Deloitte Singapore’s Budget Wish List for 2014
Aims for Singapore to remain relevant and to continue to enjoy sustained growth amidst economic restructuring
SINGAPORE, 31 December 2013 — Deloitte Singapore’s tax specialists have put together a “wish list” they hope the Government will consider, in view of the upcoming 2014 Budget Statement early next year.
Singapore is currently at an inflection point. In 2013, emphasis has been place on building a better Singapore, transforming our economy to achieve quality growth and take further steps towards building a more inclusive society. Moving forward to 2014, Singapore needs to continue to restructure its economy in order to remain relevant and continue growing in sustainable way.
This “wish list” bears in mind the long term objectives for the economy as well as the general population. It reflects Singapore’s role internationally as a global and regional hub, as well as domestically as a knowledge and capital intensive nation. One suggestion in this area is for the Government to do more in the pursuance of new tax treaties and re-negotiate old ones concluded many years ago on more competitive terms. The Deloitte Singapore tax team also hopes that there will be more guidelines and transparency on how Singapore’s tax incentives are awarded to show that these incentives are calibrated based on real business substances that investors put in Singapore.
To help businesses deal with rising costs of doing business in Singapore, the “wish-list” suggests changes to certain tax schemes such as foreign income exemption, loss carry-back relief system, group relief loss transfer, capital gains tax certainty etc., as well as to enhance the tax deductions available to businesses such as to increase the cap for qualifying renovation and refurbishment expenses to help retailers that are facing rising rental costs and higher labour costs due to difficulties in manpower recruitment.
To boost productivity and innovation, one of the recommendations the Deloitte Singapore tax team has put forth is to extend the Productivity and Innovation Credit (PIC) scheme which is currently set to expire in Year of Assessment 2015 and to allow enhanced deduction for R&D spending on a permanent basis. By doing so, it not only makes Singapore a more attractive location to perform R&D, but also provides long-term visibility for businesses to plan recurring R&D investments and multi-annual R&D programmes. For SMEs, the team also suggests an increase in the enhanced deduction for qualifying PIC spending, and to simplify the criteria for claiming the benefits.
Moreover, the “wish list” proposes tax measures relevant to indirect taxes. For instance, Deloitte Singapore tax team proposes an extension of the co-funding for participation in ACAP to incentivise additional participants in the scheme, and also to develop an ACAP-lite programme to extend the benefits of compliance assurance without the same level of requirements as for ACAP. This will provide tax-payers with more assurance about their controls and processes, but without the full burden of an ACAP review.
For specific industries, there are further suggestions on matters that would help enhance Singapore’s capacity to grow. For the financial services industry as an example, Deloitte Singapore tax team proposes an extension of the tax exemptions schemes for funds managed by a fund manager in Singapore as these schemes have proven attractive to investors seeking to set up funds in Asia. Further, it is recommended that the scope for the withholding tax exemption for interest payments under the Finance and Treasury Centre (FTC) regime be widened to include interest payments on loan notes, bonds, debentures and other debt securities.
In addressing Singapore’s social needs, the list puts forward suggestions for refinements to the current personal tax regime, such as extending the Not Ordinarily Resident (NOR) scheme to Singapore citizens who are not currently able to benefit from the scheme. This will not only incentivise Singapore citizens, but also encourage more to take on regional and global roles whilst facilitating the transfer of knowledge and build-up of local talent pools for management of regional and global companies.
Mr Low Hwee Chua, Partner and Head of Tax Services at Deloitte Singapore and Southeast Asia says, “On the international stage, Singapore is well-placed as a regional or even global hub with its excellent infrastructure and connectivity. However in recent times there has been a focus on tax base erosion and profit shifting (BEPS), particularly from the developed economies. Singapore needs to continue to engage with international groups such as OECD and G20 in light of measures to combat BEPS, while ensuring that its tax regime remains competitive and attractive to foreign investment. A re-look at the existing treaty network and the current tax incentive regime is perhaps timely.”
“Domestically, as Singapore’s economy continues to restructure in order to grow in a sustainable way, businesses are also faced with rising costs. As such, there is a need to extend a helping hand to businesses by enhancing current tax schemes such as foreign income exemption, loss carry-back and group relief loss transfer to make them less restrictive and more in line with international norms. Specific tax deductions such as borrowing costs and renovation and refurbishment expenditure can be fine-tuned or enhanced further. The PIC scheme has been very useful in encouraging productivity and innovation and should be extended, but can be fine-tuned further particularly in terms of R&D spending. For SMEs, we feel that a higher level of enhanced deduction for qualifying PIC spending may be implemented to incentivise them further as they need to quickly move up the value chain.”
