Fund management is an industry that Singapore, Hong Kong, and even China are keen to develop to improve their standing as regional financial centres. Singapore has just scored another point in advancing this cause in the form of a new tax incentive.
The Singapore government, in line with initiatives included in its 2009 budget, has announced a new tax incentive for certain investment funds managed from the city-state that have no restrictions on the residency status of fund vehicles or investors.
"What the Singapore government has done is simplify the tax rules for funds even more," says Sharon Hartline, a Hong Kong-based partner at White & Case. "This is certainly something that will help make Singapore more attractive to fund managers, particularly managers of hedge funds and private equity funds, but whether or not this will translate into many more fund managers and funds locating there, given the current market conditions, remains to be seen."
The government will add a new enhanced tier to the existing fund management incentives for funds with a minimum fund size of S$50 million ($35 million) at the point of application. The enhanced tier will be open to fund vehicles in the form of companies, trusts and limited partnerships. There will be no restrictions on the residency status of the fund vehicles or the investors. The enhanced tier will be effective from April 1, 2009 through March 31, 2014. Funds that are on the scheme on or before March 31, 2014, will continue to enjoy the tax exemption if they continue to meet the scheme's conditions.
The enhanced tier will be significantly better than the current tax incentives, according to White & Case.
Under the current tax incentives, specified income derived by qualifying funds from designated investments generally is exempt from Singapore income tax, the law firm notes. Qualifying funds can only be in the form of companies, trusts or individual accounts. Where a qualifying fund is in the form of a company or a trust, the qualifying fund must not be 100% beneficially owned by resident investors. Resident non-individual investors of a qualifying fund are subject to a 30%-50% investment limit, depending on the number of investors in the fund. If that limit is breached, the resident non-individual investors would have to pay a financial penalty.
"The current tax incentives inadvertently discourage resident companies from having their funds managed from Singapore, because of the limits placed on their holdings in the funds," White & Case says.
Under the new tax incentives that will be put into place soon (the details are still being finalised and are expected to be released in April), the enhanced tier will apply to funds that are constituted in the form of limited partnerships, in addition to funds that are in the form of companies, trusts or individual accounts, according to White & Case. This means there will no longer be any need to look through to the partners' level to apply the incentive conditions. The 30%-50% investment limit on resident non-individual investors will also be lifted for funds. That will allow resident companies to enjoy the full benefits of tax exemption for qualifying income derived by funds, without any worries about being subject to financial penalties.
Linda Ng, a Hong Kong-based counsel at White & Case, says the lifting of the restrictions will benefit Singapore-resident non-individual investors who currently are subject to investment limits.
"This gives fund managers of hedge funds and private equity funds more room to raise funds from a pool of investors because they will no longer have to worry about limits," Ng says.
In Hong Kong, profits tax on fund management companies is 16.5%.
Ken Yap, Singapore-based head of Asia-Pacific research at financial services research firm Cerulli Associates, believes the near- to medium-term impact of the tax incentives won't be significant because prevailing market conditions will tend to influence business decisions more.
"The enhancement will allow more funds to benefit from the tax incentive, but in the current environment I suspect it's going to take more than that to boost the fund management industry," Yap says. "The main issues for funds in Singapore and elsewhere are asset retention and asset gathering. In the near term it looks as though the industry will continue to see net outflows and a tax benefit will not be sufficient to address the problems."
Sally Wong, chief executive of the Hong Kong Investment Funds Association, declined to comment on how she thinks Singapore's new tax incentives would benefit the fund industry there.
Wong said, however, that Hong Kong fund managers are also lobbying for tax breaks, specifically for the Mandatory Provident Fund (MPF), which, if implemented would also strengthen the territory's position as a fund management hub.
"A key proposal that we wish the government to take on board is to provide tax incentives to employees to make voluntary contributions to MPF because the mandatory contributions are inadequate to help them to save for retirement purposes," Wong says.
The MPF replacement ratio -- or the ratio of the total resources received when unemployed to those received while employed -- is at best around 25% to 30%, Wong says, which is far below the 70% to 80% needed for one to maintain the same standard of living post-retirement.
So far, Singapore still lags behind Hong Kong in terms of the total amount of assets under management. According to the latest statistics cited by White & Case, Singapore had S$1.17 trillion ($800 billion) in assets under management in 2007 compared with Hong Kong's HK$9.63 trillion ($1.2 trillion). One of the main reasons for Hong Kong's edge in terms of AUM, according to industry players, is its access to the wealth of China's rich and mass affluent investors.
In a previous report, Cerulli estimated that Singapore's fund industry recorded an AUM growth of 30% in 2007, a five-year high and surprisingly robust given the relative maturity of the market. Strong inflows and market appreciation were the twin drivers of asset growth, with net inflows accounting for about 62% of growth and a rising stock market accounting for the remaining 38%.
Singapore's mutual fund market is one of the least volatile in the region, Cerulli notes. The conservative nature of Singapore investors, coupled with relatively good financial planning services from a large range of local, foreign, and private banks, has resulted in lower asset turnover rates in Singapore than other Asian countries, including Hong Kong, the firm adds.
In Hong Kong, the fund industry registered a 49% growth in AUM in 2007, according to Cerulli's estimates. However, such high growth rates are unlikely to be repeated in the near future because Hong Kong investors are standing on the sidelines just like investors elsewhere.