Singapore Budget 2013
Budget 2013 wish list
A Budget for a steady course
By Poh Bee Tin and Ang Lea Lea
The fourth quarter upturn in 2012 may have averted a technical recession for the Singapore economy and provided respite for some quarters, but many remain watchful. As Prime Minister Lee Hsien Loong said in his New Year Message, the country is expected to grow by 1-3% in 2013. “In our new phase, we must expect slower growth than we have become accustomed to. Slower growth does not mean we will face less pressure. Companies especially must put more effort into raising productivity.”
More productive and innovative growth
Indeed, productivity has been a national buzzword since the introduction of the Productivity and Innovation Credit (PIC) in 2010. The PIC offers arguably generous tax deductions for companies investing in six qualifying categories of productivity or innovation-led activities. Take-up of the PIC has been promising and well spread out across economic sectors thus far, according to the Ministry of Finance, who has made several welcomed enhancements to the scheme over the years.
However, this condition has remained: the enhanced tax deduction or allowance is capped at S$400,000 incurred for each of the six categories of qualifying activities. This condition of expenditure cap by category, if removed, and pooled across the categories to enable companies to claim a total maximum qualifying expenditure of up to S$2.4 million each year for any qualifying activities, will likely improve the scheme’s utility. Companies can then enjoy greater flexibility in investing according to their productivity needs while maximizing the benefits of the scheme. Another enhancement could be to broaden the scope of eligible spending for qualifying R&D activity to include overheads and equipment used to carry out the R&D.
With R&D comes to mind the promotion of IP management. To encourage Singapore companies to build their brands and base their IPs locally, the writing-down allowance (WDA) available for the acquisition of certain IPs can be extended to costs incurred in creating and developing IP, such as for consultancy, logo design and brand-building. In addition, companies may own or control customer-related intangibles or trade secrets such as customer-supplier relationships, contracts, customer lists and distribution networks. While the defined list of IP for the purpose of WDA includes “information that has commercial value”, let’s make its definition clear and classify customer-related intangibles as such.
Less business costs
M&A is an important part of many business strategies. The current M&A allowance defrays some of the cost of acquiring shares in another company and allows a double tax deduction 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. 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.
Also, a company that borrows to fund the share acquisition currently cannot get a tax deduction for the interest costs incurred. Introducing group relief for the interest costs will allow the holding company to transfer the borrowing costs to the Singapore operating companies for deduction against their income. This will mitigate the need for Singapore groups to undertake post-acquisition restructuring in order to get a deduction for borrowing costs via debt pushdown techniques.
On the other hand, companies that are disposing shares are benefiting from one of the Budget 2012 measures, where the gains from such disposal in certain circumstances are not subject to tax. Yet, the divesting company must hold and maintain at least a 20% stake in the investee company for at least 24 months continuously prior to the disposal. The non-taxation treatment currently does not apply to unit trusts, limited partnerships or limited liability partnerships, which are commonly used as investment vehicles. It will be helpful if the non-taxation treatment can be extended to these vehicles too.
Another priority for many companies is managing liquidity. Singapore’s current partial tax exemption of foreign-sourced income does not help companies that want to draw on their foreign-sourced income to meet their working capital needs. A full exemption will put the country on par with Malaysia and Hong Kong, and reduce the companies’ compliance costs associated with tracking the type and source of foreign income.
As for SMEs who may find themselves in unenviable cash-strapped positions, we hope that the government will continue to extend the SME cash grant into the 2012 tax year, and at the same time increase the grant to 10% of the company’s revenue, capped at S$10,000.
The Special Employment Credit (SEC) is a wage subsidy that encourages employers to hire older workers and graduates from special schools for the disabled. We hope that the SEC can be made tax-exempt to motivate more employers to hire more inclusively.
Health care is also a mounting concern for many individuals and employers, and not surprisingly so, given our ageing population and escalating costs. Currently, there is no relief available to individuals for premiums paid on medical-related or health insurance policies. We hope that premiums paid for medical-related insurance policies by individuals for themselves, their spouses, children, or aged parents or parents-in-laws can be fully tax deductible. This will encourage more individuals to either take up or enhance their existing health insurance policies, and have access to affordable preventive and emergency healthcare.
In addition, many companies offer medical benefits as part of a remuneration package to attract and retain talent. While they can claim a tax deduction for their employees’ medical expenses of only up to 1% of the employees’ total remuneration for the year, or 2% if the company has implemented certain defined medical schemes, it is worth considering increasing the cap for the tax deduction to 2% and or 4% respectively. Giving employers a helping hand to deliver this important benefit to employees will no doubt alleviate the growing burden on our working population.
In the years ahead, we may have to accept slower growth while making sure no one gets left behind. In exchange for more social spending, the country may have to impose higher tax rates in future. Will, and can, we agree with that? That’s a separate discussion for another day.
The writers Poh Bee Tin and Ang Lea Lea are both Partner, Tax Services at EY Solutions LLP.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.