Singapore expected to rely on grants, loans and credit schemes to draw investors amid global tax shift

SINGAPORE may have to rely more on grants, loans and credit schemes to keep multinationals here, when new corporate tax rules kick in worldwide. But though policymakers have sounded the alarm over hotter competition for global investments, watchers believe that the country is poised to stay ahead of the pack.

While Pillar Two of the Base Erosion and Profit Shifting 2.0 (BEPS) initiative could limit tax breaks for foreign investors, analysts told The Business Times that Singapore already has substantial non-tax incentives in its economic policy arsenal.

Its well-established advantages, from infrastructure to rule of law, will also continue to give it an edge, they added.

In his Budget debate wrap-up speech a fortnight ago, Finance Minister Lawrence Wong warned that multinational enterprises (MNEs) are asking policymakers what Singapore can offer to compete with cheaper regional peers and “very generous incentive packages” in these companies’ home countries.

Pillar Two of BEPs sets a minimum effective tax rate of 15 per cent for MNE groups with annual group revenues of at least 750 million euros (S$1.07 billion). Singapore will implement a domestic top-up tax on such MNE groups from 2025, with about 1,800 of them here.

Wong warned that affected companies could pull out of Singapore, especially as other countries “are now rolling out vast subsidies” to draw investors and bring their companies back home.

Singapore “will have to review and update our broader suite of economic development schemes to stay competitive”, which will require the government to plough in more funding, he said.

Non-tax toolkit

Sumit Agarwal, professor of finance, real estate and economics at the National University of Singapore Business School, flagged how other countries may rely on low-cost land and labour “to sweeten the deal” – whereas “Singapore, by virtue of its size, cannot even do those kinds of sweeteners”.

Instead, Singapore’s existing suite of schemes includes grants, loans, and co-funding, which watchers expect to be enhanced.

Yvaine Gan, global investment and innovation incentives leader at Deloitte, cited grants and loan schemes as key components in Singapore’s “comprehensive incentives toolkit” alongside tax incentives. These goodies “will remain for companies that continue to see value in these incentives”, she added.

Said Jaclyn Ho, a tax advisor at Baker McKenzie Wong & Leow: “We expect the government to leverage more heavily on capability building grants and co-funding or co-investment schemes to support businesses in Singapore.”

On top of schemes which apply to companies across the board, it is common in various jurisdictions for incentives to be tailored towards specific investors, noted analysts.

Prof Agarwal cited the Hyundai Motor Group Innovation Centre, which occupies a 44,000 square metre site in the Jurong Innovation District, as an example of a foreign investor that was given access to much-needed land.

Multinationals could negotiate “amendment of existing incentive packages or exploration of alternative non-tax incentives, such as grants or manpower facilitation schemes”, said Gan.

On the manpower front, Lei Hsien-Hsien, chief executive of the American Chamber of Commerce in Singapore (AmCham), pointed out that Singapore has been investing in access to both international and domestic talent.

“What we see is that the government will do some cost-sharing with companies on bringing in the right talent” in critical industries such as technology, she said.

Tax tweaks

At the same time, some tax measures remain possible. The global rulebook will continue to allow tax breaks such as incentives for spending, noted KPMG partner Harvey Koenig.

Ho, from Baker McKenzie Wong & Leow, said: “We also cannot rule out the introduction of new fiscal tools such as refundable tax credits.”

These are “essentially tax incentives where the tax benefits may be converted to cash within four years”, added Koenig. “To enhance its competitiveness, Singapore should consider the introduction of refundable tax credits to target high-value activities such as research and development (R&D) and sustainability-related projects.”

Granted, Singapore will find it “difficult to match” the cheap land, personal income tax incentives, and certain subsidies offered in regional countries, he noted.

But even with BEPS 2.0, Singapore could still tweak its tax regime to keep up with developed jurisdictions such as the UK, he added. He suggested replacing concessionary tax rates with a wider scope of tax deductions that could be claimed on eligible expenses such as the cost of buildings and intellectual property assets.

The whole package

Ultimately, however, Singapore’s approach should not simply be “replacing the tax incentive with something else”, said AmCham’s Lei.

Dubbing tax incentives “the old way of thinking”, she proposed looking at what Singapore can offer that investors are “simply not going to get elsewhere” – not in terms of specific carrots, but as an overall investment destination.

Similarly, OCBC chief economist Selana Ling said: “Economic incentives that are not tax-based could include either cash grants or indirect financial assistance in-kind or preferential treatment for other resources: land, manpower, R&D, and so on. However, the important point is that Singapore’s attractiveness... has to be a holistic package.”

On that front, analysts reiterated that Singapore has notable advantages such as a strategic location, intellectual property rights protection, developed infrastructure, and strong rule of law.

Staying competitive also involves nurturing a competitive labour force and business ecosystem, said DBS economist Chua Han Teng: “To remain attractive to foreign investors, Singapore’s policies are likely to continue with upskilling efforts to bolster its already highly educated workforce with relevant capabilities needed by international businesses, as well as maintain an enabling innovation ecosystem.”

He expects more “pro-enterprise policies to strengthen long-term competitiveness”, such as subsidies and funding in areas such as digitalisation, sustainability, enterprise capabilities, and targeted skills training.

Singapore also has an edge within the region specifically – and Asia remains a crucial market for MNEs. As AmCham’s Lei noted, American companies will still need a presence in the region, and Singapore continues to be a reliable base for operations.

Prof Agarwal added: “The big advantage Singapore has in this context is, if you look at the neighbourhood, it’s even worse.”

High-end investment destinations are “very difficult” to find in Asia, said Prof Agarwal, who believes that Hong Kong and South Korea have lost their lustre as financial hubs in the region: “Now, it’s pretty much Tokyo and Singapore.”

“We will see Shanghai and Mumbai come up, but they are behind... and Singapore is not just sitting and saying, ‘Oh, let’s wait for them to catch up’. Singapore is also moving.”

Ho said that Singapore can stay competitive with policies that “address the high costs of doing business” in the country, such as investing in supply chain resilience, digital connectivity and infrastructure.

“Such policies may continue to help Singapore to stay ahead of the curve if they are strategically deployed and translate to cost savings over the longer term,” she said.