Income Tax (Amendment) Bill

Mdm Speaker, thank you for allowing me to speak on the Income Tax (Amendment) Bill 2013. I support the tax changes in the Bill and would like to touch on two areas of the changes in the Bill: first, the refinement and amendments to existing tax policies and administration of the Exchange of Information (EOI) regime; and, secondly, the changes to the Productivity and Innovation Credit (PIC)

On the EOI amendments. First, let me touch on our market here, our openness and our efficient business model have helped Singapore become a leading global wealth management centre. The Bill includes refinements and amendments to existing tax policies and administration of the exchange of information regime to safeguard and reinforce our reputation as a fast-growing financial services sector.

The changes in the Bill will enable the steps to be taken to strengthen the EOI framework for international cooperation to fight against the cross-border tax evasions. These changes will increase, as the Senior Minister of State has indicated, the number of jurisdictions from 41 to 83 that Singapore will be able to exchange information with. It will also further streamline the administration of EOI under the standard and help ease the compliance burden for financial institutions in Singapore with the Foreign Account Tax Compliance Act (FATCA).

The amendments to EOI will also require financial institutions operating in Singapore to have greater disclosure requirements and monitoring obligations. With this, of course, there may be concerns on the impact of confidentiality and the banking secrecy standards. I was heartened to hear the Senior Minister of State touch on the point that every EOI request will be scrutinised and not indiscriminately adhered to and that care will be taken to ensure that that is given the right attention. We must recognise that while it is important that we continue to maintain strict policies to protect confidentiality of client information, it cannot be a reason for the flow of illicit funds. Confidentiality cannot also be a reason to stop cross-border exchange of information for crime investigation. For Singapore to remain a leading and reliable financial centre, we must have a clean regime that protects our financial institutions and the

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legitimate monies and eliminates illegal funds.

These amendments will send a strong clear signal that Singapore sees our financial integrity as crucial to uphold our reputation as a leading wealth management centre.

Let me now touch on some of the changes with regard to PIC. I will not go into details of debating the PIC itself because those have been debated earlier. But I do want to touch on the new section 371A which deals with the payment of cash amounts known as the PIC bonus of up to $15,000 over the three years of assessment from 2013 to 2015. This is meant to help businesses defray their operating costs, and encourage them to continue investing in productivity improvements and innovation based on certain expenditures which qualify for certain deductions or allowances under the Act.

This will be welcomed by businesses, especially as they deal with the necessary business transformation required to address current business competitiveness, costs and manpower constraints.

To qualify for the PIC Bonus, the conditions for the payment of PIC bonus for each year of assessment are:

(a) the person must have incurred a minimum of $5,000 of qualifying expenditure in the basis year for that expenditure;

(b) he is carrying on a trade or business during the time the Comptroller is considering his case for the bonus; and

(c) he must have made contributions to CPF for at least three local employees based on the payroll for the last month of the basis period or such other month as determined by the Comptroller.

The challenge facing SMEs, especially the very small SMEs, continues to be manpower constraints and attracting locals to certain jobs. Hence, the need to invest in productivity improvements and innovation for these SMEs is crucial. I would ask that we review the condition for making CPF contributions for a least three local employees as a qualifying criteria for the PIC Bonus. While small SMEs can still qualify for PIC tax deductions and allowances under PIC, the PIC Bonus for incurring a minimum qualifying expenditure with a dollar-for-dollar matching would definitely be a great help for small SMEs to invest in productivity improvements and innovation to reduce their dependency on

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manpower. The fact that the PIC cash payout is paid out on a quarterly basis is also another plus point for small SMEs.

The changes in the Bill also talks about the enhancements to the PIC Scheme to include Intellectual Property (IP) in-licensing. This will help businesses that license IP rights instead of acquiring the IP for innovation or productivity improvements incurred for Year of Assessment 2013 to 2015. These would definitely, again, help the very small industries and, therefore, a very welcome change. With that, I support the Bill.

Mdm Speaker, I will speak on the parts of the Income Tax (Amendment) Bill that relates to the agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA).

The amendments contained in this Bill are effectively facilitating compliance of our financial institutions with FATCA to assist the US government with identifying tax evaders as deemed so by the laws of the United States. FATCA affects financial institutions and is a matter of relationship between the US government and financial institutions with US source income streams. Typically, foreign governments are not obliged to help facilitate this relationship. Singapore is taking an extraordinary step to facilitate compliance.

As of June 2013, the United Kingdom, Denmark, Mexico, Ireland, Switzerland, Norway, Spain, Germany, France and Italy have concluded inter-governmental agreements (IGAs) to cooperate with the US on FATCA implementation. Japan and South Africa have consented to cooperation as well. We will be the first and only country in ASEAN to take such an action of cooperation with the US. Various other countries, such as Hong Kong, are in talks with the US on their own IGAs.

