SINGAPORE - More measures to encourage business innovation, attract new regional players, sharpen support for companies and help them become more competitiveness, as well as to encourage Singaporeans to take charge of their health and wellbeing.
These are the four thrusts of Ernst & Young Solutions' (EY) wish list for Singapore Budget 2017.
The business advisory firm noted that 2016 was a tough year for Singapore's economy, especially for its workforce with latest figures showing the long-term unemployment rate rose to 0.8 per cent in September - the highest for the month since the global financial crisis in 2009.
"In view of the challenges and opportunities before us, Budget 2017 is an opportunity to take stock of existing tax legislation to encourage businesses to put growth at the top of their agenda and ease business costs - whether by tweaking their business models, going overseas or through mergers and acquisitions," said Mrs Chung-Sim Siew Moon, head of tax services, Ernst & Young Solutions LLP.
Here's more on EY's proposals:
1. Encourage innovation in enterprises
a. Introducing a patent box scheme or similar tax regime
In recent years, a number of jurisdictions such as the UK and Belgium, has introduced patent box regimes. Such regimes usually offer preferential tax rates on income derived from intellectual property, and their key objective is to attract R&D or innovative activities into the country.
Said Mr Chester Wee, partner, international tax services:
"While some of these patent box schemes have come under scrutiny due to a lack of substance, the OECD's BEPS Action 5 confirms that patent box regimes, which require real and substantial activity to obtain benefits, are not harmful tax practices and can be useful in supporting growth and innovation in a country."
Ms Tan Bin Eng, partner, business incentives advisory, said such a scheme will also complement existing tax incentives that promote R&D and improve the country's overall attractiveness as a destination to conduct R&D and commercialise the resulting IP.
b. Enhancing writing down allowance for intellectual property (IP) rights
Currently, where a Singapore-based company acquires IP rights, such costs can be eligible for a writing down allowance only if the company acquires both the economic and legal rights to the IP. For companies that create IP in Singapore, such costs can only be deductible if they fall within the R&D criteria.
Said Mr Tan Ching Khee, partner, tax services:
"A review and enhancement of various types of IP will go a long way in ensuring that the Singapore IP tax regime is aligned with other jurisdictions. The definition of IP can be broadened and at the same time, the government may wish to consider whether there continues to be a need to require both legal and economic ownership of IP rights before writing down allowance can be made available. Perhaps the government can consider granting writing down allowance automatically even when taxpayers have only economic ownership of the IP?"
c. Introducing a FinTech tax incentive
Financial innovation will be a key development area for the financial services sector in Singapore.
EY proposes that the Monetary Authority of Singapore introduces and administers a targeted tax incentive to offer a preferential tax rate of 10 per cent or lower 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 or robotics.
d. Extending enhanced deductions on training expenses for upgrading or reskilling
Noting that the Productivity and Innovation Credit (PIC) scheme will lapse after Year of Assessment (YA) 2018, EY said it hopes the government can grant enhanced deduction claims on training costs incurred by businesses for their employees, with the option to convert qualifying training deductions into a non-taxable cash benefit.
e. Introducing a cash payout scheme relating to qualifying expenditure incurred by local SMEs
The existing R&D incentive scheme provides all taxpayers with enhanced tax deductions for qualifying expenditure incurred on R&D activities as part of the PIC scheme, which will expire after YA 2018.
EY proposes modifying the existing R&D incentive scheme to provide local SMEs the option to convert qualifying R&D deductions into a non-taxable cash benefit.
Local SMEs in a non-tax paying position - the category of taxpayers that is most in need of government financial assistance - have been slow to take up the current R&D incentive scheme, EY noted. This category of taxpayers are primarily focused on cash savings rather than tax savings, it said.
In the majority of cases, the cash payout option has been utilized on other categories of the PIC, most notably in the automation category rather than on R&D expenditure, EY added. As a result, the R&D incentive and PIC schemes currently do not provide SMEs with a strong incentive to invest in R&D activities, it said.
