Deloitte calls for tax measures for the future economy

SINGAPORE, 18 November 2019 — Budget 2020 is expected to be announced in a time of unprecedented global retreat from multilateralism, which will likely cause the world economy to contract further. Singapore’s 2019 growth forecast has also been correspondingly revised downwards from an earlier estimate of 2.1 percent to 0.6 percent.

“As the world economy becomes increasingly volatile, it is reassuring that the Singapore government is ready to help businesses and workers tide through potentially trying times. However, this does not mean that businesses should rest on their laurels as Singapore continues with its economic transformation and adapts to global changes. The challenge lies in how well businesses plan and prepare ahead. Developing and deepening workers’ capabilities remains one of the clear themes of Singapore’s transformation roadmap, and reinforcing tax certainty can help Singapore continue on the important journey to promote investments and innovation to benefit the economy and the people,” said Mr LOW Hwee Chua, Regional Managing Partner for Tax & Legal at Deloitte Singapore and Southeast Asia.

It is on this sentiment that Deloitte Singapore has given its feedback and recommendations for the Singapore Budget (“Budget”) 2020.

Shaping Singapore’s competitiveness

The world is currently in the midst of transiting from a ‘brick and mortar’ environment, with employees, agents and premises and where profits are ascribed and taxed on businesses with a physical presence; to a system where, potentially, a portion of the profits could be taxed in a jurisdiction where the customers of the business are located as businesses become more digital.

This represents a seismic shift in international tax principles, and both the quantum and how such profits would be allocated between countries remain up for debate amongst the global community. Businesses and, indeed, countries, are sailing into unchartered waters as we await international consensus on how the global tax pie would be redistributed.

In this regard, “tax certainty and clarity in relation to tax treatments could become competitive advantages for Singapore as tax policies across the world gravitate toward international standards and impose limits on the ability of sovereign countries to shape domestic tax policy. This could increase the appeal for Singapore as an onshore jurisdiction,” said Ms LIEW Li Mei, International Tax Leader, Deloitte Singapore.

One of Deloitte’s key recommendations for Budget 2020 is in relation to the intellectual property rights (IPRs) regime in Singapore. Global tax changes have brought about considerations of whether intellectual properties (IPs) owned by MNCs ought to remain where they are.

Ms Sharon TAN, International Tax Partner, Deloitte Singapore said, “Singapore is ranked fourth globally in IP protection works, and ranked top among Asian nations in a recently released International Property Rights Index 2019 Report. As Singapore focuses on innovation-driven economic growth, IP protection is one key area that supports the use of Singapore as an IP hub. Further enhancements to our IP tax regime could also help support the push.”

One of Deloitte’s suggestions is to provide further enhancement on the writing down allowances (WDA) claims on acquisition of IPRs. Currently, a Singapore company would need to acquire both the legal and economic ownership of qualifying IPRs before it is eligible to claim WDA on the capital expenditure incurred in acquiring qualifying IPRs unless it obtains a waiver from legal ownership from the Economic Development Board (EDB). As the approval for a waiver from legal ownership often entails additional commitments in Singapore, this may prove onerous for the Singapore acquiring company to meet the conditions for the waiver.

To attract more IPRs to be located in Singapore, we propose that consideration be given to enhance or simplify the WDA claims on qualifying IPRs as follows:

• 100% WDA claims on capital expenditure incurred to acquire qualifying IPRs where only economic ownership is transferred to the Singapore acquiring company.
• 150% WDA claims for qualifying IPRs where both legal and economic ownership are transferred to the Singapore acquiring company. There is no difference from the current regime except that a higher amount of WDA claim is available to attract bringing legal ownership to Singapore.
  

The above could also simplify the process of WDA claims for qualifying IPRs. The different rates of WDA claims on qualifying IPRs, depending on the ownership transferred to the Singapore acquiring company, would provide certainty to Multi-National Companies (MNCs) when deciding whether to relocate their IPs without the need to negotiate additional conditions required for a waiver application with the EDB if only economic ownership is to be transferred.

Reimagining human capital

“Human capital is an important driver of economic growth. With limited natural resources to depend on, the availability of quality human capital remains a key competitive edge for organisations to consider Singapore as regional or global headquarters for strategic and support activities,” said Li Mei

“That being said, companies find that there are inherent risks in investing in human capital as employees may leave before the company has a chance to recoup or realise its investment. Even though this may not be a risk to the broader economy as skills learnt by the employees will be transferable and, in principle, be productive under their new employers, the challenge arises when a company hopes to manage its profitability and at the same time, retain its quality talent. Larger companies may be able to manage the risk better compared to smaller companies.” Li Mei added.

