Singapore's headquarters incentives: The icing on the pizza

The Nation

This is the second of a three-part series provided by Grant Thornton in Thailand on the Kingdom’s move to be a centre for Regional Operational Headquarters (ROH) as the government has tried to relax regulatory barriers to bring in foreign investment.

Singapore’s International Headquarters (IHQ) package (compared with the Regional HQ scheme, which was rather lame) is now woven in with other incentives that aim to attract the whole business structure. Typically these might include any combination of other incentives on offer by the Economic Development Board (EDB), such as:

lPioneer service incentive (tax exemption)

lDevelopment and expansion incentive (reduced rates down to 5 per cent)

lIntegrated investment allowances (additional tax depreciation)

lApproved foreign loans incentive (withholding tax exemptions)

lApproved royalties, fees and development contribution incentives (withholding tax exemptions)

lForeign tax credit (FTC) incentive (10-per-cent rate on income and withholding tax-exemption

lGrants

Negotiating an IHQ incentive package is therefore like building your own pizza, only you have to provide all the ingredients and you don’t know when you start or what shape it will turn out. The conditions are typically shrouded in mystery. Every incentive award is personal to the holder, whose conditions, as the incentive certificate will tell you, are not to be divulged to other parties. This allows for no precedents to be quoted back to them.

It is therefore difficult, under these constraints, to form direct comparisons with incentives that have similar focus in other countries. However, a "target" package will often involve concessionary tax rates for HQ service fee income, an embedded Finance and Treasury Centre with its withholding-tax exemptions, and a concessionary rate of tax on mainstream "entrepreneur" business income that is channelled through Singapore.

Levels of commitment to Singapore in terms of employment, local business spending, training and technology will of course be correspondingly demanding – and to hit the high end of the incentives you are typically looking at many millions of dollars of turnover and local spend. But there is only one way to find out what your pizza is going to look like, and that is to book a table at the EDB.

The Thai story

A headquarters incentive has been available in Thailand now for a number of years. However, in November 2010 a new model was brought in that upgraded and modified some of the qualifying criteria as well as the benefits. Companies that were already on what is known as the "old regime" were able to elect to stay on it, or move to the new one, and new entrants were allowed to choose between them.

The old regime

The old regime laid down certain qualifying criteria. The company had to have a paid-up share capital of Bt10 million or more and provide qualifying services to at least three approved affiliates based in countries outside Thailand. For these purposes, an affiliate is defined in the same way as in Singapore, that is 25 per cent or more under group ownership.

Qualifying income includes service fees in relation to qualifying services, royalties from the exploitation of intellectual property developed by the Regional Operational Headquarters (ROH) and interest on funds on-lent to the affiliates.

Unlike in Singapore, however, where only income from foreign affiliates qualifies (except to a limited degree in the case of the FTC incentive), income from Thai-based affiliates also qualifies, provided the income from overseas affiliates makes up 50 per cent or more of the ROH’s total income (although this is reduced to one-third for the first three years).

For these purposes, total income includes qualifying as well as non-qualifying income, so some planning may be needed around whether, and to what extent, you house the ROH activity in a separate entity. This aspect leaves some interesting tax-arbitrage opportunities within the context of the 50-per-cent rule.

So, what are the benefits under the scheme? The first is a 10-per-cent rate of tax on qualifying income (compared with the standard 20 per cent, which was 30 per cent but the temporary reduction seems to keep being extended annually), and there is also a withholding-tax exemption for dividends paid by the ROH (compared with 10 per cent). What this does is reduce the tax cost of fully repatriated headquarters income from 28 per cent (20 per cent plus 10 per cent times 80 per cent) to 10 per cent.

The most notable difference from Singapore is that the incentive creeps under the wire and into the personal tax camp. Expatriate employees can choose to be taxed at a flat rate of 15 per cent for four consecutive years – and why wouldn’t you, when the 30- and 35-per-cent tax rates kick in at Bt2 million and Bt4 million respectively?

Singapore has long been asking how it can improve its incentives and make them more appealing (the inference being that they have already squeezed as much juice as they can out of the corporate-tax lemon). Well, here is the answer: It may not have occurred to some that business decisions are not made by corporations, but by human beings. No need to go into discussions on the frailties of human nature here. Enough said.

David Sandison, the author, is Grant Thornton’s international tax specialist from Singapore. The last part will be published tomorrow.