EY’s wish list for Singapore Budget 2014
Singapore, 9 January 2014 – EY today released its wish list for Singapore Budget 2014.
Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “Singapore needs to continually refine its tax policies to enhance its competitiveness and anchor Singapore as a business hub. Amid rising costs, a tight labour market and challenging economic conditions, businesses need to be more nimble, flexible and innovative. The answer to this lies in increased productivity.”
Adds Siew Moon: “From a longer-term perspective, bold and decisive changes to reduce the complexity of Singapore’s tax framework will enhance the ease of doing business in Singapore. Tax liabilities should be clear and certain and the tax incentives regime simplified. This will reduce the compliance burden and enable businesses to plan their investment strategies for the long term.”
- Promote productivity and innovation
Extend and enhance the Productivity and Innovation Credit (PIC)Extend the PIC for a further five years
The Productivity and Innovation Credit (PIC) has benefited many companies, particularly over the past two years as they become more familiar with the scheme. However, it will expire at the end of Year of Assessment 2015.
Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says: “Efforts to encourage the productivity and innovation will be short-lived if the PIC is phased out, especially when investments in productivity are just beginning to take off. Extending the PIC scheme for a further five years will provide companies with time and certainty to execute projects. We need a longer runway to shift the mindsets of SMEs to embrace the productivity agenda.”
Refine the PIC cash payout
The PIC allows eligible companies to convert up to S$100,000 of qualifying PIC expenditure into a cash payout. At a conversion rate of 60%, this translates to a maximum cash payout of S$60,000. There is room for a more generous payout.
Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says:
“Increasing the amount eligible for conversion into a cash payout from S$100,000 to S$400,000 for companies with less than S$100m turnover will ensure that the benefits are targeted and contained within the SME group. This would help SMEs with their cash flow needs, especially in their early years as they ramp up growth.”
Expansion of eligible R&D expenditure
Currently, eligible R&D expenditure for the qualifying R&D activity under the PIC includes manpower costs, consumables and outsourced R&D expenditure. This does not cover expenditure required to undertake R&D activities such as rental, utilities and specialised equipment.
Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says: “As R&D and innovation are intertwined, we hope the scope of eligible expenditure can be expanded to better reflect the necessary resources and costs required to undertake R&D activities. These include direct overheads and administrative costs, such as rent and utilities, and the direct use of plant and machinery for the period of R&D.”
Widen tax relief for intellectual property
Provide a clearer definition of “information that has commercial value”
The term “information that has commercial value” is included within the definition of intellectual property rights (IPRs) in Singapore, for the purposes of claiming the WDA on capital expenditure incurred in acquiring IPRs. However, the term is not explicitly defined.
Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says: “We hope for more clarity on the interpretation of ‘information that has commercial value’. For example, the inclusion of customer-related IP would help to encourage customer-centric companies to establish and expand their IP management activities here. Greater certainty will help to entrench Singapore’s position as a global IP management hub.”
- Help businesses grow and ease business costs
Enhance the M&A allowance
Extend M&A allowance to professional and incidental fees for loan arrangements and any borrowing costs incurred
The M&A allowance helps Singapore companies offset a portion of the costs of acquiring shares in another company. A double tax deduction is also available for transaction costs such as legal fees, accounting or tax advisor fees, and valuation fees incurred for the share acquisition, subject to an expenditure cap.
Mr. Russell Aubrey, Partner, International and Transaction Tax, Ernst & Young Solutions LLP says: “As it is common for share acquisitions to be funded by debt, we hope that the M&A allowance can be extended to professional and incidental fees for loan arrangements and any borrowing costs incurred. This will further encourage companies to grow via M&A.”
Widen the scope of M&A allowance
A Singapore acquiring company that wishes to claim the M&A allowance must carry on a trade or business on the date of acquisition, and also employ at least three employees 12 months before the acquisition date. These conditions prevent such an acquiring company (which is an investment holding company) that currently does not carry on a trade or business in Singapore from claiming the M&A allowance.
