Tweak tax protocol for bad debt

The Singapore Budget 2017 recognised small and medium-sized enterprises (SMEs) - which make up 99 per cent of our enterprises, employ two-thirds of our workforce and account for 50 per cent of our gross domestic product - as the heart of the nation's economy.

Yet, it is also widely recognised that there is an unmet gap in readily available, flexible and timely financing options for SMEs, one which the rise of marketplace lending, or peer-to-peer lending, will help to fill.

Currently, all interest earned on peer-to-peer lending platforms (minus insurance fees and commissions) is taxed without allowing for tax credit for bad debt or write-offs, which is at odds with the generally accepted tax principal of matching expenses to income.

Previously, such an allowance could have been easily abused if, for example, a person lends money to his relative, who then turns around to say he cannot pay, so the person asks for a tax write-off.

The advent of peer-to-peer lending platforms allows individuals and corporations to act as micro-banks in a transparent manner while limiting the individual lender's ability to commit this type of tax fraud.

Singapore's use of tax policies to encourage certain behaviour, industries and practices is well established.

Therefore, the Inland Revenue Authority of Singapore should consider letting peer-to-peer lenders recognise bad debt as a real cost of doing business and allow such losses to be carried over to another year instead of limiting them to current-year deductions.

Regardless of how carefully loans are scrutinised, in the long run, loan write-offs are inevitable. As they have a clear, undisputed and direct link to income and interest generation, they need to be tax-deductible.

Patricia Howe Tsan Peck (Ms)

A version of this article appeared in the print edition of The Straits Times on January 15, 2018, with the headline 'Tweak tax protocol for bad debt'. Print Edition | Subscribe