Budget Wish List 2012
PwC reveals wish list amidst signs of slowing economic growth
SINGAPORE, 30 Dec 2011— In early 2011, we predicted that there was still a threat of a continuing global crisis. Now, with 2012 around the corner and the financial crisis in the Euro zone still unresolved, the Singapore economy is showing signs of slowing. The coming Budget therefore should have measures to avert an economic downturn, and we suggest that this is a good time for a reduction in tax rates. This would be a clear welcome sign for businesses and individuals, and particularly timely, as many are now looking to investing in Asia. Domestically, we expect that measures to improve productivity and innovation will double up as measures to reduce unemployment. Of course, more can still be done to nudge Singaporeans to have more babies, and to convince an aging population that it needs to take a serious look at its retirement needs.
Reduce costs and simplify compliance
Reduce headline corporate tax rate
Singapore’s corporate tax rate of 17% is lauded as one of the most competitive in the region. However, a 2% reduction to 15% could pave the way for a more streamlined tax system and reduced administrative compliance work for taxpayers.
Of course, tax rate reductions also make newsworthy international headlines – a good way to attract the attention of potential foreign investors at a time when businesses are looking to invest in the Asia Pacific region.
Tax compliance can also be expected to improve as a low tax rate would remove the need for complicated schemes to help businesses reduce their effective tax rates.
Housekeep tax incentives
Tax incentives which are less attractive or well-used can be removed if the headline tax rate is reduced. Incentivised taxpayers who had to monitor their compliance with qualifying conditions and reporting obligations can thus be freed of this administrative burden.
The multitude of tax incentives available could also be streamlined and the qualifying conditions made more transparent.
Financial Sector Incentive
The concessionary rate for the Financial Sector Incentive (FSI) was increased from 10% to 12% from 1 January 2011 to accommodate a revenue-neutral removal of the qualifying base. In line with a reduced headline tax rate, the FSI concessionary rate could revert to 10% to ensure that the scheme remains attractive.
Reduce final withholding tax rates for interest and royalty payments
If the corporate tax rate were to be reduced, the final withholding tax rates of 10% and 15% on royalties and interest respectively should also be reduced accordingly. As it is, these rates have been due for readjustment for some time now as they are no longer representative of the effective tax rates on net income of non-resident persons
Lower final withholding tax rates would also help to simplify compliance. A withholding rate of say 5% on interest and royalties would match or be lower than most of the reduced tax rates provided for in most of Singapore’s tax treaties. This would remove the need for recipients to satisfy the treaty conditions in order to qualify for the treaty rates and to prepare and obtain documentation (e.g. certificates of residence) proving that those conditions are met. As the onus is on the Singapore payer to check that the non-resident qualifies for treaty relief, they would be relieved of this administrative burden as they would then be able to apply the final withholding tax rate automatically.
Strictly speaking, withholding tax is the recipient’s cost. However, “grossing up” clauses can contractually shift the tax burden to the Singapore payer. Reducing the withholding tax rates will therefore make it cheaper and more attractive for Singapore businesses to import intellectual property into Singapore. Easier access to foreign funds would help to address the credit crunch that some local businesses are already facing. Local banks should not be disadvantaged by this as they would probably have denied credit to these borrowers in the first place. In any case, the funds would likely be deposited into and disbursed from a Singapore bank account.
The Approved Royalty Incentive (ARI) could also be de-linked from other tax incentives so that companies who are unable to qualify for incentives can also benefit from the ARI withholding tax exemption.
Individual tax rates
The 20% top tax rate should be brought in line with the corporate tax rate of 17% and the tax rate for other income brackets should be correspondingly reduced. This would make Singapore even more attractive for executives to relocate to Singapore, and when foreign talent settles down, businesses naturally follow.
The 2% and 3.5% income tax brackets applicable to residents earning $20,000 to $40,000 could also be dissolved. This will benefit lower income earners while reducing the government’s tax administration costs.
- Encourage employee training
In past economic downturns, companies have been encouraged to make use of the downtime to send employees for training. 2012 should not be an exception. Liberalising the rules for Productivity and Innovation Credits for internal training would give employers an incentive to do so. Employers should also continue to invest in training the next generation and a double deduction for internship expenses may be useful.
- Liberalise group relief and loss carry-back rules
The group relief system, where the losses of a company within the group can be set off against the profits of another, should be liberalised to allow more corporate groups to take advantage of this relief.
The minimum equity holding requirement should be reduced to 51% from the current 75%, and the Singapore holding company requirement should be removed. It should be sufficient that the group has common ownership. The condition requiring group companies to have co-terminous year-ends should also be removed. The group relief system should also be extended to non-corporate entities like Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) that own Singapore companies. In addition, consortium relief should be introduced.
In addition, companies could be given more flexibility to decide the amount of losses to be transferred to each transferee, and order of set off. Brought-forward loss items should also be allowed to be transferred as long as they meet the relevant continuity of shareholders test and same business test.
The restrictions on the amount of unutilised loss items a company is allowed to carry back should be removed altogether and companies should be allowed to carry back losses for at least three years.
Encashment of unutilised loss items
Allowing companies to surrender unutilised loss items for a cash payout would be especially helpful for start-ups trying to tide over this difficult period.
- Streamline the tax treatment of research and development expenditure
Greater clarity is needed on what qualifies as research and development (R&D) projects for tax deduction purposes and for determining what qualifies for the Productivity and Innovation Credit scheme. Illustrative examples would be helpful.
The tax treatment of research and development (R&D) expenditure should be streamlined and simplified. For example, the distinction between R&D expenditure and expenditure under R&D cost-sharing arrangements and the need to obtain approval could be removed if the requirement for legal ownership of the resulting intellectual property could be done away with.