“We also hope the Government will consider extending the personal tax rebate to YA 2014 (income year 2013) to help individual taxpayers cope with rising costs in Singapore, and to also enable individual taxpayers to reap rewards from the country’s growth.”
For more details on the specific suggestions, please refer to the following pages.
The Deloitte Singapore Budget 2014 Wish List
1. Singapore on an international stage
1.1 Transparency and cooperation
Singapore should take even greater steps towards dealing with transparency and cooperation on international tax matters. Despite the changes introduced earlier in 2013 (including a commitment to sign up to a FATCA IGA with the US, designating tax crimes a money laundering predicate offence, etc.), there is still suspicion about Singapore and its role in the global economy. Recognising that this is likely to continue to be a ‘hot topic’ in the coming years, Singapore could make even stronger steps, be more vocal in areas such as automatic exchange of information and work alongside the various leading bodies (e.g. OECD, G20 etc.), recognising that this is likely to continue to be a ‘hot topic’ in the coming years.
1.2 Treaty network
While Singapore’s tax treaty network is recognised as one of the most business-friendly globally, more can be done to pursue new tax treaties and re-negotiate old ones concluded many years ago on more competitive terms. For instance, the time elapsed since Taiwan’s treaty was contracted in 1981 and Indonesia’s in 1991 warrants a refresh to keep up with changing times. Additionally, Hong Kong has recently (in the last few years) begun to contract tax treaties, of which some are significantly more advantageous than Singapore’s (e.g. with Indonesia and Japan). In particular, it is noted that some of Singapore’s older treaties (e.g. with Australia and Taiwan) do not include any preferential tax treatment for technical service fees, while other treaties (e.g. with Indonesia) do not include any exemption or reduced rates for capital gains, which may a disadvantage for Singapore investors looking to expand into these countries and ultimately affect Singapore’s competitiveness as an international hub.
1.3 Competitiveness in the region
Today, we see declining corporate income tax rates across the region. Singapore’s corporate income tax rate is currently second lowest in the region, after Hong Kong. Whilst arguably with the partial tax exemption scheme, Singapore’s effective corporate income tax rate may be lower than Hong Kong’s corporate income tax rate of 16.5% up to certain income levels, multinational companies still tend to look at the availability of tax incentives in Singapore when comparing its attractiveness to Hong Kong from a tax perspective, in deciding the location of their Asia Pacific hub.
While there is a need to be mindful of BEPS measures, the Government should nevertheless consider revisiting some of the tax incentives currently available to ensure they remain relevant and competitive in today’s environment. Also, the incentive rates have in general remained stagnant even though the corporate tax rate has been decreasing over the years. For example, the basic incentive tax rate under the Global Trader Programme starts at 10% which is only a 7% reduction from the headline corporate tax rate. It may be more worthwhile to set such rate at 8.5% (half of the prevailing corporate tax rate) to signal a greater commitment from the Government to support foreign investment.
It would also be helpful to potential investors if there are more guidelines available in terms of the minimum headcount and local business spending requirements in order to be considered for the tax incentives. This would enable potential investors to do a self-assessment before approaching the Economic Development Board to discuss the possibility of tax incentives.
In addition, having more guidelines and transparency on how our tax incentives are awarded could in itself help address international concerns about BEPS and countries engaging in harmful tax competitions as Singapore tax incentives are calibrated based on real business substance that investors put in Singapore.
2. Business tax
2.1 Support for businesses
2.1.1 Partial tax exemption
To consider increasing the partial tax exemption from the first S$300,000 of chargeable income to the first S$400,000 of chargeable income. This would be a targeted measure to reduce the tax burden on our small and medium enterprises (SMEs), many of which are facing challenges in rising business costs especially in terms of rental and staff costs.
2.1.2 Loss carry-back relief
The existing loss carry-back relief is capped at S$100,000 and can only be carried back to the immediate preceding year of assessment (YA). To help the cash flow of businesses which were making losses during the last financial crisis, the Government had temporarily enhanced the loss carry-back relief for YAs 2009 and 2010 by increasing the threshold to S$200,000 and also allowing the carry-back to immediate three preceding years of assessment. This amount of S$100,000 now looks inadequate given the rising costs of business. Given that businesses, and especially SMEs, are still facing challenges in restructuring their business model to include greater automation and measures to reduce reliance on labour and hence may incur losses in the short-term, we propose to the Government to consider either removing the cap for loss carry-back relief permanently or at least enhance the loss carry-back relief to a cap of S$300,000 for YAs 2014 to 2015, with a view to reviewing the situation in YA 2016.