2. Attract new regional players to set up business in Singapore
a. Adopting a pure territorial taxation system
Currently, not all foreign-sourced income derived by companies can be exempt from tax. A permanent tax exemption of all foreign-sourced income without prerequisites (supplemented with safeguards such as explicit tax rules on the determination of source of an income without creating opportunities for double non-taxation) will encourage companies to grow beyond Singapore, aid EY.
Said Mrs Chung-Sim: "In the long run, it can boost Singapore's position as a launch pad for new industries with base operations in Singapore, including digital service sectors such as media, travel, FinTech and gaming."
b. Enhancing tax incentive for venture capital fund managers
In Budget 2015, it was announced that an approved venture capital fund management company that manages Section 13H funds will be accorded a 5 per cent concessionary tax rate. The Section 13H tax incentive is administered by Spring Singapore and may have conditions related to the investment objective of the fund, which may not be possible for every venture capital fund manager to meet, aid EY.
Said Mr Desmond Teo, partner, financial services tax: "As Singapore seeks to be a regional hub for start-ups and entrepreneurs, it may wish to attract smaller start-up venture capital fund managers by extending the Financial Sector Incentive - Fund Manager tax incentive to this group of managers.
While the incentive can continue to be linked to headcount, the government can consider removing the minimum assets under management of S$250m for these start-up venture capital fund managers. Instead it could be linked to making a minimum number of investments for the funds in a certain growth industry, for instance, FinTech."
3. Sharpen support for enterprises and sector competitiveness
a. Introducing a simplified income tax code for smaller companies
Similar to having a separate set of financial standards for small companies, it is suggested that a simplified income tax code for small and medium-sized enterprises (SMEs) be introduced in the Singapore Income Tax Act.
Mr Chai Wai Fook, partner, tax services, said simpler tax rules on capital allowance claims and deductions to ease compliance costs, can, in the long run, make Singapore a more conducive growth environment for start-ups and SMEs.
b. Refining the renovation and refurbishment (R&R) deduction scheme for SMEs
This scheme is especially beneficial to SMEs in the retail, food and beverage and entertainment sectors, said EY. However, restrictions under the scheme such as spending cap, three-year deduction period and qualifying expenditure have curtailed the benefits and entailed administrative effort in claiming deductions for SMEs, it said.
Said Mr Chai: "To support the SMEs, we propose to simplify the R&R scheme by increasing the spending cap and allowing one-year deduction claim for SMEs. To take a step further, why not expand qualifying R&R costs to include designer or professional fees and costs that affect the structure of the building as industrial building allowance has been phased out and land intensification allowance scheme is only available to certain industries?"
c. Carry-back of unutilised tax losses and capital allowances
Said Ms Goh Siow Hui, partner, tax services: "To ease business costs of companies in the current weak economic conditions, the government can consider temporarily increasing the quantum of carry-back loss relief from S$100,000 to S$300,000, for example, and extending the one-year carry-back to a maximum of three years, similar to Budget 2009."
d. Enhancing the Tax Framework for Corporate Amalgamations (TFCA)
The TFCA is currently applicable only to defined qualifying amalgamations of companies. As a result, other types of business restructurings such as business transfers involving Singapore branches are not able to come under the TFCA.
Said Mr Darryl Kinneally, EY partner, transaction tax: "To encourage business restructurings to streamline their operations in Singapore, we urge the government to consider extending the TFCA to include such business transfers."
e. Enhancing M&A allowance
The M&A allowance scheme is beneficial to companies considering M&A as a strategy for growth and internationalisation. However the benefits of the scheme to Singapore groups can be limited by the inability to transfer the excess M&A allowance to other companies under the Singapore's group relief scheme.
Mr Kinneally said allowing group relief for M&A allowance will tie in with the objective of encouraging Singapore companies to consider M&A as a strategy for growth and internationalisation.
f. Enhancing the group relief scheme
To support Singapore groups during the economic downturn and to encourage risk-taking, Mr Chia Seng Chye, partner, tax services: "The group relief scheme can be enhanced to allow brought forward tax loss items to be transferred to group companies for set-off against their current year taxable profits. Currently, only the current year tax loss items may be transferred between group companies. To ensure that this enhancement is targeted to help SMEs, a limit of say S$1m can be imposed on the amount of brought forward tax loss items that may be transferred per tax year under the group relief scheme."
g. Enhancing the S-REIT regime
Currently, the 10 per cent concessionary tax rate, foreign-sourced income tax exemption and GST concessions granted to S-REITs will expire on 31 March 2020. As these concessions have a shelf life, uncertainty in the market always exists when the sunset date looms.
