Duane Morris & Selvam LLP





	Singapore Budget 2012: Enhancing Singapore's Attractiveness as an International Maritime Centre February 22, 2012 – The Singapore Budget Statement 2012 was delivered by Mr Tharman Shanmugaratnam, the Singapore Minister for Finance, on 17 February 2012. One of the key developments was the announcement of further tax incentives to entrench Singapore as a leading international maritime centre. By way of background, pursuant to Singapore Budget Statement 2011, all existing tax incentives for the Singapore maritime sector were streamlined and consolidated under the new Maritime Sector Incentive (“MSI”) scheme with effect from 1 June 2011. The purpose of this article is to provide readers (in particular, those in the shipping and maritime sector) a broad overview of the existing Singapore maritime tax incentives under the MSI scheme, and to highlight further enhancements to maritime tax incentives announced during Singapore Budget Statement 2012. MSI-Shipping Enterprise (Singapore Registry of Ships) (“MSI-SRS”) The objective of the MSI-SRS scheme is to encourage ship operators to register their ships with the Singapore Registry of Ships (“SRS”). Under the MSI-SRS scheme, certain qualifying income derived by shipping enterprise from operating Singapore-flagged ships is exempted from Singapore income tax. In addition, income derived from the uplift of freight (excluding transshipment) from Singapore by foreign-flagged ships is also exempted from Singapore income tax. It should also be noted that to incentivize ship owners to register their ships with the SRS, the Maritime and Port Authority of Singapore (“MPA”) administers the Block Transfer Scheme as a volume discount scheme for ship registration fees with the SRA, provided their primary registration outside Singapore were suspended. MSI-Approved International Shipping Enterprise (“MSI-AIS”) The MSI-AIS scheme seeks to encourage international ship owners and ship operators to establish their commercial shipping operations in Singapore. Under the MSI-AIS scheme, certain qualifying income derived by approved international shipping enterprise from operating foreign-flagged ships is exempted from Singapore income tax. A MSI-AIS company will enjoy tax exemption on qualifying shipping income for a 10-year renewable period, where qualifying conditions are met. International shipping companies with a strong business record, established global networks, demonstrable business plan/strategy and a commitment to develop their shipping business in Singapore may apply for the MSI-AIS award. Qualifying new ship operators who are starting out in Singapore on a smaller scale may also be approved under the MSI-AIS scheme to enjoy tax exemption on qualifying shipping income for a non-renewable tenure of 5 years, subject to meeting certain conditions. MSI-Maritime Leasing (“MSI-ML”) The objective of the MSI-ML scheme is to promote Singapore as the preferred capital or funding base amongst ship/container leasing entities to finance their vessels or sea containers. Subject to meeting qualifying conditions under: the MSI-ML (Ship) scheme, qualifying leasing income derived by qualifying ship lessor will be exempted from Singapore income tax throughout almost the entire life of the vessel in the lessor’s hands (30 years for ships used for cargo, passengers, towage or salvage, and 40 year for dredgers and ships used in oil and industry), for vessels acquired during the relevant incentive period; and the MSI-ML (Container) scheme, income from the leasing of “qualifying containers” derived by qualifying container leasing companies enjoy tax concessions of 5% or 10% for up to 5 years. For the purpose of this tax incentive, “qualifying containers” refer to containers that adhere to the standards defined by the International Organisation for Standardization (“ISO”) or the Institute of International Container Lessors (“IICL”). Further, qualifying management income derived by an approved manager of the asset-owning entity will enjoy concessionary income tax rate of 10%. In order to permit asset-owning flexibility in leasing and chartering options, both operating and qualifying finance leases are covered under the MSI-ML scheme. MSI - Shipping-Related Support Services (“MSI-SSS”) The MSI-SSS award aims to attract ancillary shipping service providers and shipping conglomerates to set up their corporate services functions in Singapore. Incremental income derived from approved shipping-related support services derived by an approved MSI-SSS company will enjoy a concessionary tax rate of 10% for a period of 5 years. These shipping-related support services include ship broking, forward freight agreement trading, ship management, ship agency, freight forwarding and logistics services, and corporate services rendered to qualifying approved related parties who are carrying on business of shipping-related activities. Withholding tax exemption on qualifying payments on loans obtained from foreign lenders to finance the purchase or construction of ships With effect from 1 June 2011, subject to meeting certain qualifying conditions, automatic withholding tax exemption will be extended to qualifying payments in respect of qualifying loans entered into on or before 31 May 2016 by MSI-SRS companies, MSI-AIS companies and MSI-ML (Ship) entities, with foreign lenders to finance: the purchase or construction of Singapore-flagged and foreign-flagged vessels (including vessel lengthening or vessel conversion work); or the purchase of 100% of the shares of special purpose vehicles (“SPVs”) that have 100% legal and beneficial ownership of one or more Singapore and/or foreign flagged vessels. Qualifying entities are required to submit a self-declaration form by the 15th of the month following the first relevant payment due date to the non-Singapore tax resident lender, for each loan obtained to inform the MPA that the qualifying conditions have been met. It should be noted that an entity which is unable to meet the qualifying conditions for the withholding tax exemption may apply to the Singapore Ministry of Finance for remission of withholding tax.		