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Business Times - 26 Jan 2007

Corporate tax cut benefits some more than others

Impact on companies will depend on incentives and exemptions they already enjoy

By WONG WEI KONG



(SINGAPORE) Confirmation that Singapore intends to reduce corporate taxes has helped stocks to new highs this week, but the reality is that while a corporate tax cut is broadly positive, the impact will not be equally felt by all companies.

A lot will be determined by factors such as the incentives and exemptions companies already enjoy, the size of their earnings, and the current tax treatment of their overseas income.

Singapore's benchmark Straits Times Index rose 2.35 per cent on Monday, following Minister Mentor Lee Kuan Yew's remarks over the weekend that the corporate tax rate would be trimmed by at least one percentage point.

The government is expected to announce the corporate tax cut when it tables its new Budget on February 15, with the market widely anticipating a 2 percentage-point cut from the current 20 per cent. The move is seen as an attempt to ensure Singapore stays competitive against rivals such as Hong Kong.

Stockmarket players immediately saw a flow-through from the planned tax cut to corporate earnings. 'A rate cut of between 2 and 3 percentage points will be positive for the market due to its consequential improvement to corporate earnings,' said Kim Eng Research in a note to investors.

OCBC Investment Research said: 'Based on a one per cent cut in corporate tax rate, this is likely to translate to about a one per cent increase in corporate earnings, all things being equal. But if a greater proportion of Singapore earnings are recognised as a result of the lower taxes here, this could mean about a 3 per cent increase in corporate earnings.

'This is a positive move, especially in view of the current tight labour market and the increase in wages and other operating expenses, and will help to defray corporates' operating costs.'

While that may generally be the case, the actual impact of a tax cut will vary from company to company, tax experts say.

'All companies benefit from a proposed reduction in corporate tax rates. This is especially true for corporate tax payers with Singapore-based operations not currently enjoying other tax incentives,' said Owi Kek Hean, head of tax services at KPMG.

'Those with bigger tax bills will benefit more, and may now also accelerate expenditure and defer earnings. This is however unlikely, seeing that the company tax cut will be marginal and progressive,' he said.

'For companies in encouraged industries that are already enjoying tax incentives, the proposed reduction does not benefit them as much. They would already be paying company tax below the existing normal rate of 20 per cent.'

'Furthermore, companies in these industries enjoying targeted or dovetailed tax incentives may also not see a tax benefit in the shorter-term to mid-term. The broad-based tax cut may have little or no impact on their current tax liabilities,' Mr Owi said.

One group of companies that may not benefit as much from the tax cut are banks and financial institutions, said Paula Eastwood, tax partner and head of corporate tax at PricewaterhouseCoopers in Singapore. Firms in the financial services sector enjoy benefits under the Financial Sector Incentive, and a significant portion of their income may already be taxed at the lower rates of 5 or 10 per cent. So a cut in the corporate tax rate may not produce significant savings.

Another group of companies that may not benefit as much are those with operations overseas and receiving exempt dividend income. 'Since the exemption on foreign dividend income was introduced, the major beneficiaries for a cut in the corporate tax rate will be those companies that pay the full tax rate on profits that are earned in Singapore,' said Ms Eastwood.

The size of earnings is another factor. Assuming no other industry-specific tax incentives are in place, the suggested reduction in company tax rate (say to 18 per cent) will primarily benefit the companies with bigger profits or revenues, said Mr Owi. For example, a company with a taxable income of just $22,500 per year will now have a new effective tax rate of 8.1 per cent versus the previous effective rate of 9 per cent.

Hence, a 2 percentage point reduction in corporate tax will yield an effective savings of 0.9 per cent.

However, for a company with a taxable income of $9.95 million, the effective savings is 2 per cent.

But while the impact of the proposed corporate tax on listed companies will be mixed, the benefit is more clear-cut for their shareholders. 'With the move to the 'one-tier system' for Singapore dividends, which will be fully effective from Jan 1, 2008, a reduction in the corporate tax rate also benefits individuals who are shareholders of Singapore-listed companies and whose own marginal tax brate is lower than the corporate tax rate of 20 per cent,' said Ms Eastwood.

Source

djchris

The reduction in corporate tax announcement caused the STI component stocks and other blue chips to rise in share price the very next day. Naturally that pushed the STI up.

That is only the market sentiments & herd mentality as govt have not mentioned when they will implement this. So the day after, profit-taking occured and STI fell again...

As usual, govt papers only report the good side and not the bad.

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