Singapore Budget 2016

Budget 2016 wish list

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Singapore, 10 February 2016 - EY today released its wish list for Singapore Budget 2016.


Preliminary estimates indicate that Singapore’s economy grew by 2.1% last year – the weakest since 2009. Against an uncertain global economic outlook and China’s slowing economy, Singapore, by virtue of its open economy, remains vulnerable.

To be future-ready, Singapore must enhance its core competitive capabilities and build new ones, leveraging the strengths of a resourceful and innovative population and an agile and pro-business stance that is oriented towards global markets, so as to transform into a value creation economy with inclusive opportunities for all.

In light of these aspirations, the economic challenges and international tax developments such as the Base Erosion and Profit Shifting (BEPS) project, we propose suggestions for this year’s Budget measures under four broad themes:

  • Sharpen the focus of fiscal policies for improved effectiveness
    1. Developing corporate capabilities and innovation
    2. Using a specialised team to carry out the technical review of enhanced R&D tax deduction

      It is imperative to ensure that Singapore’s tax regime and business environment provides the necessary support to foster innovation and enable competitive growth.

      With the Productivity & Innovation Credit (PIC) scheme, Singapore has one of the more attractive R&D tax incentives globally. However, according to the IRAS’ 2012/2013 annual report, only 3% of all PIC claims were related to R&D and other qualifying activities.

      Also, it is observed that taxpayers have encountered significant administrative hurdles in their R&D claims, including multiple rounds of queries and protracted discussions with the IRAS on the technical eligibility of the projects.

      Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says:“Given the slow productivity growth seen in the last few years, more urgent efforts need to be made to bridge the gap between policy and implementation of the R&D tax incentives, which will be critical in driving pervasive innovation.

      “We propose that an IRAS technical evaluation team with broad technical or industry expertise reviews the technical eligibility of the projects from the start, raises queries on the technical eligibility to the taxpayer, and assesses the technical eligibility of the projects. This team could potentially be seconded from existing industry or economic government agencies. Such arrangement will alleviate issues of confidentiality and ensure that the taxpayer is engaging with officers who have the general technical background to appreciate and understand the technical discussions of the R&D project, and ensure that R&D tax deduction claims are dealt with efficiently and expediently.”

      Reallocating support resources from prescribed automation equipment and approved design projects categories in PIC scheme

      Looking specifically at each of the categories in the PIC scheme, prescribed automation equipment and approved design projects warrant closer attention as they sit at opposite poles of the claim spectrum.

      Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP says: “The PIC scheme could be tweaked by potentially reallocating the support for the automation equipment segment, which accounts for a significant portion of the total PIC expenditure claim, to other categories. This is to ensure that the scheme supports companies that undertake productivity leap-throughs via true automation and R&D, rather than those that make incremental steps or use the subsidies to reduce ‘business-as-usual’ costs.

      Bin Eng adds: “R&D is a key tenet of raising productivity and innovation to higher value-adding levels. Creating the R&D ‘hubbing effect’ in Singapore is critical to ensure a self-sustaining environment. In this regard, the government may wish to consider a more realistic definition of R&D, taking into account the current state of technology and level of innovation, so that businesses are incentivised to proactively consider process improvements or new ways of doing things. Further, additional tax benefits could be given for R&D that results in truly novel products and outcomes.”

    3. Promoting Singapore as a business and financial hub
    4. Enhancing the S-REIT regime

      The foreign-sourced income tax exemption and GST concessions granted to S-REITs will expire on 31 March 2020. The sunset clause in the case of the foreign-sourced income tax exemption is applied by reference to the date of acquisition of foreign properties. This could result in uncertainty, especially for cross-border S-REITs planning to list in Singapore around the expiry date.