Ms. Angela Tan, Partner, International and Corporate Tax, Ernst & Young Solutions LLP says: “We hope that the government can relax the qualifying conditions for M&A allowance. These conditions can be considered as being met so long as they are already met on a group basis.”
Allow group relief for the M&A allowance
The M&A allowance is currently not available for transfer to other companies under Singapore’s group relief system.
Ms. Angela Tan, Partner, International and Corporate Tax, Ernst & Young Solutions LLP says: “Allowing group relief for the M&A allowance will help groups defray a portion of acquisition costs. This also ties in with the objective of encouraging Singapore companies to consider M&A as a strategy for growth and internationalisation.”
Introduce group relief for interest costs
A company that borrows to fund a share acquisition currently cannot get a tax deduction for the interest costs incurred, as it does not pay tax on the dividend income received from a Singapore company and in most instances, dividend income received from a foreign company. This can significantly increase the effective tax rate of the group.
Ms. Lim Gek Khim, Partner, International and Corporate Tax , Ernst & Young Solutions LLP says: “We hope that the tax deduction rules on interest costs can be liberalised, by allowing group relief on interest costs incurred on loans used to fund share acquisitions of Singapore operations. This will enable the acquiring company to transfer the interest costs to other operating companies, or at least to the target operating company, for deduction as long as they qualify as a group under the existing group relief system.”
Expand list of borrowing costs eligible for tax deduction
Businesses can currently get a deduction for borrowing costs other than interest expense, which are incurred as a substitute for interest or to reduce interest costs. However, only borrowing costs specified in a prescribed list are deductible.
Ms. Lim Gek Khim, Partner, International and Corporate Tax, Ernst & Young Solutions LLP says: “The list of borrowing costs has not been revised since its introduction in 2007. Other common fees or costs that are payable to the lending bank should be included in the list to help businesses to lower their costs and give them more financing flexibility.”
- Promote tax certainty and simplify the tax incentive framework
Expand the scope of exemption of gains from the disposal of shares
Gains from the disposal of shares in certain circumstances are not subject to tax. Introduced in Budget 2012, this provides upfront tax certainty on the tax treatment of such gains. For this tax treatment to apply, the divesting company must hold and maintain at least a 20% stake in the investee company for a continuous period of at least 24 months prior to the disposal.
Mr. Russell Aubrey, Partner, International and Transaction Tax, Ernst & Young Solutions LLP says: “There is room to fine-tune the scheme. The scheme can be extended to include disposal of shares by unit trusts and partners of partnerships.”
Adds Russell: “A company or group restructures for growth or consolidation as and when it is required and it is difficult to time this to fall within the five years that is currently covered by the scheme. We hope the government can implement this scheme as a permanent feature of the Singapore tax regime or alternatively, to modify the sunset clause such that the validity period applies based on the date of acquisition, instead of disposal, of the shares.”
Real estate investment trusts (REITs)
To grow Singapore as a listing hub for cross-border REITs, tax exemption is granted to REITs on certain overseas income received on or before 31 March 2015. REITs that are planning to list or existing REITS that are currently looking for acquisitions to expand their overseas footprint face uncertainty as it is yet to be known whether the tax exemption will continue to apply on income received on or after 1 April 2015.
Ms. Lim Gek Khim, Partner, International and Corporate Tax, Ernst & Young Solutions LLP says: “The existing sunset clause should be modified such that the expiry is based on the date of acquisition of the investments instead of receipt of the foreign-sourced income. Alternatively, boldly remove the sunset clause completely and let the tax exemption be a permanent feature of the tax regime for REITs.”
Simplify transfer pricing rules
Singapore’s transfer pricing guidelines help companies determine arm’s length pricing and reduce the risk of double taxation. However, taxpayers need to spend significant time and costs to perform and demonstrate sound transfer pricing analysis to determine arm’s length prices.
Mr. Luis Coronado, Partner, Transfer Pricing, Ernst & Young Solutions LLP says: “The transfer pricing rules could be simplified by expanding the safe harbour rules to cover other transactions between domestic related parties, in addition to related party domestic loans. The transfer prices for more related party transactions can thus be automatically accepted, alleviating the burden of evidencing the arm’s length principle at all times. This simplifies and reduces compliance costs and also provides certainty to taxpayers that the prices charged or paid for transactions between domestic related parties will be accepted by the tax authorities.
