Winds of change in tax collection in a post-pandemic landscape

THE Covid-19 pandemic has reshaped the global economy and amplified the need for nations, including Singapore, to strengthen fiscal resilience. As we expect to move into a Covid-19 endemic new normal, Singapore needs to write a new tax chapter - one that can robustly secure economic sustainability for future generations.

More than a healthcare crisis, the Covid-19 pandemic has accelerated technology disruptions in almost every nook and cranny. It has brought into sharp focus income and wealth disparities. Along with climate change, the future is nearer than we think.

Like other jurisdictions, Singapore has injected massive fiscal stimulus into the economy to cushion the blow from the pandemic. In 2020 alone, this accounted for almost 20 per cent of Singapore's annual gross domestic product (GDP). The planned withdrawal of S$53.7 billion from its past reserves over 2 consecutive years is equivalent to about 2 decades worth of fiscal surpluses.

Past fiscal discipline has afforded Singapore the means to respond resiliently to current economic shocks and steward long-term national plans. But as Minister for Finance Lawrence Wong acknowledged in his opening speech at the 35th Singapore Economic Roundtable, "the task at hand will only become harder".

Already, we know that Singapore needs to and have committed to several key areas of focus. For one, there is a need to upskill and reskill the workforce. Some S$5.4 billion - more than a tenth of the tax revenue collection in the 2020 financial year - has been set aside in Budget 2021 for traineeships and skills training.

There is also healthcare - where the annual spend has more than doubled from S$10 billion in 2010 to S$21 billion in 2018. Over the next decade, Singapore is likely to spend an additional 3 per cent of GDP on healthcare.

Lastly, there is the fight against climate change, where the "50 to 100-year problem" of rising sea levels could cost Singapore S$100 billion or more.

Given that tax revenue collection accounted for 73.6 per cent of the government's operating revenue in the 2020 financial year, it is little wonder that the quest for new sources of tax revenue has been a top-of-mind concern for the government lately.

Singapore expects an overall budget deficit of S$64.9 billion or 13.9 per cent of GDP for the 2020 financial year - the largest since independence. During this period, tax revenue collection fell 7.3 per cent to S$49.6 billion, based on data released by the Inland Revenue Authority of Singapore (Iras).

Challenges arising from digitalisation

The single largest component of the tax collection is corporate income tax. It declined from 37 per cent of Singapore's total tax collections to around 30 per cent over the past decade and may face headwinds with BEPS 2.0.

Endorsed by close to 140 countries as atNov 4, 2021, the 2-pillar solution under the Organisation for Economic Co-operation and Development (OECD)-led BEPS 2.0 tax framework addresses tax challenges arising from digitalisation.

Pillar One proposes to reallocate profits to jurisdictions where the end consumers are located. This could result in the profits of regional hubs based in Singapore being allocated to other jurisdictions. Pillar Two plans to set a global minimum tax rate of 15 per cent. The latter could dilute the effectiveness of tax incentives that is granted to attract foreign direct investments into Singapore.

As a percentage of GDP, Singapore's tax revenue collection previously hovered between 11 per cent and 12 per cent for about a decade, but has decreased to around 10.5 per cent since 2018. According to the OECD, the average tax-to-GDP ratio among Asian countries was 21 per cent in 2019.

Clearly, it is not a question of whether Singapore needs to increase its tax collection, but rather how to do it. The low-hanging fruit is to rigorously enforce tax compliance!

Already the Iras has embarked on rolling out the tax governance framework to place greater emphasis on internal controls for tax reporting. We expect the Iras to become stricter with penalties to send the message that tax reporting and compliance is to be taken seriously.

This is not only happening in Singapore. Everywhere around the world, there is intensified tax controversy aided by increased transparency and technology.

A distinctive feature of Singapore's fiscal policy is to fund current and future expenditures while building up the reserves. A balanced budget must come before that journey can begin. While the planned GST rate increase to 9 per cent by 2025 can help to cover some of the forward expenditure, it is clearly not enough.

In recent times, about half of the Net Investment Return Contribution (NIRC) is used to fund current spending needs. Drawing further on NIRC to fund spending can impact Singapore's economic robustness in the future.

Singapore has traditionally focused more on taxing income and consumption. There is also taxation on assets such as property taxes and stamp duty, although estate duty was abolished in 2008.

In recent years, the calls for wealth taxation, in Singapore and globally, have grown louder. After all, moving towards a more progressive and equitable form of taxation is in line with promoting an inclusive society.

Almost a decade ago, Prime Minister Lee Hsien Loong shared that Singapore faced a choice of either "low taxes and targeted welfare benefits; or high taxes on all and comprehensive welfare". A high-tax model is unlikely to sit well with the general income-tax paying population. It could even chip away at the economy's competitiveness.

For our children, and their children

While higher-income earners and wealthier individuals can afford to bear a greater share of the tax bill, Singapore is balancing this against the impact that taxes on wealth can have on Singapore's position as a wealth management hub and international financial centre. Indeed, as Wong said during the recent 20th annual Morgan Stanley Asia Pacific Summit, "...if you're not careful, you (could) have a tax in place that doesn't actually end up collecting very much money, (and) it's counterproductive because the wealth just moves around to other places".

The pandemic has accelerated structural shifts. It has also forged new mindsets. To face a new notion of normality requires the courage to do things we do not lightly do or even slaughter sacred cows that we have steadfastly avoided.

Singapore's tax system has served us well for the past decades. But shifting priorities dictate changes to our tax system. Among other pressing needs, many industry sectors are seeking government support, not just to stay afloat but to rapidly adapt and grow in the new normal. This transition to the future takes time, during which the types of government support will need to transform as well. New taxes may be inevitable. Yet with these changes, we take on the burden to invest in our future generations. We pay it forward for our children, and their children.

Should we rethink or even reboot the tax system, the challenge lies in finding that sweet spot - where fair and progressive taxes are palatable while generating enough revenue for sustainable and inclusive growth.

The writers are from Ernst & Young Solutions LLP. Soh Pui Ming is Singapore head of tax and Desmond Teo is EY Asean private tax leader. The views in this article are the writers' and do not necessarily reflect the views of the global EY organisation or its member firms.