Tax rates have long contributed to Singapore's competitiveness as a location for doing business.
The city state's personal income tax rates are low, there are various types of reliefs available and, due to the territorial basis of taxation, foreign-sourced income received in Singapore is exempt from tax locally. These make the country attractive to talent, both foreign and local.
However, with the push in recent years to create a more progressive and equitable tax regime, the Government has introduced additional income bands, increased the income tax rate, capped personal income tax reliefs from Jan 1 this year, and reduced the concessions available to international assignees. It is a relief that the territorial basis of taxation remains.
TOP-TIER TAX RATE RAISED
For a start, from Jan 1 last year, the top marginal personal income tax rate in Singapore has been raised from 20 per cent to 22 per cent, with changes in the income bands above $160,000. This saw the average tax rate for high-income earners increasing for the first time. Yet, no personal tax rebates were announced for last year.
In comparison, Hong Kong, often seen as one of Singapore's competitors, has maintained its personal income tax rates, increased the child allowance available to working parents, and awarded a rebate of 75 per cent of the employee's salary tax, capped at HK$20,000 (S$3,650).
Upon scrutiny, while employees in Hong Kong generally seem to enjoy lower taxes, those earning between $128,000 and $300,000 would have actually paid less taxes in Singapore if not for the one-off 75 per cent rebate. What this means is that for Hong Kong to remain competitive on the personal tax front, it will need to continue to offer tax rebates.
In real terms, the increase in personal tax rate for high earners in Singapore has resulted in a higher percentage of tax payable for individuals earning over $160,000, but this increase is minimal. This carefully calibrated move allows Singapore to have lower overall taxes than most countries, but maintain a highly progressive regime where those who earn more are taxed more.
The total amount of reliefs claimed by an individual in Singapore will be capped at $80,000 per year of assessment from Jan 1 this year. This cap has a higher impact on high-earning working mothers than any other group in the population. This is because the Working Mother's Child Relief (WMCR), which is available only to working mothers of Singapore citizen children, is one of the most significant reliefs and, therefore, most likely to push an individual's personal tax reliefs to over $80,000.
While the full impact of the newly introduced cap has yet to be realised, it seems to run counter to the drive to increase the participation of female talent in the workforce. Yet, the cap could be seen as a way to achieve greater fairness in the tax regime as it prevents high-earners from reducing their tax burden to the extent that they pay less than medium-income earners.
To begin with, the WMCR has always been a little controversial. For one thing, it does not seem to reflect the intent to have a more progressive tax system, as the relief is pegged directly at a percentage of the mother's income. That means that as income increases, the tax relief increases correspondingly (with a cap), potentially allowing a higher-earning working mother to pay less tax than a lower-earning working mother. Whether this may have implications when weighed against the country's efforts in raising birth rates is also debatable.
A BALANCE OF INTERESTS
In reality, creating a more progressive and equitable tax system has been a work in progress and a necessary move to raise revenue in a fair manner to support increased social spending.
Small adjustments to the tax regime have already been made over the years to make the rich pay more taxes, while keeping the burden on the middle-income earners low and benefits targeted at the low- and middle-income groups.
As early as in 2010, the Government had mandated taxing properties with higher annual values at higher rates. In Budget 2013, more tiers of property tax rates were added for owner-occupied properties and progressive tax rates for non-owner-occupied residential properties were also introduced.
At the same time, the Government reduced certain concessions for foreign talent. The computation of the value of housing benefit provided to expatriate employees was revised from 2014 to better reflect the actual value of the property. From Jan 1 this year, the 20 per cent concession for home leave flights was also removed such that any home passage provided by the employer will be taxable in full.
All in, Singapore still offers comparatively low personal income tax rates and a range of personal reliefs for tax residents. This, coupled with an extensive avoidance of double taxation agreement network and the territorial basis of taxation, continues to make Singapore a competitive location from an individual tax perspective. Plus, there are other pull factors in Singapore's favour, including quality of life and safety, that companies and executives consider when deciding where to locate.
Going forward, we expect the Government to continue to review the various concessions and reliefs for individuals. It is unlikely that the personal tax rates will be raised again soon, though: The increased tax rate structure is coming into effect only in income year 2016, and according to the 2015 government projections, the various revenue measures already introduced would provide sufficiently for the country's spending until the end of this decade.
Nevertheless, it is not entirely impossible for a new income band of above $320,000 to be introduced with a new top rate of above 22 per cent in the future. That would be bold - and very progressive.
- Panneer Selvam and Pang Ai Lin are partner and executive director for People Advisory Services - Mobility (Tax) at Ernst & Young Solutions LLP respectively.