Wish list for Singapore Budget 2018

Singapore, 4 January 2018

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  • Sharpen Singapore’s competitiveness and attractiveness to global investors while enabling ASEAN’s progress
  • Maintain a simplified and enhanced tax system that is broad-based, progressive and fair

EY member firm today released its wish list for Singapore Budget 2018.

The global tax environment is seeing unprecedented changes with the implementation of Base Erosion and Profit Shifting (BEPS) action plans coupled with the recent US reforms. These will fundamentally change the foreign direct investment (FDI) landscape and impact the FDI flows into the ASEAN region.

Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says:
“In light of the above, we recommend the government adopt a two-prong focus in this year’s Budget. In focusing externally on the challenges and opportunities, it should seek to sharpen Singapore’s competitiveness and attractiveness to global investors while enabling ASEAN’s progress. In focusing internally on its tax regime, it should strive to maintain a simplified and enhanced tax system that is broad-based, progressive and fair.”

She adds:
“The Budget measures should thus seek to build the resilience and agility of the businesses, workforce and population in Singapore to adapt to change, innovate and seize the opportunities in a fast-changing landscape and increasingly digital economy.”

  • 1. Promote Singapore as a business hub in the region

    Harmonise tax treatment within ASEAN

    The ASEAN Economic Community Blueprint 2025 acknowledges that taxation cooperation is a critical element to promote trade flow and boost ASEAN’s competitiveness. Yet, there is no consistent and clear definition of tax terms and concepts nor common standards for tax administration in ASEAN. Addressing this can improve the competitiveness of the region and also help to lower business tax and compliance costs within the ASEAN community.

    Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “Singapore, as chair of ASEAN in 2018, can take the lead in proposing measures to harmonise certain tax treatments to promote greater cross-border flow of capital and labour. The government may consider adopting a consistent definition of tax concepts such as permanent establishment and characterisation of software payments, and proposing common tax administration standards such as those in relation to transfer pricing. This would help to grow the intra-ASEAN market and position ASEAN as an integrated community for foreign investments.”

    Improve treaty network

    Mr. Chester Wee, Partner, International Tax Services Leader, Ernst & Young Solutions LLP says:
    “To enhance tax competitiveness, the government has been improving the relevance of Singapore’s tax treaty network over the years. This process needs to be accelerated by including new countries such as the US and updating the older comprehensive tax treaties with countries such as Australia, Indonesia and the Philippines.”

    Provide clarity on digital-related taxation

    • Taxation of digital commerce

      With the proliferation of digital commerce, traditional means of taxation have not kept up. This results in an uneven playing field.

      Mr. Chia Seng Chye, Partner, Tax Services, Ernst & Young Solutions LLP says:
      “To protect Singapore’s tax revenue base neutrality, the government needs to review the taxation of digital commerce income. This includes possibly imposing a digital levy on goods and services imported into or consumed in Singapore, if refining the withholding tax rules and activating the GST reverse charge mechanism are not effective in addressing this or levelling the playing field. Otherwise, there could be an erosion of our tax revenue base.

      Conversely, with imposing of a digital levy increasingly being considered by other countries, broadening the availability of foreign tax credits for Singapore tax purposes to include such digital levies suffered overseas can help to mitigate double taxation of such income. This may encourage e-commerce businesses to locate operations within Singapore and generate other spinoffs for the Singapore economy.”

    • Tax treatment of virtual currency

      The growth in adoption of virtual currencies has contributed to a rise in their price and market capitalization. Clarity on the tax treatment of these currencies will better position Singapore to tap the growing economic opportunity to attract prospective funds trading in virtual currencies to set up and be managed here, which will also feed the supporting ecosystem of banks, custodians, fund administrators, auditors and lawyers.

      Ms. Amy Ang, Partner, Financial Services Tax Leader, Ernst & Young Solutions LLP says:
      “The IRAS has clarified that businesses that accept virtual currencies for their remuneration or revenue are subject to normal income tax rules. However, in addition to this broad guidance, further clarity is needed. For example, should virtual currencies be treated as a commodity for tax purposes, or as a commodity derivative, given the proposed statutory definition that it is a digital representation of value where the underlying asset is a virtual commodity.

      “This is important as it allows Singapore managed funds to ascertain if the current tax exemption regime applies to trading gains arising from virtual currencies, as well as whether the Financial Sector Incentive (FSI) tax regime covers the gains and service income in respect of virtual currencies for other financial institutions enjoying the FSI tax regime.”

  • 2. Promote innovation

    Encourage funding for targeted innovative companies

    There are currently no government-funded tax measures to provide extra support in terms of funding to targeted companies that are focused heavily on innovation. Measures designed to help smaller higher-risk innovative companies to raise finance will be particularly important to unlock the potential of equity crowdfunding for private investment.

