Deloitte shares recommendations to re-evaluate tax incentives for businesses amidst BEPS 2.0 developments

SINGAPORE, 18 January 2023 – In the run-up to the Singapore Budget (“Budget”) 2023, Deloitte Singapore calls for a re-evaluation in tax incentives for businesses amidst ongoing developments to the Base Erosion and Profit Shifting (BEPS) 2.0 initiative. Deloitte’s recommendations include studying what other tax jurisdictions are doing or intend to do in response to BEPS 2.0, and re-evaluating Singapore’s incentive landscape amidst these ongoing changes in the tax universe. Proposed tweaks to tax measures include introducing expenditure-based rather than income-based tax incentives, and a targeted activity incentive framework rather than a broad-based incentive framework. Against the backdrop of an energy crisis, economic concerns, and extreme weather events worldwide, Deloitte also provides suggestions on how to enhance Singapore’s agenda on sustainable development.

Deloitte’s recommendations are provided based on the expectation that the government will continue to assist households, workers, and businesses to identify and seize new opportunities in the face of uncertainties and volatility.

“Singapore’s Gross Domestic Product (GDP) is expected to grow at a slower rate of 0.5 to 2.5 percent in 2023 amidst continued global supply and energy disruptions. The slower growth forecast, however, should have no significant impact on long-term strategies for transitioning to a more digital, inclusive, and green economy. We expect Budget 2023 to address key challenges such as maintaining the economy's competitiveness and keeping living expenses manageable in an inflationary environment, among others,” said Mr LOW Hwee Chua (刘辉泉), Regional Managing Partner for Tax & Legal (税务区域主管合伙人) at Deloitte Singapore and Southeast Asia (德勤新加坡及东南亚).

Tax incentives and grants and their interactions with international tax developments (Page 9)

In response to BEPS 2.0, the Government announced that it will consider implementing a Minimum Effective Tax Rate (METR), which would top up a multinational enterprise group’s effective tax rate in Singapore to 15%. We understand that there is no desire to introduce the METR as a matter of urgency, and support this approach. It would not be in Singapore’s best interest to be the first mover in enacting the Pillar Two rules domestically. Instead, it would be more prudent to wait until international consensus on domestic implementation options are formed, while studying the impact and design of the rules in the meantime. This will give Singapore the ability to quickly enact the rules when required.

Singapore currently provides many tax incentives as one of the key policy tools to attract foreign investments. Such tax incentives may no longer be as effective in light of Pillar Two, which requires large multinational entities to pay a minimum Effective Tax Rate of 15% regardless of where they are earned. Singapore may need to shift away from traditional tax incentives and consider other measures in order to promote investments.

Pillar Two and its potential impact are high on the agendas of many. As such, Deloitte proposes tweaks to existing incentives and grants to encourage companies to anchor their operations in Singapore.

“The BEPS 2.0 project initiated by the Organization for Economic Cooperation and Development (OECD) has achieved a significant milestone with EU Member States reaching a preliminary agreement on Pillar Two, which calls for a minimum level of taxation for large multinational groups. Pillar Two and its potential impact are high on many large multinational groups’ agendas, and this is expected to increase. Given that tax incentives and grants are part of Singapore’s investment and tax ecosystem and in view of the OECD report on Tax Incentives and the GloBE rules, additional work to review, evaluate, and formulate a streamlined response on suggested mechanisms to these would be required in a post-Pillar Two environment,” said Ms LIEW Li Mei (刘丽梅), International Tax Leader (国际税主管), Deloitte Singapore (德勤新加坡).

“We propose that the Singapore Government commissions a study or analysis of what similar tax jurisdictions are doing or plan to do in response to a post-BEPS environment. This study could explore the potential pros and cons of using Qualified Refundable Tax Credits (QRTCs), Research and Development (R&D) tax credits and other fiscal and non-fiscal support to attract investments,” said Ms Yvaine GAN (颜心怡), Global Investment & Innovation Incentives Leader (全球投资与创新激励主管), Deloitte Singapore (德勤新加坡).
 

Sustainability and climate (Page 12)

Mr WONG Meng Yew (王明耀), Sustainability & Climate Tax Leader (可持续发展与气候税务服务主管), Deloitte Singapore (德勤新加坡) said, “Climate and sustainability remain a key concern for Singapore. Against the backdrop of an energy crisis, extreme weather events and the corresponding economic ramifications, companies and governments around the world are becoming more concerned about the need to be environmentally responsible amidst intense political and burgeoning consumer pressure. In keeping with Singapore's commitment to addressing climate change challenges and meeting Paris Agreement goals, our proposals seek to accelerate the transition to a green(er) economy while also providing feedback on the recent Draft Carbon Pricing (Amendment) Bill”.