The Senior Minister of State has explained the reasons for Singapore to enter into IGA with the US on FATCA. The US has made it clear that financial institutions operating in countries that do not sign IGA with US IRS by the end of this year must sign individual agreements with the US tax authorities. Failure to do so will subject the financial institutions to a 30% withholding tax, as the Senior Minister of State has explained. Given the importance of the US as a political and economic partner of Singapore and the trend of countries complying with FATCA, it is understandable that Singapore will want to work

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with the US on this matter.

The US Department of Treasury provides two IGA models. Model 1 involves financial institutions in the partner countries reporting information about US accounts to the partner country's tax authority, which then provides the information to the US authorities. Model 2 involves financial institutions reporting directly to the US Internal Revenue Service and partner countries agreeing to lower legal barriers to reporting.

All the countries that have concluded IGAs with the US are on Model 1, except for Switzerland, which concluded a Model 2 agreement. Japan is also considering Model 2 as well. According to the Swiss Finance Minister, Model 2 "better protects privacy and sovereignty." Swiss banks will have to report accounts belonging to US taxpayers above a minimum balance, but client's data will only be exchanged once the US authorities have requested administrative assistance. Singapore had signalled that we will be implementing Model 1 IGA with the US.

I would like to raise six areas of concerns with the Senior Minister of State on this matter.

First, it is about mutual benefits. In a reply in Parliament in 2009 to a question regarding Singapore being on the OECD's "grey list" of countries committed to internationally agreed tax standard, then Second Minister for Finance Mrs Lim Hwee Hua had said that "Singapore is starting talks with several countries to update our DTAs (Double Taxation Agreements) with them on a mutually beneficial basis, including having exchange of information provisions that are in line with the new international Standard."

In the matter of bilateral agreements, governments form arrangements on a mutually beneficial basis. There will be compliance costs. There will be cost incurred by our Government to collect data on behalf of the US. We will be facilitating the US government to implement one of their laws.

Singapore currently has comprehensive DTAs with 71 countries providing for exchange of information, but not with the US. We have only a limited treaty with the US covering shipping and air transport income.

I would like to ask the Senior Minister of State if we are currently negotiating a comprehensive DTA with the US or seeking other concessions

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from the US in view of us facilitating FATCA. If so, what are these?

My second area of concern is about the cost of compliance. Countries that opt for Model 2 will let the financial institutions deal directly with the US IRS. There will be compliance costs for the financial institutions as they need manpower to deal with queries from the US and to change their IT systems to comply with FATCA. In the Model 1 supported by Singapore, our Government will collect data from financial institutions for the US. While this will make compliance with FATCA easier for our financial institutions, compliance costs will be transferred to the Government and, therefore, to the taxpayer. What is the expected annual compliance cost and would our Government be carrying this cost? If not, how will this cost be borne?

In the IGA reached between Switzerland and the US, three of the six objectives are to:

(a) increase "legal certainty by clarifying which Swiss financial institutions are subject to FATCA implementation";

(b) "reduce implementation costs including by suspending, under certain circumstances, certain withholding and account closing obligations"; and

(c) "simplify the necessary due diligence procedures".

The joint statement with Japan also has similar provisions benefiting Japanese financial institutions. Can the Senior Minister of State clarify what are the similar provisions in our proposed IGA on FATCA?

My third concern is about the impact on Singapore citizens. FATCA does not only affect US citizens but is targeted at anyone who is potentially earning a US taxable income stream. A person takes the definition of a "US person", which is indicated by any one of the following:

(a) US citizenship or permanent residence (green card status);

(b) A US birthplace;

(c) A US residence address or a US correspondence address;

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(d) Standing instructions to transfer funds to an account maintained in the United States, or directions regularly received from a US address;

(e) An "in care of" address or a "hold mail" address that is the sole address with respect to the client; or

(f) A power of attorney or signatory authority granted to a person with a US address.

This definition could see many Singapore citizens being identified as a US person. In a Model 1 IGA, our Government may have to automatically transmit information on Singapore citizens who are deemed as US persons to the USA. What is the Government's estimation of how many Singaporeans will be deemed as US persons in the implementation of FATCA?

Are there any safeguards to limit extraterritorial implementation of foreign laws to prevent overreach by any foreign government on Singapore citizens? Generally, as the Senior Minister of State had stated, it is expected that any treaty or international agreement should be fully reciprocal. What reciprocal rights will we have on US citizens on similar matters?

