Budget 2012 wish list: bracing for unpredictable weather
By Poh Bee Tin and Ang Lea Lea
Singapore is not immune to the shifting global economic winds. With the unfolding debt crisis in Europe and potentially worsening economic woes in the US, Budget 2012 needs bold fiscal measures to help Singapore tide over the economic challenges, and at the same time, stay focused on carving out a blue-ocean strategy that will continue to burnish Singapore’s credentials as an excellent place to do business. We look at how measures aimed at driving productivity, easing business costs, and improving cash flow and competitiveness can work.
Productivity has been a key thrust of past budgets. The Productivity and Innovation Credit (PIC) scheme was introduced in 2010 and enhanced in 2011 so that more can benefit. SMEs, among other entities, need to move up the productivity ladder the most. Putting cash back into the hands of SMEs so that they continue to invest in productivity initiatives is critical. As such, the cash conversion option of the PIC can be liberalised by increasing the current conversion rate of 30% and lifting the conversion cap of S$100,000. The Australian government enhanced its R&D tax regime recently to remove the A$2 million cap on the R&D expenditure that can be refunded as cash to SMEs. We hope the government can consider a similar enhancement.
Easing business costs
To help Singapore companies acquire and grow, we hope that the government can introduce group relief for borrowing costs, which would allow borrowing costs attributed to equity investment in Singapore companies to be transferred to the relevant Singapore company.
Shareholders currently do not have to pay tax on the dividend income that they receive from Singapore companies. Therefore, if a company borrows to fund the acquisition of a Singapore group, the costs incurred by the acquirer has no tax deduction value. Although it is possible to re-structure post-acquisition to get deduction for the borrowing costs via debt pushdown techniques, this may not happen in practice.
With a group relief for borrowing costs, the holding company will be allowed to transfer the borrowing costs to the operating companies for deduction against their income as long as they qualify as a group under the existing group relief system, without undertaking costly post-acquisition restructuring in order to do so.
Helping businesses grow through M&A
To encourage companies to consider M&A as a strategy for growth and internationalisation, the qualifying conditions on the buyer and target under the existing M&A allowance can be relaxed. More can then qualify for the allowance, particularly acquisitions involving special purpose vehicles (SPVs).
It is quite common for an acquisition to be carried out through an acquiring subsidiary which is an SPV. In this situation, the M&A allowance is available to the Singapore buyer only if the acquiring subsidiary is directly and wholly owned by the buyer, that is, there is only one SPV involved. Similarly, if the target is held through an SPV, the M&A allowance is available if there is only one SPV above the target.
It is not uncommon for acquisitions to be structured through more than one level of SPV so as to effectively manage the tax consequences. Removing the restrictions on the number of SPVs that can be involved in the acquisition will provide more flexibility to Singapore companies.
Improving cash flow
Securing cash flow is critical as companies need to maintain enough liquidity to meet working capital needs. Currently, not all foreign-sourced income is exempt from tax. A permanent tax exemption of all foreign-sourced income without prerequisites will be useful in enabling companies to draw on their foreign-sourced income to ease their cash flow, or consolidate funds and prepare for economic upturn.
In the long run, it can boost Singapore’s position as a leading business hub and choice location for holding companies, putting Singapore on par with Malaysia and Hong Kong, where full tax exemption on foreign-sourced income is practiced. Alternatively, a more modest measure is to grant a two-year tax amnesty to help companies ride over the rough economic period. A two-year period instead of one gives companies more time to liquidate the funds tied up in overseas assets.
Another way to improve cash flow for businesses is to remove the cap on loss carry back relief. Currently, companies can carry back current year’s capital allowances or trade losses (known as qualifying items) for offset against taxable income in the previous year, subject to a cap of S$100,000. It is timely to lift the ceiling for the amount of qualifying items, and remove the restriction on the number of years that these items can be carried back, at least for the next two tax year.
Singapore’s tax incentive framework is a defining feature of our tax regime. We need to continually rationalise and simplify our tax incentives regime to ensure it remains attractive.
For example, the government can consider refreshing the Development and Expansion Incentive (DEI), which encourages new and existing companies to expand into higher value-added business activities in Singapore. The DEI enables companies to enjoy a concessionary tax rate of 10% or lower on qualifying profits above a pre-determined base for a set period of time, and is conditional upon the meeting of agreed milestones.
However, the tax benefit may not be realised for companies especially in a downturn, given that the pre-determined base is pegged to historical earnings during better economic times. We hope that the government can relax the base requirement for the next two years. One way is to reduce the base for DEI companies who are affected by the downturn and hence unable to enjoy the concessionary tax rate because the base is being pegged to historical performance. The reduction could be stepped (e.g., 10%, 20%, 30% or 40%) depending on the companies’ performance vis-à-vis the committed milestones.
For the longer term, we hope that the government can consider removing the base requirement, or allowing companies to choose between a lower concessionary tax rate with a pre-determined base or a slightly higher concessionary tax rate with no pre-determined base. This gives companies greater certainty of the tax benefits.
It is also important to keep our overall tax system competitive. At 17%, Singapore’s corporate income tax rate is one of the lowest in the world. In fact, the effective tax rate is even lower if we take into account the partial tax exemption.
In 2011, the government had introduced a 20% corporate income tax rebate, capped at S$10,000, and a one-off SME cash grant of 5% of the company’s revenue, capped at S$5,000, for 2011 tax year.
We hope these measures can be extended for the 2012 tax year. In addition, to further benefit SMEs, a 25% corporate income tax rebate, capped at S$10,000, will be helpful. For companies which pay little or no tax because of low or no profits, it may be more meaningful to increase the cash grant to 10% of the company’s revenue, capped at S$10,000.
Similarly, Singapore’s personal income tax rates are already low by international standards. In Budget 2011, the government had fine-tuned the tax rates structure to benefit the middle-income individual taxpayers, with effect from the 2012 tax year. Also, it had granted a personal income tax rebate of 20% to Singapore tax resident individuals, capped at S$2,000, for the 2011 tax year.
It will be welcomed if the personal income tax rebate can be extended to the 2012 tax year, despite the revised tax rates structure. To help the middle-income employees further, we hope that the government can increase the percentage of the rebate to 25% even if the cap is maintained at S$2,000.
Storm clouds brewing
It is not possible to insulate Singapore entirely from shifting economic winds abroad, given our open economy. In a worst-case scenario where Singapore’s economic growth is choked off by major global fallout, saving jobs for Singaporeans will be crucial. To this end, it may be necessary to bring back the Jobs Credit Scheme that was introduced in Budget 2009. A handout that will put cash in the hands of every employer will be more impactful than a scheme targeted at only certain sectors or industries.
Poh Bee Tin and Ang Lea Lea are Tax Partners at Ernst & Young Solutions LLP
This article was first published in The Business Times on 11 January 2012