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How will Singapore face the wave of global tax competition?


By Chris Woo, Tax leader, Raine Lai, senior manager in financial services tax practice, and Rushan Lee, senior manager in indirect tax practice, at PwC Singapore

This article was contributed to and first published in the Business Times on 7 February 2017.

SINGAPORE is facing intensifying tax competition. Globalisation amidst slow global economic growth has given rise to greater competition for investment dollars among countries and those seeking to incentivise local businesses to create jobs in their own countries.

Major global economies such as the United States, United Kingdom and Japan have looked to corporate tax reforms to boost competitiveness. The United States is considering reforms that may lower their 35 per cent corporate tax rate to as low as 15 per cent while the United Kingdom has announced plans to move their corporate tax rate to 17 per cent from 2020. Last year, Japan has also brought forward its planned corporate tax rate cut to below 30 per cent, a year ahead of schedule.

This puts pressure on trade-dependent economies where similar moves were already being introduced. Luxembourg will lower their corporate tax rate to 18 per cent from 2018, while certain cantons in Switzerland are looking to reduce their overall corporate tax rates to between 12 and 14 per cent. Hungary has committed to a corporate tax rate of 9 per cent from 2017 (the lowest corporate tax rate in the European Union).

While Singapore has fared extremely well over the years by taking a principled and consistent approach to attracting multinationals to its shores, the risk of losing its enviable position amidst the intensifying global tax competition is real.

Singapore last reduced its corporate tax rate to 17 per cent in 2009. At that time, the move was set against a similar backdrop of falling corporate tax rates globally. Today, Singapore's manoeuvres may arguably be more limited while having to balance the increasing government spending needs such as those relating to our ageing population. Any measure to reduce the incidence of tax will need to be considered with an offsetting increase in revenue through alternative measures.

Globally, there has been a shifting reliance from direct to indirect taxes, which was the reason that Goods and Services Tax (GST) was introduced in Singapore in the first place. Indirect taxes, in the form of Value Added Tax (VAT) or GST, are at an all-time high for Organisation for Economic Co-operation and Development (OECD) countries in 2015, at a record average of 19.2 per cent for standard VAT/ GST rates. Further, countries are looking to broaden their indirect tax base with a particular interest in the digital economy to close gaps where no VAT/ GST is being accounted for by either the supplier or the consumer. The European Union has already implemented new rules for the digital economy in 2015 and a number of countries nearer to home - including Japan, South Korea, China and New Zealand - have since introduced similar rules.

Singapore has not announced plans to change the present GST rules although it is expected that the government is following these developments closely. Any such change or any other proposed changes to broaden the tax base for GST should, however, be balanced against measures to soften the impact on the lower income group, who would be most affected by any increase in the GST.

RETHINKING INCENTIVES

Some may argue that Singapore's tax regime remains competitive even as the corporate tax rate gap narrows between Singapore and other countries. The current system of tax incentives and super-deductions which reduce the effective tax burden for enterprises can arguably be more targeted in optimising resource allocation than the application of a single low flat tax rate across all enterprises.

Moreover, it has served Singapore well over the last 50 years in attracting new investments and technologies which in turn benefitted other related sectors of the economy.

However, Singapore needs to rethink its incentive regime to maintain its attractiveness to investors. Greater transparency of incentive conditions would provide greater certainty to potential investors and dispel unwarranted suspicions over secrecy.

While competitive pressures are to be expected with increased transparency of incentive conditions, the benefits from enhanced certainty for investors and reputational benefits for Singapore should not be underestimated. Moreover, incentive conditions are not the only consideration of corporates looking for the best location to base themselves. Singapore's strong rule of law, good business infrastructure, political stability and coherence with international principles are also key to strategic decision makers. Taking these into consideration would allow them to appreciate the benefits and the necessary investment costs for Singapore at an earlier stage when comparing against territories that offer upfront lower tax rates.

The spectrum of existing incentives also needs to address the growing pressures on local businesses to further reward specific incremental growth within Singapore. This could entail providing greater clarity on conditions tied to greater job creation, enhanced productivity or similar preferred results which could help grow the tax base without necessarily causing an immediate decline in tax takings. There is also room to further encourage research and development and intellectual property management and exploitation activities in Singapore.

Singapore cannot afford to maintain status quo in the face of intensifying tax competition. Unlike resource-rich countries or those with large customer markets, Singapore faces a clear and present danger of staying relevant and attractive to businesses looking to invest in Asia especially with its rising costs. Singapore needs to redefine its role in the global marketplace and its value offerings as competition for foreign investment intensifies. Enlarging the economic pie, with the resulting broadening of the tax base, would no doubt be the preferred approach. It is clear that Singapore needs to adapt its tax system to the changing global economic landscape, but it remains to be seen how Singapore will ride the wave of global tax competition to stay ahead. Given the coming Committee on the Future Economy reports and Budget announcement that will follow, we look forward to the coming changes.

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Chris Woo

Tax Leader, PwC Singapore

Tel: +65 9118 0811

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