In addition, the loss should be allowed to be carried back for at least 2 back years. Many developed countries have much more liberal loss carry-back rules, for example, the default rules in countries like UK allow carry-back without any cap for one year and the default US rules allow loss carry-backs without a cap for two years. Such rules recognise that economic cycles can produce profits in one year followed by losses in another and that it would be inherently unfair to currently tax the profits and provide relief for the losses only if and when future profits are realised (which of course may take a while and may sometimes not happen at all).
2.1.3 Tax exemption on foreign-sourced income remitted
Tax exemption is given to existing Singapore tax resident companies on remittance of specified foreign income (i.e. dividend, branch profit and service income) only. To encourage multi-national companies to consider migrating certain intellectual property to their Singapore tax resident entity and boost the use of Singapore as an IP hub, we propose for the Government to consider extending the current foreign-sourced income exemption to at least cover royalty income.
Also, given the bleak economic conditions during the global financial crisis and to help ease the credit tightness at that time, the Government temporarily allowed tax exemption to all foreign-sourced income remitted during the period from 22 January 2009 to 21 January 2010.
Given the usefulness of this scheme, we hope the Government will consider granting permanent exemption of all foreign-sourced income.
In the past, the Government has resisted this on the grounds that a) it will deter tax treaty partners from negotiating tax treaties with us and b) it may encourage round tripping i.e. enabling taxable Singapore sourced income to be re-characterised as foreign-sourced income and bringing it back to Singapore as exempt income. However, some other countries e.g. Hong Kong and Malaysia, generally do not tax foreign-sourced income whether or not remitted to their respective countries, and this does not appear to have impeded their ability to contract advantageous tax treaties or materially eroded their tax base. Also, in the latter instance, the Inland Revenue Authority of Singapore (IRAS) already has wide ranging powers to invoke general anti-avoidance rules in Section 33 of the Singapore Income Tax Act which can be used to counteract blatant tax avoidance.
2.1.4 Foreign tax credit scheme
Foreign-sourced income is only taxable in Singapore when they are received/deemed received in Singapore. Where tax has been paid in the foreign jurisdiction from where the foreign-sourced income is received, the Singapore tax resident company should be able to claim a credit for the foreign tax paid against the Singapore tax payable on the same foreign-sourced income received/ deemed received in Singapore.
The amount of foreign tax credit allowed is restricted to the Singapore income tax payable on the foreign-sourced income, after deduction of allowable expenses, if any, or the actual foreign tax paid on the same foreign-sourced income, whichever is the lower. Under the pooling system for the claiming of foreign tax credit which was introduced from YA 2012, subject to certain conditions, the amount of foreign tax credit to be granted will be based on the lower of the pooled foreign taxes paid on the foreign source income and the pooled Singapore tax payable on such foreign-sourced income. However, any excess credit is not available for carry forward, regardless of whether the foreign tax credit is pooled or otherwise. Perhaps consideration may be given to allow the Singapore tax resident company to carry forward the excess foreign tax credits for offset against its future Singapore tax payable on foreign-sourced income, carry-back of such excess credits for set-off against foreign-sourced income taxed in the immediate preceding year (akin to the current loss carry back relief scheme) and transfer the excess credits to other group companies under the group relief system.
In addition, currently, for purposes of determining the amount of foreign tax credit allowed against the Singapore tax payable on foreign-sourced dividends, the dividend withholding tax and the underlying tax paid on the income out of which the dividend is paid, are, subject to certain conditions, taken into account. However, if the dividend income is received from a jurisdiction that does not impose dividend withholding tax and does not impose tax on foreign-sourced dividend income received from operating subsidiaries (e.g. Hong Kong and Malaysia), the Singapore tax resident company would not be able to claim any foreign tax credit on the dividend income received from subsidiaries in such jurisdictions if the dividend income is not exempt under Section 13(8) of the Singapore Income Tax Act. In this regard, perhaps consideration could be given to allow the claim of foreign tax credit through more tiers of subsidiaries to enable the Singapore tax resident company to claim the dividend withholding tax and/ or underlying tax at the level of the operating subsidiaries.
