Singapore, 30 November 2013 – The changes we would like to see in the 2014 Budget relate mainly to the alignment of Singapore’s tax policies and administration with its strategic positioning as a trade and services hub and its current stage of economic development, so as to enhance our competitiveness as well as to help individuals manage costs.
Singapore has effectively used tax incentives and low headline tax rates to attract foreign investments. However, low corporate tax rates are increasingly coming under international attack and measures that served Singapore so well in the past may no longer be acceptable.
In addition, in recent years, many measures have been introduced to help small and medium enterprises (SMEs) and local businesses survive in an increasingly competitive business environment. These measures range from enhanced tax deductions to grants and cash payouts. Although intended primarily to help SMEs, they also inadvertently benefit MNCs which may not need the assistance. It may therefore be timely to review these measures and address the needs of different groups of taxpayers in a targeted manner, so that the effectiveness of each Budget dollar is maximised. To do this would entail an extensive review of Singapore’s tax system, which we would be glad to comment on in due course, but is beyond the scope of this wishlist. We will instead suggest some areas that can be improved in the meantime.
Singapore is one of the easiest places in the world to pay taxes1. However, there is still room for improvement. This is particularly so if we were to compare ourselves to our closest competitor, Hong Kong. For example, Hong Kong abolished sales tax and duty on wine whereas Singapore introduced wine duty exemption and Goods and Services Tax (GST) relief, which are subject to a long list of conditions.
Singapore’s tax rules in themselves are generally fairly straightforward. However, some of the monitoring and reporting required under those rules give rise to disproportionately high administrative costs compared to the benefits enjoyed. Some measures that can be taken to simplify the tax rules are provided below.
Review qualifying conditions for tax incentives
Tax incentives come with complex rules and conditions attached, making compliance a costly affair. These should be reviewed and aligned. For example, the 12%/5% tax rate differential for banks under the Financial Sector Incentive (FSI) could be replaced with a single incentive rate. This is particularly so given the small differential between the standard tier incentive rate of 12% and the general corporate rate of 17%, where the resulting administration and monitoring costs seem disproportionate.
Sunset clauses have been introduced for most tax incentives as they need to remain relevant. However, there may not be a need to introduce sunset clauses for some tax rules. For example, there is a five year sunset clause for the safe-harbour rule for gains from disposals of equity investments even though it is not a tax incentive. The clause unnecessarily limits the effectiveness of the safe harbour rule - it would be of no use to companies planning to acquire new investments from 1 June 2015 since it would be due to expire before the two year minimum holding period can be met for those investments.
Rules must be easier to comply with
Some examples of tax rules that could be simplified are provided below.
The PIC scheme will expire after the 2014 financial year. The scheme should be extended as many companies are still in a transition phase and need the support that the PIC scheme offers.
Simplifying tax rules for local companies and SMEs
Transparency and certainty
The following measures could be considered to increase the transparency of the Singapore tax system.
The current requirements are more restrictive when compared to the participation exemption schemes in some other jurisdictions, e.g. Spain requires a one-year period of uninterrupted ownership of at least a 5% stake in the capital; the United Kingdom requires 10% shareholding with a minimum shareholding period of 12 months. The minimum shareholding could be reduced to 10% with a minimum holding period of one year.
As mentioned earlier, the five year sunset clause for this rule is too limiting. The clause should be extended, removed or 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 was based on the misconceived notion that insurers cannot derive capital gains. It has been decided that this is not the case in BBO v Comptroller of Income Tax.
Simplification and harmonisation of the tax code does not equate to a lax tax system, which is understandably a concern in light of the current global tax environment. Boosting our defence mechanism - robust transfer pricing rules and enhanced international cooperation in tax matters – should instead be the way to address global concerns.
Singapore is expensive place to do business compared to her neighbouring countries, and the costs of doing so have been steadily increasing.
It is no longer sustainable for Singapore businesses to compete on cost, and they will have to focus on intellectual property (IP)-related and higher value-add activities.
Measures should therefore be introduced to encourage exploitation of intellectual property from Singapore; and not just the acquisition and protection of IP. For example:
In time, low value-add activities will have to relocate out of Singapore. The Government can support Singapore businesses that need to relocate certain activities by allowing an enhanced deduction for relocation costs to move outwards.
