SINGAPORE: Amid a challenging global market as well as China's slowing economy, Singapore must leverage the strengths of a resourceful and innovative population with an agile and pro-business stance that is oriented towards global markets, professional services firm Ernst & Young (EY) said on Wednesday (Feb 10).
In its recommendations for Budget 2016, which is scheduled to be delivered by Finance Minister Heng Swee Keat on Mar 24, EY said it has four broad themes this year:
- Sharpen the focus of fiscal policies for improved effectiveness
- Enhance tax treaties for international competitiveness
- Explore new tax revenue options to support government spending
- Build a more inclusive Singapore society
Mrs Chung-Sim Siew Moon, Head of Tax Services, Ernst & Young Solutions, said: "We propose that Singapore’s income tax system be simplified and made more competitive to promote Singapore as Asia's business and financial hub, while tweaking certain policies to ease business costs and promote business growth."
EY's recommendations come on the heels of fellow Big 4 auditor PricewaterhouseCoopers' (PwC) suggestions, which noted that there is room to do more to actively encourage entrepreneurship here.
REALLOCATE RESOURCES FOR PIC SCHEME TO ENCOURAGE R&D
Under the Productivity and Innovation Credit (PIC) scheme, some of the expenses businesses may claim for include buying or leasing equipment to automate processes, or for the costs of designing create new products or industrial designs. These two categories warrant closer attention as they sit at opposite poles of the claim spectrum, EY said.
Ms Tan Bin Eng, EY Partner at Business Incentives Advisory, said the scheme could be tweaked by reallocating the support for the automation equipment, which accounts for a significant portion of the total PIC expenditure claim, to other categories.
"This is to ensure that the scheme supports companies that undertake productivity leap-throughs via true automation and research and development (R&D), rather than those that make incremental steps or use the subsidies to reduce ‘business-as-usual’ costs," she said.
“The Government may wish to consider a more realistic definition of R&D, taking into account the current state of technology and level of innovation, so that businesses are incentivised to proactively consider process improvements or new ways of doing things."
To further encourage innovation, Ms Tan recommended that additional tax benefits could be given for R&D that results in "truly novel products and outcomes".
RELOOK TAXES FOR SMALLER BUSINESSES
Another change to the income tax system EY suggested was to subject smaller companies to a separate tax rate of 8 per cent, rather than to give them a partial tax exemption.
The partial tax exemption scheme is applicable to companies with a normal chargeable income of up to S$300,000, giving them an effective tax rate of 8.36 per cent or lower, compared to the usual 17 per cent corporate tax rate.
Partner of Tax Services Chai Wai Fook said it was "timely" to relook at the partial tax exemption scheme so that the intended benefits would really benefit small and medium enterprises (SMEs).
He recommended that the Government subject companies to income tax at a separate tax rate of 8 per cent while other companies continue to be taxed at 17 per cent, without any partial tax exemption for any of the companies.
EXPLORING NEW TAX REVENUE OPTIONS
While encouraging lower corporate taxes for SMEs be maintained, EY however also suggested that the Goods and Services Tax (GST) registration threshold be halved so more companies would be liable to pay GST.
Currently, the threshold stands at a turnover of S$1 million per annum – significantly higher than most other countries, EY said. It recommended that this could be lowered to S$500,000.
Mr Kor Bing Keong, Partner, GST Services, said a high GST registration threshold was important at the start of GST implementation as it relieved small businesses from GST registration and compliance. However, GST has now become an integral part of businesses and GST-compliant accounting and point-of-sale software is readily available.
"With the expected increase in social spending by the Government, a decrease in GST registration threshold could bring more businesses into the GST net and increase revenue collection.".
EY also recommended that certain transactions in the digital economy could be a new source of Government revenue if captured in the GST system.
“The non-taxation of supplies made by overseas service providers through the digital economy does not only create a GST leakage to the Government but also a price disadvantage to domestic suppliers, resulting in an uneven playing field," Mr Kor said.
Mr Yeo Kai Eng, also a Partner in charge of GST Services, added that the Government could consider introducing new GST rules to require overseas service providers that sell to Singapore consumers to register for GST in Singapore if such sales exceed the GST registration threshold and introduce simplified GST registration procedures for these overseas service providers.
"This would bring more transactions into the GST net," he said.
ENHANCE PERSONAL TAX RELIEFS
Noting high costs of living, EY recommended raising the income ceiling for dependent spouses or children of taxpayers to S$5,000. This was also "in recognition of the efforts put in supporting families" said Ms Kerrie Chang, Partner of People Advisory Services - Mobility (Tax) at EY.
Currently, Singapore taxpayers who support their dependent spouses or children can claim a personal tax relief if the spouse or children do not have an annual income exceeding S$4,000 in the previous year.
By raising the ceiling, the Government could "indirectly free up more dependent spouses into the workforce", which in turn could potentially help to ease a shortage of labour, Ms Chang said.