And it could also be an attempt to soften the blow that companies would feel from any increase in employers' social security contributions, something mooted by the government as it tries to head off grumbles about a growing income gap, they said.

Lee Kuan Yew, the country's founding prime minister, told reporters over the weekend that Singapore planned to trim its corporate tax rate to stay competitive, a move that would cost the state up to S$500 million (US$325 million) in revenue.

The island-state lured an impressive $31.9 billion in foreign direct investment in 2006, nearly half the $70 billion that China attracted, a United Nations survey showed this month.

But it fell short of the $41.4 billion that long-time financial and manufacturing rival Hong Kong won last year with its 17.5 percent corporate tax rate.

"Hong Kong is benefiting from the China listings and it has a huge hinterland that Singapore doesn't have," said Chua Hak Bin, an economist at Citigroup, referring to the sometimes huge stock market share sales by mainland firms in the Hong Kong market.

A recent survey that ranked the world's freest economies put Singapore just behind Hong Kong, which topped the list due to its low taxes and flexible labour market.

Singapore-listed companies surged on news of the planned tax cut, with the benchmark Straits Times Index posting its biggest rise in about seven months on Monday.

The government will provide full details in its budget announcement on Feb. 15.

Owi Kek Hean, head of tax services at accountancy firm KPMG, said the government had to ensure the climate was favourable to businesses and investors.

But Singapore ranks 18th globally in terms of having the lowest corporate taxes and was already well placed vis-a-vis Hong Kong.

"Singapore has an edge," Owi said. "It has the infrastructure, the social environment and the quality of life. Tax is just one of the many factors that investors look at."

SWEETENER

Lower corporate taxes in Singapore may take some of the heat off Singapore-based companies should they be required to contribute more to their employees' pension schemes, known as the Central Provident Fund (CPF), as suggested by Prime Minister Lee Hsien Loong in a New Year's Eve message.

"It looks like they are going to raise the CPF contribution and they felt obliged to sweeten the pie a bit for the companies," said David Cohen, an economist at Action Economics.

Singapore -- the wealthiest nation in Asia ex-Japan in per capita terms -- has come under pressure for a widening in the income gap and has promised measures to help the nation's poor by building a stronger safety net.

The proposed increase in pension contributions would help cushion the blow that low- and middle-income earners especially may feel from a planned increase in the goods and services tax (GST) to 7 percent from 5 percent.

The government can afford to take some of the pain itself.

On balance, Deutsche Bank said in a research note, the changes would be "net positive" for government revenues.

Every percentage point increase in GST would raise revenue by around S$750 million while every percentage point cut in corporate taxes would reduce revenue by about S$370 million, based on fiscal 2005/06 data, the report said.

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