Singapore, 10 January 2013 - Our wishlist for the 2013 Budget is focussed on addressing the issues of the need for access to financing, increasing productivity and innovation and local companies expanding overseas.
One of the main problems small and medium-sized enterprises (SMEs) are facing is access to financing. This may be addressed by liberalising the Angel Investor Tax Deduction (AITD) scheme, reducing or removing taxes on outbound interest payments and providing certainty to cross-border investors.
AITD
This scheme currently allows approved angel investors to claim tax deduction of 50% of qualifying investments (capped at $250,000 of investments per year of assessment) at the end of a two-year holding period. The investments must be made at the individual level.
This incentive should be enhanced and simplified as follows to encourage more individuals to extend funding to promising SMEs:
Remove or reduce withholding tax on interest payments
Removing the 15% withholding tax on interest payments to non-residents would reduce the cost of financing for Singapore companies, particularly through intercompany lending. In any event, the final withholding tax rate 15% on interest should be reduced as it is no longer representative of the effective tax rates on net income of non-resident persons.
On a related note, the 10% final withholding tax rate on royalties should also be reduced to help lower the cost to Singapore companies of accessing the right to exploit intellectual property, if we are to develop Singapore as a knowledge-based economy.
Lower final withholding tax rates would also help to simplify compliance as 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 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.
Thin capitalisation safe harbour rule
Singapore does not have specific thin capitalisation rules, however thin capitalisation can arguably be governed under the transfer pricing provisions as cross border loans should be at arm’s length. Introducing thin capitalisation safe harbour rules would provide certainty to multinationals that need to finance their Singapore companies.
Understand measures available
Many measures such as the Productivity and Innovation Credit (PIC) have been introduced in recent years to help businesses improve their productivity. However, the feedback has been that these measures have benefited mainly multinationals and large corporations as SMEs, at whom the measures were mainly targeted, have found them to be too complex to understand and administer. In this regard, perhaps a grant (similar to the co-funding given for the GST Assisted Compliance Assurance Programme) could be introduced to help SMEs defray the cost of seeking professional help to understand these measures and plan to implement the necessary changes to their operations.
Greater flexibility
In our experience, the two main activities that companies are able to claim PIC for are the acquisition of automation equipment and training. The remaining four activities are generally of relevance only to a limited group of taxpayers and then only the large ones. This being the case, greater flexibility could be introduced in applying the expenditure cap. For example, a combined cap for all six activities or a higher cap for the two more common activities mentioned above may be considered. This would encourage companies to invest in the activities that are relevant to their businesses and to encourage MNC’s engaging in innovation to consider Singapore as a home base.
Encourage exploitation of intellectual property
Singapore has incentives to support the acquisition and protection of intellectual property (IP), but not its exploitation. Measures that could be introduced to encourage the exploitation of IP from Singapore are:
Deduction for overseas investments
In order to encourage local companies to venture overseas, they should be allowed to deduct any impairment losses from overseas investments against their Singapore business income.
Exempt all foreign-sourced income
Exempting all foreign-sourced income (and Singapore-sourced income from overseas) would encourage repatriation of foreign income. As it is, it is often possible to ensure that foreign-sourced income is not taxable in Singapore, either by way of exemption, foreign tax credit or by keeping the income offshore. An outright exemption would be administratively simpler as companies would not need to track the flow of funds and would give them greater flexibility in managing their finances. In this context, it would be helped if greater clarity could be given to the question of source through legislative provisions.
Simplify section 13(12) exemptions
In the absence of an outright exemption, the application for exemption under section 13(12) should be made automatic. Section 13(12) exemption is available for certain types of foreign sourced income under certain specified scenarios. To avail himself of this exemption, a taxpayer is required to submit an application to IRAS prior to remitting the income. For ease of administration, an automatic approval should be granted to taxpayers as long as they fall into any of the specified scenarios listed under section 13(12). Based on experience, we understand that IRAS has also approved cases which do not fall within these specified scenarios. These additional scenarios should also be included in the list of specified scenarios.
Liberalise foreign tax credit pooling
Foreign tax credit would cease to be relevant if an outright exemption for foreign-sourced income is introduced. Until such a time though, the pooling system should be liberalised:
In addition to the above, Appendix A provides a detailed wishlist for specific enhancements to certain tax incentives, the tax treatment for group relief and losses items, holding companies, personal income tax and indirect taxes.
The multitude of tax incentives available could be streamlined and the qualifying conditions made more transparent. A sliding scale of tax incentive rates could be introduced for greater flexibility.
Certain qualifying conditions for tax incentives should also be reviewed:
Research and development
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 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. This would also 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 attracting companies to invest in world-class facilities. All of these would increase Singapore’s credibility as an R&D location.
Financial sector
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.
Insurers
The OIB scheme is the most widely used tax incentive by the insurance industry. An insurer or reinsurer approved under the OIB scheme is subject to tax at 10 per cent on specified income earned through its offshore insurance and reinsurance business.
