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The intricacies of evolving incentives in the new decade

Written by Lee Tiong Heng, Deloitte Singapore Global Investments & Innovation Tax Partner and Yvaine Gan, Deloitte Singapore’s Tax Director and Global Investments & Innovation Incentives Deputy Leader. The above are their personal views and may not represent the views of the firm.

As published in Singapore Business Review on 12 February 2020.

In the era of digital economy, industry 4.0, and climate change, organisations are swiftly transforming their business, operating and talent models to keep pace with the times.

Transformations create investment opportunities and incentives often play a key role in decisions to invest. As governments around the world respond with a diverse range of tax and non-tax incentives to attract new investments, it comes as no surprise that the menu of incentives is constantly growing and evolving every day - incentive types, benefits and complexity are on the rise.

Singapore has been focused on transforming its economy and incentives in the areas of digital and industry 4.0, positioning itself as a hub for advanced manufacturing, innovation and digital activities. This has enticed industry giants such as Alibaba, Amazon, Facebook and Google to establish significant presence in Singapore.

In the Singapore Economic Development Board’s 2019 Year in Review, Singapore anchored better-than-expected investment commitments all round, particularly in the number of new jobs that are expected to be created, doubling its initial forecast. Out of the 32,814 new jobs, close to 50% are expected to be digital roles – those that utilise digital technologies such as Artificial Intelligence and data analytics.

In terms of tackling climate change, Singapore has pledged to reduce its emissions intensity under the Paris Agreement. To that end, various “green incentives” have been introduced, an example is the Enhanced Industry Energy Efficiency package to support companies in their drive to reduce carbon emissions and become more energy efficient. To better incentivise companies to achieve higher carbon abatement, the amount of grant support will correspond to the quantum of reduction committed, up to a maximum of 50% of qualifying costs.

Incentives intricacies in the world of BEPS

While tax and fiscal incentives have proven to work well as sweeteners for attracting investments, international tax developments such as the OECD’s Base Erosion and Profit Shifting (BEPS) have changed the global tax order and evolved the incentives landscape. The new normal for tax incentives is now to focus on substance, eradicate harmful tax practices, and limit the incentivisation of IP income.

Singapore has played by the new tax rules and has aligned its incentives regime over the last few years to international standards. Most notably, Singapore overhauled the treatment and incentivisation of Intellectual Property (IP) income and committed to global transparency obligations that require the spontaneous exchange of information for certain tax incentives.

In the overhaul of IP income, a new BEPS-compliant patent box regime known as the IP Development Incentive (IDI) was introduced in 2018 to encourage the commercialisation of IP arising from Research & Development activities, offering concessionary tax rates on qualifying IP income. Consequently, concessionary tax treatment for income derived from IP rights (IPRs) was carved out from the scope of two of Singapore’s most established tax incentives, namely the Pioneer Service Companies Incentive (PC-S) and the Development and Expansion Incentive (DEI).

The change in IP income treatment has a massive impact on incentivised companies in Singapore. All existing PC-S and DEI award holders have to evaluate their incentivised revenue streams to assess if the exclusions on IP income apply, evaluate the appropriate grandfathering timelines to remove the relevant income, and consider whether such income streams could be incentivised under the new IDI. Unfortunately, some companies with existing IP income may not be able to continue having such income incentivised due to the narrower definition of IP in the new BEPS-compliant regime.

With intense scrutiny and heightened transparency of incentive regimes, it comes as no surprise that authorities are now taking a more meticulous approach in the process of awarding incentives, as well as placing greater emphasis on the monitoring and compliance post the approval of incentives.

Before BEPS was introduced, investment projects proposing high profits in a country were very much welcomed as that generally meant higher tax revenue to the authorities. However, in the context of a BEPS-regulated environment, authorities could become very cautious when a project promising significant potential profits land in their court. In Singapore, we have seen authorities conducting a deeper second level analysis when they come across projects exceeding certain substance thresholds. This is to ensure that the assessment of such cases is robust and defensible if scrutinised by the international community.

What this implies for companies considering incentives is that there is now a need to evaluate the appropriate amount of substance, value creation, and value capture activities in order to truly benefit from incentives. Stricter incentives compliance and audit requirements also mean companies need to conscientiously track and report their incentives commitments to authorities.

Unfortunately, the dust has not settled. BEPS 2.0, which is currently in the works to introduce additional reforms to the framework of international taxation, could further impact existing tax incentives regime. Singapore’s incentives regime may have to evolve to be BEPS 2.0 compliant and yet continue to be effective as an economic tool to attract the right investments into the country. This will be a significant space to watch out for.

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