The Case For Singapore – Jason Meyers – March 10, 2015

The Case for Singapore – Jason Meyers

The Republic of Singapore is 276 square miles. By comparison, it’s about 2/3 the size of New York City. As of 2014, its total population is almost 5.5 million. It is one of the most educated societies in the world. 90% of its residents own their own homes. The divorce rate is approximately 7%. There are also 10 females for every 9 males! According to World Atlas, Singapore is the 5th richest government in the world. Its wealth per capita is $56,797. The Swift Institute lists GIC Private Limited as the 8th largest sovereign wealth fund with over $320 billion in AUM and Temasek Holdings as 11th with $177 billion in AUM, both wholly owned by the government of Singapore. Consultancy firm PricewaterhouseCoopers predicts that Singapore could dislodge Switzerland as the world’s wealth management capital. Singapore is the Startup capital of Asia.  The National Research Foundation (NRF), under its Technology Incubation Scheme (TIS) is an initiative under the National Framework for Innovation and Enterprise (NFIE) program, which was set up in March 2008. Under the TIS scheme, NRF could co-invest up to 85% of investment (up to SGP$500,000 per company) into Singapore-based start-ups, on a recommendation from one of 14 Technology Incubators appointed by NRF.

Singapore’s Aspirations

If Singapore gets its way, it will fast become the startup capital of the world. It has aspirations to become the world’s first “smart nation” and extended a $200 million fund to U.S. startups in January of this year. The fund is managed by Infocomm Investments which is the venture capital arm of the Singaporean Government’s Infocomm Development Authority (IDA) and was previously restricted to Singaporean companies and citizens. Singapore hopes to attract U.S. startups to help accelerate its Smart Nation initiative and develop new, sustainable and viable solutions that will improve all aspects of Singaporean society and meet public needs. US Startups now have an alternative to traditional funding sources and an opportunity to locate in Singapore and tackle the fast growing, emerging markets of Southeast Asia, Hong Kong, and China as a result of the extension of the IDA fund. Startups targeting the sharing economy, wearable technology, augmented reality, touch interfaces, mobile, data collection, and analytics will qualify for funding.  $200 million is not an incentive for any US startup to locate in Singapore but its other investment arms are patient and have a tendency to fortify any interest that has the potential for profit especially if it furthers the betterment of Singapore.

Regulation

Unlike FINRA, the anti-small business autocratic regulatory monolith appointed by the SEC in the US, the Monetary Authority of Singapore (MAS)  has a supportive regulatory framework. Under the present regulatory scheme, MAS supervises the securities industry. It has less oversight of an exchange´s disciplinary procedures and rule changes. The day to day supervision of the market is still left with the SGX. The internal management of the SGX is regulated by its Memorandum and Articles of Association. Trading in securities is regulated by the SGX Rules. The criteria for listing and the obligations of listed companies are found in the SGX Listing Manual. In addition to the Securities and Futures Act which governs securities offerings, the other major piece of legislation impinging on securities regulation is the Companies Act (Chapter 50, 2006 Revised Edition). This makes provision for matters such as the formation of audit committees for publicly listed companies. Besides the two major Acts, the securities industry is also regulated by subsidiary legislation. The Companies Regulations and Securities and Futures Regulations are promulgated under the respective Acts. In practice, other non-statutory rules also apply. Foremost among these is the Singapore Code on Take-overs and Mergers, a non-statutory code enforced by the Securities Industry Council (`SIC´), as well as the Code on Collective Investment Schemes.

See Securities and Futures Act and Companies Act
See also Chapter 17 Corporate Finance and Securities Regulation

Taxation

The corporate tax rate in Singapore is 17%. From the Year of Assessment (YA), companies will receive a 30% corporate income tax rebate capped at SGD30,000 per YA. There is a partial exemption of 75% on the first SGD10,000 and 50% on the next SGD290,000 of the company’s income. Start-up tax exemption can be granted on the regular income of a qualifying company on its first SGD100,000 and a further 50% exemption is given on the next SGD200,000, for each of its first three consecutive years of assessment. A concessionary tax rate of 10% or lower applies to qualified entities.  The corporate income tax rate in the United States is approximately 40%. The marginal federal corporate income tax rate on the highest income bracket of corporations (currently above USD 18,333,333) is 35%. State and local governments may also impose income taxes ranging from 0% to 12%, the top marginal rates averaging approximately 7.5%. A corporation may deduct its state and local income tax expense when computing its federal taxable income, generally resulting in a net effective rate of approximately 40%. The effective rate may vary significantly depending on the locality in which a corporation conducts business. The United States also has a parallel alternative minimum tax (AMT) system, which is generally characterized by a lower tax rate (20%) but a broader tax base.