This leads to my fourth concern, on the risk of political blowback. Even with full reciprocity in agreement, there are already some quarters in the USA resisting FATCA for fear of reciprocity requirements by foreign governments will compromise the constitutional privacy rights of US credit union members and bank customers. Requests for information by foreign governments, including Singapore Government, in the USA may be stalled in their courts. What would our Government do in the event of limited reciprocity due to US domestic politics when we have implemented our IGA with the US?

My fifth concern is whether this concession to the US may open the door for demands for similar concession by other countries. The Bill provides for similar implementation with any other countries beyond the US that Singapore will make similar type of tax compliance agreements with in future. Are there similar agreements some of our other big trading partners will be expecting of us soon in their efforts to identify their own tax evaders in the form of their own FATCA? If so, which are the countries? Would this lead to a situation where many account holders in Singapore financial institutions become subject to foreign scrutiny, with greatly increased compliance costs?

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My final concern is to understand the parliamentary process. This Bill allows the Minister to negotiate and conclude the IGA, declare it as effective and to implement it. There is no need to debate and ratify the IGA in Parliament. In Switzerland's case, the IGA was entered into in February 2013. The Swiss Parliament voted to ratify it in September 2013. Our Government is now asking Parliament to approve the implementation of an IGA with the USA that does not yet exist and for which we do not have the details on. Should Parliament not have more details of the IGA so that we can better understand the full implications of this Bill?

In conclusion, there could well be international pressure and good reasons for Singapore to enter into compliance with FATCA and, in future, with other countries on a similar type of agreement. At the same time, there are questions that Singaporeans would want answers to, and to know the implications of our compliance with FATCA. Therefore, I seek the Senior Minister of State's answers to the questions I have raised.

Mdm Speaker, the Income Tax (Amendment) Bill 2013 proposes 28 tax changes to the Tax Regulations. I would like to focus my speech on amendments relating to the Exchange of Information (EOI) regime.

Singapore amended its laws in 2009 to implement the internationally agreed Standard for EOI for tax purposes or the International Standard. Recently, the Global Forum on Transparency and Exchange of Information for Tax Purposes affirmed Singapore's alignment with the International Standard. It is only natural for Singapore to continuously and systematically strengthen our EOI regime in order to uphold our reputation as a trusted and responsible financial centre, committed to combating illegal cross-border tax offences.

However, I would like to highlight my concerns about the amendments in this Bill in the following three areas:

First, Madam, the implementation of the EOI regime will add significant complexity and operational costs which will have to be borne by taxpayers, individuals and businesses, particularly financial institutions; whilst also increasing the administrative burden on individual Singaporeans.

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Mdm Speaker, please allow me to illustrate this point by referring to new sections 105I to 105P, which are intended to implement Singapore's obligations under the agreement reached for the purpose of the Foreign Accounts Tax Compliance Act of the United States of America (FATCA), as well as other corresponding or substantially similar agreements that Singapore may enter into with other countries.

The truth is: financial institutions in Singapore and around the world are struggling to prepare themselves for FATCA, whether they are IGA or non-IGA. It does not matter if you are on IGA Scheme or non-IGA. Everybody struggles with FATCA. Even the US, the originator of this very intricate scheme, has had to push back its implementation deadlines because of FATCA's exhaustive scope and complexity. Millions of dollars have been spent and will continue to be spent by financial institutions to implement systems and change end-to-end processes in order to maintain verification and due diligence procedures, to identify accounts held by US taxpayers, obtain documentation of each identified account holder to determine US or non-US status, and report detailed information regarding such US accounts.

Banks have had to redesign their entire client on-boarding and management systems to comply with FATCA even if some of them handle a negligible amount of business for US clients. Apart from US taxpayers, who are identified by a set of indicia; non US-taxpayers are also required to provide documentation, such as Form W-8, to prove their non-US status. This non-US status needs to be updated periodically. So, not only US persons have to prove, but non-US persons also have to prove their non-US status. So, many in the financial industry actually could scarcely believe the scope and the onerousness of these requirements when they first learnt of it.

Burdensome complexity brings with it the risk of non-compliance and the accompanying cost of penalties.

There is also opportunity costs associated with bankers spending their time collecting information on clients' tax residencies instead of their clients' financial needs. These are but some of the challenges facing financial institutions in Singapore and around the world, in dealing with FATCA.

Thus far, I have spoken only about the requirements imposed by the US regulators. What if other countries decide to follow suit? This prospect is not far-fetched. A recent International Tax Review article reported that Europe's five leading economies had agreed to automatically exchange a wide range of tax

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information multilaterally, while the finance ministers of Belgium, the Netherlands, Poland and Romania backed the creation of a global system of automatic information exchange that could be based on the US FATCA.

