2015 - Budget 2015 - Key Takeaway for Fund Insurance and Banking Sectors

FUND MANAGEMENT SECTOR

Asia Pacific region continues to be the top investment destination for investors from within and outside Asia. Singapore continues to woo the fund houses from all around the world because of its connectivity to Asia, robust regulatory framework and a pro-business government that has conducive policies favouring the fund management sector. With increasing competition from the neighbouring economies, Singapore constantly reinvents its policies in order to remain at the forefront of the industry. The proactive role has successfully translated into a robust growth of 11.8% in Assets under management (AUM) in 2013, when it expanded to S$1.82 trillion from S$1.63 trillion in 2012. The government has always heeded the appeals of the industry operators and has laid out some favourable proposition in this year’s budget.

Enhanced Tier Fund Tax (ETF) Incentive Scheme- Enhanced to include SPVs

The scheme, which grants tax exemption to approved fund vehicles on specified income derived from designated investment subject to certain qualifying conditions, did not extend to the Special Purpose Vehicles (SPV). It is a common practice for master funds to set up SPVs for making investments and this is done for commercial and legal reasons. Since SPVs do not automatically qualify for exemptions SPVs had to apply independently and must meet the set conditions to qualify under the SRF or ETF. This meant additional burden and compliance costs for the funds. The concern of the sector was addressed in this year’s budget.

Effective 1 April 2015, the existing concession for master-feeder fund structures will be extended to SPVs held by the master fund, subject to conditions. This enhancement will enable master and feeder funds and SPVs within a master-feeder fund structure to apply for the scheme and meet the economic conditions on a collective basis.

Our Comments

Singapore originally granted tax exemptions to offshore funds managed from Singapore in order to encourage fund managers to setup in Singapore. Eventually Singapore resident funds were also extended exemptions on meeting the set criteria under the Singapore Resident Fund (SRF) Scheme. This furthered the appeal of Singapore to fund managers, and the landscape of the fund management industry evolved to include more sophisticated structures, leading to master-feeder arrangements. ETF was introduced in 2009 and under this, there are no restrictions imposed on the residency status of the fund vehicles as well as that of investors and the shareholding threshold on resident non-individual investors was also lifted. While the master funds and their feeders were qualified for tax exemption the wholly owned SPVs did not automatically qualify, thus accentuating the limitation of the ETF scheme. The enhancements announced in favour of SPVs will drive the fund managers to set up more SPVs in Singapore for effective fund management.

INSURANCE SECTOR

The government has been keen on developing Singapore into a regional hub for the insurance sector, part of this growth strategy is attributable to several concessions available for the players in the industry. This along with the vast market share in the region and a rich industry ecosystem has attracted several top global companies to Singapore.

Offshore Insurance Business Tax Incentive Scheme (OIB) – Extended

The scheme provides a concessionary tax rate of 10% on the incomes of approved offshore general, life and composite insurers and reinsurers. Every insurer who successfully qualifies under the scheme will be granted 10-year approval. It was due to expire in March 2015 but has been extended for another five years and the scheme will be known as Insurance Business Development Incentive. A renewal framework will be introduced in April 2015.

Our Comments

The extension of this widely used scheme is good for the sector but more could be done when compared to other regional economies like Malaysia where the offshore insurers enjoy more competitive rates. The qualifying criteria are not too demanding, this will encourage more potential foreign players to enter the market. The competition will lead to more product offerings and bring in more specialized players.

BANKING AND FINANCE SECTORS

The pro-industry policy framework has honed Singapore’s reputation as an international financial centre. This has attracted a number of financial institutions to set up and operate from Singapore. The trend of constant fine-tuning of policies and concessions has been upheld in this year’s budget as well.

Collective Impairment Provision – deduction extended. 

Under MAS requirements Banks and Finance companies have to make provisions for impairment – an estimate of loss on loan account or investments. A collective impairment is an estimate of loss on portfolio of accounts instead of on an account-by-account basis. Any increase in the estimate is treated as an expense for the company. Recognizing that it is a cost for the company’s, such costs, subject to caps, were allowed for deduction. The concessionary treatment was due to expire after YA 2016 or YA 2017, depending on the financial year-end of the financial institutions.

Tax deductions for collective impairment provisions will be extended till YA 2019 or YA 2020, depending on the financial year-end of the financial institutions.

Our Comments

This is a welcome relief for financial institutions, as they need some time to adjust to the new International Financial Reporting Standards, which applies from FY 2018. Some ambiguities of treatments are bound to be there during the transition therefore the extension will be a breather for the FIs.

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