Is Singapore a tax haven?

Now that Singapore has officially qualified for the US$100-billion club for US direct investments (as of end 2008), just as the White House is occupied by an avowed enemy of tax havens (who backed a bill targeting “offshore secrecy jurisdictions”), it’s time to dust off this old chestnut.

Before we broach this much-debated subject, some background is probably useful:

A definition of a tax haven, by the Economist:

“The existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance”

That’s fine as a starting point. But in an era of terrorist funding fears, and the need to collect taxes to fund bailouts and stimulus plans, the OECD definition offers a more detailed guideline:

Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.

Protection of financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.

Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency.

So, here’s the $100-billion dollar question: Is Singapore A Tax Haven?

Tax havens have been around for a long time. In fact, older readers might recall that Beirut was once part of this exclusive club, before the Intra Bank crash of 1966, and the “rental” of the land for proxy battles between faiths. Today, we’re probably more familiar with names like BVI, Lichtenstein, and closer to home, Labuan.

Unfortunately, according to the Financial Times…

“…the financial crisis has intensified the attack on havens. The near-collapse of the west’s banking industry has drastically increased governments’ need to raise funds, brutally exposed the risks inherent in small countries with large financial sectors, and raised questions about the role of offshore centres in destabilising the system.

Some European finance ministers claim that the “opaque environment” of offshore finance – particularly hedge funds – contributed to reckless behaviour and, ultimately, the current crisis. President Nicolas Sarkozy of France is among those questioning whether, at a time of taxpayer-funded bail-outs, banks should even be allowed to operate in tax havens.”

Where does Singapore stand?

Back in early 2008, under some pressure from the EU, the Singapore Foreign Minister, George Yeo, had this to say:

“Singapore is not a tax haven. We are a low-tax country but not a tax haven. “

Yeo goes on to add:

“A situation which arose in Liechtenstein cannot happen here.”

At that point in time, Singapore was negotiating an FTA with the European Union, but balanced against its stated desire to create a highly successful private banking centre in competition with the likes of Hong Kong. As Yeo points out..

“We’re an international financial centre so banking secrecy is very important. It is protected by law. But at the same time we do not condone drug money or terrorism money or money laundering — these are crimes,”

The EU adopted a savings directive in 2005, dealing a first blow to tax havens by forcing European wealth management centres such as Switzerland and Liechtenstein to apply a withholding tax on savings from undeclared EU income. But efforts to force Singapore to join so far have been unsuccessful.

Question 1: Does Singapore have “nil or nominal taxes”?

18% (soon to be 17% effective 2010) is the official corporate tax rate.  But the picture is muddied by the fact that many global organisations can avail themselves to special tax breaks, which place the effective tax rate somewhere between 5 to 10%. So going on a comparative basis, that’s probably a check for this question.

Question 2: Does Singapore offer protection of financial information?

This is trickier to answer.

A widely-publicized court case against ex-Citibankers has also revealed a bit more about banking secrecy laws in Singapore. To wit:

“Singapore has some of the world’s strictest bank secrecy laws, which have helped make it the fastest-growing wealth management centre. This was the first time that Singapore authorities have used the computer misuse act and banking laws to prosecute the disclosure of bank customer information.”

More recently, a March 2009 article from FT noted that:

[Singapore is] accused of marketing itself as the “ultimate secrecy jurisdiction” by the Organisation for Economic Co-operation and Development at a US Senate hearing in 2007.

But the times are a-changing. While Singapore has shown a willingness to apply banking secrecy laws to prosecute, it also needs to adapt to the increasingly negative attitudes towards tax havens around the world. The same article notes that:

Singapore promised.. to relax its strict bank secrecy laws in a sign of the escalating international pressure on tax evasion.

A shift in Singapore’s policy is also reflected in a Feb 2008 mutual 3rd-party evaluation by the FATF. In the report, Singapore is generally now more compliant with the OECD definitions.

As a point of interest, Singapore still falls short in the following areas (Gold bugs and property speculators please note):

Lack of any anti-money laundering (AML) or combating of financing of terrorism (CFT) supervisory regime for:

• Real estate agents
• Dealers in precious metals and stones
• Accountants
• Trust and company service providers
• Lawyers (sigh)

I’ll leave the transparency question for now, and maybe answer it in another post.

And just for the record, Obama laid bare his hostility towards tax havens during his campaign trail:

“There’s a building in the Cayman Islands that houses supposedly 12,000 US-based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”

Advertisement