The government could also consider allowing writing down allowances for acquired intellectual property in cases where the seller and buyer become related parties as a result of a merger or acquisition.
Allowing a deduction for R&D expenditure outsourced overseas for a new business if the resulting intellectual property rights will be owned and exploited from Singapore would attract new research capabilities to Singapore and encourage multinationals engaging in innovative R&D to consider Singapore as a home base.
Talent is critical to R&D and attractive personal tax concessions would go a long way towards building up Singapore’s R&D talent pool and attract companies to invest in world-class facilities. All of these would increase Singapore’s credibility as an R&D location.
Make Singapore a more attractive holding company location
- Clarity on residence and access to double tax treaties
The government could consider amending the legislation to treat a company incorporated in Singapore as tax resident in order to minimise uncertainty. In practice, it is becoming increasingly difficult to obtain certificates of residence particularly for special purpose companies or investment holding companies as the IRAS expects companies to be carrying on a business in Singapore in order to be resident. This undermines Singapore’s appeal as a location for holding companies and is a potential roadblock for overseas multinationals that are keen to set up regional holding companies in Singapore.
- Provide certainty on the treatment of capital gains
Another factor which affects the attractiveness of Singapore as an investment holding hub is the lack of certainty for investors as to whether their gains from disposals of investments, particularly in shares or real property, will be subject to tax. A new set of transaction-based rules or incentive could be introduced to provide clarity of treatment of gains arising from the sale of shares or investments (in and/or out of Singapore) by a Singapore tax resident.
- Interest deductions
Allow holding companies to deduct the costs of financing investments against business income or to transfer those deductions to group companies. This would greatly facilitate mergers and acquisitions structuring and would make Singapore much more attractive as a holding company location.
- Remove section 10E
The uncertainty around when a company will be subject to section 10E, and the restrictions on the carry forward of unutilised losses is a disincentive for multinationals to locate investment vehicles in Singapore.
Provide for medical and retirement needs
- Medical benefits and insurance
The cap on the employer’s tax deduction for employees’ medical benefits should be removed. It is complex and a disproportionately large administrative burden given the revenue it collects.
Individual tax relief for life and medical insurance should also be de-linked from CPF relief.
- Retirement needs
CPF has become less and less significant as a retirement savings mechanism over the years. Reasons for the reductions have been cited as the need to reduce the cost to business, with the tendency to assume that all businesses are struggling. The restrictions in place therefore might not be appropriate to all businesses or their circumstances. The government could consider:
- Continue increasing the mandatory employers’ CPF contribution until the former 20% rate is reinstated. In the meantime, a range of tax deductible statutory CPF contribution rates could be introduced to give some latitude to companies who want to contribute more. To reinforce the objective of saving for retirement, certain rules may be implemented such that contributions are channelled to the Special or MediSave accounts.
- Allowing increased voluntary CPF contributions for older workers. Currently, the mandatory contribution rates decrease with age, which is counter-intuitive as the closer one gets to retirement, the more likely they would be in a position to save for their twilight years.
- Simplifying retirement planning by aligning the Supplementary Retirement Scheme (SRS) and section 5 pension schemes to allow tax deductible employee contributions into section 5 plans, subject to reasonable contribution caps, and 50% tax exemption for withdrawals.
- Re-introducing compulsory CPF for non-permanent residents. This would be an excellent way of anchoring foreign talent to Singapore and enhancing retention rates.
- Stop allowing individuals to use CPF savings to finance property, investments and children’s education. CPF is intended to provide for retirement needs. Allowing CPF to be used for these investments results in an asset-rich, cash-poor retirement and contributes to an artificially inflated market for HDB property. Incidentally, this gives tax relief for capital value of homes, which is truly unique to Singapore.
Subsidies and relief for childcare and infertility treatment have proven effective in increasing the birth rate in Taiwan. These could be introduced in Singapore.
In addition, procreation reliefs that are currently available only to working mothers should be allowed to either working spouse so that couples with stay-home mothers are also encouraged to have more children.
Another (non-tax) measure to consider would be to give priority to children with two or more siblings during primary school enrolment exercises.
As more countries are unilaterally introducing environmental taxes and regulations to address environmental issues, it is perhaps time for Singapore to also send a clear signal to the international community that it is committed to playing a part in reducing carbon emissions, even if it is physically too small to be a major contributor. Penalties have been shown to be more effective than incentives in this respect and a carbon tax, for example, would give companies an incentive to reduce emissions while the revenue from it could soften the blow somewhat by financing a reduction in the corporate tax rate.
- Liquor duties
Abolishing duties on alcoholic beverages would allow Singapore to compete more effectively with Hong Kong as a wine storage hub. It would also make it more appealing to discerning high-end tourists.
- Goods and Services Tax
On the Goods and Services Tax (GST) front, the government could consider allowing a recovery of GST for foreign businesses that incur GST on business travel expenditure in Singapore. This is similar to a recovery of European Union (EU) VAT under the EU 13th VAT Directive. Doing this will help position Singapore as the business travel destination of choice for European businesses while providing reciprocal treatment for Singapore business travellers to the EU to recover EU VAT without the need for VAT registration in the EU.
At the same time, the government could also effect reverse charge provision. Singapore companies would then have greater flexibility in structuring billing arrangements for services that do not qualify for the zero-rating treatment.
For media inquiries, please contact:
Eileen WK Lee (Direct Line: +65 6236 7262, e-mail: email@example.com)
Lisa LY Chong (Direct Line: +65 6236 3972, e-mail: firstname.lastname@example.org)
Sarah WW Sim (Direct Line: +65 6236 3959, e-mail: email@example.com)
Yih Lin Chen (Direct Line: +65 6236 3960, e-mail: firstname.lastname@example.org)