In addition, the incentives for research and development (R&D) could be enhanced as follows:
Under the PIC scheme, an enhanced tax deduction of 400% for up to $400,000 of R&D qualifying expenditure is available to companies who perform R&D activities. However, once that limit is reached, an enhanced deduction of 150% of the balance of the qualifying R&D expenditure is only available if the R&D activities are carried out in Singapore.
Some R&D activities must by their very nature, be undertaken partly outside of Singapore. An example of this would be in the pharmaceutical industry where R&D conducted in connection with clinical testing of a new drug often needs to be conducted outside of Singapore, simply because of the required population size for conducting a statistically significant clinical trial. Another example would be oil and gas companies that develop surface drilling and exploration equipment. Whilst some of the R&D activities can be conducted in Singapore fairly easily, R&D activities in connection with the field testing of prototypes cannot (this would need to be done in in oil fields, say, the Middle East or Malaysia).
For such R&D expenditure incurred overseas, the taxpayer would be able to claim an enhanced tax deduction of 400% for up to $400,000 of R&D expenditure. But any R&D expenditure incurred overseas beyond that, is only eligible for a 100% deduction, and not a 150% deduction.
In contrast, a company operating in a different industry but with R&D that can be conducted wholly in Singapore would not face any such restriction on the tax deductions available to it.
In both cases the intellectual property is likely to be retained in Singapore. However, when it comes to the amount of tax relief received by each company, there is an obvious disadvantage for the company that, simply by virtue of its industry or the products it deals in, has to conduct part of the R&D activities outside of Singapore.
Such anomaly should be properly addressed.
Further recognise the higher risk associated with investments in innovation related activities by increasing the cash payout limit. One way to administer this increase would be to target it to a narrower group of companies, perhaps to SMEs exclusively. This could be accomplished by incorporating the SME definition used by Spring and IE Singapore into the rules. As a point of reference, Australia’s new R&D scheme features a refundable feature; however this feature is only available to companies with a group turnover of less than AUD 20,000,000. An additional consideration should be to provide a cash payout for each activity category. This will encourage companies to embark on activities which they had previously not considered such as R&D and registration of designs.
Certain existing schemes that can be liberalised:
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 noncorporate entities like Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) that own Singapore companies provided the requisite common ownership requirement is met. 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.
Recent changes have had the net negative cash effect for individuals - new stamp duties on property and progressive property tax rates for all residential properties and owner-occupied homes. Tax revenues were healthy in the 2012/2013 financial year, so those revenues could be used to help lower income earners deal with the increasing cost of living. Some measures that could be considered include:
Progressive, structural tax changes, not one-time rebates
Rather than giving another one-time rebate (which has now happened so regularly in recent years that it is becoming something of an expectation), those revenues could be used to help the lower income group through a more structural change in the tax rates. The lowest two tax bands could be abolished (i.e. do away with the 2% on income from $20,000 to $30,000 and the 3.5% on income from the $30,000 to $40,000 slabs). Alternatively, channelling the surplus into more GST rebates and offsets for lower earners would make the tax structure more progressive.
Tax relief for home offices
As telecommuting and home offices become increasingly common, employees who work from home should be given personal tax relief as their residence and resources are partially used for employment purposes. For example, the UK allows tax relief for work-related expenses such as business telephone calls, additional utilities, etc., and the US allows deductions for home-office expenses for areas used exclusively and regularly for business purposes.
Review the effectiveness of the Not Ordinarily Resident (NOR) scheme
The five-year sunset clause for the NOR scheme should be removed. This will help Singapore businesses retain senior talent and build towards long-term stability.
The current rules really only benefit foreign nationals during their first few years in Singapore. Given the increased mobility of Singaporeans, the requirement to be non-resident for three years in order to qualify for NOR status could be removed to widen the applicability of the scheme to include Singaporeans.
The exemption on employer contributions to non-mandatory overseas pension plans could also be removed. The tax relief available is very small, the qualifying conditions require companies to give up corporate tax deductions in order to provide employees with the tax benefit (which rarely happens in practice), and adds complexity, making it difficult for employers to understand.
Provide for medical and retirement needs
The government could consider the following to boost the adequacy of CPF retirement savings:
1 Source: Paying Taxes 2013