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Singapore has the ambition to become the Monaco of Asia, with all the attributes for which the European principality is well-known.
The south-east Asian city-state held its first Formula One grand prix last September. Super-yachts are berthed at new luxury harbour facilities. The first casino resort is scheduled to open this year. And dozens of international private banks have sprouted since 2004 as the government has made a concerted push to establish the country as the regional centre for wealth management services.
Officials hate Singapore being described as a tax haven. They prefer to say it is a low-tax jurisdiction. Nevertheless, Singapore has long been a favoured destination for the rich to stash their cash. It gained a reputation as a financial bolthole in the 1960s, as ethnic Chinese business tycoons in south-east Asia viewed Singapore as a safe haven to protect their funds from confiscation by local governments that resented the wealth accumulated by the Chinese elite.
Singapore’s rise as a wealth management centre for those beyond Asia got a boost in 2005 with the adoption of the European Union Savings Directive, under which banks in tax sanctuaries such as Switzerland must impose withholding taxes on accounts held by EU citizens if the names of the account holders are not revealed.
In response, Credit Suisse and UBS established their biggest private banking operations outside of Switzerland in Singapore, and were followed by smaller European private banks including Julius Baer and Liechtenstein’s LGT.
What attracted them to Singapore was the bank secrecy laws, which are among the world’s strictest. In addition, the country has no law against international tax evasion. “Under current law, Singapore will not assist in tax evasion cases in foreign jurisdictions,” says Edmund Leow, a tax lawyer at Baker & McKenzie. Wong & Leow in Singapore.
Singapore does not tax the global income of those holding local bank accounts. Residents are subject to a maximum tax rate of 20 per cent on local salary income, and investment income is tax-free. The corporate tax rate will be cut by 1 percentage point to 17 per cent this year, making it among the lowest in the world.
Singapore’s bank secrecy laws are based on British common law, inherited from its former colonial rulers. Although it has signed double-taxation treaties with 60 countries, “Singapore has been much more restrictive than the UK in the exchange of information” under these treaties, says Leow.
An important exception is its qualified intermediary agreement with the US, which requires all foreign banks that operate in the US to disclose overseas bank accounts held by US citizens. Singapore also has laws banning the laundering of money from internationally recognised illegal activities, such as drug trafficking and financial fraud, or funds looted from national treasuries by foreign leaders or their families.
“We do not stand for the abuse of our [banking] laws to shelter criminals,” Lim Hwee Hua, a senior finance ministry official, told parliament recently. But Singapore is under growing pressure from foreign governments to disclose more information about local bank accounts to counter tax evasion.
One crucial test of the city-state’s resolve to maintain bank secrecy has been a demand by the EU that Singapore – along with Hong Kong – accept the EU Savings Directive. So far, Singapore has refused to do so and the dispute has blocked the signing of an EU-Singapore partnership agreement to promote closer co-operation.
In addition, Singapore could attract the attention of the new Obama administration in the US, which has vowed to take drastic actions against countries that it sees as tax havens.
Singapore appears to be softening its stance somewhat. The government is considering adopting standards set by the Organisation for Economic Co-operation and Development for transparency and effective exchange of tax information. “Singapore agrees with the principles behind the OECD standard, which will serve to help government address offshore tax offences,” Lim told parliament.
Under the OECD rules, Singapore would have to assist with information requests on specific tax evasion cases from its tax treaty partners. But the city-state would have the right to reject such a request if its purpose was unclear or it appeared that foreign governments were engaging in “fishing expeditions” to gain information to identify possible tax evaders.
How far Singapore is willing to go to disclose information under the OECD rules will be important for the future of its private banking industry, which is a pillar of the financial services sector. An aggressive enforcement of the rules would probably drive away some private banks.
The sector is already reeling from the effects of the global financial crisis. “High net worth individuals have been among the hardest hit in Asia by the crisis, which has slowed the growth of the wealth management industry,” says Cem Karacadag, an economist with Credit Suisse in Singapore.
However, if the city-state is able to maintain some degree of bank secrecy, the crisis could prove beneficial in the years ahead. “Singapore is likely to see a bigger inflow of money as western countries raise taxes to finance the bail-out of their local banking systems,” says a Singapore-based private banker.