Singapore's network of EOI partner jurisdictions is expected to more than double, from 41 to 83. I am concerned about how this would add to the volume of requests and thereby the administrative costs of handling them. How can we justify the significant increase in effort and costs, including Singapore taxpayer dollars, to implement what is essentially a comprehensive information disclosure exercise for another jurisdiction. I hope the Minister can shed some light on how we may resist the trend that FATCA might set.

Mdm Speaker, my second area of concern relates to the amendment that gives IRAS access to information currently protected under the Banking Act and the Trust Companies Act for EOI purposes, without having to first obtain a Court Order.

Notwithstanding the existing EOI regulations which have been in place since 2009, foreign clients continue to regard Singapore as a major financial centre and wealth management hub. Why? Many of these clients value Singapore's political stability, robust regulatory environment, strong judiciary and internationally recognised rule of law. I am concerned that the proposed lifting of the current requirement – that IRAS first seek a Court Order before pursuing privileged client information – lifting this may undermine the confidence that clients and investors have in Singapore's banking privacy laws.

Members of this House may recall that when the "Court Order" requirement was instituted in 2009, the Minister for Finance Mr Tharman Shanmugaratnam explained to Parliament why there was a need for safeguards to protect against unauthorised disclosure under the Banking Act and the Trust Companies Act.

The Minister said, and I quote:

*"IRAS will make an application to the High Court for a production order to access the requested information. The affected taxpayer and bank or trust company will have the right to apply to the Court to discharge or vary the Court order. I should emphasise that these procedures are not meant to frustrate or delay the information exchange process. Rather, they are intended to provide a fair and independent assessment of the validity of requests, and allow us to render effective assistance to valid requests. They are essentially similar to procedures used in the United Kingdom, which relies on a tribunal process, or the United States which relies on the courts."*

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Madam, today, these reasons given by the Finance Minister in 2009 remain sound and the principles behind them remain very valid. Our courts are known to work efficiently and with minimum delays. I am given to understand that we have actually consistently met our EOI commitments since its implementation in 2009, with the requirement for an application to the High Court in place as a requirement. So, could the Minister please clarify why is it now necessary to remove the "Court Order" requirement?

I urge the Minister to consider retaining the "Court Order" requirement whilst fully meeting our obligations under the International Standard, and continue to uphold the confidence of clients in Singapore's Banking system that is robust and independent.

Mdm Speaker, my last area of concern relates to the apparent lack of safeguards for taxpayers' rights which is supposed to be an integral part of the internationally agreed Standard.

Whilst I fully agree that Singapore's financial system must never be used to serve financial criminals, it must be equally accountable to clients who have trusted the system, and client confidentiality would not be compromised without justification.

So, let me use an example. Let us suppose that a foreign client has proven his source of wealth in a Singapore bank account to be legitimate. So, it is legitimate money. Let us further suppose that this same client resides in a country where corruption is rampant and the politics unstable. And that, one day, the government of his country changes suddenly to one which does not like him, and he becomes the target of a political witch-hunt.

The so-called "incriminating evidence" is fabricated and such material is used to support a request for this client's information in Singapore. I think Members of this House will not find such a scenario so implausible. The question is: how are the relevant agencies in Singapore to react to such a request?

Could the Minister clarify how the affected taxpayer's rights would continue to be protected and how such a taxpayer may be afforded the right of appeal should he or she believe the basis for such request for information to be unjustified? The right of appeal should be spelt out clearly in the same provisions within the EOI regime.

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I note with further concern, Madam, the new section 65E, which requires that the Comptroller's notice to obtain information be kept confidential from the affected taxpayer so as to prevent the person from being tipped off. In this case, the person involved may never have the chance to tell his or her side of the story, or be given the opportunity to appeal against the Order.

Without the requirement for a Court Order, the onus to ensure supremely fair and robust processing of EOI requests would lie solely with IRAS. On what basis does IRAS judge the EOI requests to be clear, legitimate and relevant to the enforcement of the requesting jurisdiction's tax laws, especially in cases where they have not had the input of the taxpayer being scrutinised? Could the Minister please clarify what processes are in place to protect taxpayer's rights under such circumstances?

Lastly, Mdm Speaker, please allow me to briefly comment on the amendments relating to the tax changes announced in the 2013 Budget Statement meant to support companies to restructure for higher productivity. Despite the many schemes that the Government has rolled out over the years, it is disheartening to see labour productivity in Singapore slip 0.3% in the second quarter of 2013, compared with a year ago – the sixth straight quarter of decline.

I would like to ask the Minister whether she is assured that the vast resources being dedicated to supporting productivity programmes are, indeed, effective, or whether we need a review of the productivity programmes or change initiatives.

