Reimagining Singapore’s incentive schemes: what’s next?

Singapore should rethink its incentive landscape amidst the changes in the tax universe.

The Base Erosion and Profit Shifting (BEPS) 2.0 framework is accelerating at a pace that surprised many. In Budget 2022, Singapore, as an Inclusive Framework member, announced it would explore a domestic minimum top-up tax: the minimum effective tax rate (METR), which will conform to the Pillar Two Global Anti-Base Erosion (GloBE) rules.

The METR works by topping up the multinational enterprise (MNE) group's effective tax rate (ETR) in Singapore to 15%. This may reduce the attractiveness and efficacy of Singapore’s tax incentive schemes.

The Organisation for Economic Co-operation and Development (OECD) also recently published the Commentary on the Pillar Two Model Rules. It states that any new incentives being introduced (or existing ones enhanced) post-Pillar 2 announcement should not be targeted only at taxpayers subject to the GLoBE rules, otherwise it could potentially result in the prevailing domestic income inclusion rule (IIR) regime to be disqualified.

Considering the changes in the tax landscape, are incentives no longer relevant in investment decision-making?

As the Singapore Finance Minister keenly observed, “BEPS 2.0 may have reduced the scope for tax competition, it has not reduced global competition for investments.” For example, the European Union (EU) had recently unveiled a €43b investment plan to build up the chips industry, following from Joe Biden’s administration coming up with a US$52b package to subsidise semiconductor manufacturing^[1]. 

With this in mind, we share a few guiding principles that could aid the rethink of incentives as Singapore charts into a post-BEPS 2.0 environment.

1. Fit-for-purpose strategy (overhaul versus fine-tuning of incentives schemes)

Singapore can revisit the various incentives currently offered against their success in investment promotion. This can be helpful in determining whether an overhaul of the respective incentive is necessary, in light of METR changes, or just fine-tuning of existing incentive is sufficient.

For one, Singapore has been a go-to destination for headquarters (HQ)-related setup, where the Singapore HQ typically carries out activities across a broad range of business functions ranging from supply chain, marketing and distribution, and strategic management. The concessionary tax rate offered by the Development and Expansion Incentive (HQ-DEI) has been one of the marquee tools used by the Singapore Economic Development Board (EDB) to entice these companies to set up their HQs in Singapore. As the tax framework evolves, it would be pertinent to evaluate if the HQ-DEI needs an overhaul or even complemented with other types of incentives.

For example, in supply chain development, Singapore can assess how to better partner companies in strengthening their supply chain network in the region and uplifting the supply chain capabilities of MNEs and small and medium-sized enterprises (SMEs). The support mechanism for such incentives can cover a broad range of areas such as supply chain training, new green technology development or even pairing companies to create new trade routes to bypass disruptions to existing ones. In fine-tuning and enhancing these incentives, the authorities need to ensure that the economic value returns from such schemes can be captured back in Singapore.

In the innovation and research and development (R&D) space, an overhaul of the current tax incentives may be needed given the shape-shifting nature of the activities. Currently, the existing R&D enhanced deductions focus on the location where the R&D is conducted, and more support is provided on R&D activities conducted locally in Singapore. It may be worthwhile to consider reforms in the R&D incentive. Should our R&D incentives be enhanced such that their benefits could also be differentiated based on where the intellectual property (IP) and commercial benefits manifest, instead of solely based on the location of the R&D activities?

Other possible areas to explore relating to the R&D tax incentives would be to convert the existing R&D tax deductions into a refundable tax credit or R&D cash payout so that the companies can have more above-the-line funds available for reinvestments. The Singapore authorities may also consider expanding the competitive grant calls programme for high-impact R&D areas to include more participation from private companies through closed and open innovation models for global problem statements.

Rethinking how the incentives or grants would fit the purpose and needs of incumbent and new entrants would allow Singapore’s incentives policies to be in sync with the fast-changing business models and strategies.

2. Fit-for-scale strategy (building flexibility for fast-growing companies)

While BEPS Pillar Two is expected to acutely impact large MNEs with a global turnover of €750m or more, it is imperative for the economic agencies to proactively engage companies on both sides of the revenue divide and listen to their concerns and challenges navigating the post-BEPS 2.0 operating environment and growing their businesses. Singapore should not overlook the contributions and growth potential of smaller and emerging MNEs that may not be directly impacted by BEPS 2.0. These group of companies may have unique needs that require revisiting existing incentive programmes by the authorities to better suit their needs.

For example, unlike the large MNEs, the smaller and emerging MNEs may require more help in boosting their operations locally. Therefore, the authorities can offer assistance to support their workforce during the critical growth period through targeted foreign workforce quota concessions in the near term. In exchange, the companies need to commit to building a strong local workforce core in Singapore over the medium and long range. This is especially pertinent with the tight labour market, and to counterbalance the recent changes to the qualifying salary of employment pass (EP) holders and the introduction of a new COMPASS (Complementarity Assessment Framework) points system^[2] to attract high-talent expatriates.

It may also be worthwhile considering initiatives that will bridge the capital financing gap for the smaller and emerging MNEs. For example, to ease access to capital and reduce time to market, the newly launched Anchor Fund @ 65^[3] offers an initial tranche of S$1.5b to assist promising high-growth companies raise capital through public listings. Singapore can consider other types of financing schemes, such as loans or grants. With the cost of capital expected to increase globally in the next few quarters, such capital support scheme would be attractive and meaningful to potential companies that hope to access the much-needed capital for their continued expansion in the region from their Singapore HQ.

Finally, fast-growing technology and digital businesses have different needs, compared to those from traditional industries. Unlike the traditional industries, these new businesses can be built from anywhere in the world, such as Singapore, as long as there is access to talent and connectivity. To respond to these new business model requirements, Singapore needs to rethink and develop tailored incentives that can help to accelerate these businesses in creating, enhancing, commercialising and protecting new digital native IPs. The highly mobile nature of these businesses also means that any incentives should consider talents and assets that lie beyond Singapore’s shores. This can mean incentivising venture capitals funds and family offices to invest in regional digital businesses – or even supporting qualifying activities and costs linked to activities done overseas when benefits from the projects can be anchored back to Singapore.

As the global economy rapidly evolves, policymakers, businesses and academia need to come together to devise new strategies and business models for the continued growth of our economy. It is also important for them to collaborate and implement these strategies and business models to ensure commercial success and the greatest possible impact to the society. And this implementation is a very tall order to achieve – one that will require dynamic stability, adjustment beyond comfort and acceptance beyond legacy.

As we stand here, at the precipice of this change, let us ask ourselves: will this little red dot in the large blue ocean sink or swim? And can incentives be the tool that will make or break it?

The co-authors of this articles are Johanes Candra, Partner, Business Incentives Advisory from Ernst & Young Solutions LLP and Serene Ker, Associate Director, Business Incentives Advisory from EY Corporate Advisors Pte. Ltd.