Singapore has had a challenging 2016, buffeted by events happening many miles from her shores. The trend towards deglobalisation, notably in the United States and the United Kingdom, have cast a gloomy outlook on the global economy and this poses risks for Singapore whose economy relies heavily on international trade.
2016 also marks the implementation phase of the Base Erosion and Profit Shifting (BEPS) Project – an ambitious revamp of corporate tax rules by the world’s major economies to ensure multinational corporations pay their fair share of taxes.
The desire to level the tax playing field may affect countries like Singapore where relatively low taxes are a competitive advantage.
Against this backdrop and coming on the back of soon-to-be-released recommendations by the Committee on the Future Economy, Budget 2017 will certainly be a keenly awaited one, although one should not expect silver bullets for the various challenges facing Singapore.
With the above in mind, Deloitte Singapore calls upon the Government to build on the strong foundations laid in previous Budgets – helping Singapore businesses survive and thrive amidst uncertain economic conditions by reinforcing the pillars of innovation and internationalization, whilst carefully steering Singapore through choppy BEPS waters by ensuring that our tax regime remains transparent and acceptable in the international tax arena.
Deloitte’s Budget 2017 feedback is broadly organized along the following key themes that aim to navigate Singapore through the challenges in hopes of creating more opportunities for our future.
Creating an innovation-friendly tax regime
‘Innovation’ is an all-encompassing term; indeed, Minister for Finance Heng Swee Keat once remarked that “there is no textbook answer to innovation.”
An archetypal case of innovation would be Uber, which by combining existing technologies such as the global positioning system and online payment system was able to create new value for its customers.
“Innovation does not necessarily involve the creation of something new from scratch,” says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.
“Taxpayers who undertake innovative activities – which in certain instances may just be shy by a whisker from being regarded as research and development (R&D) as per the definition under the Singapore Income Tax Act – may be frustrated by the lack of broad-based support.”
With the popular Productivity and Innovation Credit (PIC) Scheme set to end in 2017, Deloitte Singapore is calling for more support for innovative activities to complement existing incentives for R&D. This could come in the form of enhanced tax deductions for spending incurred on “innovative activities” that lead to the creation of new products or services.
In line with the Smart Nation initiative, the Government could also consider introducing enhanced tax deductions to encourage digitization, such as designing and implementing e-billing systems or workflow systems, so as to subsidize part of the upfront costs.
“Currently, purchases of computer hardware and software are incentivised under the PIC scheme,” says Daniel Ho, Tax Partner and Tax Leader for Public Sector at Deloitte Singapore.
“With the PIC scheme coming to an end, the Government may wish to consider incentivising personnel or consultants’ costs involved in the digitization of processes – the nexus between such expenditure and improvements in productivity may be greater, as compared to mere purchases of computer equipment.”
Enhance existing R&D tax
Amidst keen competition from many countries for R&D dollars, Deloitte Singapore is also proposing enhancements to Singapore’s existing R&D tax regime so that both local and foreign businesses continue to anchor their R&D activities in the city-state.
“As the PIC scheme expires at the end of 2017, there is a perceived gap in broad-based R&D tax incentives, leading to a concern that this may hinder the general development of Singapore’s R&D capabilities and innovative culture,” says Lee Tiong Heng, Tax Partner and Leader of R&D and Government Incentives at Deloitte Singapore and Southeast Asia.
“As an alternative to granting additional tax deductions on qualifying R&D expenditure, the Government could consider granting R&D tax credits. This would be calculated based on the R&D expenditure incurred and it would achieve the same objective of decoupling the R&D regime from Singapore’s tax rate to ensure that Singapore remains attractive to R&D investments.”
In addition, Deloitte Singapore is calling for enhancements to existing policies to make it more attractive to invest in start-ups, which generally carry a higher level of risk.
This broadly entails giving certainty to investors – that should their investments in a start-up turn a profit, their divestment gains would be exempted from taxes. It also increases the certainty for such start-ups on the use of brought forward tax losses which may otherwise be forfeited if there is a substantial change in shareholders.
