Singapore has undertaken a number of initiatives in recent years to improve tax competitiveness to encourage investments and to help grow the Singapore economy. Indeed, Singapore is often ranked as a country with one of the most business-friendly tax regimes in the world.
However, there are still areas in which Singapore could improve its tax regime to encourage further investments and stimulate growth, says Deloitte Singapore in view of the upcoming 2013 Budget Statement to be delivered on 25 February.
Deloitte urges the Singapore government to to continue to pursue competitive new double tax treaties and also to re-negotiate old double tax treaties with more competitive terms.
The existing loss carry-back relief is capped at S$100,000 and can only be carried back to immediate preceding year of assessment. To help the cash flow of businesses which were making losses during the last financial crisis, the government had temporarily enhanced the loss carry-back relief for Years of Assessment 2009 and 2010 by increasing the threshold to S$200,000 and also allowing the carry-back to immediate three preceding years of assessment.
The Euro crisis, the grim global economic outlook and the economic restructuring proposed by the government may to a certain extent negatively affect Singapore businesses and the impact may not be short term.
"As such, we propose the government consider either removing the cap for loss carry-back relief permanently or at least enhance the loss carry-back relief for Years of Assessment 2013 and 2014 (similar to that for Years of Assessment 2009 and 2010)," says Chan Huang Chay, Tax Partner, Deloitte Singapore.
Chay notes many developed countries have much more liberal loss carry-back rules e.g.the default rules in countries like UK allow carry-back without any cap for one year and the default US rules allow loss carry-backs without a cap for three years.
"Such rules recognise that economic cycles can produce profits in one year followed by losses in another and that it would be inherently unfair to currently tax the profits and provide relief for the losses only if and when future profits are realised," says Chay.
According to Ajit Prabhu, Partner & Head, Tax Services, Deloitte Singapore & Southeast Asia, tax exemption is given to existing Singapore tax resident companies on remittance of specified foreign income (i.e. dividend, branch profit and service income) only.
Given the bleak economic conditions during the global financial crisis and to help ease the credit tightness at that time, the government temporarily allowed tax exemption to all foreign-sourced income remitted during the period from 22 January 2009 to 21 January 2010.
"In view of today's grim global economic outlook, we hope the government will consider granting similar enhanced tax exemption to all foreign-sourced income remitted during the period from 1 January 2013 to 31 December 2013 or better still, permanently exempt foreign-sourced income," says Prabhu.
In the past, the government has resisted this on the grounds that a) it will deter tax treaty partners from negotiating tax treaties with us and b) it may encourage round tripping i.e. enabling taxable Singapore sourced income to be re-characterised as foreign-sourced income and bringing it back to Singapore as exempt income.
However, some other countries e.g. Hong Kong and Malaysia, generally do not tax foreign sourced income whether or not remitted to their respective countries, and this does not appear to have impeded their ability to contract advantageous tax treaties or materially eroded their tax base.
Also, in the latter instance, the Inland Revenue Authority of Singapore (IRAS) already has wide ranging powers to invoke general anti-avoidance rules in Section 33 of the Income Tax Act which can be used to counteract blatant tax avoidance.
Reduce Corporate Tax Rate
Prabhu adds that the government should also consider reducing the current corporate tax rate from 17% to 16.5% (which is the prevailing Hong Kong corporate tax rate) or lower than 16.5% to improve competitiveness.
Lee Tiong Heng, Tax Partner, Deloitte Singapore, urges the government to consider increasing the partial tax exemption from first S$300,000 chargeable income to first S$400,000 chargeable income.
"This will be a targeted measure to reduce the tax burden on our small & medium enterprises many of whom are facing challenges in implementing the national economic restructuring agenda," says Lee.
In addition, Deloitte recommends the lifting of a sunset clause for Section 19B writing down allowance scheme whereby any capital expenditure incurred on Intellectual Property Rights (IPRs) after the last day of the basis period for Year of Assessment 2015 will not qualify for the scheme.
Low Hwee Chua, Tax Partner, Deloitte Singapore, explains that the existing Section 19B does not allow deferral of writing down allowance claim (i.e. Section 19B allowance is given within 5 years of expenditure incurred). "We suggest that Section 19B allowance should also be given on due claim basis similar to Section 19 allowances for plant and machinery."
For businesses that presently have both income producing and non-income producing assets, the IRAS will disallow the interest expenses attributable to non-income producing assets based on a so called total assets method.
The total assets method works on the principle that cash is fungible and total liabilities plus shareholder funds are mobilised to finance total assets and therefore interest expenses should be attributable to income producing and non-income producing assets respectively.
"In our view, the current tax deduction rule for interest expenses is too narrow and we would suggest the government considers liberalising it such that so long as the loan/borrowing is used for business purposes (regardless of whether the loan/borrowing is used to fund a taxable income producing asset), full tax deduction should be given to businesses," says Chan Huang Chay, Tax Partner, Deloitte Singapore.
Chan adds that the suggested tax treatment should also be equally applicable to upfront loan related costs such as facility fee, arrangement fee, etc which are presently disallowed on the grounds that they are capital in nature.