Singapore Budget 2013
More certainty in Singapore tax rules
This article was contributed and first published in The Business Times on 13 February 2013
By Lim Gek Khim
We often express how desirable it is to have certainty in tax codes. We also lament how tax rules have become more complex and wish that they could be simplified. But does certainty mean having simpler tax rules? Can taxation really be kept simple when business operations and transactions are becoming more complex?
As Pascal Saint-Amans, director of the Organisation for Economic Co-operation and Development's (OECD) Centre for Tax Policy and Administration, said in a recent dialogue: "In French we talk about 'le realism du droit fiscal' because realistically if business is complex, then the taxation of that business must be complex. In fact, my view is if taxation isn't complex, it isn't fair. But there is no good reason to overcomplicate the rules."
With governments trying to bridge the widening gap between spending and revenues, there have been an ever-increasing number of complex changes to tax laws and regulations. No wonder businesses worldwide are feeling a mounting sense of uncertainty. Yet, in the midst of this storm of changes, governments are also embracing tax reforms to simplify their tax systems, so that they are more competitive and relevant to businesses.
Take the US for example. House Ways and Means Committee Chairman Dave Camp, in an interview with EY, had remarked: "We're not competitive internationally - it's a huge burden, compliance costs are out of sight, it's very complex - and if we can address that, we can get a tax code that's modernised, fair, simple, and really grows the economy and creates jobs." Well, at least in the short term, the recent fiscal cliff deal offers greater tax certainty and respite for American taxpayers.
It's easy to appreciate the underlying tensions, dilemmas, and challenges that governments are facing in finding the delicate balance between certainty and simplification on the one hand, and dealing with complex business transactions on the other.
In Singapore, the government does not have much of a choice. As a small country with no natural resources, keeping our tax system fair and relevant to attract and grow businesses is fundamental to economic progress. The government has also taken efforts to eradicate ambiguities in certain tax rules. In last year's Budget, measures were introduced to provide greater certainty on the tax treatment of share disposal gains, albeit under certain circumstances.
Still, many in the industry had applauded the change. Hopefully, this will become a permanent feature of the tax system, providing even greater certainty for businesses, which increasingly need to adapt and adjust their business holding structure in an environment of rapid change.
Can more of Singapore tax rules be made more certain and compliance made simpler? Yes, many would argue. For one, transfer pricing has been a perennial bugbear for many businesses and a common ground for controversy.
Let's be clear though: the transfer pricing guidelines in Singapore are robust. However, it is the time and costs spent by businesses to undertake a sound transfer pricing analysis to determine arm's length prices and then demonstrating that they have performed this analysis, that is creating enormous burden on resources.
Perhaps the transfer pricing rules could be simplified further by expanding the safe harbour rule to cover other transactions between domestic related parties, ie in addition to related party loans. The transfer prices for more related party transactions can thus be automatically accepted, alleviating the burden of applying the arm's length principle at all times.
Another change can be in the concessionary tax treatment on interest on borrowings. Currently, interest incurred on a loan taken up to re-finance an earlier loan is not deductible for tax purposes. However, the Inland Revenue Authority of Singapore (IRAS) may allow claims for deduction of such interest if the taxpayer can prove that the re-financing is for genuine commercial reasons.
While IRAS has provided examples of situations where this concessionary tax treatment may apply, there is still room for more upfront certainty. Let the concessionary tax treatment be applied automatically where the new loan or borrowing is obtained from a bank or financial institution.
The premise is that businesses would not undertake a refinancing with a third party lender had there not been a commercial need to do so.
Greater tax certainty can also be extended to real estate investment trusts (REITs), a thriving sector in Singapore. Many Singapore REITs have invested overseas, given the limited size of Singapore's property market.
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 March 31, 2015. This "sunset" clause expires in just over two years. Is the clause relevant if you consider that REITs do invest for the long term and overseas expansion is inevitable?
Perhaps the clause should be modified, such that the expiry is based on the date of acquisition of the overseas investment instead of receipt of income, or even removed completely?
So while Singapore already has a progressive tax framework, there are opportunities to introduce greater certainty. Yet, the national coffers must be protected for rainy days. Managing the dichotomy between addressing business concerns and protecting the tax base will not be easy. In life, as many say, it is all about finding the right balance.
Lim Gek Khim is Partner and Asean Tax Quality Leader, Tax Services
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