The Singapore Fund

Making it a preferred option

Why not, indeed?
A PwC viewpoint on creating a new platform for Singapores asset
management industry
Chapter 4
2 Why not, indeed?
Singapore is strategically located in the heart of
Asia, and offers fnancial institutions excellent
infrastructure, a highly skilled and cosmopolitan
labour force, and access to investors. The Singapore
government makes continual efforts to develop the
fund management industry by providing a stable
economic and political environment that is conducive
to business operations. These factors make Singapore
a choice location for setting up fund management
operations focused on investments in Asia, particularly
India and Southeast Asia.
However, the changing global environment is putting
increasing pressure on fnancial centres, including
Singapore, to re-invent themselves to remain at the
forefront of the industry.
PwC Singapore has developed a white paper to
consider the various aspects of a new investment
fund framework to make Singapore the jurisdiction
of choice for the fund management industry to set up
funds. In support of the white paper, PwC Singapore
has conducted a high level survey of representatives
from the asset management community in Singapore
and carried out a jurisdictional benchmarking
study to compare Singapore with other established
international fund centres. Following our previous
chapters which summarise the results of the survey
and key fndings of the benchmarking study, we will
now look at what changes may be introduced from a
tax perspective to create even more opportunities for
the asset management industry.
A PwC viewpoint on creating a new platform for Singapores asset management industry 3
From a tax perspective, any investment fund structure
should meet two key criteria. First, it should be tax
neutral, i.e. as an investment fund essentially operates as
a pooling vehicle it should not expose investors to a more
burdensome taxation than if they were to invest directly.
Second, it should provide certainty of taxation, i.e. it
should be possible to determine the tax consequences
at every level, from income from investments to the
distributions to investors.
Generally, tax neutrality of a fund structure means the
following:
no taxation at the level of the fund itself; and
no taxes on distributions from the fund to its investors
in the location of the fund.
A Singapore fund set up as a company and approved
under one of the existing tax exemption schemes, i.e. the
Singapore Resident Fund Tax Exemption Scheme and the
Enhanced-Tier Fund Tax Exemption Scheme, generally
meets the above criteria. So what can be done to make
Singapore a more attractive location for establishing
investment funds? Some have raised the question as to
whether such funds should automatically qualify for tax
exemption in Singapore once they are regulated, so that
there is no need to spend additional time going through
the process of applying and waiting for approvals. The
counter-questions to this are, is there really a downside,
since the exemption will take effect from the date the
application is submitted, regardless of the amount of
time taken for processing? And is there really a beneft to
making it automatic?
Back to basics
4 Why not, indeed?
Substance is the word
The recent tax initiatives of the Organisation for Economic
Cooperation and Development (OECD), such as the
Base Erosion and Proft Shifting (BEPS) report and the
Comprehensive Action Plan (CAP) are redefning the
parameters of international tax planning. The key message
of these initiatives is to align taxation with operational
and commercial substance, and to call for greater
transparency to restore the intended effects and benefts
of international taxation standards.
Singapore has always respected the need for substance
and has made it a basic requirement of its tax incentives.
Even though Singapore has schemes that provide for
tax exemption on income of funds set up in Singapore,
such exemption is only granted if the funds meet
certain conditions, such as minimum business spending
and the existence of a fund manager with investment
professionals. These conditions act as indicators of
commercial substance and an anti-avoidance mechanism,
effectively ruling out conduit vehicles lacking associated
business activity in Singapore from the tax exemption
schemes.
Given the BEPS and CAP developments, Singapore will
need to demonstrate that its incentives continue to focus
on substance and that its tax incentive framework for
investment funds is compliant with the CAP objectives,
such as not to encourage unsubstantiated proft shifting.
Although Singapore is not a member of the OECD, it has
already expressed its support for the BEPS initiative.
In this respect, it is not likely that Singapore would
agree to exempt Singapore fund vehicles from tax
unconditionally or would relax conditions dealing with
commercial parameters. In fact, it may be counter-
productive to do so against the current backdrop.
