How Singapore succeeds
City-state has long excelled at attracting international headquarters but now it aims to do even better by combining programmes in a more holistic approach.
Singapore first established its Operational Headquarters (OHQ) programme in late 1992 to encourage multinational companies to use the city-state as a base for their incursions into Asia, and it has been a significant success.
The initiative offered a 10% tax rate on fee income generated from associated companies for the provision of an array of head or back office services as well as a limited scope of treasury activities. To qualify, a company needed to hold at least a 25% stake in the affiliates.
Around the turn of the century, the incentives were enhanced to provide tax breaks for similar activities where the company made Singapore not just its regional headquarters but a global one, under the administration of the Economic Development Board (EDB).
Meanwhile, the Monetary Authority of Singapore (MAS), the city-state’s central bank, offered another incentive programme. Known as the Finance and Treasury Centre (FTC), it had a goal to attract regional support services of a specific financial nature. In addition to duplicating many of the treasury aspects of the OHQ incentive, it actually went further by expanding the range of qualifying services and income. More importantly, it granted withholding tax exemptions for interest or borrowing from overseas that supported those activities.
Then in 2003, the EDB introduced two new incentive programmes for Regional Headquarters (RHQ) and International Headquarters (IHQ). With four types of packages available, the RHQ became the entry-level programme and the IHQ was promoted as the gold standard, but with more qualifying conditions.
The final nail was put in the OHQ coffin in February this year when the administration of the FTC incentives was switched from the MAS to the EDB.
“What we are left with now on the headquarters front is something more holistic and ‘touchy-feely’ than what used to be available under the previous more ‘silo-ed’ and prescriptive approach to incentives,” said David Sandison, a Singapore-based tax specialist at the consulting firm Grant Thornton.
The reason for the change reflected the EDB’s own shift over the years from just attracting head offices and their top executives to going after the value drivers of the businesses themselves.
“The entrepreneurial model under which Singapore is the nerve centre, profit generator and intellectual property owner for the region is now king; its regional servants being the outsource providers and toll and contract manufacturers,” said Mr Sandison.
The IHQ plays its part in this but is now more typically woven in with other incentives that aim to attract the whole business structure. Typically these might include any combination of “juice” extracted from other incentives on offer by the EDB. Those include tax exemptions for pioneering services, and withholding tax exemptions for foreign loans as well as royalties and fees.
Every incentive award is personal to the holder, whose conditions are not to be divulged to other parties. This allows for no precedents to be quoted back to them.
“It is therefore difficult to form direct comparisons with incentives that have a similar focus in other countries,” said Mr Sandison. “However, a target package will often involve concessionary tax rates for HQ service fee income, an embedded Finance and Treasury Centre with its withholding tax exemption, and a concessionary rate of tax on mainstream ‘entrepreneur’ business income that is channeled through Singapore.
“The level of commitment to Singapore in terms of employment, local business spending, training and technology will of course be correspondingly demanding, and to hit the high end of the incentives you are typically looking at many millions of dollars of turnover and local spending.”
According to PwC Thailand, Singapore has attracted significant investment in ITC activities by reducing taxation on offshore trading activities. The ITC rules now provide tax exemptions for offshore trading and a tax reduction for certain export activities. As the requirements to obtain the benefits are less onerous than those in Singapore, Thailand should now be a very competitive location for such trading activities.
According to a World Bank survey, Singapore and Hong Kong represent, respectively, the first and third easiest places in the world to do business while Thailand is ranked 26th.
As the PwC report noted: “Many of the issues that cause Thailand to score poorly have been raised numerous times by the international community but are not addressed by the new rules, which consider only tax matters, such as unnecessary bureaucracy around many aspects of establishing and operating a company, cumbersome procedures for obtaining visas and work permits, and in particular the onerous 90-day reporting requirement, uncertainty about the interpretation of laws and regulations and difficulties in dealing with the Revenue and Customs departments.”
