SG Budget 2022: Deloitte calls for tax measures to enable businesses to adapt to the changing business landscape and to keep up with recent international tax developments

Deloitte’s recommendations are intended to assist businesses to adapt and thrive in the new normal while also keeping up with the recent international tax developments, with the main goal to ensure Singapore remains relevant for companies seeking to capitalise on new opportunities, and achieve new levels of growth in a changing business landscape.

Singapore, 23 November 2021 — According to the Macroeconomic Review released by the Monetary Authority of Singapore (“MAS”) in October 2021, growth in the Singapore economy has been subject to "fits and starts" since the beginning of this year, as successive waves of COVID-19 infections have led to the reimposition and subsequent lifting of movement restrictions. Disruptions to activities in some sectors contributed to the flattening of the overall Gross Domestic Product (“GDP”) growth profile in Q2 2021 and Q3 2021. However, the decline in economic activity was less severe compared to Singapore’s circuit breaker period in Q2 2020, as restrictions are less stringent this year, and businesses have adapted to some extent by switching to alternative methods in tandem with the changes in public health measures.

“Budget 2021 provided much relief to businesses, and while we recognise that the level of support cannot be sustained indefinitely, certain businesses, particularly small and medium-sized (“SME”) businesses, are still struggling despite the improved outlook and may require additional assistance to get through this challenging time,” said Mr LOW Hwee Chua (刘辉泉), Tax & Legal Leader, Deloitte Singapore (税务区域领导，德勤新加坡), and Regional Managing Partner for Tax & Legal at Deloitte Southeast Asia (税务区域主管合伙人， 德勤东南亚).

“The pandemic has caused a tectonic shift in the business landscape – we have witnessed rapid digitalisation, the rise of intangible assets, the normalisation of the mobile workforce, reverse globalisation, and increased interest in climate and sustainability issues. All these developments, along with the Base Erosion and Profit Shifting (“BEPS”) 2.0 project initiated by the Organisation for Economic Cooperation and Development (“OECD”), will have a significant impact on the country’s economic growth. Singapore should continue to restructure, reorganise, and reposition itself for new and better opportunities, fueled by technological advancement and innovation, as well as a renewed emphasis on green finance and Environmental, Social, and Governance (“ESG”) projects,” Hwee Chua added.

It is with this sentiment that Deloitte Singapore (“Deloitte”) has given its feedback and recommendations for the Singapore Budget (“Budget”) 2022.

Transitioning to the new normal

Regular COVID-19 testing will be the "new normal" as Singapore reopens in a calibrated manner. Since the beginning of the stabilisation phase, all employees working in settings that involve frequent community interactions, such as retail mall establishments, supermarkets, last-mile delivery workers, and public and private transportation workers, have been required to undergo mandatory rostered routine COVID-19 testing.

Currently, the deduction of medical expenses incurred by an employer is restricted to 1% of total employee remuneration, unless the employer implements certain portable medical benefits schemes, in which case, the cap is increased to 2% of total employee remuneration. In most instances, COVID-19 testing will almost certainly increase the cost for employers to provide medical benefits to their employees. Deloitte proposes that the cost of COVID-19 testing be fully deductible for tax purposes, rather than being subject to the medical expense restriction, where the costs of COVID-19 testing are not fully covered by a government subsidy.

Mr Rohan SOLAPURKAR, Tax Partner (税务合伙人), Deloitte Singapore (德勤新加坡) said, “To detect and prevent infections in the workplace, many organisations are voluntarily requiring their employees to self-test for COVID-19 before returning to the office and/or work site. Allowing COVID-19 testing costs to be fully deductible should encourage regular testing among employees to keep the workplace safe, as well as help to reduce COVID-19 transmission rates in the community without tighter curbs.”

Helping our businesses adapt and thrive

As the COVID-19 situation improves in the region coupled with relatively low cost of funding, the market environment is becoming more favourable for Mergers and Acquisition (M&A) activity. This activity may potentially accelerate, and the deal-making may even surpass those made pre-COVID-19.

Currently, some of the existing qualifying conditions for claiming M&A allowance may be too prescriptive or onerous, and hence, may be difficult to meet. To support companies in Singapore that are making an effort to grow their businesses through M&A and scale-up, Deloitte proposes to liberalise the conditions around the nature and timing of the consideration for the acquisition of the shares in the target company, or allow discretion to be accorded to the Comptroller of Income Tax to waive such prescriptive conditions if there are valid commercial reasons provided by businesses.

In particular, Deloitte proposes removing the requirement that the consideration must be fully paid up within six months from the date of share acquisition; or in the case of contingent consideration, within six months from the date on which the contingent consideration becomes payable, presuming that these requirements were put in place to ensure that the acquiring company claiming the M&A allowance actually incurred the expenditure, but these additional requirements may sometimes make it difficult for companies to benefit from the M&A scheme.

Mr Daniel HO (何仁奇), M&A Tax Leader, Deloitte Singapore (德勤新加坡) said, “The acquiring company should be given the flexibility to carry out the M&A transaction in a commercially viable manner, including the flexibility to decide the timing and manner of payment, in a bonafide commercial transaction. Fundamentally, tax rules should aim to facilitate and not disqualify commercially driven arrangements. In any case, if the arrangement is deemed to be abusive for tax purposes, anti-avoidance provisions can be invoked.”

