Singapore Cuts Company Tax, Taps Reserves Amid Slump

By Shamim Adam, Andrea Tan and Chen Shiyin

Jan. 22 (Bloomberg) -- Singapore cut corporate taxes for the second time in three years and said it will tap its reserves to fund record spending amid efforts to drag the island’s economy out of its deepest recession since independence.

The government will reduce the maximum tax rate payable by companies to 17 percent from 18 percent this year, Finance Minister Tharman Shanmugaratnam said in a budget address today. It will spend S$20.5 billion ($13.7 billion) on property and personal tax rebates and cash handouts to help businesses and workers, using S$4.9 billion of its national reserves.

The tax cut will narrow Singapore’s gap with Hong Kong as Prime Minister Lee Hsien Loong’s government aims to attract investment in services and manufacturing industries. Singapore said yesterday its economy may contract a record 5 percent this year as the global recession hurts exports and companies including Creative Technology Ltd. fire workers.

“A lot of help is extended to companies to keep jobs and the tax cut makes Singapore more competitive in this difficult period,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “It’s a budget to help cope with the recession, not exit it.”

Stimulus Measures

Asia’s export-dependent economies have pledged more than $680 billion in extra public spending over the next five years as demand for their products diminishes amid recessions in the U.S., Japan and Europe. Exports account for about 32 percent of Asia’s gross domestic product, according to the World Bank.

China’s Premier Wen Jiabao promised this month to increase a 4-trillion yuan ($585 billion) stimulus package to create employment and support industries. Malaysia is planning a second economic stimulus package after unveiling a 7 billion-ringgit ($1.9 billion) plan in November, Deputy Prime Minister Najib Razak said this week.

Singapore’s spending plans will lead to a budget deficit of S$8.7 billion in the year starting April 1, equivalent to 3.5 percent of gross domestic product, Shanmugaratnam said. That compares with a shortfall of S$2.2 billion, or 0.8 percent of GDP, in the current fiscal year.

The Singapore dollar rose 0.1 percent to S$1.4960 as of 7:43 p.m. local time, while the benchmark Straits Times Index climbed 0.25 percent to 1,708.77 at the 5:05 p.m. close.

“The budget gave a bit of a boost to the Singapore dollar but it will only ease the pain of the recession, not reverse it,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “The market is not taking this very positively and any impact on the currency will be limited.”

Projects Canceled

The city state’s government expects fixed-asset investments to fall to as little as S$10 billion this year from a record S$18 billion in 2008 as demand weakens and companies face difficulty in securing funds for their projects.

About 20 percent of investments originally slated for 2009 have been canceled or postponed, and investment commitments next year may be affected if the global economy doesn’t improve, the Economic Development Board said Jan. 19.

With today’s announcement for a lower tax level, Singapore will have shaved nine percentage points off the corporate rate since 2000. The government reduced rates by 2 percentage points to 18 percent in 2007, while Hong Kong last year lowered its company tax rate by 1 percentage point to 16.5 percent.

“It is a signal of the government’s continued and future commitment to being the best hub for enterprises, small and large, from all over the world,” Shanmugaratnam said.

Job Losses

More than 10,000 people were retrenched last year and a worsening economy may result in job losses tripling in 2009, reaching numbers not seen since the Asian financial crisis a decade ago, the government said this week.

Singapore will give employers a combined S$4.5 billion in cash grants for retaining local workers, the finance minister said today. It will also distribute S$2.6 billion in cash, utility and tax rebates to citizens, the poor and unemployed.

The government plans as much as S$20 billion in public works in 2009, a third higher than the previous year, and will give S$800 million in tax rebates for industrial and commercial properties. It will also allow unprofitable companies to get a cash refund on taxes paid in previous years under an enhanced so-called current loss-back relief plan, Shanmugaratnam said.

Singapore will spend S$5.8 billion to split the risks of bank loans extended to businesses, Shanmugaratnam said. The government will bear 80 percent of the risks on loans of as much as S$5 million to help medium-sized companies.

“The budget stimulus measures will significantly reduce business costs,” said Robson Lee, a partner in Singapore-based law firm Shook Lin & Bok LLP. “The measures will also enhance the local enterprise refinancing. Banks will be more inclined to extend credit to the enterprises.”

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Andrea Tan in Singapore at atan17@bloomberg.net; Chen Shiyin in Singapore at schen37@bloomberg.net