By Alvin Foo

THE move to cut the corporate tax rate has thrown down the gauntlet to arch rival Hong Kong and earned praise from tax experts.

'It's now only 0.5 percentage point higher than that of Hong Kong,' said Deloitte Singapore and South-east Asia tax partner Ajit Prabhu.

'Combined with our extensive tax incentive regime and tax treaty network, Singapore now likely has one of the most competitive tax environments in the Asia-Pacific region.'

KPMG Tax Services executive director Leonard Ong said: 'This gives us one of the most competitive tax rates in this part of the world, and makes us potentially even better than Hong Kong if we take the partial exemption scheme into account.'

Finance Minister Tharman Shanmugaratnam announced that the corporate tax rate will be lowered from 18 to 17 per cent to sharpen Singapore's competitiveness and further enhance its status as a business hub. It takes effect in the 2010 tax assessment year.

'It is a signal of the Government's continued and future commitment to being the best hub for enterprises, small and large, from all over the world...our effective corporate tax rates are now lower than in any competing destination for small and medium-sized enterprises,' said Mr Tharman.

The cut is also Singapore's second in three years, after it reduced rates by two percentage points to 18 per cent in 2007.

Tax experts called the cut timely, given that Hong Kong had lowered its company tax rate by 1 percentage point to 16.5 per cent last year.

With the difference between the top corporate tax and individual tax rate having widened to 3 per cent, there may be a worry that higher earners could form companies to dodge tax.

But Ernst & Young tax partner Ang Lea Lea said: 'It shouldn't pose much of a problem, as forming a company could result in more hassle, such as the need for auditors and maintenance costs.'

Ms Ang added that the difference may not be that significant, as the effective personal tax rate will be less than the 20 per cent rate as it is not a flat rate.

The rate reduction brought mixed reactions from the business community.

Courts regional chief executive Terry O'Connor said: 'Any reduction in business costs is welcome. It would help us to better cope with the downturn and bring about long-term benefits.'

But others expected a more generous cut. Singapore Indian Chamber of Commerce and Industry chief executive Predeep Menon said: 'This was lower than the 2 percentage point reduction that we had hoped for.

'The reduction should also have been for Year of Assessment 2009 rather than 2010, as it would have provided a more timely impact for companies.'

But almost all agreed that the cut will enhance Singapore's reputation as an attractive place to do business.

Singapore Manufacturers' Federation president Renny Yeo said: 'The cut comes in handy for people who are looking at a longer-term plan. It'll help to retain manufacturers here in the long term.'

This article was first published in The Straits Times on Janaury 23, 2009.