The OIB scheme tax rate has remained at 10 per cent over the last 30 years. Yet, over the same period, Singapore's corporate tax rate has more than halved from about 40 per cent to the current 17 per cent.
Particularly for the reinsurance industry, Singapore’s OIB scheme tax rate is grossly uncompetitive. Hong Kong now levies an 8.25 per cent tax rate (being half of its corporate tax of 16.5 per cent) on offshore reinsurance business. Malaysia is also shaping up to be a serious competitor. Although its domestic corporate tax rate is 25 per cent, it offers a 5 per cent tax rate on offshore insurance and inward reinsurance business. Labuan is even more attractive, offering a near-zero per cent tax regime with flexibility to base various operations in Kuala Lumpur.
Singapore should consider reducing the OIB scheme tax rate to, say, 5 per cent or alternatively, to one third of the corporate tax rate. Pegging the OIB scheme tax rate to one third of the corporate tax rate would ensure that the incentive rate is continually adjusted in line with the corporate tax rate.
Currently when a particular business is incentivised, only selected types of investment income are exempt or taxed at the lower incentive rate given for underwriting profits. These include offshore dividends, offshore interest and interest from Asian Currency Unit deposits supporting the incentivised business.
Investment activity is a big part of the insurance business. Funds received from writing policies are usually invested to support the insurance business. Thus, it seems logical that all investment income (whether onshore or offshore) supporting the incentivised business should be allowed to enjoy the same incentivised tax rate. Why attract the underwriting of the incentivised (mainly offshore) businesses to Singapore, yet prompt these businesses to make their investments offshore? This is particularly relevant in light of the fact that underwriting, per se, is not a very profitable activity.
These incentives should be expanded - instead of incentivising specific types of investment income, some alternatives are:
Expanding the pool of incentivised investment income will increase the attractiveness of Singapore's incentive schemes. It would also promote the growth of the onshore investment management industry in Singapore.
A number of natural catastrophes in 2011 occurred close to home – the Thai floods, the Japan earthquake/tsunami, the Queensland floods, the New Zealand earthquake, to name a few. While these natural catastrophes have had a major financial impact on insurers/reinsurers in Singapore, their widespread occurrence also indicate an opportunity to create capacity to write more of such regional business in Singapore. One way of incentivising this business would be to treat it as another line of “offshore specialised risks” for which tax exemption is available.
Insurance is based on the principle of spreading risk over a large number of policyholders, and in relation to infrequent, catastrophic events, of spreading risk over time. Hence, it is not unusual for insurers and reinsurers with exposure to certain special risks to build up contingency reserves to help them cope with sudden and infrequent big losses. In Singapore, insurers writing mortgage risks, financial guarantee risks and trade credit risks are required by insurance regulations to set aside contingency reserves. These contingency reserves are not tax deductible on the premise that the loss event has not yet happened. Certain approved offshore special reserves are deductible under a Tax-Deductible Special Reserves (TDSR) incentive scheme. However, this scheme requires compliance with qualifying criteria, annual reporting requirements and complex rules for tracking movements in the deductible reserves.
As the scheme expired on 1 July 2012, it is perhaps a good time to review the provisions for contingency reserves.
The benefit of a tax deduction for contingency reserves is one of timing only as the benefit is reversed when a disaster occurs and the reserves are utilised to meet claims. Therefore, instead of an administratively burdensome incentive scheme, an automatic special deduction for contingency reserves could be introduced. The deduction allowed could be the amount an insurer is required to set aside for insurance regulatory purposes. The deduction should also be extended to onshore businesses.
Offshore leasing
The concessionary tax rate for offshore leasing under section 43I should be extended to ancillary services and maintenance.
Charter lease income
The exemption for charter lease income under the current Maritime Sector Incentive - Approved International Shipping Enterprise should be extended to income from finance leases.
Land Intensification Allowance
The requirement to obtain approval should be removed in order to reduce the administrative burden. Companies should be automatically allowed to claim the allowance when qualifying conditions are met.
In addition, this allowance should not be restricted to the specified industries. The stated intention of introducing the incentive is to encourage more intensive use of land. Therefore taxpayers in any industry who are able to demonstrate a higher gross plot ratio than their respective industry benchmarks should be allowed to qualify for this allowance.
Mergers and acquisitions scheme
In order to encourage acquiring groups that do not have trading operations in Singapore to conduct their mergers and acquisitions (M&A ) from Singapore, the government could consider waiving the condition that the ultimate holding company must either be incorporated in Singapore or a company that qualifies for the international headquarters (IHQ) incentive. Alternatively, M&A allowances could be allowed to be transferred under the group relief system, as discussed below.
International legal services incentive
Extend the incentive to non-companies as many (if not all) foreign law firms are partnerships.
Group relief
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, providing equity to foreign-owned groups operating in Singapore.
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 the 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.
Companies undertaking mergers or acquisitions should be given greater flexibility in structuring acquisitions by allowing the allowance to be transferred under the group relief system or given to the target instead of only to the acquiring company.