      Ms. Lim Gek Khim, Partner and Asean Tax Quality Leader, Tax Services, Ernst & Young Solutions LLP says: “Foreign properties are likely to play a key role in the growth of the S-REIT market in the coming years. Given that tax exemption is critical for S-REITs with foreign properties and to level the playing field for pure play cross-border S-REITs, the sunset clause should be removed.”

      Providing incentives for Singapore-based family offices

      Singapore-based families that seek to set up their own Singapore-based family offices to professionally manage their investments may be exposed to Singapore tax due to our territorial basis of taxation.

      Ms. Goh Siow Hui, Partner, Private Client Services, Ernst & Young Solutions LLP says: “We propose tax incentives to provide tax certainty for income arising from family investments of Singapore-based families that are professionally managed, either through in-house family offices or through third party fund managers. This will help to maintain Singapore’s competitiveness as a wealth management centre.”

      Refining the Finance and Treasury Centre (FTC) incentive

      The FTC incentive is aimed at encouraging companies to perform their treasury management activities out of Singapore and will expire on 31 March 2016. The FTC incentive allows for a concessionary rate of tax for approved FTCs and a withholding tax exemption on interest payments made by the FTC to overseas payees for funds that are used in conducting qualifying FTC activities. Without the withholding tax exemption, the cost of establishing a treasury centre in Singapore would likely result in much higher operating costs.

      Mr. Desmond Teo, Partner, Financial Services Tax, Ernst & Young Solutions LLP says: “The incentive can be extended beyond its expiry date, which is important for Singapore to remain competitive as a global financial hub, especially in light of regional competition from the likes of Hong Kong, Shanghai and Thailand.”

      Ms. Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP adds:“The current legislation for the FTC has not kept up with the changing business models and activities undertaken by multinational companies, and creates significant tracking requirements for FTC companies. It is timely to review and update the qualifying activities and services of the FTC to ensure that it continues to be relevant and meaningful. Also, removing the need to identify and track its sources of funds in order to determine whether its income is a qualifying income will help to alleviate significant administrative burden for companies and enhance Singapore’s reputation as a pro-business and investor-friendly destination.”

      Transfer pricing

      Country-by-country (CbC) reporting was one of the first recommendations to be made under the OECD’s BEPS project. Singapore has not made public its position on CbC reporting and the taxpayers’ obligations.

      Mr. Henry Syrett, Partner, Transfer Pricing Services, Ernst & Young Solutions LLP says: “We urge the government to consider announcing its position on the implementation of country-by-country reporting to allow taxpayers sufficient time to understand its implications and ensure compliance. We also propose for IRAS to issue clear guidance on its transfer pricing compliance and audit focus so that taxpayers can consider accordingly as they prepare their transfer pricing documentation and assess their transfer pricing risks.”

    5. Enhancing Singapore's global competitiveness
    6. Maintaining the corporate tax rate

      Singapore’s headline corporate tax rate has remained at 17% since the year of assessment 2010.

      Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “The current headline corporate tax rate should be maintained. It is already very competitive by global standards – only 0.5 percentage points higher than Hong Kong’s profits tax of 16.5% and 4.5 percentage points higher than Ireland’s corporation tax for trading income of 12.5%. In addition, taking into account partial tax exemption and various tax incentives such as the Productivity and Innovation Credit (PIC), the effective tax rate falls below 17%.”

      Reducing the withholding tax rate

      The domestic withholding tax rate for technical and management services provided by non-resident companies is the prevailing corporate tax rate of 17%. If non-resident companies incur allowable expenses, they can submit a claim for these expenses such that they are taxed on a net income basis. On the other hand, non-resident individuals or foreign firms deriving any income from profession or vocation can elect to be taxed at a rate of 15% on the gross income derived from Singapore, at 17%, or 22% on the net income after deduction of allowable expenses.

      Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “There is room to lower the withholding tax rate for technical and management services. Aligning the withholding tax rate for technical and management services provided by non-resident companies with the existing scheme for non-resident individuals or foreign firms will make it more attractive for Singapore companies to tap on foreign technical and management expertise to transfer know-how, address skill gaps, improve business processes, manage organisational change or enhance productivity.”

