Opinions on Budget 2010: Corporate Tax

As Singapore shifts its focus from achieving mere industrialisation to becoming a world class economy in the next decade, tax measures which encourage high value-adding activities and greater intensification of industrial land use are called for to support the progressive restructuring of the economy.

However, the immediate phasing-out of Industrial Building Allowance (IBA) has taken many by surprise. It may prove costly to companies and businesses that would be unable to enjoy a significant tax deduction on an otherwise qualifying capital expenditure. Whilst traditional manufacturing and SMEs are the likely losers brought about by the change, it remains to be seen if the repercussion is intended to extend beyond the tip of this industrial iceberg.

Currently, businesses are allowed to claim IBA on qualifying capital expenditure on the construction or purchase of a building or structure which is to be used for a qualifying trade under Section 18(1) of the Income Tax Act (ITA). Under this regime, an initial allowance of 25 percent and an annual allowance of 3 percent may be claimed on qualifying capital expenditure. Hence, the full cost of a qualifying industrial building may generally be fully claimed over 25 years.

In general, IBA will no longer be allowed on capital expenditure on the construction or purchase of industrial buildings or structures incurred from 23 February 2010, except under limited circumstances.

For the existing IBA claimants, there would also be a ‘grandfathering’ of the existing IBA provisions such that they can continue to claim remaining IBA until the allowances are fully claimed.

In its place, the new Land Intensification Allowance (LIA) incentive is available to businesses incurring qualifying capital expenditure for the construction of a qualifying building or structure. However, the user of the building or structure needs to be from one of the following nine industry sectors: Pharmaceuticals, Petrochemicals, Petroleum, Specialties, Other Chemicals, Semiconductor-Wafer Fabrication, Aerospace, Marine and Offshore Engineering or Solar Cell Manufacturing.

Subject to other conditions, businesses qualifying for LIA are able to claim an initial allowance of 25 percent and annual allowance of 5 percent. This means that the qualifying expenditure may be claimed over 15 years.

The proposed change shifts the criteria for capital expenditure claims on a qualifying building or structure from that of its qualifying use to that of the industrial sector that it falls under and the intensity of use of the land it occupies.

The question for the longer term is whether production gains from the targeted sectors (which will be the beneficiaries of the new LIA incentive) would more than offset any decline in such gains from the broader base of industry players denied this benefit.

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.