Potential wealth tax raises concern over Singapore's competitiveness as wealth hub

Singapore

THE imposition of wealth taxes, such as a reinstatement of estate duty and introduction of investment-related taxation such as a capital gains tax, is widely expected to dent Singapore's competitiveness as a wealth management hub.

Consultants and banks contacted by The Business Times believe that the impact - should various forms of wealth taxation be introduced - is likely to be felt more among the high net worth (HNW) cohort of individuals as opposed to the ultra wealthy and family offices. Banks typically classify those with net assets of at least US$1 million as HNW; the ultra HNW net assets threshold may start at US$30 million.

Based on a database of worldwide tax rates compiled by PwC, an outright tax on net wealth or worth is relatively uncommon. Out of over 150 countries, roughly a dozen have some form of wealth tax, including Spain and Switzerland.

The idea of wealth taxes, however, is increasingly under consideration as governments globally are under pressure to find sources of revenue to shore up deficits which have deepened with the pandemic.

In BT's compilation of 10 jurisdictions that are recognised as wealth management hubs, Singapore is among the most competitive in terms of taxation. Taxation data is extracted from PwC data and excludes property-related taxes. The 10 countries were those that were ranked top 10 in Deloitte International's wealth management centre ranking in 2018.

In Deloitte's overall competitiveness ranking, Singapore was ranked second highest after Switzerland, followed by Hong Kong. The UK was ranked fourth, and the US sixth.

Interestingly, Deloitte's report said the factor that saw the biggest reduction in importance was tax and regulation. In taxation, tax treaties were seen as more important for clients than taxation in the wealth management centre itself.

Deputy Prime Minister and Finance Minister Heng Swee Keat said during the Budget debate recently that Singapore has scope to review wealth taxes, even as it raises the goods and services tax (GST) and implements new taxes to fund increased social spending.

Sources said tax competitiveness isn't the only factor driving the movement of capital to certain jurisdictions. Other factors include vibrant and open capital markets, ease of capital flow, political stability and a strong legal system, and quality of life.

The US and the UK, for example are mainstays in global wealth management despite high-tax regimes; their respective personal income tax rates are at 37 and 45 per cent. In Capgemini's World Wealth Report 2020, North America's share of the global US$74 trillion wealth pie in 2019 was around 29 per cent. Asia-Pacific's share was 7.9 per cent.

In 2019, North America's growth rate for wealth surpassed the Asia-Pacific for the first time since 2012, thanks to a robust stock market.

Lee Woon Shiu, DBS Private Bank regional head of wealth planning, family office and insurance solutions, said: "For the US and London, the depth of their capital and forex/commodity markets and access to some of the most prolific private equity dealmakers in the world are some of the more compelling reasons that continue to appeal to investors despite their tax regimes.''

Lim Li Li, Bank of Singapore head of global investors and family offices, says wealth taxes may have an impact on investors looking to set up a family office here as it could bring additional costs and complexities. "The impact from wealth taxes will depend on where it is levied. Taxes on capital gains and inheritance could be perceived more negatively compared to personal income. That said, the decision on the location of a family office does not hinge solely on costs.''

Chris Woo, PwC Singapore tax leader, says the idea of a wealth tax "warrants a more in-depth study to address some of the efficiency, equity and administrative aspects''.

"This can relate to who should be subject to such wealth taxes; what assets should fall in the ambit; what is the valuation basis; what is the timing of collections of such cash taxes; etc. It is complex and the impact can be far reaching. It would be worth calibrating this against other countries that have similar taxes.''

Mr Woo adds: "Ultimately, the most sustainable way to increase tax revenue is to grow the economy so we can achieve a 'win-win-win' situation - businesses earning more revenue, individuals earning higher wages and, consequently, an increase in tax revenue collected.''

Singapore abolished estate taxes in 2008. Withers KhattarWong partner (private client and tax team) Mahesh Kumar says any move to withdraw various tax exemptions for individuals or to reinstate the estate duty can hurt Singapore's attractiveness as a wealth hub.

"While choosing alternative residency options to live and manage their global assets, wealthy families often consider a country's tax competitiveness and certainty with respect to tax and regulatory matters.

"It is important for Singapore to continue attracting wealthy families, entrepreneurs, innovators and thought leaders since they add considerable value to the overall ecosystem.''

KPMG partner and head of tax Ajay Kumar Sanganeria says estate duty collection prior to its abolition was modest at around S$70-75 million a year. "The re-introduction of estate duty would discourage wealthy overseas individuals from bringing their assets into Singapore...

"Ordinary Singaporeans may also see the estate duty as an additional layer of tax imposed on individuals who have worked hard, paid taxes on their income, and accumulated their wealth through their efforts over the years.''

Desmond Teo, EY Asia Pacific family enterprise leader, says the reintroduction of estate duty may send mixed signals. "(Estate duty) affects the middle and upper middle income groups disproportionately compared to ultra HNW individuals."

He added: "In today's digital age, economies are borderless where capital, assets and talent are fluid and can flow out as easily as they flow in.''

Ravi Makhija, Capgemini managing director (financial services Asia), says Singapore has about 130,000 HNW individuals with total financial wealth of US$654.8 billion, an increase of 4.5 per cent in the HNWI population between 2018 and 2019.

" Given the current scenario, we anticipate even with the implementation of any form of wealth taxes measures, Singapore should continue to strengthen its position as the region's wealth management hub due to its strong, robust market with relative geo-political stability and strategic location."