Strengthening and making use of Singapore’s innovation and Intellectual Property (IP) ecosystem (Page 6)

The digitalisation of businesses has resulted in the rise of intangible assets. Intangible assets, such as Intellectual Property (IP), are important drivers of Singapore’s economic growth as they do not require land, are infinitely scalable, and offer a plethora of new financial instrument opportunities. However, becoming a global IP hub entails more than just moving IP to Singapore; it also entails leveraging IP to promote innovation and create value.

Mr LEE Tiong Heng (李忠兴), Global Investment & Innovation Incentives Leader (全球投资与创新激励主管), Deloitte Southeast Asia (德勤东南亚) said: “Even as Singapore faces structural changes, the innovation and IP ecosystem remain key pillars of Singapore's economic development. We propose that different tiered schemes or benefits be made available to support companies engaged in R&D, based on their size. Furthermore, we propose a middle-tier incentive for development activities that fall somewhere between qualifying R&D and clearly routine. This tier would incentivise activities that are evolutionary rather than revolutionary, and can be incentivised at a lower credit rate or deduction.”

Financial Services Industry (Page 14)

Slowing external demand due to higher global inflation and tighter financial conditions may dampen the financial sector’s growth prospects. Although the short-term outlook for the global financial sector is expected to be bearish with central banks around the world tightening policies, Singapore's financial sector has remained agile and resilient thus far.

“The Government should continue to promote and encourage the growth and development of Singapore as an asset management hub and leading financial centre in Asia. Our proposals address how Singapore can remain relevant for companies seeking to capitalise on new opportunities and achieve growth. In proposing the changes, we seek to clarify existing tax rules and assist Singapore’s financial services industry to adapt and thrive,” said Mr Michael VELTEN, Asia Pacific Financial Services Industry Tax Leader (亚太地区金融服务业税务主管), Deloitte Singapore and Southeast Asia (德勤新加坡及东南亚).

Other areas of focus: Providing support to low and middle-income groups, as well as small and medium-sized businesses

GST increased from 7% to 8% on 1 January 2023, and is set to further increase to 9% on 1 January 2024. The combined effects of rising inflation and GST increases will raise the cost of living in Singapore, disproportionately affecting those with lower and middle incomes. Businesses will also be affected, particularly small and medium-sized enterprises that are unable to pass on the higher costs to customers.

Goods and Services Tax (Page 17)

Mr Richard MACKENDER, Indirect Tax Leader (间接税主管), Deloitte Singapore, Southeast Asia, and Asia Pacific (德勤新加坡, 东南亚及亚太地区) said, “The government should comment on the certainty of a GST rate increase in 2024, or whether the situation will be reviewed nearer the time given the prevailing economic conditions.”

Personal tax reliefs (Page 18)

Ms Sabrina SIA (佘爱玲), Global Employer Services Tax Leader (全球雇主服务主管), Deloitte Singapore and Southeast Asia (德勤新加坡及东南亚) said, “To assist individual taxpayers with the current challenges of caring for both elderly parents and young children, as well as to cope with the rising cost of living which has been exceptionally acute the past year given inflationary cost pressures, the government may wish to consider introducing additional personal reliefs or increasing the current quantum amounts of relief. Given that the total amount of personal tax relief that an individual can claim is capped at S$80,000 per Year of Assessment (YA), any such increase of relief quantum or introduction of a new relief will be more beneficial to the lower and middle-income groups who are more in need of support, while limiting the benefits to high-income earners to ensure progressivity in taxes.”

Immigration (Page 21)

“A mobile approach to work is now being seen as the ‘future of work’ where highly skilled individuals can ‘work from anywhere’, resulting in the tougher global competition for acquiring, developing, and retaining talent. Our recommendations seek to enhance the attractiveness of Singapore as a work destination for inbound talent and their families, as well as to assist businesses to overcome the talent shortage. For example, the requirement for COVID-19 vaccinations to apply for new or the renewal of long-term passes in Singapore should be revisited. This requirement has been removed for most long-term pass holders’ renewals (except for Work Permit and S Pass holders employed in construction, marine shipyard or process sectors, and those staying in dormitories). As the health threats posed by COVID-19 recede, this requirement will gradually become unnecessary. As such, it may make sense to remove this requirement for all moving forward,” said Ms Christina KARL, Immigration Leader (出入境签证服务主管), Deloitte Singapore, Southeast Asia, and Global (德勤新加坡，东南亚及全球).

Conclusion

“Securing Singapore's future whilst addressing near-term challenges is a recurring theme in each Budget. This year's budget should be no different. We expect the Singapore government to continue attracting our fair share of investments and creating good jobs for all Singaporeans, even as global investment competition intensifies. We also expect the Singapore government to assist families/households and workers/ businesses in identifying and seizing new opportunities in this more volatile and complex world, even in the face of greater uncertainties and volatility,” Hwee Chua concluded.

More details of our recommendations are available in Deloitte’s Budget 2023 Feedback report here.

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