    Mr. Chai Wai Fook, Partner, Tax Services, Ernst & Young Solutions LLP says:
    “The government may consider offering tax incentives to encourage private investments by funds, partnerships, companies and even individuals, into small and growing innovative companies. For example, there can a range of tax reliefs for these investors in the form of an initial tax relief of a certain percentage on investments, certainty on non-taxation of gains arising from the disposal of investments (beyond ordinary shares) and tax deduction for losses on investment.”

    Enhance the effectiveness of R&D incentives

    The existing R&D tax incentive scheme provides all eligible taxpayers with enhanced tax deductions for qualifying expenditure incurred on R&D activities. It has been almost a decade since the introduction of the enhanced tax deduction, yet uptake and feedback on the effectiveness of the scheme remain less than ideal. This gap, particularly for the small and medium enterprises (SMEs), will be particularly glaring with the Productivity and Innovation Credit (PIC) scheme (including cash payout option) expiring after Year of Assessment (YA) 2018.

    Ms. Tan Bin Eng, Partner, Business Incentives Advisory Leader, Ernst & Young Solutions LLP says:
    “It has been laborious for both large and small companies to leverage the current R&D enhanced tax deductions to scale their innovation efforts. For SMEs in particular, where cash is key to survival, they would no longer find it worth the effort to avail of the incentive with the expiry of the PIC. Given the intensifying global competition to tap the explosive growth in innovation activities that is transforming economies, there is now greater urgency for Singapore to address this issue.”

    She adds:
    “The government may wish to consider if its current approach of evaluating R&D eligibility and documentation requirements can be simplified and streamlined, particularly for SMEs.

    “The government can also consider extending and increasing the cash payouts under the PIC, limited only to R&D related activities. Where necessary, the government can consider a two-step process, with an added simplified pre-approval approach to the R&D activities where cash payouts apply. These incentives will help to partially offset the financial risks and prioritise spending on R&D activities, and the resulting cash payout can then be channeled to fund and catalyse more R&D.”

    Enable IP strategy and FinTechs

    In creating intellectual property (IP), technology personnel conducting the R&D activities may be employed in one entity while the IP rights are held in other entities within the group due to economic, commercial or legal requirements. The development and commercialisation of IP may take time even as the group continues to invest in R&D. This results in substantial losses carried forward in one entity, while income from a successful IP venture may be generated in other entities, translating to a timing mismatch of trade losses incurred and income generated.

    Mr. Chai Wai Fook, Partner, Tax Services, Ernst & Young Solutions LLP says:
    “The government may consider introducing provisions to allow tax losses carried forward (beyond existing current year tax losses) in one entity to be transferred within a qualifying group for deduction against income derived by another qualifying group entity, especially if such tax losses arise from FinTech-related R&D activities.”

    Financial innovation will be one of the keys to the development of financial services in Singapore.

    Ms. Amy Ang, Partner, Financial Services Tax Leader, Ernst & Young Solutions LLP adds:
    “We propose that the Monetary Authority of Singapore introduce and administer a targeted tax incentive offering a preferential tax rate of say, 5% or 10% (depending on the conditions and levels of commitments) to promote financial innovation-related activities by financial services companies in areas such as digital and mobile payments; authentication and biometrics; block chain; cloud computing; big data; and robotics.”

  • 3. Keep taxes competitive, broad-based and progressive

    Maintain corporate income tax (CIT) rate but review for mid to longer term

    Singapore’s CIT rate of 17% since YA 2010 is one of the lowest in the world. The government may wish to, for now, maintain this rate for Singapore to remain attractive and competitive internationally.

    Mr. Chester Wee, Partner, International Tax Services Leader, Ernst & Young Solutions LLP says:
    “Notwithstanding the above, countries globally are decreasing their headline tax rates for competitiveness. At the same time, many are focusing on measures to address Base Erosion and Profit Shifting to protect and consolidate their tax revenue base. In this regard, Singapore’s CIT rate in the mid to longer term should be reviewed, and this warrants further research and analysis.”

    Facilitate overseas venture with relaxed relief conditions for foreign taxes suffered

    It is common for companies to send personnel overseas to perform or render services in other markets. Yet, companies in the initial phases of their overseas venture may not spend enough time or carry out substantive activities in the foreign market to create branches or subsidiaries in those jurisdictions. As a result, these companies, especially those in the services sector, may suffer foreign withholding taxes in their overseas ventures.

    Mr. Chai Wai Fook, Partner, Tax Services, Ernst & Young Solutions LLP says:
    “In practice, the foreign tax credit claims to relieve such companies from double taxation are often denied on the basis that the income is Singapore-sourced and that the company does not have a taxable presence or permanent establishment in that foreign jurisdiction. In such instances, companies suffer double taxation in their quest for regional or overseas expansion. The government may wish to consider the grant of a tax credit claim (through a tax remission mechanism) for targeted companies, for example, local SMEs.”

