Once certain issues are sorted out, the country will become a brilliant location for both managers and their funds
By DAVID SANDISON 2 December 2008
There is no doubt that there has been an unprecedented surge in interest in Singapore as a fund management location over the past couple of years. This was kicked off by a keen interest from hedge fund start-ups, then increasingly mature hedge fund businesses, and finally a feeding frenzy in the Singapore real estate market that caused the real estate managers to turn their attention here.
Obviously, there are significant economic and infrastructure drivers that have contributed to the volume increase. However, tax incentives have also added something more than just lipstick and perfume to the overall attractiveness of the location.
Probably the two most significant changes to have come about are the scrapping of the 80:20 rule relevant to funds managed from Singapore (which we will not deal with further here) and the ‘on-shoring’ of funds to grant them access to concessions previously only available to offshore entities.
The changes brought about by these initiatives have been dramatic, and have created significant interest from managers around the world. I would not go so far as to say that Singapore is now a tax haven with tax treaties for fund managers, but that is largely because it does not have an ocean facing beach.
When you consider the analysis below, and on the assumption that some of the thorns in the side that are currently causing irritation will hopefully be teased out in the next few months, it will be difficult to admit that Singapore does not stand head and shoulders above its fund management centre competitors.
There are a number of factors that a manager is after when he is putting a fund together. The first is protection for the fund, and consequently the investors, from tax issues that are actually created by the fund manager and the way he structures himself. The second is to minimise tax costs for the fund which are independent of the manager’s structure. The third, though perhaps least important, is a minimisation of the tax on the manager’s own income from managing the fund.
Singapore offers all of these opportunities. Firstly, all funds managed by a Singapore-based fund manager (a term that is defined) are protected from Singapore tax in respect of ‘specified income from designated investments’ which in shorthand means pretty much returns from any type of equity, debt or real estate investment other than real estate situated in Singapore (for obvious reasons).
Secondly, the new onshore fund scheme allows access to Singapore’s significant treaty network (in comparison, Singapore: 58 countries, the Cayman Islands: nil) which has the benefit of reducing withholding taxes on dividends and interest from investments, as well as in some cases protecting against local capital gains tax.
Finally, managers that reach a certain operational critical mass and employ staff of the requisite calibre can qualify for a concessionary tax rate on their income of 10 per cent.
So is this a free lunch? We all know that the free lunch is a myth. Of course, there are strings attached, especially if you want to enjoy the full suite of benefits and protections. However, none of them is particularly onerous and, in many respects, they all fit in quite neatly with how the managers would in any event like to organise themselves in an ideal world.
The onshore fund
To qualify for the onshore fund exemption, the fund entity, inter alia, has to be a private limited company that is incorporated and tax resident in Singapore and which has a management or advisory agreement with a Singapore-based fund manager. It also has to be a qualifying fund, which means that it is not 100 per cent owned by Singapore investors.
The other significant requirement is that the fund must be administered from Singapore. What administration means may vary from fund to fund and obviously will be much different for a retail equity fund compared to a private real estate or infrastructure fund; but it basically means that your back office (accounting, documentation, investor information) should be handled here. This can be either internally or externally. Taken as a whole, if the manager, the fund and the auditors are here, it makes sense to have as many as possible of the other ancillary service providers based in Singapore too. So the thrust of the incentive is to encourage efficiency and convenience rather than put obstacles in the way.
In relation to treaties, there are no requirements from the Singapore side. Rather, the critical issue, in obtaining the treaty benefits outlined above, is being able to prove to the tax authorities in the investee location that the Singapore entity is not simply there as a means of obtaining treaty benefits. The fact that the onshore fund entity is incorporated and resident in Singapore, is serviced by a genuine fund manager based in Singapore and is surrounded by a host of other local service providers, should make it difficult for the authorities to argue that the Singapore fund is not bona fide and properly entitled to the benefits.
This is a significant area of growing concern, as regional tax authorities (particularly those in Japan, South Korea, China and India) become increasingly aggressive and sophisticated in their policing of treaty shoplifting offences. Singapore, therefore, has a clear advantage over traditional fund locations in tax havens which then have to rely on what we call ‘treaty’ platforms, that is, individually tailored special-purpose companies, if they are going to attempt to build the same benefits into the structure. Many of these platforms may be on fire pretty soon.
The basic requirements for the fund manager to obtain the 10 per cent rate of tax on his fee income are qualitative ones. Although certain de minimis quantitative criteria are laid down (minimum of three investment professionals earning at least S$3,500 per month), really the aim of the incentive is to attract genuine talent. Thus, each of the managers, or the entity they represent, must have a sufficiently impressive track record of experience.
