Match Singapore tax lure, specialist urges

SINGAPORE will continue to lure foreign companies away from Hongkong unless the Government improves the tax environment for firms seeking a regional base, a tax specialist has warned.

An associate director of KPMG Peat Marwick, Ms Jennifer Wong, says Taiwanese firms are already using Singapore as an access point for China in preference to Hongkong, even though it is further away, because of better tax incentives.

She singled out Singapore's double-tax treaty with China, concluded late last year, and its guaranteed return agreement as inducements for companies. The agreements cut companies' tax bills and protect their assets in the event of nationalisation.

Ms Wong said that in the past companies wanting to do business with China - especially Taiwanese companies - usually worked through Hongkong because of its position.

''But after the double-tax treaty and guaranteed return agreements, some Taiwanese are looking at setting up investments in China through Singapore,'' she said. ''So Hongkong has to offer certain tax benefits or incentives.'' The Government is drafting proposals to go to the Executive Council with a long-term aim of establishing double-tax treaties, but it is expected to tread softly, beginning with agreements in specific areas such as shipping.

Many tax specialists as well as companies are pushing for a series of comprehensive treaties.

In a further attempt to woo foreign investment, Singapore last week unveiled plans to levy a three per cent sales tax - an option shelved by the Hongkong Government - which will allow it to cut corporate and personal taxes as well as increase individual allowances and relief.

KPMG Peat Marwick reckons it will be able to shave five per cent off the corporate tax rate - bringing it down to 25 per cent - and the top rate of income tax could come down to 25 per cent from 33 per cent because the Goods and Services Tax (GST) has a far broader base.

Based on 1987 household expenditure, it is expected that the Singapore Government will net S$800 million to $900 million (about HK$3.74 billion to $4.21 billion) through the GST. Collection costs are estimated at between $30 million and $40 million.

Small neighbourhood shops - those in public housing areas - are exempted from GST.

For a long time KPMG Peat Marwick has advocated a similar tax for Hongkong, where it has been rejected as too inflationary.

But Ms Wong said the New Zealand experience showed inflation plunging after GST came in, adding that it had a one-off effect.

The US, Canada, France and Britain charge a sales tax. In the region, China operates the Consolidated Industrial and Commercial Tax, which varies between 3.03 per cent and 5.05 per cent in the special economic zones.

Relying on direct taxation when more and more companies are shifting over the border could create a vacuum for government revenues, she said.

At a separate function yesterday, the British High Commissioner in Singapore, Mr Gordon Duggan, said Singapore's close diplomatic relations with China had encouraged British firms to set up regional headquarters there.

Singapore had become a target for British firms because of its regional interests with other Chinese communities in Southeast Asia, especially its close connections with China.

Britain was now the third biggest investor in Singapore, with investment averaging GBP60 million (about HK$652 million) a year, based on the past six years.

Last year British exports to Singapore were worth GBP1.15 billion, representing double-digit growth over the previous year.

Mr Duggan attributed the heavy investment by British firms to the availability of good infrastructure and communications in Singapore.

Although some British contracting firms had wanted to give up Singapore as an investment venue, they were now coming back.