2.1.5 Group relief – Section 37C
Presently, subject to conditions, a company belonging to a group may transfer its unabsorbed tax losses, capital allowances and donations (collectively referred to as “loss items”) for the current year to another company within the same group to set off against the assessable income of the claimant company. A group consists of a Singapore incorporated company and its Singapore incorporated group members. Two Singapore-incorporated companies are members of the same group if at least 75% of the ordinary share capital in one company is beneficially held by the other or at least 75% of the ordinary share capital in each of the two companies is beneficially held directly or indirectly, by a third Singapore company. In addition to this 75% shareholding requirement, the holders of the ordinary shares must also be beneficially entitled to at least 75% of the residual profits and assets of the first-mentioned company.
The above is arguably too restrictive as two Singapore incorporated companies which are held through a foreign intermediate holding company or commonly held directly by a third company incorporated outside Singapore will not be able to transfer loss items under the group relief system. It may be worthwhile to consider expanding the definition of “group” for the purpose of the above system. For instance, two Singapore incorporated companies should be allowed to transfer loss items if one is 75% owned directly or indirectly by the other (i.e. whether held through a Singapore or foreign intermediate holding company) or they are at least 75% commonly owned by the same corporate parent, whether incorporated in or outside Singapore. This expanded definition of “group” is currently adopted for a similar group relief scheme in the UK.
2.1.6 Capital gains tax certainty
The safe harbor rules introduced during the 2012 Budget stipulate that where investors hold at least 20% of the ordinary shares in an investee company for a continuous period of at least 24 months immediately prior to the sale, they would not be taxable on the gains from the sale of such ordinary shares. This was a much welcome move for investors as there is upfront certainty on the tax treatment of the gains if the conditions under the safe harbor rules are met. Unfortunately, these rules are set to expire on 31 May 2017.
We propose for the Government to consider making the safe harbor rules a permanent feature in Singapore tax legislation.
In addition, to simplify compliance, perhaps consideration could be given to remove the requirement for foreign companies to file a tax return in Singapore in order to avail themselves to this certainty.
2.1.7 Section 19B writing down allowance
There is a sunset clause for Section 19B writing down allowance scheme whereby any capital expenditure incurred on Intellectual Property Rights (IPRs) after the last day of the basis period for YA 2015 will not qualify for the scheme. We recommend this sunset clause be lifted. This will create more certainty for businesses who would like to use Singapore as an IP hub.
The existing Section 19B does not allow deferral of writing down allowance claim (i.e. Section 19B allowance is given within 5 years of expenditure incurred). We suggest that Section 19B allowance should also be given on due claim basis similar to Section 19 allowances for plant and machinery.
Currently no balancing allowance will be given for disposal of IPR where it is sold at a price lower than the tax written down value. As such, we would also propose the current claw-back rules for Section 19B be amended to be same as normal claw-back rules for plant and machinery.
2.2 Raising productivity and innovation
2.2.1 Productivity and Innovation Credit (PIC) scheme
The PIC scheme has encouraged innovation and productivity among companies. However, given the current qualifying period for PIC spending expires at YA 2015, it is timely to consider extending the scheme beyond this period.
Currently, Sections 14D, 14DA and the PIC scheme provide a 400% tax deduction of qualifying R&D activities below the expenditure cap of S$400,000 per year until the PIC expires in YA 2015. However with the road to productivity and innovation being a continuous process, a 400% enhanced deduction on R&D activities should be considered on a permanent basis.
Consideration should also be given to the fact that the current S$400,000 expenditure cap (under PIC) does not incentivise companies to invest in excess of this value in R&D in Singapore. Section 14DA could therefore be amended (from additional 50% to additional 200%) to permanently reflect a 300% tax deduction, with no cap, for R&D activities.
The above measures would not only make Singapore a more attractive location to perform R&D, but also provides long-term visibility to plan recurring R&D investments and multi-annual R&D programmes.
In addition, although PIC is available across 6 categories of spending making for a combined cap of S$2.4m per year (S$400,000 per category), in practice we find that most business, especially the SMEs, will claim PIC mainly on automated equipment and training expenditure, and to a lesser degree, expenditure on R&D activities. As such, most businesses do not have an opportunity to fully enjoy the PIC scheme with its combined expenditure cap of S$2.4m. The Government should consider combining the expenditure cap of S$2.4m across all six categories of spending, to demonstrate that it is prepared to fully support any qualifying spending that increases productivity and the knowledge base in Singapore.