Do we need to measure success differently at this stage of our restructuring journey to shed light if our efforts are bearing fruits, even if we are not able to see improvements in the top line official productivity indices?

It is troubling that IRAS' audit has revealed that one in three claims for Government grants and subsidies to boost productivity were found to have errors, with a few firms clearly setting out to "game" the system. I am glad to see deterrent penalties for flagrant and reprehensible abuses of the schemes are part of the changes proposed in the Bill. MOF must find ways to institute relevant measures to ensure productivity grants and subsidies are, indeed, linked to value-added activities.

Of course, we continue to hear feedback from companies, especially SMEs, that they are often lost in the sea of complexity of schemes available, unsure

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about which scheme to apply and how to go about it. I would like to suggest again a much more tailored-sector level intervention and support, working in close collaboration with trade associations, to quickly address each sector's unique challenges, replicate best practices and develop shared services capabilities.

To conclude, in the end, the Government can only do so much to push for productivity. The rest is really up to individual companies, managers and their employees to truly work towards the vision of a more productive and innovative Singapore, where skilled workers are fully engaged in meaningful jobs and pulling their weight in the competitive global landscape. Madam, I support the Bill.

Mdm Speaker, I refer to clause 3B of the Income Tax (Amendment) Bill, which amends section 6 of the original Bill. Why should the Government allow the Comptroller of Income Tax to share information with a foreign country, pursuant to our agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA)?

Are there other ways that local financial institutions can comply with FATCA, without amending the Income Tax Act? Was FATCA approved by this Parliament? Even if we have to pass a Bill, I suppose we can debate the full

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scope of FATCA.

I understand, of course, that the Ministry of Finance aims to place Singapore in line with evolving global standards on the Exchange of Information regime. Our main competitors are the major global financial centres, Switzerland and possibly Hong Kong, too, are signing up to FATCA. But there are still tax havens, such as Liechtenstein and the Cayman Islands, that do not fall under the current scope of FATCA. Does our Government believe that FATCA will ultimately be effective and fair to all countries?

I also refer to clause 35, in which the Income Tax Act is amended by providing for the remission of tax of companies for the Years of Assessment of 2013, 2014 and 2015. I would like to ask if the Ministry had considered the potential amount of tax loss incurred arising from this provision. Can the Minister inform us of this amount of potential tax loss?

If the intention is to manage the increase in business costs, can the Government design a more practical scheme? For example, if the bulk of business cost increases is due to rentals, is it not better for HDB and JTC to provide more affordable commercial and industrial facilities? Many SMEs cite overly high rental costs as the biggest contribution to increased business costs today.

I now refer to clause 24, on the Productivity and Innovation Credit bonus. According to the Ministry of Finance website, the intention is to defray business operating costs, especially for SMEs, and encourage them to invest in productivity improvements and innovation.

I would like to ask the Minister if dead-weight loss was considered. That is to say, what if an SME is not run efficiently on a good business model? What determines improvements and innovation? Can they be objectively measured?

Lastly, I would like to seek clarification from the Minister whether this arrangement is compliant with World Trade Organization rules and with the Free Trade Agreements that Singapore has signed. Would this open us to possible trade disputes with foreign firms who may allege that our SMEs and our products are unfairly subsidised against foreign competitors?

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Mdm Speaker, I thank Members − Ms Jessica Tan, Ms Foo Mee Har, Ms Tan Su Shan, Mr Yee Jenn Jong and Mrs Lina Chiam − for their comments and suggestions. The comments and suggestions fall into two main parts and I propose to address those relating to PIC first and then we can focus on the Exchange of Information (EOI).

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Madam, Ms Foo Mee Har has asked about the effectiveness of productivity-related grants and subsidies and the potential for abuse. Ms Jessica Tan suggests refining the criteria to better support micro SMEs where the eligibility for the PIC Bonus is a concern.

Madam, the raising of productivity is a medium to long-term endeavour that would take much more than grants and subsidies to bring about. Government support is, therefore, much broader than the PIC scheme and enhancements which this Bill addresses. It includes the setting up of the National Productivity Fund and the efforts to design targeted strategies in different sectors where productivity is lagging, including working with industry associations, as mentioned by Ms Foo, as well as significant investments in continuing education and training to help Singaporeans keep pace.

All these efforts require changes at the micro level of individual enterprises, as well as at the macro level of industries. It is, therefore, not surprising that it takes time for the results to become visible. In the meantime, we can expect short-term productivity fluctuations due to economic cycles and volatility. In fact, economists know this – it is often more sensible to compare productivity changes from decade to decade and to monitor sector-specific productivity measures rather than to look at productivity changes on a quarter-to-quarter basis because that is masked by too many short-term volatile factors.

