Deloitte Singapore calls for an enhanced broad base and progressive tax system for sustained economic growth and an inclusive society

SINGAPORE, 4 January 2018 — Prime Minister Lee Hsien Loong’s recent remarks on raising taxes as government spending increases has garnered much public focus in the lead-up to this year’s Budget. As Minister for Finance Heng Swee Keat had earlier remarked “raising taxes is not a matter of whether, but when”, Singaporeans are naturally concerned as taxes have a direct impact on the cost of living.

The fundamental principle of Singapore’s tax system has been to keep tax rates competitive for individuals and corporations that will help encourage entrepreneurship and attract foreign investments. “Should Goods and Services Tax (GST) be increased, we would like to propose that the Government considers a modest and phased increased in the GST rate, with the increase ameliorated to a certain extent by introducing zero-rating for certain basic necessities. In addition, the rise of the ‘gig economy’ should also be studied to gauge its long-term impact on Singapore’s tax base,” says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.

While global uncertainty generated by today’s political and legislative environment remains, we should not lose sight of the broader objective of each Budget – that is to prepare Singapore for the challenges ahead and to secure a brighter future for the next generation of Singaporeans.

Deloitte Singapore’s feedback for Budget 2018 is broadly shaped by twin requirements of maintaining competitiveness and fiscal sustainability with a key focus on ensuring that Singapore’s tax base is not eroded by structural shifts in the global economy. With this in mind, Deloitte Singapore’s feedback for Budget 2018 is organised along five broad themes.

1. Ensuring a sustainable revenue base

The call for a sustainable revenue base began in Budget 2015 when then Minister for Finance Tharman Shanmugaratnam highlighted the projected increase in government expenditure over the medium to long-term. Thus far, tweaks have been made to the personal income tax regime but there has been no clear indication whether adjustments would be made to corporate income tax or GST, the number one and two tax revenue contributors respectively to Government coffers.

“There are predictions on the ground that the GST rate is likely to be raised by one to two percent with perhaps a potential ceiling at 10 percent, which is the average GST/Value-added tax (VAT) rate in this region. Should the GST rate be increased by two percent, Deloitte Singapore would like to propose that the increase is staggered, one percent at a time. This would hopefully lessen the financial impact to the lower income group in Singapore.

In addition, the Government may wish to consider expanding the scope of GST zero-rating to cover certain prescribed basic necessities, e.g. children’s clothing, basic foodstuffs such as rice, vegetables, certain prescription medicines to the elderly, so that such items are exempted from GST. This, together with the permanent GST voucher scheme, would help to ease the financial impact on the lower income group,” says Richard Mackender, Tax Partner and Indirect Tax Leader at Deloitte Singapore and Southeast Asia.

2. Adopting a multi-faceted approach towards innovation

In 2017, it was noted that investments in Research and Development (R&D) by businesses in Singapore continued to see an encouraging growth of eight percent year-on-year from 2010 to 2015. With the expiry of the Productivity and Innovation Credit (PIC) scheme in 2017, there is concern that the innovative mindset and momentum of our R&D ecosystem that Singapore has painstakingly built up may slow.

“We note that other countries in the region, such as Malaysia, Thailand and the Philippines, have started ramping up their R&D tax incentive offerings; our perennial competitor Hong Kong has recently decided to take a leaf out of Singapore’s playbook by introducing R&D initiatives similar to the PIC scheme,” says Lee Tiong Heng, Tax Partner and Leader of Global Investment and Innovation Incentives at Deloitte Singapore and Southeast Asia.

“Accordingly, we propose that the Government considers quadrupling the amount of enhanced tax deductions for qualifying R&D expenditure, from the current 50 percent to 200 percent, to ensure that the effective tax savings per dollar of investment in R&D activities remains competitive on a global scale,” adds Mr Lee.

Amongst other suggestions, we have also proposed enhancing the current R&D deduction regime in order for Singapore to keep pace with regional economies, as well as incentives to reduce the financial risk for small and medium-sized enterprises (SMEs) undertaking innovation and R&D activities.

3. Enhancing the tax regime for SMEs

2018 marks the first year where expenditure on activities along the innovation value-chain would no longer be supported by the PIC scheme.

In previous budget, the Government has signaled a clear preference to concentrate its resources on targeted initiatives. Although the authorities have repeatedly stressed that not all businesses will survive as the economy restructures into one that is value-creating, businesses should not be left bereft of support in the post-PIC era.

With this in mind, Deloitte Singapore’s recommendations for Budget 2018 primarily calls for the simplification of the tax system for SMEs as a cost reduction measure.

“Whilst the benefits of an efficient tax system should accrue to all companies, it may be argued that SMEs stand to benefit the most, as, all things being equal, SMEs generally face a disproportionately higher tax compliance cost vis-à-vis bigger companies (as a percentage of sales)”, says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.

4. Building an inclusive society

The projected increase in Singapore’s expenditure needs is, in part, due to additional spending on various social safety nets and assistance programmes to ensure that no one gets left behind as Singapore transits into the ‘future economy’.

Given the propensity of tax to influence behaviour, Deloitte Singapore’s recommendations are intended to complement existing measures, such as enhancing the employability of persons with special needs by providing double deductions for salaries and integration costs as well as making enhanced deductions for charitable giving a permanent feature of the Singapore income tax regime.

In addition, with today’s ageing population and escalating healthcare costs, it has become more expensive for employers to provide medical benefits for their employees.

“It is timely for the Government to relook its objectives of the cap on medical expense deductibility and determine whether the current cap has impaired the provision of medical benefits to employees due to healthcare costs rising much faster than wages. Perhaps this should be given a higher priority than a worry on the over-consumption of medical services in the long run,” says Low Hwee Chua, Regional Managing Partner for Tax at Deloitte Singapore and Southeast Asia.

5. Keeping pace with international tax developments

President Trump has recently signed the US tax reform bill into law. This comprehensive tax reform legislation, amongst others, will reduce the Federal corporate income tax rate to 21 percent, down from the current 35 percent.

“With an already low headline corporate tax rate of 17 percent, and an even lower effective tax rate for multi-nationals after factoring in tax incentives, Singapore may not have much room for further reduction in its corporate income tax rate without rationalising our tax incentive regime. As such, we reiterate our call for a holistic examination on whether a more sustainable tax regime can be achieved by moving from ‘picking winners’ to a reduced corporate income tax rate for the overall economy”, says Ms Liew Li Mei, Tax Partner at Deloitte Singapore.

Apart from the above recommendations, Deloitte Singapore has also provided suggestions for specific sectors such as the financial services, shipping and marine, and insurance industries; certain broad-based business tax recommendations, as well as proposed enhancements for personal tax and GST. The specific details are available in Deloitte’s Budget 2018 Feedback at www.deloitte.com/sg/budget2018feedback.

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