Singapore cuts taxes to remain competitive

Singapore cuts taxes to remain competitive

Agence France-Presse, Singapore

Singapore on Friday announced hefty cuts in corporate and personal income taxes to lower the cost of doing business in the city-state, which is feeling the pinch of stronger regional competition.

Deputy Prime Minister and Finance Minister Lee Hsien Loong said corporate taxes and personal income taxes will be slashed to 20 percent from 24.5 and 26 percent respectively within three years.

Starting this year, personal and corporate taxes will be reduced to 22 percent, with the rest of the cuts to be fully implemented by the year to March 2005 budget.

To partly offset revenue losses, the government will raise the goods and services tax (GST) from three percent to five percent by 2003, he said in his budget speech at parliament.

Singaporeans on lower incomes will receive relief measures totaling 1.2 billion Singapore dollars (US$665 million) to cushion the effects over a five year period.

"I would say that this budget is pro-growth, pro-jobs and compassionate," said Lam Kok Shang of KPMG Tax Services.

He said 20 percent corporate and income taxes, while higher than those in Hong Kong, were "competitive" as investors had to consider other factors.

Vasu Menon, an analyst with Internet bank finatiQ, cited estimates showing that a every percentage point cut in the corporate tax rate would lift profits by 1.3 percent.

But the share market barely reacted to the widely anticipated announcement, dealers said. The key Straits Times Index edged up by a mere 0.66 points to 1,741.01.

Targeted government revenue in the year to March is 29.21 billion dollars, with spending seen at 28.33 billion dollars.

The modest forecast surplus of 885.51 million dollars followed a deficit of 1.43 billion dollars in the last fiscal year when the economy plunged into a recession.

Lee said the tax cuts would be fully implemented, "barring a major change in the economic and political climate which unfortunately cannot be completely ruled out given the uncertain regional and global environment".

Reducing direct taxes was "fundamental to strengthening our competitiveness".

"When companies compare the attractiveness in investing in different countries, the corporate income tax flows straight through to the bottomline.

"If we set our tax rate too high, we make it harder for companies to make money, expand and create more jobs," he added.

He cited Germany which last year slashed corporate income tax to 25 percent from 40 percent and the United States where the effective rate is 11 percent.

Ireland is expected to cut corporate income taxes to 12 percent next year and Hong Kong's current rate is 16 percent.

"These examples show just how fierce the competition is. Unless we keep pace with our competitors, we will inevitably lose investments and business," Lee said.

Singapore would also set aside more funds to guard against external threats, particularly from terrorism, in the aftermath of Sept.11.

It will spend about S$10.64 billion on domestic and external security operations, or 38 percent of total expenditure, due to increased threats after the terror attacks in the U.S. last year.

In the last fiscal year, security spending accounted for 37 percent of total spending.