At this stage of our push for productivity-driven growth, what is most important is for businesses to get started on their productivity journey, to learn, to invest in improvements and to sustain the effort over time. And this is why we have designed the scheme to be broad-based to support as many businesses as possible and also kept the criteria for the schemes as straightforward as we can.

In this regard, it is heartening that a survey conducted by the Singapore Chinese Chamber of Commerce and Industry earlier this year revealed that over eight in 10 of the companies in Singapore are trying to raise productivity levels. And also the feedback from businesses suggests that more of them now see raising productivity as a key priority, especially given the tight manpower situation. So, mindsets have shifted and we are seeing greater awareness of the schemes available to support the productivity push.

In terms of potential abuse, I should, firstly, highlight that the vast majority of the errors in claims which Ms Foo cited are due to the lack of familiarity. The vast majority of them were unintentional. As businesses gain more experience

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in claiming PIC benefits, we can expect the error rates to come down.

IRAS makes it a point to highlight common mistakes found in PIC claims through its website and conducts seminars, including in the heartlands, to reach out to small businesses. IRAS also has ongoing compliance programmes to review and audit PIC claims because there are, indeed, a number who try to take advantage. If businesses are found to have artificially inflated their claims or abused the PIC scheme, IRAS will not hesitate to take stern enforcement actions against these businesses and any consultants helping them. So, for example, a company director was recently sentenced to eight weeks' jail for making fraudulent claims for the PIC cash payout for his company. He also paid a penalty four times the amount of the cash payout fraudulently claimed.

Notwithstanding the strong stance against abusers, IRAS is mindful not to burden businesses with excessive documentation which would especially discourage micro SMEs from even getting started.

In response to Ms Jessica Tan's suggestion, I should clarify that all businesses can enjoy the PIC benefits, regardless of the number of employees. The requirement of three local employees only applies to the payment of PIC Bonus and to businesses claiming the cash payout. I think this was also a point that I recall Ms Foo and Ms Tan Su Shan raised when we first debated the PIC enhancements as they were introduced. This condition of requiring the businesses to have at least three CPF-paying local employees is really intended to reduce the risk of abuse which we talked about earlier and ensure that the cash payouts really go to active businesses, not those that are just set up for the purposes of gaining from the scheme.

However, the businesses that have fewer than three local employees can still benefit from the enhanced tax deductions under the PIC scheme. And many of them, including micro companies, have claimed these deductions. So, Members will be pleased to know that the PIC take-up rate for micro companies − and for that we are referring to companies with less than $1 million in annual turnover − has improved. And based on the corporate income tax returns filed as at April this year, about one in four active micro companies have claimed PIC and this is up from one in five that we have seen in the previous year. So, it is an improvement. I would say also that there is still a lot of room for us to reach out and help these micro SMEs get onto this productivity journey. We are not stopping at having seen the improvements, we will push forward.

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Madam, I would now like to turn to comments relating to changes in our EOI with other tax jurisdictions. The first point to make is, as Ms Tan Su Shan rightly pointed out, that Singapore is not a tax haven. We have a diversified economy where manufacturing is the largest contributor to GDP; accounting for 21%, followed by retail and wholesale trade at 17%; business services and financial services each contribute another 12%. So, we are a diversified, substantive economy.

Our tax system seeks to attract and anchor economic activities that create good jobs for Singaporeans. In fact, the corporate sector contributes a very significant share to the budgetary resources which are needed to implement the Government's programmes. We have also ensured that our financial sector is built upon the quality, breadth and depth of services we offer. We have established strong and consistent regulatory policies and demonstrated firm commitment to the rule of law.

Our strict anti-money laundering regime, for example, is held in high regard by the Financial Action Task Force (FATF), an international body which conducts peer reviews of jurisdictions' anti-money laundering regimes. Singapore clearly does not condone abuses of our laws for tax evasion purposes.

To this end, we co-operate actively with other jurisdictions through exchange of information for tax purposes based on international standards. This is world recognised and our practices and laws have been assessed by our peers to be in line with international norms.

Members have supported the EOI-related amendments but expressed concerns about the impact on Singapore's attractiveness as a financial centre. Singapore is not alone in adjusting our EOI regime to be more aligned to international standards. Several key financial centres, such as Switzerland and Hong Kong, have recently announced key shifts in their EOI regime. Switzerland recently signed the Multi-lateral Convention on Mutual Administrative Assistance and Tax Matters. And Hong Kong announced that it, too, will be negotiating a FATCA agreement with the US, as was pointed out by Mr Yee Jenn Jong.