      Enhancing the foreign-source income exemption scheme

      Currently, foreign-sourced dividends, overseas branch profits and service income derived by a Singapore resident company are exempted from tax if the income falls within section 13(8) of the Income Tax Act.

      Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “Extending the current foreign-sourced income exemption to royalties will incentivise companies to generate new intellectual properties or house their intellectual property (IP) management hub here, which aligns with Singapore’s ambition to be Asia's IP hub.”

      Relooking at the partial tax exemption

      The partial tax exemption scheme was introduced to help SMEs grow and become established. The scheme is applicable for normal chargeable income of up to S$300,000. For a company with a chargeable income of S$300,000 and below, the effective tax rate would be 8.36% or lower.

      Mr. Chai Wai Fook, Partner, Tax Services, Ernst & Young Solutions LLP says: “It is timely to relook at the partial tax exemption scheme, so that the intended benefits would really vest in the SMEs. The government could consider subjecting smaller companies to income tax at a separate tax rate of 8% while the remaining companies continue to be taxed at 17%, without any partial tax exemption in both cases.”

      Increasing the cap for tax deduction for medical expenses

      Most companies offer medical benefits as part of a remuneration package to attract and retain talent. Currently, companies can claim a tax deduction for their employees’ medical expenses of up to 1% of the employees’ total remuneration for the year.

      Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says: “Increasing the cap will help companies to defray part of the business cost of providing this important benefit to their employees. The government can consider increasing the cap for the tax deduction for medical expenses to 2% of employees’ total remuneration or 4% if the company has implemented Portable Medical Benefits Scheme or Transferable Medical Insurance Scheme; or provided portable medical shield plans; or made ad-hoc contributions to the Medisave accounts of its employees.”

  • Enhance tax treaties for international competitiveness

    Promoting Singapore for headquarter and centralized business activities

    Mr. Chester Wee, Partner, International Tax Services, Ernst & Young Solutions LLP says: “To continue attracting global businesses, Singapore needs to accelerate the conclusion of tax treaties with the US and emerging markets in Africa and Latin America. With the establishment of the ASEAN Economic Community, economic cooperation and trade among ASEAN countries is expected to increase. Singapore should negotiate for the Most Favoured Nation clause with all its treaty partners in ASEAN, similar to the one in the Thailand-Singapore tax treaty.”

    Refreshing Singapore’s tax treaties

    Mr. Chester Wee, Partner, International Tax Services, Ernst & Young Solutions LLP says: “To stay relevant as a business hub, Singapore needs to refresh many of its existing tax treaties that were signed during its developing years, as well as secure new tax treaties with the US and emerging countries in Latin America and Africa.

    “Singapore should also look at including tax arbitration clause in tax treaties. In the new tax environment, cross-border tax controversies and disputes are expected to increase significantly. Arbitration may be the solution to resolve disputes more efficiently and avoid aggressive actions by treaty countries.”

  • Explore new tax revenue options to support government spending

    Lowering the GST registration threshold

    The GST registration threshold in Singapore is S$1m per annum – significantly higher than most other countries.

    Mr. Kor Bing Keong, Partner, GST Services, Ernst & Young Solutions LLP says: “The government could consider lowering the GST registration threshold to S$500,000 per annum. A high GST registration threshold was important at the start of GST implementation as it relieves small businesses from GST registration and compliance. GST has now become an integral part of businesses and GST-compliant accounting and point-of-sale software is readily available. With the expected increase in social spending by the government, a decrease in GST registration threshold could bring more businesses into the GST net and increase revenue collection.”

    Imposing GST on the digital economy

    Singapore generally adopts a pragmatic and pro-business approach in its design of the GST system. This approach has however compounded the GST leakage brought forth by certain transactions in the digital economy, which if captured, can be a new source of government revenue.

