Budget 2022: Going green, collecting green

Written by Low Hwee Chua, Regional Managing Partner for Tax & Legal, Deloitte Singapore and Southeast Asia and Chua Kong Ping, Tax Director, Deloitte Singapore. The below are their personal views and may not represent the views of Deloitte.

As published in The Business Times on 19 February 2022.

Prior to 18 February, there were some known-knowns as well as some known-unknowns, to borrow a phrase popularised by former United States Secretary of Defense Donald Rumsfeld, about the tax measures to be announced on Budget Day.

The government announced in 2018 that it would increase the Goods and Services Tax (GST) rate to 9 per cent from the current 7 per cent. What was unknown is when that increase will take place, and whether it will be a split-hike or a one-time increase.

When carbon taxes were first announced in 2018, we knew then that such taxes will likely be raised in 2024 and hit around S$10 and S$15 per tonne by 2030 when the initial rate of S$5 per tonne of CO2 emission expires in 2023. Since then, the push towards net-zero has accelerated. It is likely the increase in carbon taxes will exceed the projections set in 2018; the exact trajectory of the hikes, however, was unknown.

Taxes on wealth, arguably an amorphous concept but in Singapore usually takes the form of taxing the acquisition and holding of real property and to a lesser extent the use of private vehicles, is perhaps a wildcard for Budget 2022. Additional buyer's stamp duty has just been raised two months ago, albeit as a property cooling measure. Would further taxes on property be announced in Budget 2022, or would perhaps a tax on capital gains be introduced for certain categories of assets?

With these in mind, were there any genuine surprises in Finance Minister Lawrence Wong's maiden Budget speech? Hindsight is 20/20, so let's start with the headliner of Budget 2022—implementing the GST hike.

Much to everyone's relief, the implementation of the rate hike will take effect from next year and will be in two tranches, rising to 8 per cent on 1 Jan 2023 and thereafter to 9 per cent from 1 Jan 2024.

There were expectations that GST will be raised to 9 per cent this year given the huge budget deficits that Singapore ran up in FY2020 and FY2021 from battling the COVID-19 pandemic. Delaying the hike by a year must not have been an easy decision for the minister as he spent the first half of the Budget speech outlining Singapore's long-term spending needs.

Hastened timeline

The staggered rate increase is reminiscent of the GST rate hike from 3 to 5 per cent between 2003 and 2004, and to forestall complaints that businesses have an opportunity to raise prices twice, the minister has also announced a committee to combat profiteering.

The announcement that Singapore will accelerate its ambition to achieve net-zero emissions on or around 2050 is a pleasant surprise. The hastened timeline also means a sharpened trajectory of carbon tax rate increases, with S$80 per tonne of emissions by 2030. Pragmatically speaking, it will take more than Singapore alone to halt rising sea levels, but striving towards net-zero is a shrewd move on the government's part as it will provide impetus for individuals and businesses alike to tap on opportunities arising from the "greening" of the economy.

A tax on gains arising from the sale of properties did not arise in Budget 2022. Instead, the tax on wealth comes in the form of raising property tax for high-end homes and luxury vehicles. Somewhat surprisingly, taxes on top-earning individuals were raised. At the highest tier, the portion of chargeable income in excess of S$1 million will be taxed at 24 per cent, up from 22 per cent today.

With corporate income tax rates remaining at a flat 17 per cent, we expect the Inland Revenue Authority of Singapore to be extra vigilant in combating "corporatisation", a phenomenon where individuals attempt to convert personal income into corporate earnings.

Budget 2022 has certainly made big strides for Singapore's fiscal and environmental sustainability. But a greater challenge awaits the country. Impending changes to international tax rules will, at its broadest, shift taxable earnings away from Singapore and impose a minimum rate of tax of at least 15 per cent on the remainder. These rules are titled Pillar One and Pillar Two respectively and will affect larger multinational companies (MNCs).

Business costs

The net impact of these rule changes is presently hard to gauge. Pillar One is expected to result in less taxes collected by Singapore, while Pillar Two might yield a short term revenue boost as the minister has announced that any top-up to MNCs' tax rates to 15 per cent will be collected by Singapore.

We expect MNCs to closely monitor Singapore's response to the rule changes, in particular Pillar Two. Most MNCs pay effective rates of tax well south of 15 per cent in Singapore due to tax incentives, and tacking a higher tax bill to already rising business costs may deter new investments and is a tough pill to swallow for existing ones.

In the meantime, the government will be studying the rule changes thoroughly and it is a safe bet that Singapore's corporate income tax regime will be the central focus of Budget 2023.

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