Singapore has similarly reviewed our EOI regime to ensure that we adhere to the spirit of international tax co-operation. Ms Foo Mee Har, Mr Yee Jenn Jong and Ms Tan Su Shan highlighted the considerable cost of complying with the EOI standards and, in particular, those imposed by the US FATCA. I think Ms Foo highlighted that the financial institutions could scarcely believe how

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much work they have to do in order to comply. Ms Foo also expressed concern about the volume of requests when the number of partner jurisdictions expands.

Madam, enhanced international standards have, indeed, increased compliance costs for financial institutions around the world. The amendment to extend EOI assistance to all our agreement partners without having to update each agreement bilaterally means that however many partner jurisdictions there are going to be, it is still the same internationally agreed EOI Standard that applies. This, in fact, gives financial institutions a much higher degree of certainty and removes the problem of further complexity due to differing standards. Although it is not yet possible to assess how voluminous the request will be, as I have said earlier, IRAS will evaluate each request carefully and draw on its experience to provide assistance to only those which are clear, specific and legitimate. And I will have more to say about the processes that it employs.

As for FATCA, I should emphasise again that the burden it places on financial institutions is felt worldwide. Everywhere in the world, and not just in Singapore, does not matter where you are located, FATCA is going to hit you.

Following intensive consultation with the industry, we started discussions with the US on an arrangement whereby information would be reported to IRAS before onward transmission to the US Internal Revenue Service. This, as Mr Yee shared with us earlier, is Model 1 of the Inter-Governmental Agreement (IGA). What this means is that financial institutions in Singapore will only need to deal with IRAS instead of additional reporting to the US Inland Revenue Service. So, that is one benefit. Another benefit of the IGA is that financial institutions in Singapore would automatically be deemed compliant and will not be subject to a withholding tax unless they fail to meet their reporting obligations subsequently. So, the assumption is that you are compliant unless you fail to meet your reporting obligations.

Through the IGA, therefore, we hope to reduce the cost of compliance and complexity for financial institutions in Singapore. Specifically to Mr Yee's question on who is bearing the compliance cost, the vast bulk of the cost of compliance is to be borne by the financial institutions. I heard loudly and clearly Ms Tan Su Shan saying, "We have no choice. We will do it." The cost to IRAS is, in fact, minimal, since we are merely aggregating the information provided by the financial institutions for onward transmission.

Mr Yee also asked whether we could estimate the number of Singapore citizens who could be considered US persons and caught under the FATCA. It

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is not possible to estimate with any accuracy because Singapore citizens working, living in the US, are not required to register with our Embassy. So, we do not have an exact number.

Mr Yee also asked, "What about reciprocal rights?" Indeed, that is our intent. And to do that, we would first need to have a Tax Information Exchange Agreement (TIEA) or a Double Tax Agreement (DTA) with the US.

In relation to Mr Yee's other question, we are always keen to establish Double Taxation Agreements that will benefit Singapore-based businesses, and that, of course, includes the US. It is not confined to the US but it includes the US. Specific to the US, in fact, Singapore has been pro-active in pursuing the DTA.

Our agencies will continue to work pro-actively with banks and all other relevant parties to streamline processes and make compliance easier. Where banks are required to provide information, for example, under FATCA, we will ensure that the guidelines are clear and practical. We remain open to suggestions from practitioners on what else can be done to address their operational concerns.

Let me address briefly Mr Yee and Mrs Chiam's questions on whether the IGA ought to be debated in Parliament. The Government is authorised within prescribed limits to negotiate and sign international agreements, and this includes the IGA. To meet the commitments of the IGA, we need to make several changes to our Income Tax Act. And for these changes, we are seeking Parliament's approval.

Let me now turn to safeguards. Ms Foo asked whether the removal of the court process would affect Singapore's reputation as a banking centre. She reminded us that the Court Order process that is being removed was only introduced in 2009. Madam, having dealt with over 500 EOI requests, IRAS' experience with the EOI Standard is much better than it was four years ago in 2009.

Initially, the Court Order process helped IRAS to assess the validity of requests. As IRAS gained experience, its own evaluations were increasingly validated by the Court Order process. That experience has been very helpful and IRAS is now sufficiently well-versed with the range of EOI requests and has in place established processes to evaluate them.

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To reassure Members, the removal of the Court process does not mean that IRAS will freely share information with our EOI partners. There are robust safeguards in the international EOI Standard to ensure that only clear, specific and relevant requests are acceded to. And this is the case whether or not a Court Order is needed. In particular, the requesting foreign jurisdiction will, firstly, have to explain why the request is being made, and has to put forward the case for why they are making the request. Secondly, they have to identify the taxpayer under investigation or assessment, and declare that it has pursued all available means in its own jurisdiction to obtain the information. So, firstly, explain why you want the information. Secondly, tell us who is being investigated. Thirdly, declare that you have, indeed, exhausted all other means.

