Broadening Singapore's tax base to sustain long-term growth

IN 2017, the Committee on the Future Economy spelt out bold strategies to take Singapore forward over the next decade. Its report recognised that Singapore may have to raise tax revenue over time to meet rising domestic needs.

Indeed, tax collection will need to increase in order to build better infrastructure, deepen digital capabilities, strengthen innovation and prepare for an ageing population. To ensure long-term fiscal sustainability, Singapore may have to cast the tax net further afield.

As it is, the government is already moving towards a more progressive tax regime. Signs that higher-income earners will have to bear a heavier tax burden have already emerged over the past few years.

Budget 2013 announced an increase in property tax for owner-occupied properties from a scale of 0 per cent to 6 per cent to a steeper, progressive scale of 0 per cent to 16 per cent. Budget 2015 raised personal tax rates for taxpayers with chargeable income of S$160,000 or more. More recently, Budget 2018 lifted the buyer's stamp duty from 3 per cent to 4 per cent for residential properties exceeding S$1 million. Is there room then, to increase taxes elsewhere?

Corporate income tax already very low

Singapore's formerly sky-high 40 per cent corporate income tax rate was cut to 33 per cent in the 1987 tax assessment year and has been on a downtrend since. The current 17 per cent rate has remained unchanged since the 2010 tax assessment year.

Other countries have been hopping on the rate-cutting bandwagon to attract investments. Over the last decade, the UK has steadily clipped its corporate tax rate from 30 per cent to 19 per cent, and will be reduced further to 17 per cent from April 1, 2020. Under the Trump administration, the US has accelerated tax reforms and slashed its corporate tax rate from 35 per cent to 21 per cent. A 2018 report by the Organisation for Economic Co-operation and Development (OECD) highlighted that the average corporate tax rate across OECD countries has declined from 32.5 per cent in 2000 to 23.9 per cent in 2018.

In this regard, it appears that Singapore does not have much scope to raise the corporate income tax rate, especially if it wants to stay competitive to attract foreign investment and to encourage local entrepreneurship.

Is consumption tax the way to go?

In the face of mounting public spending, the importance of consumption taxes cannot be ignored. Singapore's Goods and Services Tax (GST) is one such tax and it is the second-highest tax revenue contributor behind corporate income tax. The government has already announced in Budget 2018 that it will raise the current 7 per cent GST rate to 9 per cent some time between 2021 and 2025.

Implementing the "Netflix" tax

Can more be done to widen the consumption tax base? It is timely that attention is shifting to the digital economy.

International tax rules have been rooted in the traditional brick-and-mortar way of doing business, which assigns a tax jurisdiction according to the permanent establishment concept. Tax administrations are beginning to address these loopholes to get their fair share of taxes from the digital economy.

India was one of the first countries to introduce a 6 per cent withholding tax on digital services in 2016. The UK plans to implement a 2 per cent tax on certain digital revenues linked to users in the country from 2020, aimed at global digital businesses that hit a certain revenue threshold. Meanwhile, an EU-wide tax on digital activities is also under discussion.

Singapore will introduce its own version of the digital sales or "Netflix" tax on imported digital services from 2020 to level the playing field between local and overseas players. The overseas vendor registration scheme will hit B2C services including movie and music streaming, software subscription fees and mobile apps. Overseas players will have to register and pay for GST in Singapore if they have an annual global turnover above S$1 million and sell over S$100,000 worth of digital services to consumers in Singapore.

Will a more broadbased digital tax eventually be levied on the purchase of high-value goods from e-platforms? The challenge lies in its administration. As millions of mail orders cross our borders, ensuring the right amount of digital tax collected will be complex.

Time to revisit the sugar tax?

Singapore has the second-highest proportion of diabetics among developed nations, according to a 2015 report by the International Diabetes Foundation. Might it be time to introduce a sugar tax, given the rise of diabetes in Singapore?

As a form of consumption tax, sugar tax is not new. In 2018, the UK introduced a sugar tax, following in the footsteps of countries such as Belgium, Mexico and France, in a bid to tackle obesity - the leading cause of diabetes. Asian nations such as Brunei, Sri Lanka, Thailand, the Philippines and Cambodia have already implemented a sugar tax on sugar-sweetened beverages. In its recent Budget 2019, Malaysia announced that it would impose a sugar tax of 40 sen per litre on drinks with more than 50g of sugar per litre from April 1, 2019.

While a sugar tax did not materialise in Singapore's Budget 2018, it may be timely to revisit this in the upcoming Budget 2019.

Finding the right mix of taxes

Singapore's taxation system has always been pro-growth, anchored by the principles of fairness and progressiveness. To play its tax cards right, Singapore needs to find the right mix of taxes to balance between national revenue needs and sustaining future growth.

The writer is partner and Singapore head of tax at Ernst & Young Solutions LLP. The views here are the writer's and do not necessarily reflect the views of the global EY organisation or its member firms.