Some thorns in the side were mentioned. What are these? The greatest frustration at the moment is a Goods and Services Tax (GST) issue. This is of particular concern to real estate and infrastructure funds which may not be producing tangible returns immediately or by reference to a consistent pattern. As a result, they are not producing taxable supplies, and therefore may not be in a position to register for GST. Inability to register means that the GST that is nevertheless chargeable on all the fees of the local service providers (which you will remember from the income tax incentive is required or encouraged), cannot be recovered and becomes a cost to the fund. The invitation of ‘Come on in, the water is lovely’ is thus tempered by, ‘But mind the sharks’. This is not a situation that plagues a fund that is incorporated and resident offshore, thus there is a cost to the convenience and treaty benefits that the onshore funds confer. In some cases, that cost has clearly outweighed the benefits and the funds have gone elsewhere. It is an area we know the government is working on and it is hoped they can see the importance of levelling this playing field if the onshore fund concept is to properly take off.
Other issues
The other two issues are perhaps less tangible but still may be of concern. The first is that a Singapore resident fund is governed by the Companies Act which only permits distributions of income where there are distributable accounting profits. Without going into detail, this can result in cash traps or difficulty in getting returns back to investors in a manner that reflects cash flows generated. While there are techniques which can be introduced to get around this, we understand that the government is currently considering other forms of qualifying onshore fund entities that are not so constrained.
The final irritant, which is something that time should heal, is the ‘familiarity factor’. To date, the first port of call in any fund structure is to use a tax haven, such as the Cayman Islands. Why? Well, that is how it was done last time and all the documentation is already vetted and in template form. Also, it would appear that investors, however sophisticated they may claim to be (an interesting concept these days), still want the comfort blanket of what others have done before them, and the inclusion of a Singapore entity in the structure apparently makes them feel a bit giddy.
The benefits of not only bringing management into Singapore but also using Singapore as the location for the fund and its ancillary service providers should be obvious. Certainly, there are some issues to iron out; but of the three identified, one is a perception issue, another can be sorted, or solutions are being thought through; and the third, the GST issue, has just got to be fixed. Once this has happened, Singapore will be nothing short of what a Glasgow Celtic football supporter would describe as ‘Pure dead brilliant’, as a location for not only managers but also their funds.
David Sandison is a tax partner with PricewaterhouseCoopers
1 comment:
Why Singapore Draws Fund Management
Once certain issues are sorted out, the country will become a brilliant location for both managers and their funds
By DAVID SANDISON
2 December 2008
There is no doubt that there has been an unprecedented surge in interest in Singapore as a fund management location over the past couple of years. This was kicked off by a keen interest from hedge fund start-ups, then increasingly mature hedge fund businesses, and finally a feeding frenzy in the Singapore real estate market that caused the real estate managers to turn their attention here.
Obviously, there are significant economic and infrastructure drivers that have contributed to the volume increase. However, tax incentives have also added something more than just lipstick and perfume to the overall attractiveness of the location.
Probably the two most significant changes to have come about are the scrapping of the 80:20 rule relevant to funds managed from Singapore (which we will not deal with further here) and the ‘on-shoring’ of funds to grant them access to concessions previously only available to offshore entities.
The changes brought about by these initiatives have been dramatic, and have created significant interest from managers around the world. I would not go so far as to say that Singapore is now a tax haven with tax treaties for fund managers, but that is largely because it does not have an ocean facing beach.
When you consider the analysis below, and on the assumption that some of the thorns in the side that are currently causing irritation will hopefully be teased out in the next few months, it will be difficult to admit that Singapore does not stand head and shoulders above its fund management centre competitors.
There are a number of factors that a manager is after when he is putting a fund together. The first is protection for the fund, and consequently the investors, from tax issues that are actually created by the fund manager and the way he structures himself. The second is to minimise tax costs for the fund which are independent of the manager’s structure. The third, though perhaps least important, is a minimisation of the tax on the manager’s own income from managing the fund.
Singapore offers all of these opportunities. Firstly, all funds managed by a Singapore-based fund manager (a term that is defined) are protected from Singapore tax in respect of ‘specified income from designated investments’ which in shorthand means pretty much returns from any type of equity, debt or real estate investment other than real estate situated in Singapore (for obvious reasons).
Secondly, the new onshore fund scheme allows access to Singapore’s significant treaty network (in comparison, Singapore: 58 countries, the Cayman Islands: nil) which has the benefit of reducing withholding taxes on dividends and interest from investments, as well as in some cases protecting against local capital gains tax.
Finally, managers that reach a certain operational critical mass and employ staff of the requisite calibre can qualify for a concessionary tax rate on their income of 10 per cent.