Loss carry-back
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. This is of particular relevance to insurers with exposure to natural catastrophe risks as they typically find themselves in cycles of profitable years and when a significant disaster hits, in significant loss positions. The current carry-back loss relief system is grossly inadequate in view of the cyclical nature of writing natural catastrophe risks.
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.
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.
Safe harbour rule
The current requirements are more restrictive when compared to the participation exemption schemes in some other jurisdictions, e.g. 5% shareholding in the Netherlands and 10% shareholding in Luxembourg; the Netherlands does not impose any minimum holding period while Luxembourg requires only one year. The minimum shareholding could be reduced to 10% with a minimum holding period of one year.
The safe harbour rule should also be available in respect of hybrid instruments such as preference and/or redeemable/convertible shares, convertible bonds. The current rule is only applicable to ordinary shares.
The five year sunset clause for this rule should be extended or removed as a five year timeframe is too short a time horizon to give certainty to companies planning their corporate structures. Unless an extension of the rule is announced before 1 June 2015, we will be back to complete uncertainty within three years. The rule would be of no use to companies planning to acquire new investments from that date as the safe harbour rule would be due to expire before the two year minimum holding period can be met for those investments. We recommend that the qualifying period is given with reference to the date of disposal of investments instead of the date of acquisition
Insurance and reinsurance companies are specifically excluded from this safe harbour rule. This exclusion should be removed as it is unfair and does little to encourage insurance companies to set up their holding company and regional management companies in Singapore. It also conflicts with the findings in U Limited v CIT which arguably have reintroduced uncertainty for insurers.
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.
Clarify treatment of unincorporated entities
Update tax legislation to clarify the tax treatment of newer legal entities that businesses operate from (e.g. PPPs, LPs, LLPs, trusts) as these become more common.
Inflation is high, so a tax rebate could be introduced to redistribute income into the hands of lower income earners. We suggest a one-time 10% income tax rebate of up to a maximum of S$2,000 for individuals.
The lowest income bands for personal income tax should be removed and the tax rates for remaining income bands recalibrated accordingly.
Provide for medical and retirement needs
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 insurance should also be de-linked from CPF relief.
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:
Increase birth rate
Fiscal “carrots” (e.g. Baby Bonus, Parenthood Tax Rebate, Child Relief, etc) to encourage childbirth do not appear to have been successful, so it may be time to consider addressing some of the more social factors which may be inhibiting the birth-rate. Some suggestions:
Various generous tax subsidies/reliefs already exist, but have not yet resulted in material improvement in the birth rate in Singapore, so these should be reviewed and adjusted to target these more effectively:
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.
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.
Medical and health insurance are currently subject to GST at 7%, and life insurance policies are exempt. All of them should be zero-rated. This will make medical and health plans cheaper, thereby providing an incentive for individuals to invest and provide early for their own healthcare.
Zero-rating life insurance policies on the other hand would allow life insurers to recover their input tax, thereby achieving cost savings which we hope can be passed on to customers in the form of lower premiums.
Stamp duty relief
Extend the stamp duty relief provisions to include limited partnerships. They are currently available only to limited liability partnerships.
Customs and International Trade
The GST Assisted Compliance Assurance Programme (ACAP) has proven an effective tool in improving GST compliance at a relatively low cost to the government. Consequently, the government should consider extending the programme to areas of import / export compliance such as:
Given the limited resources that Singapore Customs have, covering areas like the above through an extended ACAP would improve compliance at a manageable cost.
Treat the whole of Singapore as a Free Trade Zone
The use of Free Trade Zones and other deferment and suspension schemes has been very attractive to companies to establish business operations in Singapore. Nevertheless, movement of products between such facilities are still subject to significant controls. It may aid business to business transactions if such movement were deemed to be taking place in a Free Trade Zone or equivalent facility.
Introduction of customs duties to facilitate the establishment of an ASEAN internal market
Although progress is being made to the establishment of an ASEAN Economic Community by 2015, this is not an internal market allowing free circulation of products within the region such as exists in the European Union or Gulf Cooperation Council. Allowing such free circulation would require harmonisation of the external tariff among ASEAN countries. Given that customs duties in Singapore are currently predominantly at 0%, an ASEAN external tariff would only be possible if other ASEAN countries reduced their applied customs duty rates to 0%, or if Singapore were to introduce positive rates of customs duty. Singapore’s bound rates of duty under the General Agreement on Tariffs and Trade may allow for this to happen.
As the former is unlikely to happen, the latter may be a good first step on the way to a common ASEAN market. Any impact on domestic prices could be mitigated through reductions in GST and /or implementation of a broader Singapore-wide Free Trade Zone.
Media contacts
Alan Lee (Direct line: +65 6236 3961, email: alan.ec.lee@sg.pwc.com)
Chen Yih Lin (Direct line: +65 6236 3960, e-mail: yih.lin.chen@sg.pwc.com)
Candy Li (Direct line: +65 6236 7429, email: candy.yt.li@sg.pwc.com)