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Budget 2017: A clear shift towards targeted measures
By Daniel Ho (Tax Partner) and Chua Kong Ping (Tax Senior Manager), Deloitte Singapore
As published in The Business Times on 21 February 2017
Those expecting ‘big-bang’ tax policies in Budget 2017, on the back of a report issued by the Committee on the Future Economy (“CFE”) may have been be disappointed. From a tax perspective, the most notable change appears to be the introduction of a patent box regime to incentivise intellectual property income which is in line with the substance-driven and development-linked approach introduced under the OECD Base Erosion and Profit Shifting (BEPS) Project.
Save for modest tax rebates announced for both corporate and personal income taxes, Budget 2017 was long on targeted measures and relatively short on broad-based tax initiatives. In this regard, it is consistent with the trend, started in Budget 2016 with the introduction of the Automation Support Package, that the use of targeted measures, as opposed to broad-based tax incentives such as the Productivity and Innovation Credit Scheme may be the preferred approach by the Government going forward, in supporting specific activities or spending.
Budget 2017 has introduced a slew of these targeted measures to address the economic strategies highlighted by CFE.
These include the SMEs Go Digital Programme that comprises the provision of advice to Small and Medium Enterprises (SMEs) on digital technologies that can be implemented to piloting emerging Info-Communications and Technology solutions that has the potential to level up entire sectors. Deloitte Singapore had previously called on the Government to provide enhanced deductions for businesses seeking professional assistance in this space and are pleasantly surprised that the authorities have gone one step further to essentially ‘hand-hold’ SMEs in their digitalisation efforts.
Another measure aimed at strengthening businesses in their broader efforts to tap on innovation and technology is the ‘Tech Access Initiative’. Under this initiative, assistance will be provided to businesses that require advanced machine tools for prototyping and testing. Again, instead of granting enhanced tax deductions to businesses to procure such equipment, A*STAR has taken a further step to provide access to such equipment, including the provision of user training and advice.
The Government has repeatedly stressed that not all businesses will survive as the economy restructures into one that is value-creating. Taken collectively, it appears that the days of broad-based tax schemes to drive productivity and innovation are well and truly over and businesses should adapt to this new normal of targeted assistance. Nevertheless, in order for these specific assistance schemes to reach the targeted businesses, the qualifying criteria and benefits should be well-publicised and the application process should not be unduly cumbersome.
Providing support for businesses to internationalise has been a cornerstone of recent Budgets, even before the release of the CFE Report. Venturing abroad not only helps Singapore companies overcome the constraints of a limited domestic market, keen competition in the international arena also sharpens these companies’ competitive edge.
Amongst others, the Government has enhanced efforts to help businesses in this area by creating a new International Partnership Fund as well as enhancing the existing Internationalisation Finance Scheme. The former represents Government capital that will be used to co-invest with Singapore-based firms, whilst the latter sees the Government co-sharing risks with the private sector in financing overseas projects.
The Government’s focus at this juncture appears to be on getting firms ‘off-the-ground’ in terms of scaling-up and internationalisation. Going forward, it may be opportune to consider whether tweaks are necessary to the Singapore tax regime to increase the efficacies of these initiatives. For instance, to defray part of the external funding costs, the Government can consider granting a special tax deduction on interest or related borrowing costs incurred to acquire or set-up overseas equity investments. These costs are generally not tax deductible currently. The special deduction could be targeted at SMEs to encourage them to expand, and may also benefit Singapore financial institutions.
As businesses begin to reap the fruits of their overseas investments, the Government could also review the scope of the Foreign-sourced Income Exemption Scheme, which currently exempts from tax foreign dividends that are repatriated into Singapore, subject to fulfilling certain conditions. The scope of this exemption could perhaps be expanded to include foreign interest income, given that such overseas investments could be funded by both equity as well as debt and funding the foreign investment using debt may give rise to tax deduction benefits in the foreign jurisdiction.
On a personal note, we held our collective breaths when the Finance Minister mentioned that Singapore will have to raise revenues through new taxes or raise tax rates. Given that the GST rate was last raised in 2007, there was plenty of cause for speculation. It may be a relief that potential changes to GST appear to be limited to how Singapore would respond to increasing digital transactions and cross-border trade, with an emphasis on ensuring a level playing field between local businesses which are GST-registered, and foreign-based ones which are not. This is one of the recommendations under the BEPS project to address tax leakages in the digital economy. Nevertheless, online shoppers – you have been warned.
The writers are Daniel Ho, tax partner and Chua Kong Ping, tax senior manager, at Deloitte Singapore.