How Singapore stacks up to changes in Hong Kong’s shipping regime
Singapore remains attractive even as recent changes in tax concessions for the shipping industry in Hong Kong challenges its appeal.
The top maritime centres around the world all have certain key characteristics: a robust maritime ecosystem, excellent geographical position as well as business-friendly government policies.
This year, Singapore topped the 2020 Xinhua-Baltic International Shipping Centre Development (ISCD) Index for the seventh consecutive year. While Hong Kong remained in the top five, it fell from the second to the fourth place.
On 26 February 2020, Hong Kong released its budget proposal and included amongst others, tax concession for ship lessors and ship leasing managers in a bid to further enhance its position as the international maritime hub of choice in the region. The new tax concession was officially gazetted on 19 June 2020.
With this new development, we look at how Singapore’s Maritime Sector Incentive (MSI) matches up against Hong Kong’s new tax concession for ship lessors and ship leasing managers.
Comparison between Hong Kong and Singapore
Hong Kong, with its territorial basis of taxation and its shipping regime, has been one of the top locations for shipping companies. Generally, shipping companies do not have to pay taxes in Hong Kong if the shipping income is:
► Foreign-sourced (i.e., not derived in Hong Kong)
► Falling under the concession under Section 23B of the Inland Revenue Ordinance (IRO) (such as income derived by a Hong Kong company from the time charter of ships plying in international waters and qualifying income derived from Hong Kong flagged vessels)
Prior to Hong Kong’s new tax concession for ship lessors and ship leasing managers, the Inland Revenue Department (IRD) had put forward its view that Section 23B of the IRO does not apply to “leasing/rental derived from a pure ship leasing business carried on in Hong Kong”. As such, leasing income derived by ship lessors may be exempted from tax in Hong Kong only if such income is considered foreign-sourced.
Under the new tax concession, the following (subject to conditions) are provided:
► A tax exemption for the profits of a ship leasing business conducted in Hong Kong
► A tax exemption for the profits of a ship leasing management business conducted in Hong Kong when that business is conducted for related parties
► A reduced tax rate of 8.25% for other ship leasing management businesses
► An exemption from tax on any gains arising from the disposal of ships used in a ship leasing business
► Inclusion of hire-purchase and other leasing arrangements that may result in a transfer of ownership within the exemption
The new tax concession squares up Hong Kong very well against other maritime centres in terms of its tax regime, in particularly against the EU tonnage tax regimes, which generally do not cover finance lease income. Singapore, which is located on the same side of the world as Hong Kong, has since 2006, introduced the Maritime Sector Incentive – Maritime Leasing (MSI-ML) to promote the growth of ship financing activities in Singapore.
Singapore’s MSI-ML provides incentive under two subcategories, one targeting the investment vehicles that acquire and own vessels (Approved Shipping Investment Enterprise [ASIE]) and the other for the fund managers with strategic control over the ASIE (Approved Shipping Investment Manager). We provide a comparison between MSI-ML and Hong Kong’s new tax concession for ship leasing in the table below.
 Pursuant to Section 23B of the IRO
|Ship leasing activities||0% for income derived by an ASIE from chartering or finance leasing of any sea-going ships for use outside the limits of the port of Singapore||0% for qualifying profits of qualifying ship lessors derived from qualifying ship leasing activity|
|Ship leasing management activities||10% on qualifying income derived by an ASIM in connection with and incidental to the management of vessel portfolio in ship leasing entities enjoying the ASIE status, which include fund management, performance and bonus fees||8.25% for qualifying profits of qualifying ship leasing managers carrying out qualifying shipping leasing management activities for non-associated qualifying ship lessors and 0% if the qualifying ship lessor is an associated corporation|
While there is no difference in terms of the tax rate for ship leasing activities, it is important to consider the scope of qualifying income under the two tax regimes. It is understood that the Hong Kong’s new tax concession expressly states that the tax exemption for ship leasing cannot apply to any person who is an operator of a ship or who has income arising from any source other than qualifying ship leasing income. Commercially, we would expect ship leasing companies to have the flexibility to deploy its vessels in different ways, be it a lease, bareboat charter, time charter or even voyage charter depending on market demands. While further guidance and clarifications are expected from the IRD, the current understanding is that the tax concession is catered towards a pure ship leasing company, which may pose some restrictions to t companies availing themselves to the tax concession in terms of their ability to react flexibly to market conditions and needs.
In contrast, Singapore’s MSI-ML qualifying income includes income from the chartering of sea-going ships, which in practice, is widely accepted to include various kind of charter including time and voyage charter.
However, a key advantage of Hong Kong’s new tax concession over Singapore’s MSI-ML is that it could potentially cover hire purchase arrangements where there is a transferring ownership of the vessel at the end of the financing arrangement, subject to anti-avoidance provisions regarding defeasance arrangements.
As for ship leasing management activities, Hong Kong has a clear advantage of a tax rate at either 8.25% or 0% as compared to Singapore’s 10%.
