourage financial activities in Singapore.
A summary of the changes for the financial sector is set out below.
Financial Sector Incentive (FSI) Scheme
The FSI Scheme is aimed at enhancing financial intermediation and deepening capabilities in key financial services and banking activities in Singapore. It accords concessionary tax rates of 5%, 10%, 12% and 13.5% on income from qualifying banking and financial activities, headquarters and corporate services, fund management and investment advisory services.
Originally scheduled to lapse after 31 December 2023, the scheme will now be extended until 31 December 2028. The withholding tax exemption under the FSI-Headquarter Services incentive which covers interest payments on qualifying loans made to qualifying non-residents will similarly be extended until 31 December 2028.
The existing set of applicable concessionary tax rates will also be streamlined to two rates of 10% and 13.5% for different categories of FSI awards approved on or after 1 January 2024. The details of the concessionary tax rates pegged to the respective FSI Schemes are as follows:
- FSI-Capital Market (CM), FSI-Derivatives Market (DM), FSI-Credit Facilities Syndication (CFS) - increase from 5% to 10%.
- FSI-Fund Management and FSI-Headquarter Services – remain at 10%.
- FSI-Trustee Companies – increases from 12% to 13.5%.
- FSI-Standard Tier (ST) – remains at 13.5%.
The extension of the FSI Scheme would help to ensure that Singapore remains a competitive key financial and banking hub regionally and globally. However, as the differential in tax rates between the enhanced-tier schemes (i.e. FSI-CM, FSI-DM and FSI-CFS schemes) and the FSI-ST scheme has been substantially reduced, financial institutions may well choose to apply for the FSI-ST scheme given the lower economic commitment that comes with the standard tier scheme.
Qualifying Debt Securities (QDS) Scheme
The requirement that a QDS has to be substantially arranged in Singapore will be rationalised as follows:
- All debt securities issued on or after 15 February 2023 must be substantially arranged in Singapore by a financial institution holding a specified licence (instead of a FSI company).
- For insurance-linked securities (ILS) issued from 1 January 2024 onwards, to the extent the substantially arranged in Singapore requirement is not met, at least 30% of the ILS issuance costs must be paid to Singapore businesses.
The QDS Scheme will be extended till 31 December 2028 and the scope of qualifying income will be streamlined and clarified such that it will include all payments in relation to the early redemption of a QDS.
The MAS will provide details by 31 May 2023.
Approved Special Purpose Vehicle (ASPV) Engaged in Asset Securitisation Transactions (ASPV scheme)
The ASPV Scheme was introduced to support the development of Singapore as a structured finance centre in Asia and grants a suite of tax concessions to an ASPV engaged in asset securitisation transactions including a tax exemption on income derived by an ASPV from asset securitisation transactions, a fixed Goods and Services Tax (GST) recovery rate on its qualifying business expenses at a rate of 76% and a withholding tax (WHT) exemption on payments to qualifying non-residents on over-the-counter financial derivatives under certain conditions.
The Finance Minister has announced that the ASPV scheme will be extended until 31 December 2028.
In conjunction with the extension of the ASPV scheme, the GST input tax recovery rate of an ASPV will be aligned and pegged to the prevailing GST recovery rate/methodology accorded to licenced full banks under the MAS. Banks in Singapore currently recover GST based on a fixed recovery rate which is dependent on the type of licence held and updated on 1 April every year. Since the introduction of the ASPV scheme in 2004, the GST recovery rate for the ASPV had remained unchanged at 76%, which was the same as the fixed input tax recovery of a licenced full bank in 2004. As the input tax recovery rate for a licenced full bank has changed over the years (the current being 74% for 1 April 2022 to 31 March 2023), the policy intent is to adjust the input tax recovery rate of an ASPV more dynamically by reference to the prevailing recovery rate for licenced full banks.
In addition, the ASPV Scheme will include a new sub-scheme named ASPV (Covered Bonds), introduced for the special purpose vehicle holding the “cover pool” in relation to the covered bonds as defined in MAS Notice 648 to support the issuance of covered bonds in Singapore. The ASPV (Covered Bonds) sub-scheme will take effect from 15 February 2023 to 31 December 2028 and will be administered by the MAS.
The extension of the ASPV Scheme is a welcome move by the MAS to continue the development of Singapore as a structured debt centre in Asia. In addition, the introduction of the ASPV (Covered Bonds) sub-scheme may be seen as a move by the MAS to provide further support to local bank issuers of covered bonds due to the growing investor interest in such products. However, not all ASPV structures relate to securitisation of a bank’s assets. Pegging the ASPV input tax recovery rate to that of a licenced full bank instead of a prescribed fund under the fund tax incentives (which enjoys a higher recovery rate - 91% for 2023) when both are essentially pooling vehicles for investors, may spur financial intermediaries to package their offerings to investors through a fund structure instead.
Tax Concession for Deduction of General Provisions for Doubtful Debts and Regulatory Loss Allowances Made in Respect of Non-credit impaired Financial Instruments for Banks (Including Merchant Banks) and Qualifying Finance Companies
Banks and finance companies are granted a tax deduction under section 14G of the Act, subject to a cap, for collective impairment provisions as required under the MAS Notices.
To promote the overall robustness and stability of the Singapore financial system, the tax deduction has been extended from YA 2024 for these financial institutions with 31 December financial year ends or YA 2025 for those with non-31 December financial year ends to YA 2029 or YA 2030 correspondingly.
Tax Exemption on Income Derived by Primary Dealers from Trading in Singapore Government Securities (SGS)
The SGS Scheme, which exempts income derived by primary dealers from trading in SGS from tax and which was scheduled to lapse after 31 December 2023, will be extended till 31 December 2028. All other conditions of the scheme remain the same.
Incentive Schemes for Funds
As part of the ITM 2025 strategies, Singapore is also working towards enhancing the Variable Capital Companies (VCC) regime and other fund structures to cater to the ever changing industry needs. Whilst there is no significant enhancement for asset management in Budget 2023, we recognise that the Government has been continuously evaluating the relevance of the Singapore tax regime for the asset management industry. On 19 September 2022, the Monetary Authority of Singapore (MAS) issued circulars to provide clarity on certain aspects of “designated investments” for the purposes of the section 13D, section 13O and section 13U Schemes:
- Inclusion of investments in non-publicly traded partnerships.
- Inclusion of investments in Tokutei Mokuteki Kaisha (TMK).
- A revised formula in evaluating the threshold for investments in physical investment precious metals.
Further, on 13 January 2023, the MAS extended the VCC Grant Scheme by another two years to 15 January 2025. Although the grant amount is reduced and conditions are revised, the extended VCC Grant continues to open doors for Singapore registered or licenced fund management companies to set up their first VCC.
We remain optimistic that the Government will continue to seek feedback from the industry and refine the fund tax incentive schemes to keep them relevant.
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