Keeping Singapore’s innovation and intellectual property (“IP”) ecosystems competitive

Digitalisation of businesses has resulted in the rise of intangible assets. Intangible assets, such as IP, are important drivers of Singapore's economic growth because they do not require land, are infinitely scalable, and offer a plethora of new financial instrument opportunities. However, for Singapore to become a global IP hub, it entails more than just moving IP into the country; it also entails leveraging IP to promote innovation and create value, leading to a multiplier effect in the local economy.

Deloitte's proposals focus on strengthening the innovation and IP ecosystems so that they can be leveraged to promote economic development, which includes addressing gaps in Singapore's current research and development (“R&D”) and IP regime in comparison to competing countries.

Ms Sharon TAN (陈丽斌), International Tax Partner, Deloitte Singapore (德勤新加坡) said, “IP continues to be a key driver in Singapore's ongoing transformation and restructuring exercise. Singapore’s IP tax incentives must evolve to ensure relevance and attractiveness in an era when investors have many choices. To remain at the top of its game, Singapore must identify and address the gaps in its IP regime, including the consideration of broadening the scope of section 19B to include other intangible assets which are critical to certain businesses in gaining a competitive advantage and assuming a market leadership position. The current IP regime has helped to establish Singapore as an IP hub and a knowledge-based economy. However, the successful recovery of Singapore's economy post-COVID-19 is dependent on new market concepts, large-scale innovation, and the pivot of traditional business models. This should be enabled by a new and more liberalised IP regime incorporating intangible assets above and beyond the traditional Intellectual Property Rights (“IPRs”).”

Given that digital sales are expected to outpace brick-and-mortar sales, many businesses are investing in advanced data analytics and cognitive technologies to gain deeper insights into individual consumers' behaviours, actions, and preferences to stay ahead of the competition. The goal for many businesses is to increase customer loyalty and engagement, which are key drivers of their profitability and growth. Deloitte proposes broadening the scope of section 19B to give recognition that digitalisation and the value of data will cut across the supply chain ecosystem which is no longer linear but is circular/ a web of interaction. In other words, Deloitte proposes to include the information of customers of a trade or business and information on work processes as part of the scope of coverage under section 19B.

Separately, there are concerns that the administration of the definition of R&D by the authorities is arguably restrictive, making it difficult for companies to benefit from the R&D regime, particularly where innovation is incremental and any discoveries are more evolutionary than revolutionary.

Deloitte proposes that the authorities consider reassessing their administration of the current R&D definition to benefit a larger group of companies or introduce a hybrid approach of both targeted and broad-based R&D tax incentives.

“The Singapore R&D tax regime is over a decade old, and it is time for a facelift to make it relevant to the current claimants. The support required by SMEs and larger companies can be very different, and it is important for the regime to be adjusted to have tiered schemes or benefits available to support companies engaged in R&D, based on the size of the company. Using the R&D tax relief scheme in the United Kingdom as a model, our R&D tax regime could be divided into an R&D tax credit scheme for large companies and an enhanced R&D tax deduction scheme for SMEs. Companies that incur losses should also be allowed to claim a tax credit,” said Ms Yvaine GAN (颜心怡), Global Investment & Innovation Incentives Leader (全球投资与创新激励领导), Deloitte Singapore (德勤新加坡).

Tax incentives and grants and their interactions with international tax developments

Deloitte proposes retaining Singapore's tax incentive framework to continue attracting new investors, as well as reviewing our current tax incentives to see if they may need to be recalibrated in view of the impending implementation of the Global Anti-Base Erosion (“GloBE”) rules, which is part of the BEPS 2.0 initiatives aimed at ensuring multinational enterprises (“MNEs”) pay a fair share of tax wherever they operate and setting a global minimum tax rate.

Ms LIEW Li Mei (刘丽梅), International Tax Leader, Deloitte Singapore (德勤新加坡) said: “When considering the impact of global developments on Singapore’s tax incentives, the authorities may have to address the needs of two types of investors: existing investors who are already benefiting from the current incentives, and new investors who will be looking out for how these incentives may shift as a result of these developments. Given that different types of investors may have different priorities, Singapore will have to consider how the GloBE rules will impact each group differently.”

Mr LEE Tiong Heng (李忠兴), Global Investment & Innovation Leader (全球投资与创新激励领导), Deloitte Southeast Asia (德勤东南亚) said: “Singapore will have to consider how best to adjust its tax system, particularly the effectiveness and relevance of tax incentive awards in light of the BEPS 2.0 initiatives, to ensure that Singapore remains an attractive inbound destination for foreign-headquartered MNEs while safeguarding its taxing rights.”