Currently, the IRAS is responsible for administering the PIC scheme and performs a technical assessment in order to determine whether a project constitutes a qualifying R&D project. It may be beneficial to divorce the technical and financial assessment responsibilities, i.e. leaving the IRAS with the assessment of the financial aspect being its core expertise and forming a separate technical assessment team, or utilising a more suitable government body like the EDB. This will greatly enhance the uniformity of the technical queries.
In addition, the Government may wish to consider a mechanism that permits for an independent technical assessment of projects as is the case in Australia (i.e. Innovation Australia).
2.2.2 PIC scheme for small and medium enterprises (SMEs)
To encourage the uptake of PIC among SMEs, it may be helpful to introduce a variation to the PIC scheme for SMEs. This may include, for example, increase the enhanced deduction for qualifying PIC spending for SMEs to 400% (from 300%), making a total of 500% tax deduction.
In addition, the minimum qualifying spending to qualify for the PIC bonus could be reduced from S$5,000 to S$1,000.
It may also be helpful to simplify the criteria for claiming benefits under the PIC scheme, for example, aligning the types of qualifying expenses for internal and external training (in that companies incurring rental expenses for external training premises would qualify for enhanced deduction under PIC, but not imputed overheads such as rental and cost of utilities on internal training).
2.3.1 Borrowing costs – Section 14(1)(a)(ii)
Currently, borrowing costs (such as guarantee fees) which are incurred as a substitute for interest expense or to reduce interest costs could qualify for tax deduction. In this connection, a list of the allowable borrowing costs is prescribed by Regulations. However, with the continuous development of new bank products, there might be borrowing costs which are payable in lieu of interest or which reduce interest cost, but which are not on the prescribed list. It would be more useful to have a “negative” list rather than a prescribed list. Further, to reduce administrative efforts for the review of the deduction claim for borrowing costs, we would recommend a de-minimis rule, e.g. to allow tax deduction to taxpayers for borrowing costs up to x% of the loan.
2.3.2 Tax deduction for stock-based compensation expense – Sections 14P & 14PA
Currently, no tax deduction is allowed to taxpayers where new shares are issued to meet its obligations under an employee equity-based remuneration scheme. However, there could be circumstances (e.g. opportunistic purchasing of treasury shares) where the taxpayer may issue new shares to employees first to fulfil stock plan obligations before the treasury shares are purchased from the open market. In such situations, we would recommend that tax deduction for stock-based compensation expense be considered allowable where the taxpayer incurs actual cost outlay on treasury shares since in substance, the cost of acquiring the treasury shares has in fact been incurred by the taxpayer for the purpose of fulfilling its stock plan obligations.
In addition, where the stock-based compensation scheme is fulfilled via shares of the parent company being transferred to employees of the Singapore subsidiary, tax deduction is currently allowed based on the lower of the recharge from the parent company or the actual costs incurred by the parent company in acquiring the treasury shares. There are complex rules around how the actual costs incurred may be tracked, using either the weighted average or first-in-first-out method. This gives rise to administrative difficulties in tracking the cost of acquisition of the treasury shares, especially for MNCs where the parent company’s shares are normally granted to employees of various subsidiaries worldwide. As such, to ease the administrative burden, we suggest that the Government consider allowing tax deduction for share-based compensation to be based on the amount recharged by the parent company as long as this is computed under FRS 102 (share-based payment), without a need to compare against the actual costs incurred in acquiring the treasury shares. This could be done on an election basis, similar to the current FRS 39 tax treatment.
2.3.3 Renovation and refurbishment (R&R) expenses – Section 14Q
The provisions of Section 14Q currently allows the taxpayer a deduction on expenditure incurred for any R&R works for the purpose of his trade or business, subject to certain conditions and exceptions. The deduction is allowed over a period of three consecutive years on a straight line basis and the amount of R&R expenditure is capped at S$300,000 for every three consecutive basis periods for each business entity.
Given the rising costs of doing business in Singapore, the S$300,000 expenditure cap for every three consecutive basis periods may no longer be adequate for certain businesses; particularly for those in the retail/F&B sectors where customers’ comfort and attractiveness of outlets is key to attracting customers and remaining competitive. As such, consideration should be given to increasing the expenditure cap for R&R works from S$300,000 to S$600,000 for every three consecutive basis periods, to all businesses.
