Singapore, new tax haven for offshore investors

Singapore - offshore investorsWORLDWIDE THERE are over 70 tiny tax haven destinations that offer no-tax or low-tax status. Among these destinations different jurisdictions tend to be havens for different types of taxes, and for different categories of people or companies. India and Mauritius executed the Double Taxation Avoidance Agreement (DTAA) in 1982 with the sole purpose of mutually strengthening their economies.

Since then, Mauritius has been considered a virtual tax haven for offshore investment. Most investors, especially from highly taxed countries, preferred to route their operations through this paradise tropical island, as they benefited under its tax structure with negligible rates. However, since 2000 Mauritius has become a controversial podium with its Supreme Court’s intervention on the residency status.

With the controversies on investments through Mauritius moving to the forefront, Singapore will be the most sought after destination from next month. Many investors including large financial institutions will soon shift to Singapore from Mauritius. Strategically located, Singapore has the reputation as an attractive financial centre and is an outstanding haven for offshore funds. The government also provides numerous incentives to help foreign companies with their start-ups. The political and economic stability of the country is an added attraction and offers security to investors.

The India-Singapore Comprehensive Economic Cooperation Agreement (CECA) signed on June 29, 2005, which will become effective from August 1 is significant and unique. The treaty has turned the heat on tax haven Mauritius and to some extent Cyprus. FIIs may now choose to route their funds via Singapore which is also considered an ideal Asian business hub.

While investment through Mauritius was more than a post-box operation just to take advantage of its tax incentives, it will be different with Singapore because investors can raise capital and establish full presence activities in Singapore, facilities not available while investing through Mauritius. The present treaty offers an integrated package governing trade in goods and services, promotion of bilateral investments, better tax incentives and cooperation in areas of education, e-commerce, media and intellectual property. Beginning August 1, almost 80 per cent of Singapore’s imports from India will become duty free. India, in return, has scrapped tariffs on 506 trade items that will benefit IT companies. The treaty also envisages zero capital gains tax treatment to Singapore-based companies by avoiding the double-taxation system. Indian software companies rendering services in Singapore will be major gainers of the improved DTAA.

The effective tax liability of these companies will drop as India and Singapore have agreed to lower the withholding tax on royalties and fee for technical services from 15 per cent to 10 per cent in the revised DTAA. The benefit of a lower withholding tax rate under the Indo-Singapore tax treaty will be broad-based. Software product companies that license technology to Singaporean companies will be among the major gainers. Visa restrictions have been eased through the CECA for Indian professionals. Singapore will also recognise educational degrees from 129 UGC-approved universities. Singapore is also a great market for debt market investment.

Controversies over the use of tax havens with an ulterior aim to minimise or avoid high tax rates in the investor’s home country have become common. The legitimacy of such tax havens has been debated by several aid organisations worldwide. Tax is an important source of revenue, which the government utilises for building infrastructure and making adequate provisions for the poor and the needy.

Siphoning money to offshore destinations causes substantial collateral damage to the investors’ home country. A regulatory framework governing the use of tax havens ought to be put in place but till such laws are enacted investors wanting to make a quick big buck through tax havens will have a field day.

By Dorothy Thomas

DOROTHY THOMAS

(The writer is Partner, Kochhar & Co. and can be contacted at: dorothythomas@chennai.kochhar.com)

Source: The Hindu


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