Building resilience for difficult times
In light of a weaker global economic outlook, Deloitte Singapore proposes that the Government continues with current fiscal expansionary policies albeit with some enhancements. Firstly, the existing loss carry-back relief system could be enhanced.
Allowing businesses to carry-back a higher amount of losses to profitable years would help businesses obtain a correspondingly higher amount of refund for taxes paid in prior periods. This would help alleviate cash-flow issues impacting businesses amidst a downturn.
“Beyond aiding businesses during tough economic times, the Government should also encourage them to build up their capabilities so that they are better placed to seize opportunities when the economy recovers,” says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.
Amongst others, the Government could allow more renovation and refurbishment expenses to rank for tax deduction so as to encourage businesses, such as those in the retail sector, to refresh their premises.
In the medium to long term, increasing automation and technological disruption, especially in the services and manufacturing industries, coupled with a high mismatch of skills (in particular IT-related skills) between job openings and job seekers, may mean that laid-off workers would be competing for fewer job openings and consequently take a longer time to find jobs.
In line with the Government’s active promotion of life-long learning amongst Singaporeans, Deloitte Singapore proposes that skills upgrading can be given a boost by granting further tax deductions to employers for absentee payroll where such expenses are not already defrayed by grants.
Catering for the workforce
To encourage employers to provide more healthcare benefits for their employees and in view of the rising medical costs, Deloitte Singapore recommends increasing the cap on tax deduction for medical expenses. To support employees in managing chronic diseases, expenses incurred on preventive health screenings and the like should be fully deductible.
“Incentives should be provided to employers that hire older Singaporeans in their workplace; this may include allowing a double deduction on Medisave contribution to CPF for older workers. In addition, to encourage individuals to take responsibility for healthcare needs, the Government should consider granting personal relief for premiums paid for medical insurance,” says Jill Lim, Tax Partner and Leader of Global Employer Services at Deloitte Singapore and Southeast Asia.
Building a strong Singapore core and growing the external economy
In line with the Government’s vision to enhance the Singapore core and develop local talent, Deloitte Singapore suggests introducing an enhanced tax deduction for costs incurred in hiring Singaporeans for key roles and possibly a relaxation of the qualifying criteria for the Not Ordinarily Resident Scheme. This is so that Singapore citizens and permanent residents with regional or global roles that require extensive travel may see a reduction in their tax burden.
“To further encourage Singapore businesses to branch out and think regionally, the government can also consider enhancements to policies such as the foreign-sourced income exemption and foreign tax credit schemes; and possibly granting a special tax deduction for interest and related funding costs incurred to support overseas investments,” says Daniel Ho, Tax Partner at Deloitte Singapore.
“This could be designed to target specifically at SMEs to encourage them to grow, and may also benefit the Singapore financial industry.”
Keeping pace with international tax developments
International tax developments have a significant impact on Singapore both as a preferred hub in Asia Pacific for foreign investment, as well as for Singapore-based companies investing overseas.
To keep pace with these developments, Deloitte Singapore has included in its Budget 2017 feedback, proposals for the Government to review whether Singapore’s headline corporate tax rate of 17% will remain competitive in the international arena in the medium to long term, as well as the need to articulate Singapore’s tax policy for offshore suppliers of digital services.
“The international tax agenda has in recent years been dominated by calls from developed countries to end harmful tax competition,” says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.
“Somewhat ironically, some of these countries have recently announced plans to reduce their tax rates to unprecedented low rates. Although nobody wants to see a race to the bottom, Singapore would undoubtedly be keeping a close eye on these developments to ensure that her tax regime remains competitive.”
Apart from the above recommendations, Deloitte Singapore has also provided suggestions for specific sectors such as the financial services, marine and aerospace industries; certain broad-based business tax recommendations as well as enhancements for personal tax and goods and services tax.