Said Ms Lim Gek Khim, partner, tax services: "As foreign properties are likely to play a key role in the growth of the S-Reit market in coming years, and given that tax exemption is critical for S-Reits with foreign properties, the sunset clause should be removed.
"The other alternative to allay uncertainty is to tie the tax exemption to the life of the S-Reits. This will allow tax exemption to apply as long as the S-Reits are listed on or before 31 March 2020, and continue to be listed on the Singapore Exchange.
"Removing the sunset clause or tying the sunset clause to the listing status of the S-Reit will also ensure that the input GST incurred by cross-border S-Reits will continue to be recoverable. This will ease costs for such S-Reits and level the playing field for them against those that own Singapore properties."
h. Fine-tuning the Finance and Treasury Centre (FTC) Scheme
The FTC incentive is aimed at encouraging companies to perform their treasury management activities out of Singapore. However, there is room to fine-tune the incentive so that it remains instrumental in convincing multinationals to entrench their headquarters here, said EY.
Said Mr Teo: "An FTC company is required to identify and track its sources of funds in order to determine whether its income is a qualifying income. As an FTC company can borrow from various sources and deposit the borrowings into a single bank account, it would be difficult to segregate this pool of funds into those obtained from qualifying and non-qualifying sources. This, coupled with the fact that the loans could retire at different times, makes the task of tracking a difficult one.
"In addition, FTC companies can face the practical difficulty in tracking qualifying and non-qualifying sources of accumulated profits, which are pooled together. This administrative challenge of tracking the different types poses a significant strain on resources.
"Removing the need to identify the sources of funds for the qualifying activities will help to alleviate a significant administrative burden for companies and enhance Singapore's reputation as a pro-business and investor-friendly destination."
4. Encourage Singaporeans to take charge of their health and wellbeing
a. Enhancing tax deductions or providing tax incentives for work-life programs
Singapore already has several initiatives to support companies in adopting flexible work arrangement practices. An example is the WorkPro programme, which offers a work-life grant to help employers defray the costs of implementing work-life strategies.
Said Ms Kerrie Chang, partner, people advisory services: "To continue encouraging the adoption of work-life practices, the government can consider further reliefs such as allowing individual taxpayers to claim a tax deduction for costs incurred in running a home office, if these costs are not reimbursed by employers.
"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."
b. Providing 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.
Said Ms Chang: "Allowing a tax deduction that is not tied to Central Provident Fund (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 (for example, spouse, children, parents or parents-in-law) will encourage taxpayers to be more responsible for the health and wellbeing of themselves and their families. Enabling a tax write-off for health insurance premiums will not only encourage more taxpayers to take up health insurance policies for themselves and their families, but also offer them greater access to preventive and emergency health care."
c. Enhancing personal tax reliefs
Currently, Singapore taxpayers who support their dependent spouse 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.
Said Mr Panneer Selvam, partner, people advisory services: "Given the high costs of living and to recognize 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 and children into the workforce, which can potentially help to ease labour shortage."
d. Incentivising contributions to Supplementary Retirement Scheme
The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, in addition to their CPF savings. CPF savings are meant to provide for housing and medical needs as well as basic living needs after retirement. The SRS was introduced to supplement the CPF savings. Contributions into the SRS are deductible as personal reliefs against taxable income.
Said Mr Selvam: "The SRS is meant to encourage individuals to save part of their income for retirement in addition to CPF contributions. However, a drawback of the SRS is its illiquidity, as premature withdrawals of the monies from an SRS account may incur a 5 per cent penalty and 100 per cent of the withdrawal sum will be subject to tax. This not only negates the tax savings but contributes to additional costs for savings into the SRS.
"We welcome the tax law to be changed such that only the amount equal to the tax deductions allowed in respect of the contributions made to the SRS is taxed."