2.3.4 Donations – Section 37
As Singapore progresses, it is important that vulnerable groups in our society, such as the low income, the elderly and the disabled are not left out. Currently, donations made from 1 January 2011 to 31 December 2015 to an approved Institution of a Public Character qualify for 250% tax deduction. It may be an opportune time to consider making this a permanent feature of Singapore’s tax system thereby encouraging community involvement across the charitable sectors and emphasising the importance of caring for our society.
In addition, presently unabsorbed donations can only be carried forward for 5 years. We would suggest allowing for indefinite carry-forward of unabsorbed donations, similar to the carry-forward of unabsorbed capital allowances and tax losses.
2.3.5 Life insurance and other group insurance premiums
Currently, the tax rules relating to group insurance policies (e.g. group term life, personal accident insurance) are inherently complex and difficult to understand. The tax deduction rules vary depending on whether there are named beneficiaries or not and whether the company is under contractual obligation to disburse the payout to the employees or their nominated beneficiaries. Separate tracking is needed where there are no named beneficiaries such that deduction is allowed only at the point when payout is given to the employee. This is on the basis that the group insurance schemes may be treated as an investment by the company where there are no named beneficiaries or no such contractual obligation and hence are considered as investments held on capital account. Given that businesses normally take up such insurance as a package of benefits provided to staff, we suggest that these premiums be treated as such, i.e. staff costs, and be allowed tax deduction to the company when the group insurance premiums are incurred, as opposed to the point when there is a payout. This also creates an incentive for companies to continue to provide group insurance schemes to their employees.
In addition, where group term life or personal accident benefits are provided to employees or their named beneficiaries, the premiums incurred by the employer are currently taxable on the employee as a benefit in kind. We would suggest that such benefits be exempted from personal income tax in the hands of the employee, and treated no differently from medical insurance premiums, as long as the group term life or personal accident insurance scheme is offered to all employees and not merely to directors or executive management who has the ability to control the resources of the company.
3. Achieving social objectives
3.1 Personal tax enhancement
3.1.1 Child relief
We hope that the government will reflect the rising costs in supporting a child in Singapore by doubling qualifying child relief to S$8,000 per child.
3.1.2 Parent/handicapped parent relief
Where qualifying conditions are met, we hope that consideration will be given to extending the claim of parent/handicapped parent relief to multiple resident individuals who have supported their own or spouse's parents, grandparents or great grandparents, (i.e. the parent relief/handicapped parent relief in respect of the same dependent can be claimed by multiple taxpayers).
Alternatively, parent/handicapped parent relief could be shared amongst children or grandchildren based on apportionment agreed by the relevant parties. This is in accordance with the Government’s social policy in promoting filial piety and focus on elderly care, due to rapid increase in the ageing population of Singapore. We note that the IRAS had previously requested for consultation/feedback on the above, but there have been no proposed changes to date.
3.1.3 Personal tax rebate
We hope the Government will consider extending the personal tax rebate to YA 2014 (income year 2013) to help individual taxpayers cope with rising costs in Singapore, and to also enable individual taxpayers to reap rewards from the country’s growth.
3.1.4 Not Ordinarily Resident (NOR) concession
To encourage more companies to set up their regional and global headquarters in Singapore and attract their top talent to relocate here, consideration could be given to extending the period of the Not Ordinarily Resident (NOR) concession from five to ten years. This increases the attractiveness of the local individual tax regime thereby encouraging foreign talent and Singaporeans who are based overseas to take a longer-term view in making Singapore their base.
In addition, consideration should be given to extending the NOR scheme to Singapore citizens who are currently not able to benefit from the scheme. This is with particular reference to the time-apportionment of income concession, as many Singapore citizens have global and regional roles which require extensive travel outside Singapore. This will not only incentivise Singapore citizens, but also encourage more to take on regional/global roles whilst facilitating the transfer of knowledge and build-up of local talent pools for management of regional/global companies.
3.1.5 Tax on motor cars provided to employees
In line with continuous efforts to reduce tax administration, we suggest removing the tax on private mileage for petrol cost borne by the employer in respect of leased or company cars provided to employees, since this will reduce the administrative burden of having to keep track of the private mileage incurred for the year. Further, the tax revenue that can be derived from this benefit is relatively insignificant. If removing this tax altogether is not feasible, we would instead suggest establishing a prescribed amount or fixed rate.
