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Tax considerations for Singapore's Future Economy

Reforms to the tax regime is timely amid a global drive to shore up tax revenue.

With the government's focus on ''The Future Economy'' and its link to the ageing labour force, this may be an opportune time to reform the life insurance premium relief.

THE announcement of "The Future Economy" committee chaired by new Finance Minister Heng Swee Keat is timely in the face of a weakened global economy and the review of policy measures instituted since 2010 can certainly help chart the direction of Singapore's economy to SG100.

Such recommendations are often the harbinger of major policy announcements. One area that would be of keen interest for the tax community will be the fiscal policies formulated to achieve desired economic and social outcomes.

So what are some of the tax policy issues that the finance minister and his team may be concerned about?

Productivity tax benefits

A central tenet of Singapore's economic restructuring is to raise the productivity of enterprises and workers so as to reduce the country's dependence on foreign labour. The accompanying fiscal policy response was the Productivity and Innovation Credit (PIC) Scheme, which provides significant tax deductions for investments in a broad range of activities along the innovation value chain.

To date, indicators on the efficacy of the PIC Scheme in promoting productivity and innovation are not encouraging. Figures from the Department of Statistics show productivity gains sliding into negative territory in 2012, 2014 and in the first half of 2015, following a promising 2.3 per cent year-on-year growth in labour productivity in 2011.

Likewise, only one per cent of PIC claims in year of assessment 2014 relates to initiatives that are largely research and development (R&D) in nature, although the amount of R&D spending claimed makes up 17 per cent of the total PIC expenditure . The majority of PIC claims (97 per cent of all claims and 77 per cent of total expenditure) relate to acquisition and leasing of automated equipment such as computers and servers, as well as staff training.

Given its high price tag (some S$9.1 billion over eight years), one area of focus for the committee may be to examine the effectiveness of PIC in promoting productivity and innovation. The committee may also wish to mull over whether future productivity enhancement incentives should include some measure of accountability on the part of businesses to actually achieve productivity growth; after all, buying a new laptop does not necessarily make one more productive.

Furthermore, companies that claim PIC on R&D spending have come under intense scrutiny from the Inland Revenue Authority of Singapore (IRAS) and often have to prove whether the project constitutes R&D as opposed to routine or cosmetic modifications. It is an "all or nothing" approach. Perhaps a separate category of PIC deductions (with lower benefits) could be introduced for spending on non-routine upgrading of products or processes using available technology, but resulting in improved functionalities or productivity. This could encourage companies to actively engage in continuous upgrading while minimising claim costs.

Insurance premium relief

Rising medical and healthcare costs in Singapore have become key concerns of the populace. With the government's focus on "The Future Economy" and its link to the ageing labour force, this may be an opportune time to reform the life insurance premium relief, which a large majority of Singapore citizens and Singapore Permanent Residents are unable to benefit from.

Broadly, only individuals whose mandatory employee Central Provident Fund (CPF) contributions are below S$5,000 per annum qualify for the relief. This translates into a gross monthly wage (excluding employer's CPF) of S$2,083 or less, which is below the gross median monthly income of S$3,250 based on statistics by the Ministry of Manpower as at June 2014. Ironically, the group of taxpayers that benefit from life insurance relief are mostly foreigners as they do not need to contribute to CPF.

Increasing the cap for life insurance relief and introducing a separate relief for medical insurance as a supplement to the current employee CPF contribution relief would be a welcome change. In the spirit of promoting responsibility to the family, the government could also consider extending the relief to premiums paid on life and medical insurance policies for dependent children and elderly parents.

Goods and Services Tax

For most Singaporeans, the golden question is whether the Goods and Services Tax (GST) rate will increase. As GST collection is now almost a quarter of the country's total tax collection, the government may perceive a lesser need for a GST rate increase in the short term. In the longer term, as with many other countries, the government will need to balance fiscal spending against sources of revenue in which case the finance minister will probably review the rate and make an appropriate decision.

A less eye-catching, but equally important issue is whether the scope of GST would be broadened due to, among others, the pervasiveness of the digital economy. Presently, paying a fee to an overseas vendor to stream movies online would not attract GST in Singapore. However, paying for a Blu-ray disc or going to the cinema to enjoy the same movie would attract GST.

Following recent discussions by the Organisation for Economic Co-operation and Development (OECD) on levelling the playing field between resident and non-resident vendors as well as to plug potential GST "leakages", countries in the region are moving or have already moved to impose GST on such digital supplies. This is an area that may well be on the new finance minister's to-do list.

International tax developments

The committee's report containing key recommendations would be issued in the midst of an international drive to combat tax avoidance under the auspices of the Base Erosion and Profit Shifting (BEPS) project established by the OECD. Fundamentally, the BEPS project is about ensuring profits are taxed where substantive economic activities generating the profits are performed and where value is created. This is in direct response to tax planning techniques and structures used by multinational corporations to reduce or avoid, albeit legitimately, taxes on their cross-border investments or transactions.

One key priority for the committee may be to look at how Singapore can remain an attractive destination for foreign investments in a BEPS environment. This entails close monitoring of developments in the OECD's BEPS project and adopting proposals that are in Singapore's interests and economic priorities, but at the same time, ensuring Singapore does not become an outlier. Specifically, Singapore's incentive and holding company regimes may need to be reviewed for their relevance and acceptance in the post BEPS world.

Impact of fiscal policies

The government has a proven record of identifying changing economic and social objectives and steering fiscal policies towards such purposes. A case in point is the internationalisation of Singapore companies. Tax policies such as the merger and acquisition tax allowance, double tax deductions for overseas marketing and investment development spending, exemption of certain foreign sourced income and the International Growth Scheme - which offers approved companies a reduced 10 per cent tax rate on qualifying overseas income - have been implemented to grow Singapore's "external economy".

We are confident that "The Future Economy" committee is well placed to recommend the necessary reforms to our tax regime while watching out for possible headwinds amid a global drive spearheaded by developed countries to shore up tax revenue.

  • The writers are head of tax services, tax partner and senior manager respectively at Deloitte Singapore. The views expressed are their own