Taking a leaf or two from UK's tax book
By Low Hwee Chua, Head of Tax Services at Deloitte Southeast Asia/Singapore and Ben Pickford, Director, Tax Services at Deloitte Singapore
This article was first published in Business Times on 7 February 2014
The historic relationship between Singapore and the United Kingdom is very visible all around us - in our architecture, street names and even our language. That relationship also provides the basis for much of our legal system, which is very different from many other Asian countries: indeed, many Singapore judgments have references to English case law. The same applies to our tax system which, like the UK, combines statutes and judgments and still has its roots in the Income Tax Act imposed in 1948 under the British colonial government.
The partnership between the two countries since Singapore's independence has flourished, with significant UK investment into our island state and more recently, an increase in Singaporean investment into the UK, particularly in London real estate. With so much in common, there will always be areas where each country can learn from new initiatives undertaken in the other, and this applies to the tax regimes too.
While Singapore's tax system has many great attributes and incentives - some of which the UK could learn from - there are a few areas where there is still room for improvement, and the UK provides a helpful benchmark, given that our Income Tax Act was originally based on the Model Colonial Territories Income Tax Ordinance 1922. These changes seem relatively minor but could potentially go a long way to ensuring sustainability for businesses and to encouraging investment.
One interesting development in the UK recently has been a change to how research & development (R&D) credits are accounted for. Based on a consultation process held with companies across the country in 2012, the UK tax authority, HM Revenue and Customs, introduced a change which saw R&D credits being moved "above the line"- essentially accounting for the credit like a grant within operating profit rather than at the tax charge level, where it is applied in Singapore. Based on feedback from taxpayers and professionals, the rationale for this was that many businesses assess their R&D projects at the operating profit level, meaning that it is now easier to see the clear benefits of the project. Many business commentators believe that this change will encourage more R&D by making the subject more business-focused and less of an issue for the tax accountants.
There is also more variety in the way in which businesses in the UK can utilise group relief compared to Singapore (group relief being broadly the mechanism which permits companies in the same group to share losses and transfer assets on a tax-free basis). Firstly, the group relief definition is much narrower, requiring direct Singapore ownership; in contrast, in the UK, it is possible to "look through" non-UK entities and non-UK parents to create a group. The implications of this are that Singapore companies can only transfer losses if they are held by a common Singapore parent company, meaning less flexibility - particularly where the companies are organised under business divisional lines instead of geographic lines. A revision would allow businesses to structure their group with more flexibility to meet the optimal model for their business and would also help in post-acquisition restructuring as it sometimes happens that there is a period where groups cannot use their provisions between pre-existing and acquired entities. An optimist would suggest that the savings made by companies could be reinvested into their business for sustainable growth.
The rules around loss carry-back are also stricter here than in the UK: Singapore only permits carry back for one year, and up to a maximum of S$100,000. In contrast, the UK permits unlimited loss carry-back for one year (up to the lower of the available loss and available unrelieved profit).
More tax treaties
For Singapore companies facing volatile markets or tight economic conditions, the ability to benefit from those losses to offset past profits - triggering a cash refund - can in some instances be the difference between surviving and bankruptcy in the following year.
Finally, one area that the Singapore government could work on is that of tax treaties: While Singapore has a comparatively large number of treaties by Asian standards (74 at last count), the UK has a huge number, at over 120 treaties in force. More importantly, many of the UK's treaties are more up-to-date than Singapore's, thanks to new treaties or protocols, and a proactive approach to treaty renegotiation. Hong Kong is one of the best Asian proponents of modern tax treaties: Their treaty with Indonesia is significantly better than Singapore's, with improved terms around dividend withholding tax for dividends paid from Indonesian tax resident companies and protection from Indonesian capital gains tax.
Having a wider range of beneficial treaties attracts foreign investment and trade, both inwards and outwards. In other words, enhancing existing treaties or expanding our current network would enhance Singapore's attractiveness as a destination for trade and investment.
There are other areas where Singapore could also make small enhancements based on the UK system: For example, tax deductions for interest expenses on loans taken to fund the purchase of investments that qualify for participation exemption (ie where the dividends are tax exempt) and no withholding taxes on management fees and technical service fees, to name just two.
It is important to remember that the UK and Singapore, for all their similarities in legal and tax systems, have fundamentally different economic models - that's apparent enough from the differing systems of social security and the level of personal and corporate tax rates, for example. Singapore's system has provided a solid base for substantial investment and sustained growth over the years but some minor enhancements in the areas suggested may help maintain the economy's attractiveness for investment and trade for many more years to come.