Given the unfavourable regulations in India that restrict early-stage investing, merger and acquisition (“M&A”) transactions and initial public offerings (“IPOs”), it is no wonder that many India’s start-ups in need of funding have gone elsewhere, such as Singapore, where funding is far more accessible.
Why locate your start-up in Singapore?
Why choose Singapore for business? The reasons why many Indian start-ups first look towards Singapore as a base for their business are mostly practical ones. In a world that has rapidly modernised, Singapore’s government has done well in revamping and developing its infrastructure and facilities to meet the demands of a rapidly evolving economy, leading to its no. 1 ranking in the World Bank’s annual survey on the Ease of Doing Business.
In contrast however, India has struggled to balance traditional ways of life whilst attempting to keep itself globally competitive, leading it to the unique challenge of dealing with a complex and haphazard city infrastructure, with native wildlife seemingly uncooperative in its bid to modernise.
Moreover, Singapore is also one of the most business friendly countries in the world, with a large number of tax incentives, easily understood ongoing compliance requirements; and its strong diplomatic policy has established approximately 74 Double Taxation Agreements (“DTAs”), 41 Investment Guarantee Agreements (“IGAs”) and 21 Free Trade Agreements (“FTAs”) / Economic Partnership Agreements (“EPAs”) that companies in Singapore can leverage off to expand their market reach.
A key factor that is also extremely attractive to new age entrepreneurs is Singapore’s strong respect for the rule of law and its developed intellectual property (“IP”) protection laws; which is crucial for tech start-ups and various other industries that need to protect their trade secrets. Indeed, the strong framework set in place for IP protection has been a key reason why leading multi-national corporations (“MNCs”) such as Proctor and Gamble, Mead Johnson, Fraser and Neave have selected Singapore as their destination of choice for research & development.
Particularly for tech entrepreneurs who do not have the funds to spend on engaging expensive legal counsel to draft and apply for patents, etc; but consider protection of their IP as an essential and core component of their business, Singapore’s reputation as a strong protector of IP is a strong reason to locate their business here.
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Reaching Out to India
For companies based in Singapore, there are various tax reliefs in Singapore that foster and nurture business growth and regional expansion. Two examples would be the Global Trade Programme (“GTP”) and Regional Headquarters Award (“RHQ”).
The GTP grants a concessionary tax rate to foreign corporations who earn income from qualifying commodity derivatives or freight derivatives. The GTP and RHQ are governed by the Economic Development Board and will have minimum requirements to be met.
For example, RHQ grants a concessionary tax rate of 15% on incremental income from qualifying activities, for MNCs who choose to base their international or regional headquarters in Singapore. Qualifying is subject to the company being able to justify and show that its base in Singapore engages in a substantial level of qualifying activities, such as:
- Strategic Business Planning and Development
- General Management and Administration
- Marketing Control, Planning and Brand Management
- Intellectual Property Management
- Corporate Training and Personnel Management
- Research, Development and Test Bedding of New Concepts
- Shared Services
- Economic or Investment Research and Analysis
- Technical Support Services
- Sourcing, Procurement and Distribution
- Corporate Finance Advisory Services
In addition, the company should meet all of the following requirements:
- Have paid up capital of at least S$0.2 million at the end of Year 1 of the incentive period, to be increased to S$0.5 million by the end of Year 3
- Provide three headquarter services to network entities in three countries outside Singapore by the end of Year 3 of the incentive period
- Maintain at least 75% skilled staff
- Hire an additional 10 professionals in Singapore by the end of Year 3
- Average remuneration per worker should be S$100,000 for the top five executive designations by the end of Year 3
- Additional $2 million in annual total business spending in Singapore by the end of Year 3.
In addition, companies in Singapore are taxed a flat corporate tax rate; and there are no differential tax rates for different types of goods or services, as is the case in certain countries. This means that the corporate tax paid is the final tax and there will be no additional taxes imposed on dividends distributed by Singapore tax resident companies. This is unlike the U.S. territorial tax system, which imposes tax on worldwide income.
Moreover, Singapore’s current DTA with India ensures that dividends paid out from the Indian subsidiary to the Singapore holding company will be considered exempt under Singapore’s foreign-sourced income exemption scheme, provided the necessary conditions are met. Companies can also claim tax credits under Singapore’s foreign tax credit (“FTC”) scheme, subject to the following conditions:
- Company is a tax resident in Singapore for the relevant basis year;
- Tax has been paid or is payable on the same income in the foreign country; and
- Income is subject to taxation in Singapore
For entrepreneurs who have already set up their base in Singapore, fulfilling these conditions should not be an issue. For companies that may have several subsidiaries throughout the region, they can utilise the FTC pooling system, which grants businesses more flexibility and reduces their Singapore taxes payable on remitted foreign income. To qualify, a company would be required to fulfil all of the following conditions:
- Foreign income tax is paid on the income in the foreign country from which the income is derived;
- The highest corporate tax rate (headline tax rate) of the foreign country from which the income is derived is at least 15% at the time the foreign income is received in Singapore; and
- The company is entitled to claim for FTC under the Income Tax Act and there is Singapore tax payable on the income.
Conquering the Indian Market
Undeniably, Singapore’s economy, whilst dynamic, is limited somewhat by its relatively small domestic market. Hence, despite the opportunities that countries like Singapore can offer in terms of funding opportunities, facilities and infrastructure, many Indian-founded start-ups do eventually look back to the domestic market in India, where they would not have the same barriers of entry that other entrepreneurs from different cultural backgrounds may have.
As a market, India is one of the largest in the world, with a population of approximately 1.2 billion; which is nearly 10% of the world’s population. Weaknesses in infrastructure and complicated bureaucracy notwithstanding, India has a wealth of talent that companies can tap on. In particular, India’s strength lies in its engineering and technical workforce; and many are able to converse in English; an essential skill to have in a global work scenario.
For entrepreneurs on a budget, looking towards India for technical talent may be a better option. “India… offers excellent yet affordable technical talent. Startups are able to choose from freshers, mid-, junior- and senior-level software engineers without shaking up their hiring budget or compromising on quality,” noted Varun Chandran, Founder and CEO of Corporate360, a start-up based in Singapore.
In addition, with Prime Minister Modi advocating huge economic reforms, it is anticipated that India’s economy is becoming increasingly dynamic, supported by a growing segment of middle-class income households.
However, companies targeting the local market may find difficulties in tailoring their product to their needs and demands. Entrepreneur Niranjan Rao, co-founder of 6degrees notes, “It is also a relatively tough place to sell paid products due to lower purchasing power, especially for B2B/enterprise products.” That said, if done well, Singapore companies could potentially reap huge benefits from expanding into India.
“Overall, despite obvious headwinds, Singapore entrepreneurs would do well to study the Indian market and identify areas of their own strength in order to ensure an appropriate product-market fit. The scale of the market ensures a large enough prize worth pursuing,” Rao concludes.
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