Getting to grips with Singapore's tax profile

Singapore

SINGAPORE is among the Asia-Pacific jurisdictions that saw an increase in tax revenues in 2017, says the OECD. As tax increasingly becomes a key factor to consider for business investments, companies must understand the tax systems in the jurisdictions that they have an interest in.

Singapore is one of the strongest leaders in the Asia-Pacific in terms of growing its tax revenues - not only in the past year but also across the last decade or so.

According to the recent Revenue Statistics in Asian and Pacific Economies 2019 report by the Organisation for Economic Co-operation and Development (OECD), the nation saw a one percentage point increase in its tax-to-GDP ratio (that is, how much of GDP is made up of tax revenues) between 2016 - 2017.

The report covers 17 jurisdictions in the Asia-Pacific region and is based on data available up to 2017. More broadly, it found that tax revenues in the Asia-Pacific had rebounded in 2017. Placed fifth among Asia-Pacific jurisdictions, Singapore is one of the stronger performers. Six other economies in the Asia-Pacific had lower ratios in year-on-year comparison.

This is further confirmed by a Sept 2 media release from the IRAS, in which it announced that it collected S$52.4 billion in tax revenue in financial year 2018/19, an increase of 4.4 per cent from the previous year.

That said, Singapore's tax-to-GDP ratio is still lower than the OECD average, indicating that it may well increase in the future, as the country not only grows strongly, but continues to compete with global peers.

That growth seems to be happening already, as illustrated by 2016-17 OECD data, with corporate income tax having contributed the highest share of tax revenues in Singapore in 2017.

From a tax mix perspective, in nine of the Asia-Pacific economies covered in the OECD report, taxes on goods and services - chiefly value-added taxes (VAT) and goods and services taxes (GST) - accounted for the largest share of tax revenues in 2017. VAT/GST revenue ranged from 13.2 per cent in the Philippines to 44.4 per cent of total tax revenue in the Cook Islands.

Singapore lies near the lower end of the regional range, with GST making up 16.5 per cent of the government's revenues in 2017.

In most of the eight remaining countries, income taxes provided the main share of tax revenues. Across the Asia-Pacific economies, revenues from corporate income taxes (CIT) in 2017 ranged from 9.1 per cent of total tax revenue in Samoa to 41.5 per cent in Malaysia.

Singapore's share of CIT revenues was 29.9 per cent - which is relatively high, and more than three times the OECD average for the same year. Personal income tax contributions, on the other hand, stood at 16 per cent for Singapore, lower than the OECD average of 24 per cent.

With the proposed GST rate increase to 9 per cent slated to occur between 2021 and 2025, it is expected that the proportion of GST revenues making up the government revenues will grow in the years to come. The CIT rate at 17 per cent remains competitive, and is likely to continue as a key revenue contributor.

When businesses consider a particular jurisdiction for making long-term investments, many factors come into play. These include political and regulatory stability, the availability and quality of the workforce, the availability of natural resources, infrastructure and communications.

Increasingly, tax is becoming a key criterion in investment decisions - both in terms of policy and its effective administration.

Broadly speaking, capital investment can move freely between countries with open markets. But where other investment conditions are similar, tax costs may become a differentiating factor in deciding on an investment location.

It is not just the corporate income tax rate that affects the tax burden on investments, either.

Tax costs are further affected by deductions for depreciation, inventory expenses and interest payments. Other taxes related to a company's capital expenditures - notably sales taxes on capital purchases, transfer taxes on property and financial transactions, and asset-based levies - may also contribute to the tax burden.

The nature of tax administration also matters. Increasingly, efficient and business-friendly tax administrations have proven to appeal to investors. Indeed, companies would not want to invest heavily into a new project only to find that the local tax administration is aggressive and distrustful of business, delaying refunds, imposing fines and generally making it difficult to repatriate any profit, once made.

In this regard, Singapore's stable, business-friendly tax policy position puts it in good stead. Its tax administration is open, transparent and constructive, supporting businesses and inbound investors in a friendly, open and ultimately, fair way.

Clearly, not all tax systems are created equally. Structural economic factors, such as the importance of agriculture to an economy, openness to trade and the size of the informal economy, are key determinants of tax-to-GDP ratios.

For any business making an overseas investment, this means they must have a deep understanding of both the tax policy and tax administration of the target jurisdiction.

This goes beyond reading up on the latest Budget or Finance Act; instead, businesses need to more fully understand the country's overall tax policy direction, the structural factors that may influence government policy and, perhaps most importantly, the experiences and trajectories of other jurisdictions that have trodden a similar tax policy path.

Armed with this knowledge, businesses can turn tax into a value creator, and not just a cost centre. For any cost-conscious enterprise, this is exactly the level of insights the leadership will call for.

The views expressed here are the writer's and do not necessarily reflect the views of the global EY organisation or its member firms.