Commentary

Singapore has long put in place favourable tax incentives targeted at traditional shipping businesses. As part of the Government’s continuing efforts to promote Singapore as a maritime hub, recent Budget announcement has proposed to further enhance the existing shipping incentives and to introduce new incentive. Extension of Maritime Finance Incentive (MFI)The MFI offers alternative financing solutions to shipowners by allowing ship or container leasing companies, funds, business trusts or partnerships to enjoy the following tax incentive for a period of up to ten years:• A full tax exemption or concessionary tax rate of 5 percent or 10 percent on qualifying income derived by an approved MFI entity;• A concessionary tax rate of 10 percent on qualifying income derived by an approved manager.Originally set to expire on 28 February 2011, the expiry date of MFI has been extended from 28 February 2011 to 31 March 2016. However, applications made after 1 March 2011 will only enjoy an incentive period of not more than five years.However, the incentive period of five years may not be sufficient to provide certainty to taxpayers in the maritime industry where the capital investment is generally huge and the related tax cost is significant. Tax Incentive for Ship Brokers and Forward Freight Agreement (FFA) TradersIn general, Ship brokers and FFA traders are taxed at the prevailing corporate income tax rate. A concessionary tax rate of 10 percent for a period of five years is accorded to qualifying companies that solely carry on a business in ship broking and/or FFA trading. To enjoy this tax incentive, companies have to apply to the Maritime and Port Authority (MPA) between 1 April 2010 to 31 March 2015. Further details would be released by the MPA by end March 2010.From the recent global financial turmoil, it is clear that the shipping industry is not insulated from the consequences of financial crisis. Freight rates become volatile when demand for global trading drops. Generally, FFAs (which essentially are paper freights or option contracts on freight rates) allow parties to the agreement to take a position in a paper freight (futures) market as a substitute for physical or cash transaction. Thus FFAs offer ship owners, operators and charterers a tool of insurance and management against the volatility of freight rates. The incentive reflects the Government’s recognition of the importance of risk management to the growth of the shipping industry. However, it remains to be seen what conditions ship brokers and FFA traders must meet to qualify for the tax incentive. Tax Exemption On Ship Management Fees Currently, ship management fees do not enjoy tax exemption and is taxed at the prevailing corporate income tax rate unless it qualifies for concessionary tax rate under the Approved Shipping Logistics Enterprise scheme. Under the proposal, the scope of tax exemption under Section 13A of the Income Tax Act (ITA) and Approved International Shipping (AIS) scheme would be extended to cover qualifying income derived from the rendering of ship management services to qualifying related Special Purpose Vehicles (SPVs). This extension is a long-awaited welcoming leap for the shipping industry and is in line with the aim to promoting growth of the ship management industry in Singapore. No details are currently available as to what would constitute qualifying related SPVs. Further details are expected to be released by the MPA by the end of March 2010.”Land Intensification Allowance (LIA)The introduction of the LIA is also consistent with the Government's call to achieve higher productivity and efficient land use. However, the importance of aligning the qualifying industries and the qualifying criteria with the Government's focus in promoting Singapore as a business hub for various industries should not be underestimated. In this respect, the inclusion of other sectors such as port, warehousing, transportation and logistics support into the existing nine qualifying industry sectors should be considered. This is crucial as cost effectiveness and operational efficiency are vital to maintaining and improving Singapore's world-wide ranking as one of the busiest ports.The writer is an Executive Director of KPMG Tax Services in Singapore. The views expressed herein are those of the author and do not necessarily represent the views of KPMG in Singapore.

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