Introduction
For a number of years Singapore has worked to establish itself as a major international shipping centre and has introduced a number of tax incentive schemes to achieve this goal. In an effort to consolidate and simplify the regime of maritime tax incentives available to maritime industry participants in Singapore (Tax Incentives), the Singapore Government has recently introduced the Maritime Sector Incentive (MSI) Scheme.
Effective from 1 June 2011, the MSI scheme (operating under the auspices of the Singapore Maritime Port Authority (MPA)), offers both local and international entities a more concise and clearer picture of the Tax Incentives. The MSI Scheme is intended to simplify and enhance the existing regime and further promote Singapore as an international maritime centre, but it remains to be seen whether the amendments made by the MSI Scheme will in fact promote or hinder the expansion of the maritime industry in Singapore.
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Previous regime
Prior to 1 June 2011, Singapore had a suite of tax incentives targeted at various different sectors of the maritime industry, including:
- the income tax exemptions under section 13A of the Income Tax Act (ITA), for qualifying income derived from operating Singapore-flagged and foreign-flagged ships;
- the Approved International Shipping Enterprise (AIS) scheme under section 13F of the ITA, providing for tax exemption on qualifying income derived from operating foreign-flagged ships in international trade;
- the Maritime Finance Incentive (MFI) offering a tax exemption (or a concessionary tax rate of between 5 per cent and 10 per cent depending on the activity) under section 13S of the ITA, on qualifying income derived from leasing ships or containers and managing a shipping or container investment related enterprise;
- the Approved Shipping and Logistics (ASL) scheme offering a 10 per cent concessionary tax rate on incremental qualifying income derived from certain shipping support services (by ship agencies, ship management companies, freight forwarders and logistics operators); and
- the Ship Broking and Forward Freight Agreement (FFA) trading incentive providing a 10 per cent concessionary tax rate for certain income derived by approved ship brokers and approved FFA traders.
In addition, withholding tax exemption was granted on a case-by-case basis on qualifying payments made in respect of qualifying foreign loans taken to finance the construction or purchase of ships (subject to certain conditions).
Generally, under the AIS and MFI schemes, the relevant company applying for the exemption needed to be tax resident in Singapore, meaning that the central control and management of its business needed to be conducted in Singapore.
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The MSI scheme
In broad terms, the MSI scheme consolidates the Tax Incentives previously offered and creates three broad categories of tax incentives for entities involved in international shipping operations, maritime leasing arrangements and shipping support services.
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International Shipping Operations
The International Shipping Operations category of tax benefits (including the MSI-AIS Award and the MSI-SRS Award) was adopted by the Singapore Government to encourage international ship owners and operators to establish and grow their operations in Singapore and, where possible, to register their vessels under the Singapore flag.
Accordingly, the MSI-AIS Award and the MSI-SRS Award, together, offer entities entering into the scheme after 1 June 2011 similar tax benefits to those previously offered under section 13A of the ITA and the AIS Scheme. Existing entities enjoying tax exemptions under section 13A (mainly for Singapore-flagged ships) and section 13F (AIS Enterprise Scheme - mainly for foreign-flagged ships) will transit into this category.
The benefits include tax exemptions on:
- qualifying income derived from the operation of Singapore-flagged ships and foreign-flagged ships plying in international waters;
- qualifying in-house ship management fees derived from related qualifying special purpose vehicles; and
- income derived from foreign exchange and risk management activities which are carried out in connection with and are incidental to the operation of the ship.
In addition to the existing incentives, qualifying MSI-AIS Award and MSI-SRS Award participants will receive an automatic withholding tax (WHT) exemption in relation to qualifying payments made on foreign loans used to finance the purchase or construction of Singaporean-flagged and (in the case of approved ship operators) foreign-flagged vessels, and on certain charter payments to overseas shipping companies. Previously, entities had to apply for a WHT exemption on a loan-by-loan basis, which was often cumbersome and time consuming (and often difficult to obtain for ship construction loans).
Significantly however, the incentives offered by the MSI-AIS Award will no longer be enjoyed for a guaranteed maximum period of 30 years by all qualifying entities, as was the case under the previous regime. International shipping companies with established worldwide networks, strong track records, demonstrable business plans and a commitment to expanding their shipping operations in Singapore may apply for a 10-year renewable award for a maximum period of 30 years. However, smaller entities or new entrants who do not meet these criteria may, up until to 31 May 2016, apply for a 5-year non-renewable award (with the possibility of graduating to a 10-year renewable award for a maximum of 30 years at the end of the 5- year period on reassessment of the application by the MPA).
