How Singapore's incentives for headquarters evolved

One of the rather old babies that was swept out the door was an incentive that had been around for a long time but whose thunder had been stolen over the years by subsequent initiatives that overlapped and improved upon it. This was the “Approved Headquarters” incentive (originally known as the Operational Headquarters, or OHQ, incentive) given under Section 43E of the Singapore Income Tax Act.
The demise of this trusty old warrior seems to present an ideal opportunity to step back and take a look at what goodies remain available in Singapore for regional (or indeed global) headquarter operations, but at the same time do a little comparison with Thailand’s present offerings.

Genesis
The OHQ incentive was first brought in around late 1992 as a way of encouraging multinationals to use Singapore as a base for their incursions into Asia, and it has to be admitted that it met with significant success. What it did was provide a 10-per-cent rate of tax on fee income generated from “associated companies” (that is, those in which an entity held a 25-per-cent stake or more) that operated outside Singapore, in respect of an array of head-office/back-office services as well as a limited range of treasury-type activities.
Then, around about the turn of the century, the incentive was enhanced to provide tax exemptions for similar activities where the company made Singapore not just its regional headquarters, but also its global HQ. For obvious reasons, this enhancement to the package did not attract as many acolytes.
The incentive was administered by the Economic Development Board (EDB). However, another regional-type incentive was in place over at the Monetary Authority of Singapore (MAS). This was known as the Finance and Treasury Centre (FTC) incentive, and the aim, again, was to encourage regional support services of a specific financial nature.
In addition to duplicating many of the treasury aspects of the OHQ incentive, it actually went further by extending the range of qualifying services and income. More important, though, it granted withholding-tax exemptions for interest on borrowings from overseas that supported those activities.
Then, in 2003, in a move that put the writing on the wall for OHQ, the EDB introduced two new headquarter incentives, the Regional Headquarters (RHQ) incentive, and the International Headquarters (IHQ) incentive. This made the HQ space a bit of a crowded house, with up to four regional-type packages available (and in fact with others on the launch-pad for mainline business activities).
The RHQ became the entry-level incentive, surprisingly, offering even less than the OHQ. However, its 15-per-cent tax rate on qualifying income and some fairly complex conditions that went with it meant that in most cases, and given Singapore’s already competitive 17-per-cent basic corporate tax rate, it was just much more trouble than it was worth.
The IHQ was paraded as the gold-class award, which indeed, with subsequent tweaks, it has turned out to be. But it was surrounded by one great mystery: its qualifying conditions. All that is mentioned in the literature is that IHQ requires something more than the RHQ qualifying conditions (which, by contrast, are spelled out in graphic detail). It therefore inevitably involves a trip down to the EDB offices to find out what is actually going on.

Exodus
The final nail was put in the OHQ coffin when the administration of the FTC incentive was switched from the MAS to the EDB, although it has hung around in the waiting room for a number of years before being finally laid to rest on September 30 this year.

Where we are now
What we are left with now on the headquarters front is something more holistic and “touchy-feely” than what used to be available under the previously more siloed and prescriptive approach to incentives. This is largely because the EDB’s focus has similarly shifted over the years from just attracting the head office “top brass” to going after the value drivers of the business itself.
The entrepreneurial model under which Singapore is the nerve centre, profit generator and intellectual property owner for the region is now king, its regional servants being the outsource providers and toll and contract manufacturers.

This article is the first of three parts provided by Grant Thornton in Thailand. David Sandison, Grant Thornton’s international tax specialist in Singapore, who wrote the article, focuses on the incentives Thailand offers under its for Regional Operating Headquarters scheme compared with Singapore’s similar regime.

The next two parts will appear on Monday and Tuesday