One of Deloitte’s Budget 2020 recommendation in this regard relates to conducting a study on the feasibility of introducing an “unrealised investment in human capital” tax credit/allowance.

Businesses, in particular small and medium-sized enterprises (SMEs), may face the issue of not recouping or realising its investment in training their employees if those employees decide to leave after the company has incurred the cost of training them. This means that such businesses may be less inclined to spend on employee training. Larger companies may be able to restrict job movements for a period of time (for example, imposing a bond or period of service on the employee), but this may not be practical for SMEs.

A grant of a tax credit/allowance for such “unrealised/unsuccessful” investment may serve to re-distribute some of the risks of training employees from the employer to the broader economy, in view that a skilled workforce is beneficial to Singapore as a whole.

Pushing ahead with globalisation

Deloitte’s Budget 2020 recommendations to push for globalisation include one with regard to the mergers and acquisitions (M&A) allowance.

Mr Daniel HO, M&A Tax Leader, Deloitte Singapore said, “The M&A allowance has been helpful and should be extended. Currently it is only available for share acquisitions. Perhaps it should also be expanded to include asset deals by granting similar allowance on the goodwill paid or for overseas joint venture investments.”

Deloitte’s recommendation is for the M&A allowance, which is set to expire on 31 March 2020, to be extended for another five years till 31 March 2025 to support SMEs to grow through acquisitions.

In addition, the scope of this allowance could also be expanded, or a separate standalone M&A allowance be created, to cover goodwill payments made by Singapore companies in an asset deal situation. As a start, 20% of the goodwill capitalised could be eligible for the M&A allowance. This would allow flexibility for Singapore companies to grow through either a share or an asset acquisition.

Other areas of focus

A review of Singapore’s individual tax regime is timely, given the changes in the economy and society since the previous adjustments in recent years, which include the increase in marginal tax rates for the higher income tax brackets with effect from the Year of Assessment 2017 (income year 2016), as well as the introduction of a personal income tax relief cap of S$80,000 with effect from the Year of Assessment 2018 (income year 2017).

“Even though the individual tax regime has been made more progressive in recent years, nevertheless, it may be timely to conduct a holistic review of our existing personal tax reliefs so that they will better reflect our economic environment and current social needs. For example, maintaining the earned income relief at S$1,000 for individual taxpayers who are below the age of 55 years - a relief quantum which has been maintained for many years - does not appear to be a real reflection of the much higher cost of living standards that we now have,” said Ms Sabrina SIA, Global Employer Services Tax Leader, Deloitte Singapore.

One of the personal tax reliefs worth exploring could be a gender-neutral working parent child relief to reflect the outside-of-work child-raising responsibilities of working fathers. Currently, only female taxpayers in the workforce can qualify for working mother child relief, which is a relief based on the percentage of their earned income, subject to meeting the specified conditions.

Sabrina added, “Given the changing demographics in Singapore where many households now have dual income earners, as well as the push for gender equality, it will be timely to consider giving additional relief and incentives to working fathers to participate more actively in the upbringing of their children.”

Another area of focus is the implementation of the Overseas Vendor Registration (OVR) regime scheduled to be effective from 1 January 2020. Overseas suppliers of digital services such as online gaming, media subscriptions, are required to register for and charge GST under the OVR regime if they exceed the prescribed GST registration thresholds and they are supplying to non-GST registered recipients in Singapore. This measure was announced in Budget 2018 as part of the move to levelling the playing field on the GST treatment of services supplied and consumed in Singapore.

Mr Richard MACKENDER, Indirect Tax Leader, Deloitte Singapore said, “Although IRAS has had a comprehensive outreach programme for potentially affected overseas suppliers, some of them may still not be familiar with the new OVR regime or fully understand their GST obligations. The government could consider granting a formal amnesty for affected overseas suppliers on any penalties and/or fines for errors made in the first year of implementation of the OVR regime. This is to encourage all to come forward to register for GST and comply with the new rules.”

“Singapore has always prided itself on, among other things, a strong rule of law, well-trained high quality workforce and excellent infrastructure. These fundamentals have distinguished Singapore and served it well for many years and we must continue to build on them. In doing so, Singapore should remain well-positioned within the global community to face the looming economic challenges,” Hwee Chua concluded.

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