Legal Structure

As a Commonwealth nation, Singapore’s legal system has its roots in English law and practice. Founded in 1819 by Sir Stamford Raffles, the once sleepy island was transformed into a major entrepȏt along the shipping route between Europe and the Far East. With the arrival of the British, English law and customs were adopted. Since self-governance in 1959 and independence from Malaysia in 1965, Singapore has developed its own autochthonous legal system, establishing legislation and case law that are unique to its social and economic circumstances. Despite forging its own path suited to Singapore’s requirements, there is one inherited British legal foundation that remains intact, albeit just: common law. Singapore inherited the English common law traditions, especially in contract, tort and restitution, and thus the stability, certainty and acceptance that such law enjoys among other Commonwealth nations. While Singapore courts still refer to case law emerging from England, it has made significant departures in the past 30 years, especially in statute-based areas such as company law, criminal law and evidence, in favour of local jurisprudence.

Source: SingaporeLaw http://www.singaporelaw.sg/sglaw/

Summary of Investment Risks In Singapore Companies

It may be difficult to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against a Singapore company, its directors and officers in Singapore. 

There is no treaty between the United States and Singapore providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters and a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would, therefore, not be automatically enforceable in Singapore. There is doubt whether a Singapore court may impose civil liability on a Singapore company, its directors and officers who reside in Singapore in a suit brought in the Singapore courts against a Singapore company or such persons with respect to a violation solely of the federal securities laws of the United States, unless the facts surrounding such a violation would constitute or give rise to a cause of action under Singapore law. (See Morrison v NAB) Consequently, it may be difficult for investors to enforce against Singapore companies, their directors and/or officers in Singapore, judgments obtained in the United States, which are predicated upon the civil liability provisions of the federal securities laws of the United States.

Holders of Singapore based companies may have more difficulty in protecting their interest than they would as shareholders of a corporation incorporated in the United States.

The corporate affairs of a Singapore company are governed by its memorandum and articles of association and by the laws governing corporations incorporated in Singapore. The rights of shareholders and the responsibilities of the members of its board of directors under Singapore law are different from those applicable to a corporation incorporated in the United States. Shareholders of public companies in Singapore may have more difficulty in protecting their interest in connection with actions taken by the company’s management or members of its board of directors than they would as shareholders of a corporation incorporated in the United States. Draft legislation that would make significant changes to the Singapore Companies Act has recently been proposed by the Singapore authorities, some of which may alter the rights of shareholders that are currently provided under the Singapore Companies Act and a Singapore company’s memorandum and articles of association. However, it is not yet certain which of these amendments will be included in the final legislation or when such amendments will become effective.

Directors of Singapore companies have general authority to allot and issue new ordinary shares on terms and conditions as may be determined by its board of directors in its sole discretion.

Under Singapore law, a Singapore company may only allot and issue new ordinary shares with the prior approval of shareholders in a general meeting. Subject to the general authority to allot and issue new ordinary shares provided by shareholders, the provisions of the Singapore Companies Act and a Singapore company’s memorandum and articles of association, the board of directors may allot and issue new ordinary shares on terms and conditions as they see fit.

Singapore corporate law may impede a takeover of a public Singapore company by a third-party.

The Singapore Code on Take-overs and Mergers contains provisions that may delay, deter or prevent a future takeover or change in control of a company for so long as it remains a public company with more than 50 shareholders and net tangible assets of S$5 million or more. Any person acquiring an interest, whether by a series of transactions over a period of time or not, either on their own or together with parties acting in concert with such person, in 30% or more of a company’s voting shares, or, if such person holds, either on their own or together with parties acting in concert with such person, between 30% and 50% (both inclusive) of its voting shares, and such person (or parties acting in concert with such person) acquires additional voting shares representing more than 1% of the target’s voting shares in any six-month period, must, except with the consent of the Securities Industry Council in Singapore, extend a mandatory takeover offer for the remaining voting shares in accordance with the provisions of the Singapore Code on Take-overs and Mergers. While the Singapore Code on Take-overs and Mergers seeks to ensure equality of treatment among shareholders, its provisions may discourage or prevent certain types of transactions involving an actual or threatened change of control of a Singapore public company. These legal requirements may impede or delay a takeover of the target company by a third-party, which could adversely affect the value of the target’s ordinary shares.

