What more can Singapore do on the tax front?
By Daniel Ho, Chua Kong Ping and Yvaine Gan
As published in The Business Times on 09 March 2016 (prior to the Singapore Budget 2016 announcement)
The clarion call for Singapore companies to venture abroad has been repeatedly sounded by the Government. With a limited domestic economy, it is crucial for companies to internationalise for access to broader global markets, resources and to scale up their businesses. Key drivers of future global growth will come from the rise of emerging markets, rapid urbanisation and escalating demands for higher-value services. With Singapore’s extensive trade links and unparalleled connectivity, companies here are well-positioned to capitalise on these growth drivers to expand their international footprint.
Venturing abroad not only enables Singapore-based companies to overcome constraints of the domestic market, intense competition in the international arena also sharpens these companies’ competitive edge. This will encourage the growth of globally competitive companies which can create value as Singapore transitions to a value-creating economy.
However, expanding beyond one’s home country can be a daunting venture, especially for smaller companies with limited resources and lack of market knowledge or business partners. Common challenges faced by companies when internationalising include navigating multifaceted operating environments, understanding complex local tax and regulatory regimes (such as local participation and licensing requirements), and dealing with political instability, lack of robust corporate governance and currency uncertainties – hygiene factors which businesses are accustomed to enjoying in Singapore.
Singapore businesses generally have difficulties understanding foreign taxes as Singapore’s tax regime is relatively straightforward as compared to countries such as the US, China or Indonesia. Other than a wide array of local taxes such as corporate tax, indirect tax, personal tax and capital gain tax, businesses will also have to take into consideration taxes on the repatriation of profits and transfer-pricing issues where there are cross-border inter-company transactions.
The good news is that businesses need not single-handedly tackle the aforementioned challenges. There are available programmes that encourage internationalisation efforts and they are applicable to all types of companies regardless of their size and readiness. These programmes have also been enhanced in last year’s Budget.
On the tax front, a new incentive, the International Growth Scheme (IGS), was introduced to provide greater support for larger Singapore companies in their internationalisation efforts. Essentially, the IGS confers qualifying companies a concessionary tax rate of 10 per cent for a period not exceeding five years on their qualifying incremental income from approved qualifying activities, in excess of a base income. The remaining income will be taxed at the prevailing corporate tax rate.
While recognising that tax is but one of many factors that businesses contend with when expanding abroad, it should be pointed out that taxes, whether imposed in Singapore or abroad, can constitute a significant drag on profit - often the raison d'être for expanding abroad. On this note, what more can Singapore do on the fiscal front to nudge businesses abroad?
Singapore’s extensive network of tax treaties are often viewed through the lens of attracting global businesses to invest and set up in Singapore. But treaties are a two-way street and also lower the costs of Singapore businesses investing overseas by lowering foreign taxes imposed particularly on profit repatriation to Singapore. The Singapore authorities are undoubtedly well aware of this and efforts should be redoubled to refresh older treaties (Indonesia, Taiwan, Australia, etc.) and to pursue new tax treaties with emerging markets. Also, a Singapore-US tax treaty should remain a priority as Singapore businesses are increasingly looking to tap the US markets. Without a tax treaty, Singapore businesses currently face a 30 per cent withholding tax on dividends, interest and other payments received from the US, on top of US local taxes.
When a business expands overseas, its employees often follow to drive the expansion. However, there appears to be a reluctance on the part of Singaporeans to be posted overseas or undertake significant business travel responsibilities. Amongst others, the reluctance stems from concerns over children's education and disruptions to family life.
As a fiscal sweetener, the Government may consider extending time apportionment of employment income (i.e. Singapore income tax is paid only on that part of the employee’s income that corresponds with the number of days the employee spends in Singapore), a perk already enjoyed by foreigners, to Singapore residents with global roles and responsibilities. This would also be in line with the Government’s vision to grow/groom Singapore leaders, especially senior management personnel who are expected to spend a significant amount of time outside Singapore.
Currently, interest and related funding costs incurred by Singapore businesses to acquire overseas companies are generally not deductible. On the other hand, if funding is sourced locally in the investee location, such costs are generally tax deductible in that foreign jurisdiction.
Setting aside interest rate differentials, it is normally difficult to source for local funding, especially if the acquiring Singapore group does not have a track record or sizable operations in that country. As such, consideration should be given to grant a special tax deduction on interest or related borrowing costs incurred in Singapore to acquire overseas equity investments, up to a certain cap. This could be targeted at Small and Medium Enterprises (SMEs) to encourage them to grow, and may also benefit the Singapore finance industry.
With the formal establishment of the ASEAN Economic Community (AEC) at end 2015, consideration may be given to granting full exemption of foreign-sourced income derived from markets within AEC. This should help entrench Singapore as a location for headquarters and a nerve centre for investments into the ASEAN region, which is expected to be a key growth engine in the world economy in the coming years.
The level of awareness amongst local enterprises of the opportunities of internationalisation and competition that arises as a result of the introduction of the AEC, the Trans-Pacific Partnership and Regional Comprehensive Economic Partnership should be increased. Encouraging SMEs to attend seminars/training on this subject should go some way towards better equipping them to understand the benefits and challenges in utilising these agreements. They would also be in a better position to self-assess their internal readiness to support their internationalisation efforts.
Notwithstanding that enhanced tax deductions on qualifying training expenditure are already available under the Productivity and Innovation Credit (PIC) Scheme (albeit with a cap), the authorities may consider disbursing training grants (in lieu of PIC claims) for such training courses or seminars.
Although fiscal incentives are no panacea to overcome Singapore businesses’ inertia or fear to venture overseas, it is hoped that the proposed tweaks to the Singapore tax regime would lessen the worries of businesses when venturing abroad and help grow Singapore’s external economy.
- The writers are respectively tax partner and senior managers at Deloitte Singapore. The views expressed are their own.