Singapore tax policies must change with domestic needs, global trends

THE Committee on the Future Economy set up by the Singapore government has proposed to change the country's economic direction from one that is "value-adding" to one that will be "value-creating". As Singapore looks to transform its economy with this paradigmatic shift in growth focus, transformation must also occur at the level of tax policies given that tax is a cornerstone of the country's fiscal policy. Clearly, change, driven by both domestic growth needs and global tax trends, must be contemplated.

Tireless push for innovation

Innovation has been deemed as possibly the single most crucial driver that can create a step change in our economic repositioning. No doubt, businesses must innovate - whether seen in products, people, processes or business models - so as to remain commercially competitive and viable in a knowledge-based economy.

To encourage businesses to conduct high value-adding activities and create value, tax deduction is provided on spending on qualifying research and development activities. Tax allowance is also granted on the acquisition of qualifying intellectual property rights. The Productivity and Innovation Credit, launched in 2010, provides additional tax deduction or allowance for qualifying activities to spur a broader range of innovative activities.

However, the pervasiveness of innovation and productivity in Singapore's economy remains questionable. Traction among small and medium enterprises (SMEs) has been lacklustre and therefore more targeted schemes to assist SMEs may be a better fit for the purpose going ahead.

Also, as cost pressures partly resulting from the stringent policies on foreign workers are not expected to let up, the government can gear productivity and innovation incentives towards motivating companies that can reduce reliance on labour with innovative business solutions.

Skill, reskill and upskill

In a knowledge-based economy where jobs are constantly reshaped by digital disruptions, it is expected that the nature of jobs will change. Tax policy too must change to further encourage the building of skills so that employees can remain relevant and competitive in an increasingly digital environment.

To equip our people with deep skills and knowledge, the government introduced SkillsFuture, a national movement that emphasises a culture of life-long learning for Singaporeans spanning across schooling years, early career, mid-career and silver years. Through tripartite collaboration, it provides a whole array of education and training options for Singaporeans to develop to their fullest potential.

Given the government's strategy of continually upgrading the calibre and quality of skills in the workforce, tax incentives or tax breaks could be introduced for running training, mentoring or developmental programmes that foster innovation or growth.

Keeping pace with shifts in global tax

Even as Singapore adapts its tax policy to underpin the drivers of domestic growth, equal attention must be paid to the tax developments in the larger external environment. Singapore must delicately balance the need for its tax practices to remain transparent to other tax regulators and jurisdictions and, at the same time, appealing and certain to investors - all of which invariably have an impact on the country's economic reputation and competitiveness.

Among many other global impetuses for tax policy changes, the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD) is arguably the most influential.

Singapore has been proactively responding to BEPS by ensuring that its tax policy and administration are aligned with global rules and OECD principles. These include having general anti-avoidance provisions and transfer pricing provisions; providing guidance on income tax treatment on hybrid instruments; and creating a robust tax incentive regime that is based on real substance where business value is created.

In addition, Singapore is committed to implementing the international standard on transparency and exchange of information on request, as well as participating and contributing to peer review process. To further strengthen its international tax cooperation, Singapore has also recently ratified the Convention on Mutual Administrative Assistance in Tax Matters.

Notwithstanding the authorities' proactive approach, there is room for greater guidance and clarity to taxpayers, for example in areas such as harmful tax practices, deductibility of interest and other financial payments, tax challenges of the digital economy and making dispute resolution mechanisms more effective. More can also be done in being transparent about ongoing treaty negotiations and including tax arbitration clauses in tax treaties.

Another noteworthy trend is that more tax authorities around the world are entering into cooperative compliance agreements with large corporations - and Singapore is not far behind on this. The Inland Revenue Authority of Singapore has been administering the Enhanced Taxpayer Relationship (ETR) Programme since 2008 to help large companies manage and improve their tax compliance.

However, not much is known about the success of the ETR in Singapore. What is certain is that trust and cooperation between the tax authorities and companies are needed to make the ETR work. Perhaps a step forward is to be transparent about what has worked well and for whom. The ETR could even be extended to medium-size firms for strategic purposes so as to expand its positive impact to a larger scale.

The early resolution of tax issues is also important to most taxpayers. A viable way to minimise the need for legal proceedings is to introduce a dispute mediation process that is administered by a professional mediator to help the taxpayer and the authorities arrive at a negotiated position. Early resolution of tax issues will help to keep compliance cost and resources manageable.

Future-ready always

In this new era of economic transformation and increased calls for accountability and transparency in tax governance, Singapore's tax policy will need to remain agile to move in tandem with internal and external influences. We believe the country is steering in the right direction; the challenge ahead is to press on with resolute on tough but necessary changes to tax policies so that Singapore will always remain future-ready.

The views expressed here are the writers' own, and do not necessarily reflect the views of the global EY organisation or its member firms