Reframing Singapore’s investment attractiveness in a post-BEPS world

THE scrutiny on ensuring that large multinational enterprises (MNEs) pay their fair share of taxes has gained momentum globally. In Singapore, Deputy Prime Minister (DPM) Lawrence Wong announced in Budget 2023 that the country is looking to effect the recommendations from Pillar 2 of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) from 2025 onwards.

BEPS Pillar 2 specifies the introduction of a minimum effective tax rate of 15 per cent for MNEs with annual global revenues of at least 750 million euros (S$1.08 billion). In particular, this will impact larger organisations with a global footprint. Small and medium-sized enterprises (SMEs), as well as startups, are unlikely to be impacted by this change.

Singapore has long deployed tax incentives as one of the key policy tools to attract and anchor foreign direct investment (FDI). About 80 of the world’s top 100 tech companies and many of the world’s top fast-moving consumer goods companies call Singapore home – a reflection of the country’s success in attracting the largest MNEs globally. With BEPS Pillar 2, the efficacy of tax incentives in attracting FDI from large global MNEs will no longer be what it was before.

How can Singapore consolidate its appeal and reframe its investment promotion strategies?

A three-pronged approach is key. First, Singapore must continue to strengthen its SMEs to create a vibrant business ecosystem. Second, Singapore should invest in its people to create a compellingly conducive environment that investors will want to be part of and thrive in. Lastly, the country needs to rethink the measure of success in attracting FDI – away from input factors and towards output-oriented metrics – so that it is drawing in investments that matter from a global competitiveness perspective.

Sustaining a vibrant business ecosystem

With the potential dampening impact of BEPS on FDIs, the key to unlock the next phase of growth for Singapore will be to drive a vibrant industry ecosystem – and catalysing close partnerships between foreign investors and large MNEs with local SMEs such that all parties co-create levers of growth and value together.

SMEs represent a significant part of the Singapore economy, making up 99 per cent of all enterprises locally. Supporting local SMEs and ensuring that they are an equally strong pillar of the economy, while complementing the large global MNEs present in Singapore, has long been an objective of the government. Leading SMEs have demonstrated exciting growth potential, going by how some of Singapore’s home-grown brands have expanded and become regional and global companies. That said, there is room for more – and more can be done for – SMEs to grow and flourish if the country were to build up a truly vibrant and diverse business ecosystem.

Several measures in Budget 2023 are helpful. A S$4 billion top-up was made to the National Productivity Fund, with the objective to anchor more quality investments in Singapore and support companies to develop new capabilities, add greater value to domestic ecosystems and upskill local workers.

Additionally, to encourage businesses to engage in research and development (R&D), innovation, and capability development activities, the new Enterprise Innovation Scheme grants a super deduction of 400 per cent for the first S$400,000 of qualifying expenses incurred on R&D conducted in Singapore, innovation collaboration projects with polytechnics and ITEs, registration and acquisition of intellectual property rights, and training activities. This generous level of benefits, designed purposefully to disproportionately benefit SMEs, will help ensure that existing momentum to transform, build innovation capabilities and upskill employees, continues to accelerate.

The government also doubled down on its efforts to develop local champions by enhancing existing schemes such as Scale Up X and other bespoke support for SMEs. Indeed, support for SMEs will need to move from a scheme-centric approach to an enterprise-centric one that caters to the companies’ needs and challenges, as the government had readily acknowledged.

Investing in a skilled workforce

For investors, having a strong pool of skilled talent that can support the growth and operations of their companies is an important factor. With technology advancements, coupled with other forms of disruption, jobs and roles have shifted radically over the last few years. Today, the need for upskilling and capability development has never been more acute, as enterprises look to build a future-ready workforce and adapt jobs accordingly.

This focus on upskilling and reskilling is not new in Singapore, with initiatives such as the Continuing Education and Training Masterplan in 2008 and then the launch of the SkillsFuture movement in 2015. Notable strides have been made, yet gaps in our talent pool continue to exist.

Given tight labour markets globally, the ability to quickly match job vacancies to available skill sets and identify in-demand skill gaps that need to be closed is critical in lubricating the job market and reducing search times. The introduction of the Jobs-Skills Integrator (JSI) recognises this urgency, with the government envisioning a more robust training and placement ecosystem for the benefit of enterprises and workers.

For the JSI initiative to be effective, a relentless push for watertight collaboration within the ecosystem of stakeholders will be key. Solving the issues with the job-skills nexus to facilitate the availability of a skilled workforce to support enterprise growth will create an attractive talent proposition that’s not easily replicable.

Reviewing metrics and choices

While maintaining the country’s appeal to investors, it is also timely for Singapore to consider a new paradigm when measuring the success of our investment promotion and industry development efforts. While incumbent metrics such as employment creation and total business expenditure are still relevant, new measurements such as sustainability, social impact and resource intensity will increasingly be important to broader slates of stakeholders. This means that Singapore may need to recalibrate how it evaluates projects, to focus on what the country wants to be known for as its differentiating competencies and contributions, in a world that is rapidly evolving.

No doubt, the changing global landscape presents a multitude of challenges for Singapore’s economy, requiring economic measures to be multifaceted, targeted and regularly fine-tuned. It is an ongoing journey – and arguably the new normal – that Singapore cannot afford to lose sight of, nor be complacent about, and must address with confidence head-on.

Tan Bin Eng is EY Asean business incentives advisory leader and Johanes Candra is partner, business incentives advisory at Ernst & Young Solutions LLP. The views here are the writers’ and do not necessarily reflect the views of the global EY organisation or its member firms.