Instead, continuing to fne-tune its existing tax incentives
would help to better serve the requirements of the fund
management industry.
A PwC viewpoint on creating a new platform for Singapores asset management industry 5
Treaty benefts
One of Singapores competitive advantages is its wide network of tax
treaties, and in particular, a number of favourable tax treaties with
Asian countries, such as India and China.
Tax treaties generally help to reduce withholding tax on dividends
and interest, as well as provide for exemption from capital gains tax,
imposed by investee countries. To qualify for tax treaty benefts, fund
vehicles need to be able to meet the defnition of a resident. In the
latest update to its model tax convention, OECD suggests that fscally
transparent (i.e. not liable to tax) fund vehicles should not be treated as
residents for the purposes of tax treaties. By contrast, funds which are
exempt from tax subject to fulflling certain criteria with regard to their
purpose or activities (e.g. source of income, minimum distributions,
etc.) may be treated as residents.
In this respect, Singapore corporate funds enjoying tax exemption
schemes should be able to qualify for treaty benefts, since they have to
be resident in Singapore (being one of the conditions for tax exemption)
and are not transparent for tax purposes. However, the application
of treaty benefts would depend on the interpretation of the relevant
articles of the treaties by the investee countries. For the avoidance of
doubt, it may be advisable to consider specifcally including such fund
entities in treaties to be entered into by Singapore. This should help
avoid the drawbacks of Luxembourg and Irish fund vehicles (such as
Luxembourg Specialised Investment Fund and Irish Qualifying Investor
Fund) which are not always eligible for benefts under their tax treaties.
New treaties negotiated by Luxembourg for example include clauses to
address the treatment of fund vehicles to avoid this uncertainty.
6 Why not, indeed?
Is the
investment
on the tax
exemption list?
The most immediate improvement to the existing
tax exemption schemes which would beneft funds
set up in Singapore would be revision of the list of
investments qualifying for tax exemption.
Currently, tax exemption only applies to specifed
income from designated investments. The
existing list of designated investments is structured
as an inclusion list; income from investments which
do not fall within this list does not qualify for
exemption. The list is diffcult to apply in practice
and does not cover a range of assets in which
investment funds now invest. Examples of such
assets include precious metals, and loans or debt
securities (that are not listed) issued by entities other
than companies (e.g. trusts).
The industry is continually developing and looking
at new investments that would generate the level
or returns desired by investors; and an inclusion
list would not be able to keep up with these
market developments. For the schemes to be even
more progressive, the government may wish to
consider adopting an exclusion list for designated
investments as well. Regulatory considerations
(such as limitations on risky assets for certain types
of funds) should be addressed separately through
the investment fund regulations. If there is a need
to impose restrictions on certain assets from a social
policy or tax policy perspective, it can be done by
way of an exclusion list, i.e. a specifc list of assets
which do not qualify for tax exemption.
A PwC viewpoint on creating a new platform for Singapores asset management industry 7
Conclusion
In the world of increasing pressure for tax transparency and commercial substance,
Singapore is well positioned as a fund and fund management jurisdiction. It has
traditionally granted tax incentives only in exchange for genuine business activities
and will continue to do so. However, there is room for fne-tuning the existing tax
regime and making it more user-friendly for the industry.
If a new investment fund law framework which would cater to the needs of various
asset managers and investors were to be introduced, fne-tuning of the Singapore tax
regime would certainly go a long way in complementing the framework and making
the Singapore Fund a preferred option for the fund management industry.
Justin Ong
Singapore Asset Management Leader
+65 6236 3708
justin.ong@sg.pwc.com
Anuj Kagalwala
Singapore Asset Management Tax Leader
+65 6236 3822
anuj.kagalwala@sg.pwc.com
Tan Hui Cheng
Partner
Tax Asset Management
+65 6236 7557
hui.cheng.tan@sg.pwc.com
Armin Choksey
Senior Manager
Financial Services Assurance Asset Management
+65 6236 3359
armin.p.choksey@sg.pwc.com
Contacts