3.2.1 Application for employment on a dependant’s pass
With Singapore’s demand for skills in the education and childcare sectors, it may be useful to look at the readily available pool of talent residing in Singapore on dependant’s passes and seek to fulfil demand by encouraging applications for employment in these areas.
4. Indirect tax
4.1 Goods and services tax (GST)
4.1.1 Co-funding for participation in ACAP
The final ACAP funding round will take place in 2014, thereafter ACAP applicants would still be able to participate in the scheme, but without the added incentive of co-funding for external costs incurred. In order to incentivise additional participants in the scheme, we propose for the Government to extend co-funding for participation in ACAP (as introduced in April 2011) on the same basis for a further three years.
4.1.2 ACAP-lite programme
The ACAP programme focus on controls whereas the ASK scheme focuses on GST reporting; this means that there is a gap between ACAP and ASK. In light of this, in order to extend the benefits of compliance assurance without the same level of requirements as for ACAP, it would be helpful to introduce an ACAP-lite programme based on the Assisted Self-help Kit (ASK), i.e. with a section covering controls at entity, transaction and reporting levels.
An ACAP-lite programme would provide tax-payers with more assurance about their controls and processes, but without the full burden of an ACAP review. The scheme would also give IRAS assurance about tax-payers who are not ACAP participants.
4.1.3 Concessionary input tax claim regime
The concessionary input tax claim regime allows funds meeting the qualifying conditions under the Singapore Income Tax Act to claim GST incurred, which is particularly relevant in respect of fund management charges from local fund managers. Although the scheme has been very beneficial in making Singapore fund managers competitive compared to Hong Kong or the UK, it is due to expire on 31 March 2014. With that, we hope that the Government will consider renewing this regime for qualifying funds in Singapore for another three years.
4.1.4 Reverse charge for non-financial services industries
We propose for consideration to implement the reverse charge for non-financial services industries and accordingly revise Section 21(3) of the GST Act to remove the directly benefitting / directly in connection with tests for supplies made by these industries. Currently, Section 14 of the GST Act provides for a reverse charge in respect of prescribed services. But no such services are prescribed. Instead, to ensure that services are appropriately taxed in Singapore, the legislation makes use of the directly benefit and directly in connection with tests. Taxpayers find these tests hard to apply in practice. A more straightforward way would be to prescribe certain services which would be subject to the reverse charge when received from an overseas supplier. This would then allow Section 21(3) of the GST Act to be revised so that the directly benefit/directly in connection tests could be removed in respect of the services which would now be subject to reverse charge.
4.1.5 Approved import GST Suspension Scheme (AISS)
To promote the MRO (maintenance, repair and overhaul) activities in the aerospace industry, IRAS introduced the Approved Import GST Suspension Scheme (AISS). AISS traders are allowed to import qualifying aircraft parts which belong to their Singapore customers into Singapore with the suspension of import GST payable at point of importation as long as the qualifying aircraft parts are consigned to them for purposes of making their taxable supplies (e.g. carrying out repair services on the aircraft parts). The same should apply too to the marine and shipping industry, especially in view of the fierce competition they face from shipyards in China, Korea and other parts of Asia. Therefore we hope the Government will consider extending the AISS to the marine and shipping industry.
4.2 Custom duties and other tariffs
4.2.1 Additional Registration Fee (ARF)
In February 2013, the ARF imposed on motor vehicles was revised from a flat rate of 100% of the vehicle’s Open Market Value (OMV) to a tiered system, with 100% ARF imposed on the first S$20,000 of the OMV, 140% ARF imposed on the next S$30,000, and 180% ARF imposed on the OMV amount over S$50,000. This change has resulted in a significant slow-down in sales in recent months, and placed tremendous pressure on small and medium sized motor vehicle sellers. The primary intent of the ARF is to limit the number of motor vehicles on the road, thereby alleviating congestion and CO2 pollution. A tiered ARF does not necessarily prevent road congestion, but would instead appear to provide an undue incentive to flood the market with budget vehicles. Given the revised scheme’s dubious effects, we would suggest that the ARF return to a single/flat rate.
4.2.2 Certificate of Entitlement (CoE)
The CoE was revised in September 2013 to add an engine output threshold for classification under Category A. Previously, vehicles with an engine capacity of 1,600 cc or less fell under Category A. Under the revised scheme, vehicles with an engine output exceeding 97 kW are now classified under the premium Category B, even if their engine capacity is 1,600 cc or less. As with the ARF, the primary intent of the CoE is to limit the number of motor vehicles on the road, thereby alleviating congestion and CO2 pollution. Given the advancements in engine technology in recent years, a less powerful engine does not necessarily equate to a cleaner engine, and instead provides an undue incentive to flood the market with budget vehicles that would ordinarily have earlier generation, and potentially less clean, engines. We would therefore suggest that the CoE scheme return to the previous methodology where Category A is based upon engine capacity only.