Tax deductions of amounts paid by related companies
Where the payer is connected to the qualifying ship lessor or qualifying ship leasing manager in Hong Kong, the tax deduction available to the payer will be reduced by the amount of tax savings obtained by the lessor or manager. This may effectively increase the effective tax rate of the Group that operates in Hong Kong, if the payer has income subjected to Hong Kong income tax.
Singapore’s MSI-ML regime, on the other hand, does not impose such limitations on the tax deductions available to the payer.
Disposal of vessel
With vessels being typically a high value asset, a major concern of ship owners is the taxability of gains on the disposal of their vessels. Both regimes provide certainty to the treatment of the gains on disposal of vessels. Hong Kong provides that ships used by the qualifying ship lessor (enjoying the concession for all relevant years of assessment) for qualifying ship leasing activities for a continuous period of not less than three years will be treated as capital assets and hence any gains on disposal will not be taxable. Lessors who do not satisfy the three-year safe harbour rule may still claim the relevant gains from the disposal of vessels as capital in nature under the general rule. Hong Kong also does not tax capital gains.
In comparison, Singapore does not have a length of ownership requirement, provided the company is an approved shipping investment enterprise. Gains on disposal of the qualifying vessel will be exempted from tax under the MSI-ML incentive so long as the ASIE is not carrying on a business of trading in sea-going ships or constructing sea-going ships for sales. In fact, under the MSI-ML, the tax exemption also covers gains from the assignment of all rights under a construction contract of a sea-going ship as well as the sale of all its shares in special purpose vehicles (SPV) that own sea-going ships.
Therefore, in terms of coverage, Singapore’s MSI-ML has an advantage over Hong Kong’s new tax concession.
Requirements of the incentives
Both Singapore’s MSI-ML and Hong Kong’s new tax concession come with certain conditions. Singapore’s MSL-ML is a discretionary tax incentive, which needs to be applied for and be approved by the Maritime and Port Authority of Singapore (MPA). Hong Kong’s new tax concession comes with a set of prescribed conditions and where conditions are met, taxpayer may make an election in writing to apply for the tax concession on a year-to-year basis.
The Singapore’s MSI-ML and the Hong Kong’s new tax concession also impose headcount and business spending requirements as follows:
S$25m over 5 years
(Or approximately S$5m a year)
|Hong Kong||HK$7.8m annual operating expenditure*||2 full-time qualified persons|
* approximately S$1.4m at a conversion rate of S$1: HK$5.58
At first glance, it is much easier to meet Hong Kong’s requirements than Singapore’s. However, it is important to note that the above requirements for Hong Kong is just a minimum threshold requirement and there is an overarching requirement that the above requirements have to be demonstrated to the tax authorities that they are “adequate”. “Adequate” is not defined by the Bill and hence the level of certainty to taxpayers is compromised. It remains to be seen what “adequate” is, so as to be compliant with international standards on countering harmful tax practices.
In addition, for shipping companies, it is common to set up one SPV for each vessel. It remains to be clarified by the Hong Kong tax authorities on how the above quantitative conditions will be applied in the case of a group of companies.
For Singapore’s MSI-ML, potential investors may approach the MPA with its business plan comprising a group of companies and the MPA will assess if the value proposition of the business plan generates sufficient economic contributions to Singapore. Once the MSI-ML status is approved, the taxpayers will enjoy certainty on the application of the tax incentive, so long as the taxpayer meets the conditions that are specifically stated in the incentive approval letter. Hence, investors may find the MSI-ML more attractive as it provides taxpayers with a higher level of certainty in terms of the tax incentive.
Organisation for Economic Co-operation and Development (OECD) peer review on tax incentive
The MSI (including the MSI-ML) has been assessed by the Forum on Harmful Tax Practices (FHTP) to have satisfied the international standards on countering harmful tax practices. It is important to see if Hong Kong’s new tax concession will eventually satisfy the international standards on countering harmful tax practices when it is reviewed.
Singapore remains attractive
It is not easy to maintain pole position with competitors constantly at your heels. Further, the COVID-19 pandemic has brought about significant changes to how businesses operate, and the maritime industry, which is a crucial part of trade and supply chain, is at the heart of disruptions.
As Singapore continues to build its attractiveness as the leading maritime centre in the world, it will have to remain agile to respond to market demands. Through the years, the MPA has actively sought feedback from the maritime community and innovatively come up with initiatives and programmes to meet the needs of the industry, whether from a tax policy, digitalisation or talent transformation perspective. With the continued efforts of the MPA and the support of the maritime community, it is envisaged that Singapore’s appeal will remain compelling even as competition heats up.
The co-authors of this article are Goh Siow Hui, Partner, Tax Services from Ernst & Young Solutions LLP, Cedric Tan, Director, Tax Services and Goh Chor Miang, Manager, Tax Services from Ernst & Young Corporate Advisors Pte Ltd.