What the Singapore Budget 2023 means for businesses
Businesses can capitalise on the available government support to address rising business and manpower costs.
The Singapore 2023 Budget Statement was delivered on 14 February 2023 by Deputy Prime Minister and Minister for Finance, Mr. Lawrence Wong.
Set against a global backdrop of economic uncertainty, supply chain challenges and the roll-out of the 15% minimum tax under the Base Erosion and Profit Shifting (BEPS) initiative, Budget 2023 aims to manage inflationary pressures, mitigate societal challenges and maintain Singapore’s competitiveness in the global arena. We speak to Russell Aubrey, Partner, Tax Services from Ernst & Young Solutions LLP on the key measures announced, and what these mean for businesses.
Was it surprising that there was no change to the corporate income tax (CIT) rate?
Some might expect the Singapore government to increase corporate income tax (CIT) rate in Budget 2023 to help fund the total expected draw of S$40bn from past reserves for the COVID-19 support measures over the last three years and projected higher social expenditures and investments.
However, as Singapore is largely dependent on foreign investments, any increase to Singapore’s CIT rate, must be weighed against that. Singapore’s current CIT rate at 17% remains one of the most competitive globally. So despite an overall projected fiscal deficit of S$2bn and S$400mn for financial year (FY) 2022 and FY 2023 respectively, Singapore’s headline CIT rate remains unchanged. The raising of the GST to 8% this year, and 9% next year will go a long way to balance the budget.
In addition, the government has decided to use asset-related and “sin” taxes such as increasing buyer’s property stamp duty rates, making vehicle registration fees more progressive and increasing excise duties across all tobacco products, as means to raise revenue. These are expected to generate an additional S$800mn in revenue each year.
What is the impact of the announcement that Singapore plans to implement the Global Anti-Base Erosion (GloBE) Rules and the Domestic Top-up Tax (DTT) for large multinational enterprises (MNEs) with FY starting on or after 1 January 2025?
The Occasional Paper on Medium-Term Fiscal Projections released by the Ministry of Finance noted that the BEPS 2.0 initiative spearheaded by the Organisation and Economic Co-operation and Development (OECD) could result in a net fiscal impact that “may not be favourable” to Singapore.
BEPS 2.0 will impede the use of tax incentives to attract new investments into Singapore, potentially impacting the nation’s competitiveness. Under Pillar 2, large MNEs with an effective tax rate (ETR) in Singapore less than the global minimum corporate tax rate of 15% may see other jurisdictions collect the difference of up to 15%.
The announcement that the implementation of Singapore’s DTT is planned for 2025, subject to further alignment with broader international developments, aims to preserve Singapore’s tax integrity once BEPS 2.0 is implemented and seeks to top up the MNE’s Singapore ETR to 15%.
Singapore MNEs should note that while the implementation of the GloBE rules and DTT is expected in 2025, various jurisdictions such as South Korea, the European Union and Switzerland have announced their intention to implement the GloBE rules effectively from 2024. Therefore, they may still be impacted by the GloBE rules in 2024 if they have presence in such jurisdictions.
Also, while foreign MNEs with Singapore operations are not required to comply with the Singapore DTT requirements in 2024, these foreign MNEs may ultimately have a top-up tax liability outside of Singapore in relation to their Singapore operations, depending on the profile of that specific foreign MNE group.
How would the Enterprise Innovation Scheme (EIS) help local businesses?
The EIS aims to further enhance productivity, innovation and workforce quality for businesses to stay competitive in the new environment, and it appears to be modelled after the expired broad-based Productivity and Innovation Credit (PIC) Scheme.
However, compared to its predecessor, the EIS focuses on innovation and is more targeted. It offers an enhanced tax deduction of up to 400% for qualifying expenditure incurred on activities related to R&D in Singapore; registration of intellectual property (IP); acquisition and licensing of IP rights; qualifying training programmes as well as innovation with polytechnics, the Institute of Technical Education and other qualified partners.
The EIS cash conversion option is particularly attractive for businesses that have yet to turn profitable and therefore are unable to maximise the tax deduction benefit. With the EIS spanning across YA 2024 to YA 2028, we hope that the modest 20% cash conversion ratio and S$20,000 cap each tax year will be further enhanced in future Budgets. By comparison, the cash payout under the PIC Scheme in its year of expiry was capped at S$40,000 each tax year. Nonetheless, the cash conversion option should encourage businesses to innovate and engage in capability development activities.
What other benefits can businesses expect from Budget 2023?
Besides the EIS, there are a slew of extensions and enhances to existing schemes that businesses should take note of. For example, both the Pioneer Certificate Incentive and Development and Expansion Incentive will be extended to 31 December 2028. This continues to encourage companies to anchor high value-added activities in Singapore. And while the effectiveness of these schemes after the DTT implementation will need to be evaluated, the Singapore government continues to make them available for businesses that find them useful. Businesses should assess these incentives in conjunction with other available industry development schemes to maximise the use of tax incentives.
Budget 2023 also announced manpower support measures, such as Jobs-Skills Integrators, employment credits for hiring senior workers, people with disabilities and ex-offenders as well as a top-up for the Progressive Wage Credit Scheme by S$2.4bn. Businesses should make the most of available government support to alleviate their manpower challenges and costs.
All in all, Budget 2023 is modestly expansionary at a time when it is particularly hard to predict the future. Personally, I feel that the government has targeted assistance where it is needed, while keeping its powder dry to face the global economic uncertainties. It also clearly reflects the Singapore government’s astuteness in balancing needs that may not align, the art of managing trade-offs.
This In conversation with article features Russell Aubrey, Partner, Tax Services from Ernst & Young Solutions LLP.