Adds Luis: “In addition, the scope of existing routine support services can be expanded to include a wider range of services to further minimise compliance costs.”
Simplify the Development and Expansion Incentive
Singapore needs to continually rationalise and simplify its tax incentives regime to ensure it remains attractive. Currently, the Development and Expansion Incentive (DEI) enables companies to enjoy a concessionary tax rate of 5%, 10% or 15% on qualifying profits above a pre-determined base for a set period of time, and is conditional upon the meeting of agreed milestones. Given that the base is pegged to historical earnings, companies may not be able to benefit from the DEI during an economic downturn.
Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says: “For the longer term, for existing companies that are awarded a Development and Expansion Incentive for the first time, we hope the Government can consider removing the base requirement, or alternatively, consider other methodologies for computing the base that would be more aligned with fluctuating economic cycles.”
- Keeping corporate taxes competitive
Reduce withholding tax rate
The domestic withholding tax rate for technical and management services provided by non-resident companies is the prevailing corporate tax rate, which is currently at 17%. If the non-resident companies incur allowable expenses, they can submit a claim for these expenses such that they are taxed on a net income basis. However, non-resident individuals or foreign firms can elect to be taxed at a rate of 15% on the gross income derived from Singapore or at 17% or 20% on the net income (i.e., after deduction of allowable expenses).
Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “We hope that the government can align the withholding tax rate for technical and management services provided by non-resident companies with the existing scheme for non-resident individuals or foreign firms, which is at a 15% withholding tax rate with an option to elect to be taxed on net income. This will make it more attractive for Singapore companies to tap on foreign technical and management expertise to improve their business processes.”
Keep corporate tax rates steady at 17%
Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “Singapore continues to have one of the lowest corporate income tax rates in the world. Taking into account partial tax exemption, the effective tax rate is lower than 17%. It will not be a surprise if the corporate tax rate remains unchanged.”
- Promote Singapore as a business and asset management hub
Refine the Finance and Treasury Centre (FTC) Incentive
Currently, an FTC company is required to identify and track its sources of funds in order to determine whether its income is a qualifying income. The administrative challenge of tracking the different types of funds could pose a significant strain on resources.
Ms. Chong Lee Siang, Partner, Financial Services Tax, Ernst & Young Solutions LLP says: “We hope that the government can remove the need to identify the sources of funds to fund the qualifying activities, or if necessary, put in place simpler rules. This will help to alleviate a significant administrative burden for companies and enhance Singapore’s reputation as a pro-business and investor-friendly destination, and a global financial center.”
Extend Singapore’s lead as an asset management hub
The current package of tax exemption and tax concessions that is instrumental to the growth of the asset management industry in Singapore will expire on 31 March 2014.
Mr. Desmond Teo, Partner, Financial Services Tax, Ernst & Young Solutions LLP says: “We hope the government will extend and enhance this package of tax incentives for another five years so that Singapore can continue to retain a competitive edge in view of increasing competition and the shifting regulatory landscape and market conditions.”
Adds Desmond: “We hope the government can refine the existing tax exemption schemes for funds managed by Singapore-based fund managers. Specifically, an umbrella tax exemption can be introduced such that the tax exemption accorded for Singapore-domiciled funds can be automatically applied to the investing or trading vehicles wholly owned by such funds or have the conditions applied on a group basis. Also, similar to the Enhanced-Tier Fund Scheme, the conditions for the qualifying offshore fund scheme can be applied for offshore funds that are in the form of limited partnership, at the partnership level. Lastly, on a non-tax front, as the race heats up within the region for the introduction of new fund vehicles such as open-ended investment vehicles, we would like to see Singapore remain ahead of the competition.”
- Personal tax rebate and relief
Personal income tax rebate to individuals
Ms. Wu Soo Mee, Partner, Human Capital, Ernst & Young Solutions LLP says: “Given inflationary pressures in Singapore, we hope that the government will extend the personal income tax rebate for another year.”