Singapore Budget Statement 2012 Income tax exemption on gains from vessel disposal To further enhance Singapore as a maritime hub, gains derived from the disposal of vessels by qualifying ship operators and ship lessors under the MSI schemes (these include those under the MSI-SRS, MSI-AIS and MSI-ML (Ship) schemes) will be exempted from income tax automatically, without the need to opt for the exemption. Previously, qualifying ship operators and ship lessors had to opt into the concession and comply with conditions imposed. Gains derived from the disposal of vessels under construction and new building contracts will also be exempted from Singapore income tax pursuant to this tax concession. Further, gains derived by ship lessors under the MSI-ML (Ship) scheme from the disposal of foreign vessels will also be exempted from Singapore income tax. It is interesting to note that the above income tax concession will take effect retrospectively from the commencement of MSI scheme on 1 June 2011. Withholding tax exempting on charter fees Generally, payments of time, voyage and bareboat charter fees falling within Section 12(7)(d) of the Income Tax Act, Chapter 134 of Singapore (“ITA”) made to non-Singapore tax residents for the use of ships would be subject to withholding tax at the concessionary withholding tax rate of 2%, unless exempted under certain bilateral tax treaties. With effect from 17 February 2012, bareboat, voyage and time charter payments made to non-Singapore tax residents (excluding permanent establishments (“PEs”) in Singapore – these typically refer to foreign branches in Singapore) for the use of ships will be exempted from Singapore withholding tax. This is to further reduce business costs for ship charterers and improve Singapore’s competitiveness as an international maritime centre. In addition, payers will not be required to withhold tax on such payments made to a PE in Singapore. The PE in Singapore will continue to be assessed to tax on the charter fees received and declare the payments received in its annual income tax return. Enhancement to the MSI-ML (Container) scheme Automatic withholding tax exemption Pursuant to Singapore Budget Statement 2012, with effect from 17 February 2012, qualifying entities under the MSI-ML (Container) scheme will enjoy automatic withholding tax exemption on interest and other qualifying payments in respect of qualifying loans entered into on or before 31 May 2016 with foreign lenders to finance the purchase of qualifying containers (or a SPV that owns 100% of the qualifying container) and intermodal equipment, subject to meeting the qualifying conditions on a self-assessment basis. The following entities under the MSI-ML (Container) scheme will enjoy the above new withholding tax exemption: MSI-Approved Container Investment Enterprise (“MSI-ACIE”); and MSI-Approved Container Investment Enterprise (Local Approved Special Purpose Vehicle) (“MSI-ACIE (Local ASPV)”). Concessionary tax rate on leasing income of intermodal equipment Pursuant to Singapore Budget Statement 2012, with effect from the year of assessment 2013: income derived from the leasing of intermodal equipment (e.g. trailers) which is incidental to the leasing of qualifying containers will enjoy the concessionary tax rate of 5% or 10%, subject to meeting certain qualifying conditions; and “qualifying containers” will refer to containers that adhere to the standards defined by the ISO, IICL or any other equivalent organization. Marine and Offshore – Research and Development (“R&D”) Fund During the Singapore Budget Statement 2012, the Minister for Finance also announced that S$150 million will be allocated from the National Research Fund to the Agency for Science, Technology and Research (“*ASTAR”) and the Singapore Economic Development Board (“EDB”) to help Singapore companies build R&D capabilities to develop solutions for deepwater oil production. This will provide a boost to new growth opportunities within Singapore's marine and offshore industry. Conclusion The Singapore government has taken bold steps to bring Singapore’s tax regime on par with other international maritime nations during Singapore Budget Statement 2012. This is consistent with Singapore’s pro-business government policies to help Singapore evolve into a leading international maritime centre as well as a strategic centre for maritime business. Should you require any further information on tax incentives for the shipping and maritime sector in Singapore, please feel free to contact us. Written by: David Teo Shih Yee Director – Corporate and Tax Duane Morris & Selvam LLP 16 Collyer Quay #17-00 Singapore 049318 (Tel) +65 6311 3666 DTeo@duanemorrisselvam.com DUANE MORRIS & SELVAM LLP is a joint law venture between Duane Morris LLP and Selvam LLC**.