Singapore sling: A tax-friendly gateway into ASEAN economic growth

Offering a wealth of opportunities for businesses, Singapore is a natural destination for law firms considering overseas expansion. Singapore's GDP in 2014 was just below S$400bn, while its per capita was S$71,318, making it the ninth highest in the world, according to World Bank data.

The city state holds a dominant strategic position within the ASEAN Economic Community, an increasingly important region of 600 million residents - considerably larger than the European Union (EU). The 2015 Index of Economic Freedom ranks Singapore as the second-freest economy in the world, behind Hong Kong.

Singapore's open and trade-oriented economy relies heavily on manufacturing and exports, particularly of consumer electronics, information technology products and pharmaceuticals. At the same time, Singapore is a leading provider of services in international banking, trade finance, maritime finance, insurance, treasury operations, and asset management in
the region.

Tax benefits, such as tax holidays and reduced tax rates, pay a pivotal role in shaping the development of Singapore's economy. It offers a very competitive tax regime, with a low headline tax rate and a wide range of tax incentives. Businesses based in the city state also benefit from more than 60 comprehensive double-taxation agreements.

With a low corporate tax rate of 17
per cent and progressive personal tax
rates ranging from 2 to 20 per cent, the tax rates are initially very attractive. However, the high after-tax income is balanced with high living costs.

Legal market

Historically, Singapore has been a hub for trade in Asia and has a highly-developed open business market, attracting businesses from all over the world.

The government's enthusiasm for attracting foreign professional service firms has resulted in it introducing a number of measures to encourage foreign direct investment (FDI) recently. As a result, there continues to be an increase in the number of international law firms establishing new offices in the nation, with foreign practices numbering 113 in May 2014 (latest data). With growth mainly driven by firms following their largest clients into the region, there is a growing expectation that all international law firms will maintain local offices.

As can only be expected, the services sector, particularly the legal services sector, is becoming an increasingly important part of the Singapore economy. Organisations defined under the 'business services' category (which essentially covers all professional services firms) contributed S$61.6bn to its GDP in 2014 - 15.8
per cent of the total output. In just four
years since 2010, output by business services firms expanded by S$20.3bn, equating to growth of 49.2 per cent.

The legal sector is expected to outstrip manufacturing, the traditional lead market, by the end of 2015. This is quite a significant turnaround for an economy with such a strong manufacturing heritage, but also testament to the attractiveness of Singapore as a geographical location to base a professional services firm.

Market entry

As with many jurisdictions around the world, the type of structure that should be used to set up a legal office in Singapore will depend on the type of services the firm intends to provide.

A representative office, for example, is used for purely liaison or promotional legal work only. Under Singaporean law, a representative office is not allowed to provide any legal services or conduct any other business activities in Singapore.

Compare this to the qualifying foreign law practice scheme - introduced by the Singaporean government to attract foreign professional service firms. The scheme enables law firms to practice Singapore law in "permitted areas of legal practice" by hiring Singaporean lawyers with practising certificates or foreign lawyers who hold foreign practice certificates. While this is a viable option, the cost and logistics of setting up qualifying foreign law practices means that, traditionally, it has only been taken up
by the largest law firms.

For international law firms, an office licensed to practise the full range of foreign law-related legal services that the firm is competent to offer is a good strategy. Smaller firms may benefit from collaboration with a local law firm via a joint law venture or a formal law alliance.

A joint law venture creates a new legal entity formed jointly between a Singapore
law firm and a foreign law firm. By contrast,
a formal law alliance enables a Singapore law firm and a foreign law firm to enter into
a 'best friends' relationship and collaborate as two freestanding firms.

Last year, the Ministry of Law unveiled proposals to revamp Singapore's legal sector. One of the proposals is to allow law firms to form alternative business structures (ABS), with non-lawyer managers and external ownership. This is expected to come into effect by the end of the year, with non-lawyer ownership capped at 25 per cent.

Whilst there is an expectation that this will be a popular structure for venture capital investment, if the UK's take-up of ABSs is anything to go by, it is unlikely that it will drive significant changes to Singapore's legal market in the short term.

Growth opportunities

Singapore holds a dominant strategic position within the ASEAN Economic Community. It is predicted that the ASEAN region will become the fourth-largest single market by 2030.

As its most developed economy and regional trade hub, Singapore is a natural starting point and gateway into the ASEAN region. The city state also benefits from its close proximity to the Chinese market, with many multinationals choosing Singapore as the location for their Asia headquarters. ASEAN generated a record US$100bn FDI inflow in 2013, of which Singapore enjoyed 63.2 per cent.

As in other nations, tax incentives are used in Singapore to promote new investments in preferred industries and to encourage existing businesses to upgrade their operations. A goods and service tax (GST) is applied at 7 per cent in the city state. However, this is exempt in a number of industries, such as financial services and international services and exports, which are zero-rated.

Singapore is a popular destination for law firms specialising in finance, real estate, marine, commodities and insurance. The finance and insurance sector expanded by 10 per cent year-on-year in the fourth quarter of 2014, according to the Ministry of Trade and Industry.

Growth in these externally-orientated sectors is largely driven by the effects on the global economy and, in particular, investment in Asia. The appointment of a renminbi (Chinese currency) clearing bank in Singapore is a good example of the greater role played by Singaporean financial institutions in intermediating the growing trade and investment flows between China and the rest of the world.

Similarly, the Singapore marine industry is also well developed and generates an annual turnover of close to US$10bn, employing 100,000 workers, according to the Association of Singapore Marine. The industry plays a significant role in the production of offshore oil and gas drilling units and supporting vessels. It accounts for around 70 per cent of the global market, driven by a global increase in energy demand. Whilst some commentators believe energy demand has hits its peak, the International Energy Agency (IEA) and America's Energy Information Administration have predicted that demand will continue to rise.

Arbitration is also a growing market in Singapore. By its nature, arbitration is flexible and Singapore is able to capture a lot of work from its geographical proximity to key Asian economies like India and China. In addition, Singapore's legal framework and laws support international arbitration, which is enforceable in over 140 countries and aligns with international practices.

Working in Singapore

Singapore's competitive tax regime is vital in balancing its high living costs. It is essential that international law firms have a tax structure that provides for local profits (with their lower instances of tax) to be passed on to the partners who are resident in Singapore.

Profits either taken back to the UK parent organisation or brought into Singapore from the UK are likely to increase the tax costs. This, in turn, will make the Singapore partners' deal less attractive and the firm less competitive. For this reason, almost all international law firms in Singapore drive local profits to their partners through a subsidiary LLP or employment of the partner.

Adherence to stringent ethical codes will be expected when expanding into any country, but this is particularly true in Singapore, which prides itself on its low corruption levels and reveres business transparency. Law firms looking to expand into the region must ensure compliance with legal and ethical codes at all times.

Besides being one of the cleanest cities in the world, Singapore is safe and orderly. Coupled with a world-class transport system and healthcare services, Singapore offers one of the best living environments in the world. Its education system features highly on international league tables each year. These are, no doubt, contributing factors to Mercers ranking Singapore as the nation with the best quality of life in Asia.

Next month, we'll be crossing the Pacific to put a spotlight on opportunities for law firms in Canada.

Neil Williams is professional services tax director at BDO (www.bdo.co.uk)