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Maritime leasing arrangement
This category of the MSI scheme, known as the MSI-ML Award (MSI-ML Award), is aimed at promoting the growth and development of ship and container financing in Singapore and takes over from the MFI scheme under the previous regime. The scheme is designed to encourage entities to use Singapore as their capital and funding base to finance their vessels and shipping containers. Existing entities enjoying tax exemptions (or concessionary rates) under the MFI scheme will automatically be granted exemptions under this category.
Qualifying entities (including ship or container leasing companies, funds, business trusts and partnerships) which own a ship or a shipping container (Asset Owning Entities) will receive a tax exemption (or concessionary tax rate of between 5 per cent and 10 per cent) on leasing income derived from the relevant asset, depending on the entity’s operational track record, whether the entity has a demonstrable business plan and whether it displays a commitment to expanding its shipping and container financing in Singapore.
Both operating and qualifying finance leases are covered under the MSI-ML award, to allow asset-owning flexibility and residual risk management options.
Approved management companies of the Asset Owning Entities may also apply for a 10 per cent concessionary tax rate on their qualifying management income under the MSI-ML Award. Again, applications will be assessed on the ability of an entity to demonstrate to the MPA that it has a strong track record, business plan and a commitment to expanding shipping and container financing in Singapore.
Tax concessions offered on qualifying income under the MSI-ML award will be for a 5-year non-renewable period and may be applied for until the sunset date of 31 May 2016.
MSI-ML Award participants who qualify as approved lessors will also receive an automatic WHT exemption akin to that received by MSI-AIS participants, as outlined above, on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase or construction of both Singapore and foreign-flagged ships, without the need to apply on a case-by-case basis.
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Shipping support services
The incentives offered under the shipping support services category of the MSI scheme (MSI-SSS Award) are aimed at encouraging support service providers to the maritime industry to base their operations in Singapore and to encourage large multinational companies and shipping conglomerates to set up their corporate service functions and conduct their ancillary services in Singapore.
The tax benefits offered under the MSI-SSS Award will mirror those offered by the ASLI and FFA schemes under the previous regime (and existing entities enjoying concessionary tax rates under the current ASL and FFA schemes will transit into this category). However, the 10 per cent concessionary tax rate on incremental qualifying income derived from the provision of certain shipping support services will now be extended to include qualifying corporate services and will therefore cover:
- ship management, ship agency and shipping freight/logistic services (previously covered under the ASL Scheme);
- ship broking and forward freight agreement (FFA) trading (previously covered under the FFA scheme); and
- qualifying corporate services, which includes shipping related corporate services (for example human resources services or legal services) rendered by applicant entities to a related party in which the applicant entity has at least a 25 per cent shareholding.
Applications will again be assessed on an entity’s track record, whether it has a demonstrable business plan and whether the entity has a commitment to expanding their ancillary shipping operations in Singapore in the future. Singapore tax benefits received under the MSI-SSS Award will be subject to a 5-year non-renewable period and the operation of the category has a sunset date of 31 May 2016.
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Future of the MSI scheme
It is clear from the Singapore Government’s adoption of the MSI scheme and the resulting restructuring/simplification of the maritime tax incentives that the Government remains dedicated to cementing Singapore’s status as a global leader in the shipping and maritime industry.
The introduction of the automatic withholding tax exemption on qualifying foreign loans (for both Singapore and foreign-flagged ships) is clearly an advantage of the new scheme and will hopefully encourage more international shipping companies to own/manage their ships from Singapore. Singapore also has other attributes which make it attractive as a location for shipping companies, such as its network of double tax agreements.
However, by reducing the guaranteed period for tax exemption/concession for many of the categories to a 5-year non-renewable period and by introducing sunset clauses applicable to all three categories of tax incentives under the MSI Scheme, there is an inherent risk that the scheme will appear less attractive to both local and foreign operators in the long term - particularly to those owners/operators who are required to operate foreign-flagged ships, for example to meet cabotage rules in a number of jurisdictions in the region, including India and Indonesia.
As such, whilst the new scheme streamlines the existing rules, and introduces certain tax enhancements to the existing arrangements, the changes also introduce a degree of uncertainty over the duration of the tax incentives (and the MSI scheme itself), which may be viewed negatively by international shipping companies thinking of using Singapore as a base for their shipping operations in the long-term. The full impact of the MSI scheme on the Singapore maritime industry may therefore only become fully apparent over time.
In all cases, shipping companies proposing to establish in Singapore are recommended to discuss their proposals with the MPA to establish the way in which the new incentives will operate in the context of their business proposal.
Norton Rose Group is a leading international legal practice. We are one of the few international legal practices able to provide a full-business law service needed by clients in the shipping industry across the world.
This article was first published by Marine Money Asia on Friday 8 July 2011.
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