4.2.3 Electronic Road Pricing (ERP)
As indicated above, the intent of the ARF and COE is to alleviate road congestion and CO2 pollution. A more effective means of achieving these goals is to control motor vehicle use, particularly in certain areas and certain times of the day. To this end, we would suggest adjustments to the ERP scheme, such as higher rates during peak times and more ERP gantries, which should have the effect of controlling driving habits, rather than negatively impacting local businesses.
5. Enhancing Singapore’s capacity to grow
5.1 Financial services
5.1.1 Tax exemption schemes for funds managed by a fund manager in Singapore – Section 13CA, 13R & 13X
The Sections 13CA, 13R and 13X tax exemption schemes for funds managed by a fund manager in Singapore will sunset by 31 March 2014. This sunset clause was introduced previously to allow the Monetary Authority of Singapore (MAS) to review the schemes on a regular basis ensuring that they continue to be useful to the industry. These schemes have proven attractive to investors seeking to set up funds in Asia, particularly when Hong Kong does not yet offer such similar tax incentives. As such, extending the schemes beyond 31 March 2014 should be considered.
5.1.2 Finance and Treasury Centre (FTC) – Section 43G
The regulations which define the qualifying activities and qualifying sources of income appear to be out of date and thus need to be reviewed and updated in line with the continuous developments on treasury and finance centre activities globally. This is particularly so with regard to the rules for qualifying sources of funding. In addition, the withholding tax exemption for interest payments under the FTC regime should be extended to interest payments on loan notes, bonds, debentures and other debt securities (currently the withholding tax exemption only applies to interest payments on loans). It would be more useful to have a "negative" list rather than a lengthy list of prescribed qualifying activities and sources of funding.
5.2.1 Tax exemption for shipping profits – Sections 13A & 13F
Currently, the tax exemption for ship operators is on qualifying income derived from the operation of Singapore ships (Section 13A) and foreign ships (Section 13F). There is a list of activities that qualifies for the tax exemption treatment. In view of the evolving nature of the shipping industry, the Government should consider simplifying the list of qualifying activities under Sections 13A (Singapore ship) and by revising them into an exclusion list (in the same vein as the exclusion list of specified income under the Financial Services tax incentive). For example, Section 13A could apply to all income derived from operation of Singapore flagged ship except derived from within port limits of Singapore.
In addition, an exemption could be granted for mobilisation income, holding fee etc. for vessels that are docked in Singapore but intended to be deployed for overseas operations or in international traffic.
5.3.1 Withholding tax exemption and tax deduction to payments for the use of domestic IRU and access rights to telecommunication facilities
Currently, payments for the use of or the right to use international submarine cable capacity (including payments for an indefeasible rights to use (IRU)) has been granted withholding tax exemption on payments made to non-residents which are accruing in or derived from Singapore. We propose that such withholding tax exemption should also be extended to payments made for the use of or the right to use domestic IRU. This will be helpful in situations where a non-resident company may enter into a capacity swap arrangement with a Singapore local carrier and such non-resident may then in turn also enters into contract with a Singapore resident in respect of the excess domestic capacity.
In addition, the current tax concession also provides for writing down allowance (WDA) over the number of years for which expenditure is incurred for the acquisition of an international IRU for the purposes of a person’s trade, business or profession. Along the same argument that consideration should be given to aligning the tax treatment of payment for domestic IRU to that of international IRU, we also propose that a tax deduction or WDA be given on the upfront payment for the use of domestic IRU and also the costs incurred by a telecommunications carrier in acquiring access rights in relation to telecommunications sites and facilities.
5.3.2 Writing down allowance for spectrum rights payment
Currently, Section 19B of the Singapore Income Tax Act allows a WDA claim on certain intellectual property rights including patent, copyright, trademark, registered design, geographical indication, lay-out design of integrated circuit, trade secret or information that has commercial value, or the grant of protection of a plant variety. Consideration should be given to extend the WDA to acquisitions of spectrum rights and bandwidths as they are essential for the continual competitiveness of the telecommunication businesses.