    Goods and Services Tax (GST) rate

    Singapore’s current GST rate of 7% is one of the lowest among the Asia-Pacific countries, where the rate is typically at least 10%.

    Ms. Chew Boon Choo, Partner, GST Services, Ernst & Young Solutions LLP says:
    “If there is going to be a GST rate hike, it could be an immediate step-up from the current 7% or it could be staggered in a multi-step approach, as seen in 2003 and 2004. We suggest a multi-step approach so as to lessen the immediate burden on individuals and impact on consumer spending, but businesses will need to manage the higher compliance costs incurred from updating and testing the accounting systems, managing transitional issues and determining the appropriate rate to apply for the supplies made.”

    Mr. Yeo Kai Eng, Partner, Indirect Tax Services Leader, Ernst & Young Solutions LLP says:
    “Singapore has generally adopted a pragmatic and pro-business approach in the design of its GST system. This approach helps to reduce the GST compliance costs of taxpayers and is welcomed by taxpayers. However, it has also resulted in tax leakages brought forth by the digital economy. Besides a possible GST rate hike, the introduction of a GST registration regime for overseas vendors supplying digital services (e.g., downloadable software, e-book, music) to consumers in Singapore that is being contemplated by the government can provide an additional source of revenue to support Singapore’s spending on the economy, infrastructure and social services. At the same time, it will also provide a level playing field for local and overseas businesses supplying digital services to consumers in Singapore.”

    Maintain personal income tax rate but review room for increase

    The personal income tax rate structure announced in Budget 2015 become effective from YA 2017, where higher tax rates are introduced for individuals earning at least S$160,000. For higher income earners with a chargeable income above S$320,000, the top marginal tax rate was raised from 20% to 22%.

    In view of this recently effective tax rate structure, we do not propose any immediate changes to the current personal tax rates. Yet, the need to increase tax revenue to meet rising domestic demand signals room for a further increase in tax rates in the mid to long term.

    Mr. Panneer Selvam, Partner, People Advisory Services – Mobility (Tax), Ernst & Young Solutions LLP says:
    “For our tax system to remain fair and progressive, the government may consider increasing the tax rate for the income bracket of over S$160,000 or S$320,000 in the mid to long term. Based on the chargeable income for YA 2016, raising the top marginal income tax rate by 1%, to 23%, coupled with S$80,000 cap on personal reliefs, can result in approximately an additional S$300m of tax revenue.

    “An alternative is to introduce a new and separate income bracket for exceptionally high earners. However, any tweaks to the personal income tax rates should be managed with care, as Singapore needs to remain an attractive place to live and work in.”

    Enhance personal income tax reliefs

    • Provide tax deduction for medical-related insurance policies

      Currently, there is no standalone tax relief available to individuals for premiums paid on medical-related or health insurance policies.

      Ms. Kerrie Chang, Partner, People Advisory Services – Mobility (Tax), Ernst & Young Solutions LLP says:
      “Allowing a tax deduction that is not tied to CPF contributions, subject to a cap, for premiums paid for medical-related insurance by individuals for themselves or their family members will encourage taxpayers to be more responsible for health and well-being. Enabling a tax write-off for health insurance premiums can encourage higher take-up of health insurance policies and offer greater access to health care. A tax relief for medical costs incurred by those over 50 years old for health screening in alternate years may also encourage preventive health care.”

    • Earned income relief

      Ms. Kerrie Chang, Partner, People Advisory Services – Mobility (Tax), Ernst & Young Solutions LLP says:
      “Earned income relief for Singapore individual taxpayers varies and is dependent on age. The reliefs are higher for those with disabilities. While there have been enhancements to this relief, the basic earned income relief for those aged below 55 has remained unchanged at S$1,000 for many years. Given the higher cost of living, we suggest that the basic relief of S$1,000 be increased.”

    • Spouse Relief and Qualifying Child Relief

      Currently, Singapore taxpayers who support their dependent spouses or children can claim a personal tax relief, if the spouse or children do not have an annual income exceeding S$4,000 in the previous year.

      Ms. Kerrie Chang, Partner, People Advisory Services – Mobility (Tax), Ernst & Young Solutions LLP says:
      “Recognising the higher costs of living and efforts in supporting families, there is room to increase the dependent spouse or child’s annual income ceiling to, say S$5,000, in order for the personal tax relief claim to apply. This will indirectly free up more dependent spouses and children into the workforce.”

    • Foreign maid levy (FML)

      Ms. Kerrie Chang, Partner, People Advisory Services – Mobility (Tax), Ernst & Young Solutions LLP says:
      “Currently, FML relief is given to encourage married women to stay in or return to the workforce. Married women and divorcees or widows with school-going children can claim this relief; singles and married men are not eligible. However, there may be individuals, regardless of marital status, who engage domestic helpers to provide care and support for their ageing parents. We suggest that singles and married men be allowed to claim the FML relief where helpers are engaged to care for aged parents.”

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