A balancing act – Singapore’s tax policy in a brave new world 

BUDGET 2024 demonstrated the government’s firm focus on providing opportunities and assurance to all of Singapore, and sends a strong message of its commitment to pursuing sustainable growth, maintaining an innovative and vibrant economy while safeguarding what makes the nation resilient.

The ambitious agenda requires a delicate balancing act. Increased spending necessitates more revenue generation, part of which will likely come from additional taxation. However, raising taxes risks damaging Singapore’s global economic competitiveness. The multibillion-dollar question is – how can Singapore strike the right balance while retaining its position as a preferred location for business and talent?

From a policy perspective, the government has made notable changes over the recent years to increase tax revenues fairly and sustainably. For instance, Singapore’s goods and services tax (GST) rate has risen to 9 per cent – a rate that is closer to regional counterparts but still lower than other developed economies. The government has also declared that there are no further plans to raise the GST until 2030.

In 2022, property taxes increased by 12.6 per cent due to rising property tax rates and higher property annual values. Market conditions and the adjusted annual value bands announced during Budget 2024 may moderate property tax collections in coming years.

Individual income tax rates were raised for higher earners in 2023. Further rate increases may be difficult, as these must be balanced against Singapore’s attractiveness as a talent hub. Wealth taxes have also been debated. However, the experience of other countries has shown that capital is highly mobile. A wealth tax may therefore do more harm than good, especially given Singapore’s position as a leading wealth management hub.

Should there be a further need to raise revenue to balance spending, corporate taxes could play a role. Where corporate tax is concerned, all eyes are on the implementation of Pillar 2 of the OECD’s Base Erosion and Profit Shifting initiative. This involves the introduction of Global Minimum Tax (GMT) rules that affect groups with consolidated revenue above 750 million euros (S$1.1 billion). Such groups may now have a minimum effective tax rate (ETR) of 15 per cent in the low-tax jurisdictions in which they operate. With a number of multinational enterprises (MNEs) in Singapore currently having tax rates below this minimum (due to tax incentives and concessions), these rules are expected to bring in more revenue, even if more will also have to be spent to retain Singapore’s competitive edge.

Impact of GMT on Singapore

Deputy Prime Minister (DPM) Lawrence Wong announced in Budget 2024 that Singapore will implement the GMT rules and introduce a Domestic Top-Up Tax (DTT). After all, if MNEs operating in Singapore are obligated to pay higher taxes, then Singapore should collect these taxes rather than have the tax contributed elsewhere (through the Income Inclusion Rule at the ultimate parent location).

Academics have attempted an estimate of such additional revenues. In December 2022, the EU Tax Observatory estimated based on 2017 data that Singapore would raise 7.9 billion euros (S$11.4 billion) via a DTT.

Accounting for the growth in corporate taxes raised since 2017, a proportionate adjustment needs to be made. The Inland Revenue Authority of Singapore reported a 2022 collection of S$23.1 billion in corporate income tax (CIT), which is an increase of 54 per cent over the S$15 billion in CIT collected in 2017. Hence, the amount raised via DTT may be higher than the estimated S$11.4 billion.

However, as DPM Wong observed, it would be difficult to precisely estimate how much additional revenue will be collected. There are many unpredictable moving parts – such as MNEs’ profitability, their reactions to the introduction of the GMT and the DTT resulting in a shift of operations elsewhere, and other global developments.

Providing MNEs with clarity and certainty

The government has plans to reinvest the additional DTT revenue and balance out the impact of the GMT initiative on Singapore’s competitiveness.

Budget 2024 contains several support measures such as new incentive tiers and the Refundable Investment Credit (RIC) scheme. The RIC supports up to 50 per cent of qualifying expenditures, which is offset against any income tax payable. Unutilised tax credits will be refunded to the company as cash within four years of it becoming eligible for receiving the credits. The RIC mitigates the impact to the jurisdictional ETR as it can be accounted for as income as opposed to a reduction in covered taxes.

Schemes such as the RIC can be specifically targeted, encouraging quality investment and business activities that are beneficial to Singapore.

Besides the quantum of support, other factors are as relevant. Upfront clarity and certainty of the benefits are also a major deciding factor for MNEs. Investment decisions are planned well in advance, and therefore any offsets from potential grants or the RIC should be articulated upfront and be sufficiently attractive.

Another key policy issue would be the resources required to administer these schemes, especially if the aim is to offset a tax increase of this scale. Managing MNEs’ incentivised tax rates could be done in broad strokes, while the review and approval of individual RICs may require dedicated effort by the authorities, taxpayers and advisers.

Cross-jurisdiction considerations

As the GMT utilises a jurisdiction-level calculation, its implementation will increase tax authority scrutiny of cross-border related party transactions and the transfer prices applied. Indeed, due to the global nature of the GMT, tax authorities may become interested in transactions that do not even involve their jurisdiction.

Existing transfer pricing rules that are broadly accepted by most countries govern the pricing of transactions between related parties, requiring transactions to be at arm’s length. Conceptually, this prevents MNEs from adjusting related party transaction flows to unfairly manage their tax exposure across jurisdictions. However, transfer pricing rules are susceptible to differences in interpretation – disagreements may arise between taxpayers and authorities, as well as between tax authorities.

Forging ahead from a position of strength

As global trends go, the world of the future is likely to be even more fragmented, and more unpredictable. Maintaining Singapore’s competitiveness as an open economy for businesses is crucial. But equally, it is heartening to see the government embarking on an ambitious agenda that strengthens the country’s social cohesion and enables it to “turn every challenge into opportunity, and every vulnerability into strength”.

Thanks to the efforts of previous generations, Singapore is well positioned to chart a clear path forward.

The writers are from Deloitte Singapore. Aaron Lee is a tax partner and Kevin Ng, a tax senior manager.