Singapore chases HK with corporate tax cut plans

Singapore, Jan 22 | Updated: Jan 23 2007, 05:30am hrs
Singapore's plan to trim its 20% corporate tax rate by at least one percentage point this year reflects a need to retain its competitive edge against rivals such as Hong Kong, analysts said on Monday.

And it could also be an attempt to soften the blow that companies would feel from any increase in employers' social security contributions, something mooted by the government as it tries to head off grumbles about a growing income gap, they said.

Lee Kuan Yew, the country's founding prime minister, told reporters over the weekend that Singapore planned to trim its corporate tax rate to stay competitive, a move that would cost the state up to S$500 million ($325 million) in revenue.

The island-state lured an impressive $31.9 billion in foreign direct investment in 2006, nearly half the $70 billion that China attracted, a United Nations survey showed this month.

But it fell short of the $41.4 billion that long-time financial and manufacturing rival Hong Kong won last year with its 17.5 % corporate tax rate.

"Hong Kong is benefiting from the China listings and it has a huge hinterland that Singapore doesn't have," said Chua Hak Bin, an economist at Citigroup, referring to the sometimes huge stock market share sales by mainland firms in the Hong Kong market.

A recent survey that ranked the world's freest economies put Singapore just behind Hong Kong, which topped the list due to its low taxes and flexible labour market.

Singapore-listed companies surged on news of the planned tax cut, with the benchmark Straits Times Index posting its biggest rise in about seven months on Monday.