Where requesting jurisdictions do not explain clearly how the requested information is relevant to its investigation or assessment, IRAS has and will continue to seek the necessary clarifications before agreeing to release the information.

Ms Foo had also asked about the anti-tipping off provision in the Bill. Such provisions are necessary as there may be certain sensitive investigations whose success might be undermined by tip-offs. This provision is, in fact, already part of our existing EOI regime. The only difference being that the court makes such orders now, whereas it is IRAS which will issue the order after the Bill is passed. This change, however, does not take away the right of the taxpayer to make representation to IRAS or lodge a request for a judicial review should he become aware of the request.

Both Ms Foo Mee Har and Ms Tan Su Shan expressed concerns that the information obtained through EOI requests might not be used solely for tax purposes. As all major financial centres have committed to the international EOI Standard, such risks are not specific to Singapore. Singapore's way of mitigating such risks is to ensure that we have a robust tax administration that will screen the request carefully to ensure that they meet the requirements of the Standard.

As Ms Tan Su Shan has noted, IRAS has been an effective gatekeeper. It will certainly strive to uphold this hard-earned reputation. Fundamentally, we depend on all our treaty partners to uphold the spirit of international cooperation and ensure that the information exchanged is used only for tax purposes, in accordance with the Standard. The assurance we have is that their adherence to the Standard is subject to continuous peer review by the international community, and any abuse could lead to an unfavourable assessment by the peers and a negative impact on their reputation in the global

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community.

Madam, in conclusion, I would also like to assure Members that as Singapore adjusts our EOI regime in support of international tax cooperation, we will push for continued international recognition of the following principles: first, EOI standards must be implemented on the basis of a level playing field across all financial centres to prevent regulatory arbitrage; second, tax cooperation between EOI partners must be fully reciprocal; third, tax cooperation can only take place within a strong legal framework that safeguards the integrity of taxpayer information and where information being exchanged is only used for authorised purposes.

These principles will not remove the costs and complexity of compliance, but they will help to ensure that the financial institutions operating in Singapore are not disadvantaged, and that taxpayers' legitimate rights and confidentiality are reasonably safeguarded.

If it surfaces that cooperation is not implemented in accordance with the terms of the tax agreement, then the principle of reciprocity, which I had spoken about, comes into consideration, and we would be entitled to review our level of cooperation with specific partner jurisdictions. I hope this addresses the question raised. Madam, having addressed these issues, I beg to move.

I would like to thank the Senior Minister of State for your very comprehensive reply. I am still not quite sure about the part on the Court Order. The argument that it was a good safeguard, as the Minister for Finance Tharman Shanmugaratnam explained in Parliament in 2009, I believe still remains valid. I am unsure we are now removing it because we feel that IRAS has a lot more experience and, therefore, we do not need this additional step but actually it is within our control as long as Singapore is able to meet the deadline laid down by the EOI regime. What I am arguing is that, as long as we can meet the deadline, do we have a choice to keep the additional step to give clients and investors optically the confidence that they would have access to the judicial process?

Mdm Speaker, I thank Ms Foo for the supplementary question. Taxpayers still have access to the judicial process through a judicial review. Now, I would just like to add that what we are seeking, in terms of removal of the court process, is not unlike the practice in the US. In the US, no court order is required for the tax authority to be able to share information. A court process is only required if the tax information to be shared applies to a

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class of entities.

What we are doing is not unlike some of the other jurisdictions' practices that are already in place. In fact, in the UK, which has the tribunal that you also mentioned in your speech earlier, it is not a court process. It is something that is administrative and the powers do not reside within their judiciary. In a sense, we are aligning more closely and not deviating from what other jurisdictions are already practising.

Madam, I thank the Senior Minister of State for her comprehensive answers. Earlier, the Senior Minister of State listed the number of EOI safeguards that must be fulfilled before information will be released. I would like to know how these are applied under FATCA. Do these apply or are information auto-transmitted?

Madam, in response to Mr Yee's question, the exact implementation details of FATCA are yet to be worked out. I should remind the House that we have not concluded negotiations with our US counterparts. These details have to be worked out. After the Bill is passed, if we get Parliament's approval, then we can be in the position to sort out the details of the implementation.

*Question put, and agreed to.*

*Bill accordingly read a Second time and committed to a Committee of the whole House.*

*The House immediately resolved itself into a Committee on the Bill. – [Mrs Josephine Teo].*

*Bill considered in Committee; reported without amendment; read a Third time and passed.*