Singapore will cut personal and corporate income taxes over three years to spur investment and narrow the gap with rival Hong Kong, which has lured companies such as Royal Philips Electronics NV with the prospect of tapping the Chinese market.
The corporate tax rate will fall 4.5 percentage points to 20 percent in three years, and the top personal rate will be cut 6 points to 20 percent, Finance Minister Lee Hsien Loong said, unveiling the budget for the fiscal year that started April 1.
Singapore is counting on lower business costs to keep electronics manufacturers while attracting companies in new industries such as biotechnology, diversifying its economy.
Plunging exports of semiconductors and other electronics last year pulled Singapore into its worst recession in 38 years.
Tax cuts "will definitely help in assisting Singapore's recovery by encouraging investments and improving Singapore's competitive position in the region," said Elie Baroudi, deputy chief executive officer at Thakral Corp, a Singapore distributor of consumer electronics.
Rising wages and costs have clouded Singapore's role as a manufacturing and shipping center for southeast Asia. Meanwhile, companies are shifting their focus to north Asia after China joined the WTO, offering greater access to the world's most-populous market.
With unemployment rising to a three-year high of 4.5 percent in March, Singapore is under pressure to stem job losses. Still, tax cuts won't make up for the 700 jobs that will be disappear when Seiko Epson Corp moves production of computer scanners to Indonesia.
To tackle the problem of industrial erosion, Singapore has created an Economic Review Committee, headed by Lee, to consider ways of spurring startup companies, building new services and industries and overcoming the island's dependence on production of semiconductors and disk drives. Lee's committee will issue a report in August.
Tax cuts, which will narrow the gap between Singapore and rival city-state Hong Kong in the competition for international business, are a first step. Hong Kong, which charges companies 16 percent, is the only Asian nation with a tax rate lower than Singapore's.
Royal Philips Electronics, Europe's largest consumer electronics company, last month said it would move its Asian headquarters from Singapore to Hong Kong. Analysts said the move was prompted by the proximity of China.
Lehman Brothers Holdings Inc and Goldman Sachs Group Inc have both cut back their investment banking staff in Singapore after failing to win as much business as they expected.
Both banks will serve southeast Asian clients out of Hong Kong.
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