    Mr. Kor Bing Keong, Partner, GST Services, Ernst & Young Solutions LLP says: “The non-taxation of supplies made by overseas service providers through the digital economy does not only create a GST leakage to the government but also a price disadvantage to domestic suppliers, resulting in an uneven playing field.”

    Mr. Yeo Kai Eng, Partner, GST Services and Asean Indirect Tax Leader, Ernst & Young Solutions LLP says: “The government can consider introducing new GST rules to require overseas service providers that sell to Singapore consumers to register for GST in Singapore if such sales exceed the GST registration threshold. The government can also introduce simplified GST registration procedures for these overseas service providers. This would bring more transactions into the GST net.”

  • Build a more inclusive Singapore society
    1. Personal tax
    2. Providing tax deduction for medical-related insurance policies

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

      Ms. Wu Soo Mee, 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 of S$5,000, for premiums paid for medical-related insurance by individuals for themselves or their family members will encourage taxpayers to be more responsible for the health and well-being of themselves and their families. Enabling a tax write-off for health insurance premiums also offer taxpayers greater access to preventive and emergency healthcare.”

      Enhancing personal tax reliefs

      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: “Given the high costs of living and in recognition of the efforts put in supporting families, there is room to increase the dependent spouse or child’s annual income ceiling to S$5,000 in order for the personal tax relief claim to apply. This will indirectly free up more dependent spouses into the workforce, which can potentially help to ease labour shortage.”

      Enhancing tax deductions or providing tax incentives for work-life programmes

      Singapore has several initiatives to support companies in adopting flexible work arrangement practices such as the WorkPro programme, which offers a Work-Life Grant to employers to help defray the costs of implementing work-life strategies. More can be done.

      Mr. Grahame Wright, Partner, People Advisory Services – Mobility, Ernst & Young Solutions LLP says: “The government can consider simplifying the grant application process for employers and making the qualifying conditions more relevant to smaller businesses. The government can also consider an enhanced allowance for the acquisition or leasing of IT equipment for flexible work arrangement purposes. A double or further tax deduction can also be considered for consultancy fees incurred on the job and performance measurement redesign and IT system design.”

    3. Foster more giving in corporates and individuals
    4. Mrs. Mildred Tan, Managing Director, Ernst & Young Advisory Pte. Ltd. says: “The current 250% tax deduction for donations made to an approved Institution of a Public Character is very effective in encouraging giving. This enhanced 250% deduction will expire on 31 December 2018. To promote Singapore to be a more giving nation, the 250% deduction can be made a permanent feature of our tax legislation. Further, to encourage the true spirit of giving, the government could consider allowing taxpayers to elect forgoing the tax savings in their tax return, and donate the tax savings back to the same charity.

      “To encourage more corporate giving, particularly in organisations that may not have the know-how to implement such initiatives, the government could look at providing grants towards training and development of such capabilities within the organisation.”

      “Also, there could be some extension of tax deduction to recognise donations made to overseas aid relief efforts, so as to promote Singapore as a country that encourages its people and corporates to care beyond its shore. The type of overseas aid relief efforts qualifying for tax deduction can be specified by the government.”

Mrs. Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions LLP says:“We propose that Singapore’s income tax system be simplified and made more competitive to promote Singapore as Asia's business and financial hub, while tweaking certain policies to ease business costs and promote business growth.

“As an open economy, we need to continue to improve the international competitiveness of our tax treaties, whether refreshing them, providing for tax arbitration clauses and greater clarity on the interpretation of tax treaties, or adding new treaties.

“Also, to support government spending, we suggest ways to capture new streams of tax revenue through lowering the GST registration threshold and imposing GST on the digital economy.

“In conclusion, our wishes are geared towards enabling the country to achieve the long-term aim of sustaining a fair and equitable tax system that promotes investment and growth of Singapore businesses, individuals and society.”

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