Singapore companies may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences to US Holders.

A non-United States corporation is considered a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the total value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. For this purpose, the total value of a Singapore company’s assets generally will be determined by reference to the market price of the Company’s shares. It is widely believed that shares of a Singapore company should not be treated as stock of a PFIC for United States federal income tax purposes for any taxable year. However, there is no guarantee that the United States Internal Revenue Service will not take a contrary position or that a Singapore company’s shares will not be treated as stock of a PFIC for any future taxable year. The PFIC status of a Singapore company will be affected by, among other things, the market value of its shares and the assets and operations of the company and its subsidiaries. If a Singapore company were to be treated as a PFIC for any taxable year during which a US Holder (defined below) holds shares of a Singapore company, certain adverse United States federal income tax consequences could apply to the US Holder.

PFIC Rules

It has been advised that shares of a Singapore company should not be treated as stock of a PFIC for United States federal income tax purposes during a given year. However, the application of the PFIC rules is subject to uncertainty in several respects, and there has been no assurance that the United States Internal Revenue Service will not take a contrary position. In addition, PFIC status is a factual determination which cannot be made until the close of the taxable year. Accordingly, there is no guarantee of PFIC status for any future taxable year. Furthermore, because the total value of a Singapore company’s assets for purposes of the asset test generally will be calculated using the market price of the company’s shares, PFIC status will depend in large part on the market price of the the company’s shares. Accordingly, fluctuations in the market price of the company’s shares could render the company a PFIC for any year. A non-U.S. corporation is considered a PFIC for any taxable year if either:

at least 75% of its gross income is passive income, or

 

at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

In the PFIC determination, the company will usually be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other corporation in which it owns, directly or indirectly, 25% or more (by value) of the stock. If the company were to be treated as a PFIC for any year during the US Holder’s holding period, unless a US Holder elects to be taxed annually on a mark-to-market basis with respect to the shares (which election may be made only if the Company’s shares are “marketable stock” within the meaning of Section 1296 of the Code), a US Holder will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition (including a pledge) of that holder’s shares. Distributions a US Holder receives in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or the holder’s holding period for the shares will be treated as excess distributions. Under these special tax rules:

the excess distribution or gain will be allocated ratably over the US Holder’s holding period for the shares;

 

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which the Company is treated as a PFIC, will be treated as ordinary income; and

 

the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if the shares are held as capital assets. If the Singapore company were to be treated as a PFIC for any year during which a US Holder holds the shares, the Singapore company generally would continue to be treated as a PFIC with respect to that US Holder for all succeeding years during which it owns the shares. If the Singapore company were to cease to be treated as a PFIC, however, a US Holder may avoid some of the adverse effects of the PFIC regime by making a deemed sale election with respect to the shares. If a US Holder holds shares in any year in which the Singapore company is a PFIC, that holder will be required to file an annual information report with the United States Internal Revenue Service.

Information Reporting and Backup Withholding

Dividend payments with respect to shares of the Singapore company and proceeds from the sale, exchange or redemption of such shares may be subject to information reporting to the United States Internal Revenue Service and possible United States backup withholding. Backup withholding will not apply, however, to a US Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. US Holders that are required to establish their exempt status generally must provide such certification on United States Internal Revenue Service Form W-9. US Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a United States federal income tax liability, and a refund may be obtained for any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the United States Internal Revenue Service and furnishing any required information in a timely manner.

Additional Reporting Requirements

Certain US Holders who are individuals are required to report information relating to an interest in shares of a Singapore company, subject to certain exceptions. US Holders should consult their tax advisors regarding the effect, if any, of this United States federal income tax legislation on their ownership and disposition of such shares. Notwithstanding the risk factors of investing in Singapore, when considering its tax, regulatory structure, government incentives for small business and the quality of life, not to mention the best prawns in the world, it is clear that Singapore will be giving the rest of the world a run for whatever money it has left. Jason Meyers is a venture capitalist based in New York City.