In Short brings to you selected Opinion pieces each week in bite-sized portions. This is a shorter version of the full commentary.
Among the tax priorities for Budget 2022, which will be delivered on Feb 18, three stand out and are included in many wish-lists: the goods and services tax (GST), wealth taxes and taxes on large multinational enterprises (MNEs).
GST hike: Sooner is better
The GST is scheduled to be raised from 7 percent to 9 percent before 2025. There have been many calls for the government to consider delaying the hike to avoid adding to inflation, or at least deferring it for sectors that are still reeling from pandemic-induced restrictions.
While such concerns have merit, the case for delaying the GST increase on their account is weak. A $6 billion assurance package of GST offsets, which is already in place, will cushion the impact of the hike on most households for five years, and for ten years in the case of low-income groups, so the GST will hardly add to inflationary pressures as experienced by most people. Such pressures should be countered by diversifying imports, building buffer stocks of essential goods and exchange rate policy, not by postponing the GST hike.
And although there are troubled parts of the economy, especially in the service sector, it would be more effective to support them through targeted subsidies - for which there is a good case - than by delaying the GST increase on a selective basis.
Revenue concerns are another reason for a GST hike to come sooner rather than later. Having run up cumulative budget deficits of more than $75 billion over the last two years, there is some urgency to rebuild public finances. GST is one of the largest and most stable sources of revenue and cannot be easily substituted by any other tax.
So although the government could decide on a two-step hike, one percentage point at a time, over the next two years, as in 2003 and 2004, it would be preferable to go ahead with the two-percentage point increase in one shot, latest by January 2023.
Looking beyond the GST hike, Singapore should also consider reducing the threshold for companies to be registered for GST, which at S$1 million of turnover per year, is high by international standards. Reducing the threshold in stages in future would bring more companies into the tax net and add to revenue resilience.
Wealth taxes: Avoid loopholes
There is broad support for new wealth taxes both to reduce wealth inequalities and raise revenue. Possible wealth taxes could include capital gains taxes, property tax surcharges as well as taxes on high value items such as private jets, yachts and sports cars.
Many wish-lists call for wealth taxes be designed carefully to avoid downside risks. One concern is that poorly designed wealth taxes can lead to "wealth-flight," creating incentives for rich individuals to move their wealth to other countries or avoid taxes, leading to higher tax burdens on the middle class.
It would be prudent to design wealth taxes to avoid loopholes. For example, the Singapore International Chamber of Commerce proposes collecting wealth taxes at the point of transaction rather than on declared wealth, which would be complicated to assess and lead to tax avoidance. To deter wealth flight, it also proposes a high "exit tax" of at least 30 percent on wealth that would be moved out of Singapore, although that might also discourage wealth from coming in.
One way to avoid burdening the middle class would be to exempt from wealth tax the sale of a first property and/or owner-occupied properties. The latter would spare the majority of property owners but also lead to substantially lower revenues. Exempting capital gains on sales of shares and other securities would also avoid a negative impact on the middle class as well as Singapore's securities markets.
There are also calls for greater progressivity in existing property taxes as well as stamp duties - for example, by imposing higher taxes on high-value properties and additional tiers on buyer stamp duties. with higher rates applied for more expensive properties.
Wealth taxes will need to be designed to simultaneously address concerns around reducing inequalities, preventing property price spirals and raising revenue.
Taxing large MNEs: Clear the air
Under an international agreement reached last year, large MNEs with revenues of €750 million (S$1.15 billion) and above will be required to pay a global minimum tax of 15 percent from 2023. So if they currently pay less than that in any jurisdiction, they will need to top up the balance to their home governments.
There are around 1,800 such MNEs in Singapore, and many pay effective tax rates of well below 15 percent because of various tax incentives. Once the global minimum tax comes into force, such incentives will be redundant.
Singapore would need to raise the effective tax rate for these companies to close to 15 percent, which would add to revenues, but at some cost to the companies. To encourage them to remain and continue investing in Singapore - as well as attract new investments from other large MNEs - many wish-lists call on the government to focus on non-tax considerations.
While Singapore is already attractive for investors for reasons other than tax, it could introduce new non-tax incentives, such as investment credits - a deduction of a percentage of a qualifying investments from tax liability and subsidies for certain types of investments.
With MNEs under increasing pressure to finalise their tax planning strategies, and given their importance to the Singapore economy, the government would need to clear the air on the tax policies they will face in the future.