Award a tax deduction for medical-related insurance policies
Currently, there is no relief available to individuals for premiums paid on medical-related or health insurance policies.
Ms. Wu Soo Mee, Partner, Human Capital, Ernst & Young Solutions LLP says: “We hope that the government will allow a tax deduction, subject to a cap of S$5,000, for premiums paid for medical-related insurance by individuals, for themselves, their spouses, children or aged parents or parents-in-law. This will encourage individuals to take up or enhance existing health insurance policies for their families or themselves. It also allows the individuals to have access to both preventive and emergency healthcare, and protect themselves and their families against rising healthcare costs.”
Adds Soo Mee: “Individuals from lower income groups may find affordability of medical insurance premiums an issue. A tax deduction may not directly benefit them as they may not be paying taxes. A cash grant would be more suitable for these individuals.”
Enhance the earned income relief
Due to increasing life expectancy, there have been calls for Singapore to move towards raising the reemployment age from 65 to 67 years old. To encourage more individuals to continue working beyond the official retirement age of 62 years old, the earned income relief could be enhanced for older workers.
Ms. Wu Soo Mee, Partner, Human Capital, Ernst & Young Solutions LLP says: “Another tier could be added to the earned income relief by creating one for the 60–64 year-old age group and another for the 65-year-old and above age group, with a higher amount of the earned income relief for the latter.”
- Promote flexibility in the workplace
The government’s launch of the “Workplace of the Future” initiative is laudable. As a new generation of employees enters the workforce, companies that do not meet the demand for greater flexibility in the workplace will lose the war for talent.
Mr. Grahame Wright, Partner, Human Capital, Ernst & Young Solutions LLP says: “To implement ‘Workplace of the Future’ initiatives, companies need to invest in the relevant IT enablers and infrastructure to create a collaborative environment that will allow employees to work smarter and seamlessly from physical locations, which may not necessarily be in the office. We hope that the government can offer a double tax deduction for the implementation costs incurred by employers for these initiatives.”
- Enhancing the GST system
Simplified tax invoices for business entertainment claims
Simplified tax invoices issued by restaurants and entertainment outlets are not valid to support the input tax claims of businesses if the business entertainment expenses (including GST) exceed S$1,000. Administratively, it is difficult and inconvenient for businesses to get the restaurants to issue a full tax invoice with the name and address of the customer printed on them.
Mr. Kor Bing Keong, Partner, GST Services, Ernst & Young Solutions LLP says: “The S$1,000 restriction was put in place in 1994 when GST was implemented. Costs of living have risen since then. We hope the Government will increase this limit and allow businesses to claim input tax on entertainment expenses using simplified tax invoice for expenses (including GST) up to S$2,000.”
Pre-registration input tax
The apportionment rules for the pre-registration of input tax claims are very complex, creating a huge compliance burden for businesses that have started making supplies before their GST registration date.
Mr. Yeo Kai Eng, Partner, GST Services, Ernst & Young Solutions LLP says: “We hope the government can allow the input tax in full as long as the input tax is incurred within say six months before the GST registration date, regardless of whether the expenses are attributable to supplies before or after GST registration date (other than those blocked expenses). Alternatively, disallow only input tax incurred that is directly attributable to a specific supply made before the GST registration date. This will reduce the GST compliance burden of businesses.”
Goods originating from Singapore supplied within the Airport Logistics Park of Singapore (ALPS)
There is already customs control in place for import GST to be paid if goods are not exported but are subsequently removed from ALPS back into Singapore.
Mr. Yeo Kai Eng, Partner, GST Services, Ernst & Young Solutions LLP says: “Introducing a scheme, with conditions, to allow goods originating from Singapore and supplied within ALPS to be zero-rated (subject to 0% GST) on the basis that the goods would eventually be exported from Singapore would help companies avoid paying GST twice - when the goods are supplied within ALPS and a second time when they are removed from ALPS back into Singapore.”
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