Budget Wish List 2014

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.

Tax policies

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.

Simplification of the tax rules

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.

  • Medical benefits - 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.
  • Productivity and Innovation Credit - Greater flexibility could be introduced in applying the expenditure cap under the Productivity and Innovation Credit (PIC) scheme. A combined cap for all six activities or a higher cap for the more commonly undertaken activities would encourage companies to invest more in the activities that are relevant to their businesses. For example, SMEs could be allowed to claim higher PIC deductions or allowances for training and the acquisition of information technology and automation equipment as these are the two activities that are of relevance to them. Similarly, multinational corporations (MNCs) which use Singapore as a home base for innovation-led activities have the potential to incur significant amounts on research and development (R&D) and the acquisition of intellectual property and would need a much higher expenditure cap for these activities.

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.

  • Group life insurance premiums - The administrative concession which allows a trade-off between corporate deduction and individual tax needs to be reviewed. The Singapore tax system does not apply the principle of tax symmetry, which is what the concession appears to have been premised upon. A de minimis rule would be simpler to administer and consistent with the treatment for other employee benefits-inkind.
  • R&D – greater clarity on what qualifies - The IRAS has published a list of examples of what is not considered to be software R&D. However, there still remains a difficulty in assessing the eligibility of the software development projects for enhanced deductions. Further clarification could be provided by way of specific illustrations after consulting software developers and others in the industry.

Simplifying tax rules for local companies and SMEs

  • Introduce a simplified tax code for local companies and SMEs before branching off to multinational corporations (MNCs) after four to five years. For example, simplified capital allowance rules, option to be taxed on a specified percentage of turnover or net profit before tax, etc.

Transparency and certainty

The following measures could be considered to increase the transparency of the Singapore tax system.

  • Carried interest could be taxed at a reduced rate (e.g. 5%) to avoid uncertainty in its Singapore tax treatment. This move could potentially attract many fund managers to move to Singapore, particularly amidst the level of enquiry on the same by the Inland Revenue Department in Hong Kong. Tax exemption could also be considered for assets under management exceeding a certain threshold (e.g. one billion Singapore dollars).
  • A public advance ruling regime.
  • Specific and transparent qualifying conditions for tax incentives. For examples, certain minimum requirements could be legislated for specified concessionary tax rates.
  • A thin capitalisation safe harbour rule. The amount of related party debt 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.
  • Amend the legislation to treat Singapore- incorporated companies as tax residents in order to provide clarity on residence and minimise uncertainty on access to tax treaties.
  • Enhance the safe harbour rule for gains from disposals of equity instruments

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.

Managing costs for businesses

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:

  • An IP box regime which allows taxpayers to claim a notional tax deduction against income and gains arising from the exploitation of qualifying IP (such as patents, trademarks, copyrights and designs). This is less likely to have controlled foreign corporation (CFC) and other overseas tax implications as it is not a reduction in the tax rate.
  • Safe harbour rules for gains on disposal of IP; Singapore’s attractiveness as an IP hub is affected by the possibility that such gains may be subject to tax if they are viewed as trading profits. Extending the safe harbour rules for gains on disposal of equity investments to IP would provide certainty to taxpayers who are looking to import IP to Singapore.

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:

  • Liberalise restrictions on enhanced deductions to include overseas R&D 

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.

  • Allow a deduction for R&D expenditure outsourced overseas for a new business if the resulting IP rights will be owned and exploited from Singapore.
  • Increase the cash payout limit for eligible deductions under PIC

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.

  • Allow writing down allowances for acquired IP in cases where a formerly unrelated seller and buyer become related parties as a result of a merger or acquisition.
  • 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.

Certain existing schemes that can be liberalised:

  • The mergers and acquisitions (M&A) scheme may be enhanced by allowing waiver of the condition that the ultimate holding company must either be incorporated in Singapore or a company that qualifies for the international headquarters incentive. This would encourage acquiring groups that have trading operations in Singapore to conduct their M&A from Singapore. Companies undertaking M&A should also be given greater flexibility in structuring acquisitions by allowing the M&A allowance to be transferred under the group relief system or given to the target instead of only to the acquiring company.
  • 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 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.

  • The loss carry-back rules should also be liberalised. 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. 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.

Managing costs for individuals

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:

  • 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, as well as employer contributions which are not taxable on the individual and are deductible for the employer. In addition, a 50% tax exemption for withdrawals could be allowed. Reasonable contribution caps should of course apply.
  • Stop allowing individuals to use CPF savings to finance property and investments. 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 property. Incidentally, this gives tax relief for capital value of homes, which is probably unique to Singapore.
  • Individual tax relief for life insurance should also be de-linked from CPF relief to encourage individuals to take up these policies.

1 Source: Paying Taxes 2013

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Media Contact
Candy Li, PwC LLP Singapore (Tel: +65 6236 7429 Email: candy.yt.li@sg.pwc.com or pwcpress.sg@sg.pwc.com)