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S'pore tax: Bold steps for a stronger future
IN his Budget 2017 round-up speech in Parliament, Finance Minister Heng Swee Keat emphasised that "at a time when other economies are lowering corporate tax rates, Singapore must do what it can to remain an attractive place to work and do business".
In a short span of 50 years since independence, Singapore has successfully evolved into a globally significant first world country.
It is however, at an inflexion point. The business environment continues to be volatile and growth sentiment remains weak. The regulatory and tax environment is necessarily tightening as broader society and community demand greater accountability and governance. Rising costs and the need to internationalise continue to be the top concerns of Singapore businesses today, while a changing (ageing) social demographic puts new dimensions on fiscal policy.
The economy is fuelled both by foreign direct investments by multinational corporations looking to grow in this region, and homegrown enterprises seeking to upscale and venture beyond Singapore. The island-state is a melting pot of such enterprises operating across a wide spectrum of industries. Increased social spending and many other needs in Singapore press it to seek revenue-raising measures.
So how might Singapore recalibrate its tax system to raise revenue but remain competitive?
The Singapore Budget 2017 is forward-looking - with a big focus on building a sustainable and prudent fiscal situation. Recent Singapore Budget announcements have been modest on major tax changes, with just small tweaks to the core tax system. But, now more than ever, Singapore needs to take bold steps to continue enhancing its tax regime to continue to help the economy remain competitive through new challenges.
To celebrate SG50 in 2015, PwC Singapore published a white paper on Singapore's tax policy titled Singapore: Sovereignty, Society, Substance, Success, with recommendations on how greater substance requirements, transparency and enhanced certainty will help build a sustainable and competitive tax system for the country:
- Substance and transparency to underpin its incentive regime
Singapore should continue to use tax incentives to attract the industries it believes will add value to the economy. We recommended a number of enhancements including (i) increasing transparency around incentives through publishing industry summary data about the schemes (such as the broad requirements, the number of taxpayers enjoying the incentives, the economic spin-offs anticipated); (ii) strengthening compliance for incentivised companies; and (iii) enhancing inclusiveness by extending these incentives and applying these on a larger scale to local enterprises.
It is heartening that the Singapore Budget 2017 has incorporated a number of these concepts, including the latest enhancements to the incentive regime such as the new Intellectual Property Development Incentive and enhancements to the Global Traders' Programme incentive.
These developments are forward-looking as they align Singapore's regime with the prevailing international standards and yet continue to incentivise greater growth in the economic base and therefore tax revenue. This is critical for safeguarding Singapore's reputation as a responsible member of the international community.
We continue to urge the authorities to consider how to introduce further transparency within the incentive programmes. We strongly believe these will go a long way to securing added tax certainty for the business community.
While there is an argument that "opening our kimono" exposes Singapore to give away its competitive edge, we believe that it will instead attract more investments. Having greater transparency will also help provide the certainty needed to promote foreign direct investments amid an increasingly extensive tax audit environment. Singapore can be agile in making adjustments to stay ahead. Also, can the competition really match the many other intangible qualities that Singapore has that attract investors and growth in the first place?
- Tax certainty through double tax treaties
Tax treaties are key for securing tax certainty on cross-border transactions and trades. Whilst Singapore admittedly already has a strong treaty network, a number of treaties with its key trading partners (such as Australia , Indonesia) are not in keeping with the OECD Model Convention. A number are also less favourable compared to the treaties which these countries have recently concluded with others. Enterprises need up-to-date tax treaties reflective of the trade dynamics to remain competitive in this challenging economic climate.
As Singapore's firms are encouraged to expand beyond its shores and explore new markets, a key weak spot remains - the country does not have comprehensive tax treaties with key trading partners such as the United States and Brazil. These need to be rectified quickly to ensure that Singapore enterprises will have a level playing field against enterprises from other countries.
- Tax certainty in cross-border transactions and dispute resolution
As the global tax environment continues to tighten, cross-border tax disputes (in particular, on transfer pricing matters) will continue to increase. The ability for Singapore to play a key role in resolving international tax disputes can be a key differentiator in enhancing its business and regulatory ecosystem.
As cross border disputes increase in frequency and substance, it would be extremely meaningful if the IRAS could take the lead in agreeing on specific transfer pricing positions with key trading partners (such as broad principles to be applied for determining transfer pricing positions and arm's length margins).
While we appreciate that these developments may require significant efforts and time of the authorities, we are of the view that such an initiative will be pioneering and will go a long way to ensuring tax certainty (and competitiveness) for local enterprises.
THE TIME IS NOW!
A conducive business environment needs to be backed by a competitive but sustainable tax system. This will require Singapore's tax system to be backed by robust policies able to withstand peer reviews on how well the country implements these new standards on transparency and substance. Taxpayers should accordingly prepare themselves based on these new standards.
Some of our suggestions will undoubtedly be viewed as "inconvenient" and require a change in mindset. These may also seem "painful" in the current economic context. Undoubtedly, taking major steps to upscale Singapore's tax system requires strong commitment and will for change. Singapore has consistently demonstrated its ability to embrace challenges to lay the foundation for a stronger future. We are confident of that and the time is now!
- The writers are from PwC S'pore. Chris Woo is tax leader and Vivienne Junzhao Ong is a tax director specialising in international tax