Looking back to turn the corner

This article was contributed and first published in The Business Times on 23 December 2008.

This time round, I can dispense with calls for clarity on capital gains, interest expense and borrowing cost deductions, group relief enhancements and all those “till I’m blue in the face” suggestions. All still relevant, but probably more structural and long-term in nature than what is needed at the moment – a quick-fix rescue package.

The problem we face is short-term. Quite how long ‘short’ is, nobody can tell; but in due course some modicum of sanity and stability will return. Construction companies may put projects on hold, banks are reluctant to lend; but ultimately they will have to or they too will go to the wall. Activity will be sparked either by one player spotting an opportunity, forcing others to follow suit or die, or there will be a wholesale sell-down of distressed assets whose buyers will break them up and get them back to work.

Where we find ourselves at the moment is in the eye of a Mexican storm, where everyone is simply standing off. And this period of inactivity is proving to be the tipping point for many businesses. They cannot get funding; their customers are cutting costs. Otherwise well-run, healthy businesses just cannot survive. On the retail side of the coin, people are losing their jobs, and the end of the property price bubble, as well as the “rabbit in headlights” behaviour of the banks, has meant that it is no longer possible to remortgage your house to pay for a Maserati Quattro Porto or a holiday in Alaska.

So what can be done in terms of fiscal measures to help get us out of the bit? There is nothing, clearly, that is going to fix everything. And tax never has been able to do things on its own, in a vacuum. But when timing is so critical and businesses can disappear off a cliff in a matter of minutes, every little bit can help.

Businesses need cash more now than ever before. Tax cuts have been suggested as offering some help, but this misses the point. When your business is about to go belly up, it is probably not because you are making record profits, and a tax rate of two percent is about as useful as a chocolate teapot. What you need is something to turn your losses to use, and quickly. So what can we do with losses?

Currently of course, they can be carried forward, but as there may be nothing that survives to carry them forward in or to, and of course they are of no use until after you have made your next profit, let us waste no more time with that. However if we can carry them back, we can perhaps access some of the tax we paid earlier, when our well-run healthy business was doing what it was meant to do – make profits, employ people and pay taxes.

At present, this can be done, but only up to $100,000 or $18,000 in tax terms, and only against the profits of the immediately preceding year (if you had any). This is hardly going to save a business. What is needed is for the limit to be taken off and carry-back to even earlier years allowed. This will then be a more potent and equitable way of getting relief to otherwise sound but currently ailing businesses.

Even with this though, timing may be an issue. If you have a December year end, then you will not know right now what your actual losses for the year will be, although you may be able to make a good guess. So when can you make the claim? And when will you get the tax back?

The first question here centres around the timing of the Budget speech itself. This is set for 22 January, a welcome decision in the circumstances. This could allow companies to submit provisional tax computations based on management accounts as soon as practicable after that date, and claim a refund. Given the potential for abuse however, some safeguards would need to be built in, and so Inland Revenue Authority of Singapore (IRAS) could perhaps agree to refund up to, say, 70 percent of the provisional claim. The balance would be repayable on the final agreement of the losses for that year.

The second question is how long it would be before the refund is processed and handed over. The answer to this is that the process has to be automatic. It should not involve any of the traditional questioning techniques used on taxpayers trying to get their money back. Otherwise the whole purpose of the exercise is defeated. The only final question is whether this should only be a temporary solution for the crisis at hand, or whether it should not be permanently embedded in the system.

I would have thought that the other angle of attack would have been Goods and Services Tax (GST), given the need to stimulate consumer demand. In the context of the rate hike last year, the government should be in a position to ease the sting for consumers by reducing it. Some in the past have called for reductions to be targeted at the lower income earners by zero rating essentials, but this option has already been ruled out by the government, and so the only option would have been for an across-the-board rate reduction. However, notions of such a reduction have been similarly quashed by recent ministerial statements in favour of more targeted, non-fiscal handouts.

So on the basis that there is a need for some cash stimulus in the economy, we will have to look elsewhere. As readers may know, Singapore’s tax system is what is known as semi-territorial. What this means is that income derived from Singapore is taxed here as it arises; but income generated overseas is only taxable upon remittance, at least if you are a company. Individuals are of course already exempt from tax on income from overseas. It is likely though that a number of Singapore companies are sitting with significant amounts of cash and investments overseas which represent foreign income. The problem is that if this cash is brought into Singapore there is a tax cost attached.

A neat way of unlocking this cash potential and getting it back into circulation in Singapore would be to allow some form of “tax amnesty” window period, much as the United States did a few years back, which would enable tax-free repatriation of those cash balances. A window period, rather than a fundamental change in the law (although some would also find favour with this), as it then allows a reversion to the status quo after the worst is over.

This last measure will not necessarily assist companies that find themselves staring insolvency in the face, but it will help from an overall perspective. Clearly the emphasis needs to be on businesses that are on the edge of the cliff and to this extent, the loss carry-back proposal is likely to be most effective, in conjunction, as mentioned above, with other non-fiscal measures. Paradoxically, it seems we may need to look backwards in order to turn the corner.