“Given that fiscal certainty is a primary concern for all businesses, in addressing the BEPS 2.0 initiatives, it will be imperative for the Ministry of Finance (“MOF”) and its supporting agencies to engage in a two-way dialogue with MNE groups and their relevant industry associations as to potential changes to the current tax system and incentives regime. This would allow such groups to provide constructive industry feedback to MOF while also allowing for potential impact assessment and scenario planning,” added Mr Brent VASCONECELLOS, Tax Partner (税务合伙人), Deloitte Singapore (德勤新加坡).

Industry specific matters

Furthermore, Deloitte recommends several proposals aimed at anchoring Singapore as a fund management hub, strengthening the insurance industry, and maintaining Singapore's attractiveness as a global financial centre.

Measures relating to the fund management sector include broadening the scope of section 13CA of the Income Tax Act to include other types of entities, expanding the list of "Designated Investments" to include partnerships, other types of foreign vehicles and digital assets, and enhancing the deduction for Variable Capital Company (VCC) promotion costs.

Mr Larry LOW (刘俊彬), Tax Partner (税务合伙人), Deloitte Singapore (德勤新加坡) said, “Funds are often formed using vehicles other than companies and trusts, and to ensure that the exemption is sufficiently flexible to accommodate common fund structures used overseas, and also to ensure our fund tax regime is kept up-to-date with the industry, our proposal to extend section 13CA is so that it may apply to offshore funds that use any other forms of vehicle (much like what section 13X currently does).”

Measures relating to the insurance sector include expanding the scope of qualifying investment income under the Insurance Business Development (“IBD”) scheme and expanding the scope of section 34C of the Income Tax Act to cover business transfers under the Insurance Act.

“As noted in the 2020 Blackrock Global Insurance Report , insurers’ investment strategy continues to combine a focus on quality with higher diversification to promote resilience. Accordingly, their exposure to multi-alternatives continues to increase. We recommend aligning the scope of qualifying investment income under the IBD scheme with the Singapore fund incentive schemes under which “Specified Income” from “Designated Investments” is exempt from tax as the current definition of qualifying investment income under the IBD scheme is relatively limited,” said Mr Benjamin TAUSIG, Insurance Sector Tax Leader, Deloitte Singapore (德勤新加坡).

Additionally, Deloitte recommends extending current financial industry incentives and withholding tax exemptions that are about to expire in order to maintain Singapore's attractiveness as a global financial centre. Notably, these financial industry proposals place a renewed emphasis on green finance and ESG initiatives.

Other areas of focus

The government's current priority is to address public finances and stimulate economic growth. Following the economic downturn triggered by COVID-19 and changes in the global tax environment, Goods and Services Tax (“GST”) has become a more prominent source of revenue for Singapore. A tax system that is efficient and cost-effective is important because it contributes to the creation of an environment conducive to economic growth. As a result, Deloitte’s recommendations around GST are primarily aimed at increasing tax certainty and improving tax cooperation between businesses and the IRAS. Deloitte believes that these proposals, along with proposals to promote specific industries, will help to improve the overall economic climate and the opportunities available to Singapore businesses.

“While the Minister for Finance has confirmed that the GST standard rate will be increased from 7% to 9% sometime before the next General Election (due in 2025), there is no firm indication yet as to when the increase will take place. With only three years left, it would be very helpful for the government to give a clear indication of the expected date of implementation so that businesses can plan effectively. There are other system changes that will be required of business, for example, Enterprise Resource Planning (“ERP”) implementations and changes in respect of Low-Value Goods import rules for Business-to-Business (“B2B”) buyers. Giving businesses sufficient lead time to be able to secure Information Technology budget and capacity is key to ensuring that businesses are ready for this change,” said Mr Richard MACKENDER (马克德), Indirect Tax Leader (间接税领导), Deloitte Singapore (德勤新加坡).

Some personal tax reliefs, such as Earned Income Relief, have remained unchanged for decades and are no longer reflective of today's income levels and cost of living. It is past time for the Government to review the personal tax reliefs in light of increasing healthcare costs, rising inflation, and an overall higher cost of living. To that end, Deloitte proposes additional personal reliefs or increases in the current quantum amounts of relief. Individual taxpayers who are caring for both elderly parents and young children, as well as those who are struggling to keep up with the rising cost of living, would benefit from these additional reliefs. This should help to boost Singapore's population growth in the long run, as well as keep the family nucleus intact.

Ms Sabrina SIA (佘爱玲), Global Employer Services Tax Leader (全球雇主服务领导), Deloitte Singapore (德勤新加坡) commented, “Currently, the total amount of personal tax reliefs that an individual can claim is capped at S$80,000 per YA. Therefore, the benefits to high-income earners from any additional personal reliefs or increase in relief quantum amounts would be limited, and the sandwich class of middle-income earners would be the bigger beneficiaries of any such changes, enabling them to have more support while resulting in a more progressive tax system.”

“While the previous year's Budget focused on issues concerning businesses' immediate survival, we anticipate that this year's Budget will likely focus on a much broader range of issues that may arise in the immediate, short, and long term as the economy begins to recover and businesses transition from responding to COVID-19 to thriving in COVID-19. Underpinning all of the above is the need for Singapore to adapt in order to capture new and better opportunities,” Hwee Chua concluded.

More details of our recommendations are available in Deloitte’s Budget 2022 Feedback report here.

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