Friday, December 9, 2011

In the Singapore Property Market, Not All FTAs Are Equal

This week the Singapore government implemented immediate measures affecting its property market.  In an effort to prevent further appreciation in property (and thereby avoid a “bubble” and its consequent “bursting”), Singapore announced that it would increase the 3% stamp duty (tax) charged on purchases of real property, but only for purchases by foreigners (now subject to 10%) and permanent residents (now subject to 6%).  The 3% rate would continue to apply to Singaporeans.   

All foreigners are subjected to the 10% stamp duty except for nationals of the United States, Switzerland, Lichtenstein, Norway and Iceland.  These nationals continue to be subject to the 3% rate imposed on Singaporeans.  The special treatment accorded these countries, and not others, is a direct result of the interaction of the various free trade agreements (FTAs) signed by Singapore.

First, Switzerland, Lichtenstein, Norway and Iceland are members of the European Free Trade Association (EFTA).  Under Article 40.1 of the EFTA-Singapore FTA (ESFTA),  Singapore must treat EFTA nationals as if they were Singaporeans for purposes of investment, including investments in property.   This obligation is known as “national treatment.”   Article 41.2 explicitly applies this obligation to taxation. Hence the ESFTA mandates that EFTA nationals be subject to the 3% rate for Singaporeans.

Second,  Article 15.1 of the U.S.-Singapore FTA (USSFTA) provides that Singapore must treat Americans as if they were Singaporeans for investment purposes through the national treatment obligation.  Furthermore, Article 15.3 provides that any privileges provided to other countries must be extended to Americans.  This obligation is known as “most-favored nation” treatment, and it allows Americans to claim the benefits accorded EFTA nationals under the EFTA-Singapore FTA.  Finally, Article 15.4 provides that Americans must be accorded the better of national treatment or most favored nation treatment.  Thus, through both the USSFTA itself and through the interaction with the ESFTA, Americans are subject to the 3% rate for Singaporeans.

Third,  although Singapore has signed many FTAs with other countries, these FTAs do not provide for the same investor treatment that the USSFTA and ESFTA provide.  Most FTAs do not have the most-favored nation clause that would allow the trading partners access to the ESFTA (see the Korea-Singapore FTA).  Furthermore, under most FTAs, Singapore expressly reserved the right to deviate from national treatment for purposes of administering its real property laws (see Annex 3.2 of the New Zealand-Singapore CEPA).  Other FTAs, such as the Peru-Singapore FTA, expressly exclude taxation from their coverage.  Finally, some FTAs do not even cover investment at all.

The new property stamp duties thus demonstrate that FTAs have a far reaching effect beyond trade in goods and services.  They have direct and continuing effects on the application of domestic law.  

This particular episode also illustrates why countries would want to negotiate an FTA with a country which has 0% import duties and is quite open to foreign investment.  The EU, which has seen its FTA talks with Singapore continue on from an expected October 2011 completion to a first-half 2012 completion, now has another negotiation goal.  Other FTA partners of Singapore must wish that they could revisit the exclusions. 

In any event, if you’re in the property market, it’s good to be an American, Swiss, Lichtensteiner, Norwegian or Icelander in Singapore now.