Refundable Investment Credit, strong fiscal position could give Singapore edge: tax experts

WHILE jurisdictions elsewhere have introduced or are planning measures similar to Singapore’s new Refundable Investment Credit (RIC) scheme, the city-state’s strong track record and fiscal ability, alongside the details of the RIC, will help to boost its attractiveness, observers said.

Finance Minister Lawrence Wong in his Budget speech last Friday (Feb 16) announced a tax credit with a refundable cash feature to encourage companies to make sizeable investments that bring substantive economic activities to Singapore, in key economic sectors and new growth areas.

This comes ahead of a 15 per cent global minimum tax, under the Base Erosion and Profit Shifting initiative (BEPS) 2.0.

Singapore will likely be the first country in the region to implement a tax credit scheme aligned with the Organization for Economic Cooperation and Development’s Qualified Refundable Tax Credit (QRTC), noted Yvaine Gan, global investment and innovation incentives leader, Deloitte Singapore. 

PwC Singapore financial services tax leader Lennon Lee agreed, adding that Singapore has an early mover advantage.

While many countries may integrate QRTCs into their incentive toolkit, “considering the cash-refundable feature, it is contingent on each country’s fiscal position and affordability”, said Chester Wee, EY Asean international tax and transaction services leader.

Andy Baik, partner, BEPS COE (Centre of Excellence), KPMG in Singapore agreed: “Not every country is in a fiscal position (like Singapore) to follow through (on) its commitment to disburse the amounts in cash within the four-year prescribed period.”

He added: “For jurisdictions with insufficient funds or reserves, we foresee potential controversies down the road on whether MNEs (multinational enterprises) have met the conditions to qualify for the QRTCs.”

How the RIC works

The specific details of the RIC also set Singapore apart from its competitors.

At up to 50 per cent of the qualifying expenditure in each category, the level of support outstrips that provided elsewhere, said PwC’s Lee, noting that Ireland and the US offer similar investment credits at 25 to 30 per cent, though he added the caveat that their investment credit calculation may differ.

Baik said the 50 per cent limit is “reasonable”, falling within the 30 to 60 per cent of expenditure incurred range of grant support historically offered by the Economic Development Board (EDB). 

It gives investment agencies the needed “firepower” and discretion to attract investments, said Wee. Barbados’ RIC equivalent offers maximum effective payroll credit of up to 300 per cent; and credit of 50 per cent of qualifying expenses incurred for qualifying research and development (R&D) activities, he added.

Noting that the RIC looks to be an update and expansion of the Investment Allowance (IA), which provides businesses with tax exemptions, Grant Thornton Singapore head of tax David Sandison said the IA originally had a 50 per cent expenditure cap on it, with a fixed monetary cap at the government’s discretion. The cap was later raised to 100 per cent.

“A wait-and-see attitude is probably sensible” in this new and complex area, he added.

Other potential approaches

The expenditure-based approach taken in the RIC has its benefits, observers said. The amount of qualifying expenditure can be easy to determine and can be audited, noted Lee.

Said KPMG’s Harvey Koenig, partner, telecommunications, media and technology, tax: “Businesses that are not profitable, for example, due to high initial outlays, will still stand to benefit from the incentives, unlike tax incentives that are income-based.”

But it also has its cons. Koenig noted that many existing tax incentives are income-based, where tax benefits are computed based on profits.

“For high value added activities, the benefits from expenditure-based incentives tend to be lower than income-based incentives,” he said.

For example, a highly profitable business with mainly labour costs expenditure, such as an artificial intelligence company, may derive less benefit from the RIC than a less profitable manufacturing business with high labour costs and fixed assets expenditure.

Lee also highlighted that the expenditure-based approach does not necessarily recognise the output and benefit of such output of a manufacturing plant. The US provides benefits based on outcomes, Koenig said. 

“Companies in different industries have varied operating models and value chains,” said Gan. Some prioritise cost efficiency, while others focus on output.

An expansion of the RIC to include output or volume-based features will help secure high-value activities in Singapore, she said.

Lee echoed the call for greater flexibility to the approaches the EDB and Enterprise Singapore use to determine the quantum of the RIC, “as different high-value and substantive economic activities require different commitments”. 

“Certain green or low carbon manufacturing and services industries that are typically less capital-intensive activities would not yield the appropriate amount of RIC relative to their ‘contributions’ to Singapore economy,” he said.

More clarity needed

Much uncertainty still remains, with further details of the RIC expected in the third quarter of 2024.

Observers raised questions about how the RIC will be computed, and details of the support mechanism behind it.

Under the RIC, the credits against income tax payable can be refunded in cash or cash equivalent, when it remains unutilised within four years from satisfying the qualifying conditions.

KPMG’s Koenig hopes that the refunds will not be significantly delayed, “especially with the current high interest rate environment where high borrowing costs can impact the viability of projects”.

It is also unclear whether the RIC will discriminate and favour certain nationalities, noted Maybank economist Chua Hak Bin.

“Currently, US MNCs (multinational corporations) appear to enjoy lower concessionary tax rates in Singapore compared to other nationalities (in the regime before BEPS),” he said. “There may be strategic reasons for anchoring large US companies in Singapore and the region.”