Singapore can stake its claim as the location of choice for MNCs seeking to set up regional headquarters, owing in part to its business-friendly tax policies. The Republic has all the ingredients that make it an excellent choice as a nerve centre for companies with operations in the Asia-Pacific.

There is a strong infocommunications infrastructure, a stable political climate, a pool of skilled professionals and a strategic location. Its favourable tax policies also boost Singapore's allure as a launch pad for investments into the region.

We take a look at some of these tax trump cards which enhance Singapore's attractiveness as a regional holding and headquarters location for MNCs.

Low corporate tax rate

Singapore has been steadily reducing its corporate tax rate to enhance competitiveness. This is evident from the 2007 Budget announcement to reduce Singapore's headline corporate tax rate by a further two per cent to 18 per cent with effect from the year of assessment 2008. With this cut, Singapore's corporate tax rate will be only marginally higher than Hong Kong's 17.5 per cent.

Singapore's corporate tax rate is further reduced if a company qualifies for tax incentives, and all companies will now enjoy partial tax exemption on the first S$300,000 (US$196,141) of chargeable income. Therefore, the effective tax rate of many companies may be lower than the headline rate of 18 per cent.

Absence of capital gains tax

Singapore does not tax capital gains. This provides a viable exit strategy that is crucial to the planning of an overseas expansion strategy.

One-tier corporate tax

The introduction of the one-tier corporate tax system in 2003 removed a tax impediment that previously required dividends to be franked. The removal of this tax obstacle allows Singapore-based holding companies or headquarters to repatriate capital gains from divestments to their home countries without any Singapore tax leakage.

Foreign income exemption

Singapore adopts a territorial basis of taxation. Foreign-sourced income is taxed only when it is repatriated back into Singapore. In addition, tax is not levied on foreign-sourced dividends remitted back into Singapore provided the dividends are received from a country with a headline corporate tax rate of at least 15 per cent, some tax was paid in that country (such as withholding tax paid on the dividends or income tax paid on the profits out of which the dividends were paid) and the exemption is beneficial to the Singapore company.

If tax was not paid in the foreign country as a result of a tax incentive for carrying out substantive economic activities in that foreign country, specified documents need to be submitted to qualify for a tax concession to treat the tax-paid condition as met.

Singapore-based holding companies or headquarters can therefore generally repatriate dividends from their directly held foreign subsidiaries to Singapore free of Singapore tax. Those whose foreign subsidiaries are engaged in substantive economic activities but are unable to meet the qualifying conditions for this tax exemption may apply for a specific exemption.

Wide tax treaty network

Regional headquarters here can tap Singapore's extensive tax treaty network with over 50 countries to benefit from the reduced withholding taxes on dividends, interest and royalties. Tax treaties can also help to reduce instances of creating a taxable presence in foreign countries. Companies heavily involved in cross-border deals will find this useful to mitigate double taxation.

Regional HQ incentive

To encourage multinational companies to set up their regional headquarters here, the Economic Development Board offers the Regional Headquarters (RHQ) and the International Headquarters (IHQ) incentives. Companies which are conferred the RHQ status enjoy a concessionary tax rate of 15 per cent for qualifying income arising from headquarters activities and operations carried out from Singapore. Those awarded IHQ status enjoy even further attractive tax rates of between zero and 10 per cent.

Not Ordinarily Resident scheme

To attract talent to relocate to Singapore, the NOR scheme was introduced in 2002. Individuals exercising employment in Singapore but whose duties are regional, requiring them to spend at least 90 days a year outside Singapore may apply for the NOR scheme for their Singapore employment income to be taxed on a time-apportionment basis for up to five years of assessment. This is subject to a minimum threshold tax rate of 10 per cent.

Employees who travel extensively can benefit from this scheme to reduce their personal Singapore income tax if specified conditions are satisfied. For those on tax equalisation, this scheme will help to reduce the operating costs of the regional headquarters company.

Writing-Down Allowance (WDA) for Intellectual Property (IP)

Regional headquarters which use Singapore as an international IP holding location may claim WDA for the cost of acquisition of the IP. Previously, this WDA was applicable to IP acquisition costs incurred in the five years from 1 November 2003 but this concession will be extended by another five years to 31 Oct 2013, according to Budget 2007.

Advance Pricing Arrangements (APA)

On the surface, APAs may not appear to be an important feature. However, the transfer pricing guidelines issued by the Inland Revenue Authority of Singapore in February 2006, that set out the procedures for applying for APAs and Mutual Agreement Procedure facilities, provide good guidance to MNCs on how they can take advantage of these facilities to avoid double taxation. This is an important consideration for regional headquarters, given that transfer pricing is one of the most important tax issues facing multinational companies today.

Proactive Regulators and Agencies

Last but not least is the readiness of our regulators and promoting agencies to regularly adapt and improve the tax framework and incentives to promote Singapore as a relevant regional headquarters location for MNCs. Many countries in the region are in the race to be the choice regional holding or headquarters location. In the face of such competition, the responsiveness of our government is key to ensuring that Singapore continues to stay ahead in the race to be the preferred regional headquarters hub.

* This article was formerly published in the March-April 2007 issue of You and the Taxman - a bi-monthly tax publication by Ernst & Young - and is reproduced in full here.