Time for Singapore to grab the tax rules by the horns?

IN PINPOINTING specific uncertainties to Singapore's revenue base in his Budget speech last year, Deputy Prime Minister and Finance Minister Heng Swee Keat pointed out then that there were "ongoing discussions to revise international tax rules under the Base Erosion and Profit Shifting (BEPS) project".

Since then, he has continued to "double down" on how the BEPS project could significantly impact Singapore's tax fundamentals and cause it to lose corporate income tax revenue.

This message of being constrained in pursuing our own tax policy mix - or what some may blatantly call a dilution of tax sovereignty - persisted subtly in his address this year with increased intensity, as noted from his use of stronger phrases such as ". . . will adversely impact".

Ending tax avoidance

Over the last decade or so, the Organisation for Economic Co-operation and Development (OECD) has been especially influential in shaping international tax developments. Under the OECD/G20 Inclusive Framework on BEPS, many countries have been collaborating to put an end to tax avoidance strategies that exploit gaps in tax rules.

With a view towards ensuring everybody pays their fair share of taxes, the BEPS-related initiatives look set to result in the most fundamental change to the international tax rules since the 1920s.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Beyond our shores, BEPS-specific positioning statements are similarly mounting.

In his 2020-21 Budget speech, Hong Kong's financial chief Paul Chan warned that "new developments in the international tax arena will affect the competitiveness of Hong Kong's tax regime", and specifically suggested the OECD's proposal for imposing a global minimum tax rate (GMTR) may diminish the attractiveness of tax-friendly hub jurisdictions in the eyes of multinationals.

The broad thrust is that if the tax paid by a multinational in Singapore is lower than the GMTR, its parent company will be subject to additional taxes or defensive measures imposed by the jurisdictions where they are located. If implemented, this could affect many multinationals operating and benefiting from incentivised corporate tax rates in Singapore.

The types of tax incentives and the choice of tax policies in Singapore have evolved with the country's economic development, and bilateral avenues (via the technical term of "tax sparing clauses" in tax treaties) were frequently used in the past to ensure that tax forgone by Singapore because of its tax incentives, was not subsequently picked up by other countries.

This new dimension of GMTR is less easily solved by virtue of it being more multilateral (over 135 countries are involved in the BEPS discussions) and multi-faceted in nature. It could arguably even pose existential challenges to some longstanding tax incentives here.

For now, since international consensus on the GMTR has not yet been reached, it is premature to do a major overhaul of our tax incentives' framework. But this should not be ruled out for future budgets within this term of government.

In a similar vein, unilaterally pursuing major local tax reforms may be futile, and it is therefore of little surprise that many of the tax changes (mostly tweaks) were detailed in an annex, rather than in the main speech.

All hands should be on deck

With most sectors contracting last year amid the worst full-year recession since Singapore's independence, the perceived growth in high-profile family offices seems a potential bright spark.

Recent reports in February of Google co-founder Sergey Brin - the world's ninth richest person - setting up a family office in Singapore to help manage his wealth, also pointed to the rush by super-rich families opening family offices here, including hedge fund boss Ray Dalio.

There may be further opportunities with the Monetary Authority of Singapore signalling that the Variable Capital Company (VCC) framework, launched in January 2020, may soon be relaxed to also accommodate single-family office (SFO) structures as part of a VCC 2.0 drive, thus allowing high-net-worth families more choices here.

Additional Budget debates on attracting more tycoons, including spin-off topics on fostering philanthropic causes in Singapore (mentioned briefly in Mr Heng's speech albeit in a wider context) and renewed conversations on whether to broaden our wealth tax net, should be encouraged.

The wealth tax discussion is not necessarily new in the Singapore context, but the surrounding fiscal circumstances certainly are.

An OECD tax policy study in 2018 showed that some countries have already expressed a renewed interest in net wealth taxes as a way to raise revenue. As revenue from income and consumption-based taxes declines with struggling economies, this call may intensify in the days ahead.

That said, in our context this clearly needs to be weighed against other factors such as a potential impact to our competitiveness and pragmatic considerations (for instance, something that can be "tax-planned away" would likely not pass muster).

A vibrant Budget

The commitments in this Budget to build a Singapore that is economically vibrant, socially cohesive, environmentally and fiscally sustainable are laudable. In this new year of the Ox, I especially applaud that there was no bulldozing through strategic tax reform measures, considering the multilateral dimensions and complexities of the day.

• The writer is tax practice leader at Baker Tilly Singapore