So is this a free lunch? We all know that the free lunch is a myth. Of course, there are strings attached, especially if you want to enjoy the full suite of benefits and protections. However, none of them is particularly onerous and, in many respects, they all fit in quite neatly with how the managers would in any event like to organise themselves in an ideal world.
The onshore fund
To qualify for the onshore fund exemption, the fund entity, inter alia, has to be a private limited company that is incorporated and tax resident in Singapore and which has a management or advisory agreement with a Singapore-based fund manager. It also has to be a qualifying fund, which means that it is not 100 per cent owned by Singapore investors.
The other significant requirement is that the fund must be administered from Singapore. What administration means may vary from fund to fund and obviously will be much different for a retail equity fund compared to a private real estate or infrastructure fund; but it basically means that your back office (accounting, documentation, investor information) should be handled here. This can be either internally or externally. Taken as a whole, if the manager, the fund and the auditors are here, it makes sense to have as many as possible of the other ancillary service providers based in Singapore too. So the thrust of the incentive is to encourage efficiency and convenience rather than put obstacles in the way.
In relation to treaties, there are no requirements from the Singapore side. Rather, the critical issue, in obtaining the treaty benefits outlined above, is being able to prove to the tax authorities in the investee location that the Singapore entity is not simply there as a means of obtaining treaty benefits. The fact that the onshore fund entity is incorporated and resident in Singapore, is serviced by a genuine fund manager based in Singapore and is surrounded by a host of other local service providers, should make it difficult for the authorities to argue that the Singapore fund is not bona fide and properly entitled to the benefits.
This is a significant area of growing concern, as regional tax authorities (particularly those in Japan, South Korea, China and India) become increasingly aggressive and sophisticated in their policing of treaty shoplifting offences. Singapore, therefore, has a clear advantage over traditional fund locations in tax havens which then have to rely on what we call ‘treaty’ platforms, that is, individually tailored special-purpose companies, if they are going to attempt to build the same benefits into the structure. Many of these platforms may be on fire pretty soon.
The basic requirements for the fund manager to obtain the 10 per cent rate of tax on his fee income are qualitative ones. Although certain de minimis quantitative criteria are laid down (minimum of three investment professionals earning at least S$3,500 per month), really the aim of the incentive is to attract genuine talent. Thus, each of the managers, or the entity they represent, must have a sufficiently impressive track record of experience.
Some thorns in the side were mentioned. What are these? The greatest frustration at the moment is a Goods and Services Tax (GST) issue. This is of particular concern to real estate and infrastructure funds which may not be producing tangible returns immediately or by reference to a consistent pattern. As a result, they are not producing taxable supplies, and therefore may not be in a position to register for GST. Inability to register means that the GST that is nevertheless chargeable on all the fees of the local service providers (which you will remember from the income tax incentive is required or encouraged), cannot be recovered and becomes a cost to the fund. The invitation of ‘Come on in, the water is lovely’ is thus tempered by, ‘But mind the sharks’.
This is not a situation that plagues a fund that is incorporated and resident offshore, thus there is a cost to the convenience and treaty benefits that the onshore funds confer. In some cases, that cost has clearly outweighed the benefits and the funds have gone elsewhere. It is an area we know the government is working on and it is hoped they can see the importance of levelling this playing field if the onshore fund concept is to properly take off.
Other issues
The other two issues are perhaps less tangible but still may be of concern. The first is that a Singapore resident fund is governed by the Companies Act which only permits distributions of income where there are distributable accounting profits. Without going into detail, this can result in cash traps or difficulty in getting returns back to investors in a manner that reflects cash flows generated. While there are techniques which can be introduced to get around this, we understand that the government is currently considering other forms of qualifying onshore fund entities that are not so constrained.
The final irritant, which is something that time should heal, is the ‘familiarity factor’. To date, the first port of call in any fund structure is to use a tax haven, such as the Cayman Islands. Why? Well, that is how it was done last time and all the documentation is already vetted and in template form. Also, it would appear that investors, however sophisticated they may claim to be (an interesting concept these days), still want the comfort blanket of what others have done before them, and the inclusion of a Singapore entity in the structure apparently makes them feel a bit giddy.
The benefits of not only bringing management into Singapore but also using Singapore as the location for the fund and its ancillary service providers should be obvious. Certainly, there are some issues to iron out; but of the three identified, one is a perception issue, another can be sorted, or solutions are being thought through; and the third, the GST issue, has just got to be fixed. Once this has happened, Singapore will be nothing short of what a Glasgow Celtic football supporter would describe as ‘Pure dead brilliant’, as a location for not only managers but also their funds.
David Sandison is a tax partner with PricewaterhouseCoopers
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