On the Road to Economic Recovery
As Singapore continues to grapple with living alongside COVID-19 and other headwinds that continue to have a negative impact on global economies, there is a certain level of cautious optimism brewing along the horizon as the country plans and prepares itself for the road out of the COVID-19 pandemic.
The country has registered an economic resurgence that is stronger than expected in 2021. According to statistics released by the Ministry of Trade and Industry in January, Singapore’s Gross Domestic Product (GDP) has grown 5.9 percent on year in Q4, bringing full year growth for 2021 to 7.2 percent. With the country now further cushioned through a high vaccination rate among the local population, it is now encouraged and even confident to leap head-on into the fray to address various key policy areas that will strengthen its competitive edge and social compact, as well as prepping for a more sustainable and greener future.
Budget 2022 was unveiled by Finance Minister Mr Lawrence Wong on the 18th of February 2022. While the Budgets of the last 2 years were predominantly focused on getting individuals and businesses through the ravages of COVID-19, Budget 2022 has been devised to set its sights on longer-term goals and to nurture the shoots of recovery after recording a stronger than expected economic recovery in 2021.
Immediate Support for Businesses
As expected, in light of the economic recovery, COVID-19 business support has been dialled down further in the country’s third pandemic-era Budget with a view to normalise fiscal policy as it is unsustainable when the economy is on a recovery path. However, calls from industry players banking on more short- and long-term aid, especially in the harder-hit sectors (e.g. aviation, retail and food and beverage industries), have not gone unheard. A S$500million Jobs and Business Support Package was introduced. Broadly, Small-and Medium-sized Enterprises (“SMEs”) that have been most affected by COVID-19 will be able to receive financial aid by way of a S$1,000 payout per local employee, up to a cap of S$10,000 per firm, subject to conditions. The existing Jobs Growth Incentive will be extended by another 6 months, but with stepped-down support rates. As the COVID-19 situation continues to stabilise, it is expected that such broad-based aids will continue to be pared down against the backdrop of improved labour market conditions. The previously-introduced Jobs Support Scheme (JSS), which, at its peak, assisted businesses with the payment of up to 75 percent of local wages in some sectors has since been gradually phased out, with a last extension for industries such as retail, food and beverage and tourism to 19 December 2021.
In addition, to ensure that the country is able to continue to compete effectively for foreign direct investments and to address cash flow concerns, the Government has announced extensions to the Temporary Bridging Loan Programme and the enhanced Trade Loan Scheme, with revised parameters for another 6 months for businesses to tap on. Apart from this, it is also acknowledged that the country needs to continue to create an environment for local enterprises to stay relevant and competitive in a heavily digitalised world. As such, the promotion of digitalisation continues to be a mainstay in the Government’s agenda and certain SME grants / schemes will be enhanced to encourage and drive enterprise and human capital transformation. For this purpose, the Government is going to set aside an additional S$200million over the next few years to enhance certain existing schemes to help businesses and workers build up their digital capabilities and another S$600million to expand the range of available solutions under the Productivity Solutions Grant (“PSG”) to push a greater take-up of productivity solutions by SMEs. Meanwhile, a new Singapore Global Executive programme will help firms attract and nurture the next generation of leaders through industry and overseas attachments, mentorships and peer support network.
Singapore companies would also be further supported to expand through Mergers & Acquisitions (“M&A”). This includes expanding the M&A loan programme to include M&A activities from 1 April 2022 to 31 March 2026. The Enhanced EFS – Trade Loan (EFS – TL) has also been further extended for 6 months from 1 April 2022 to 30 September 2022, with enhanced 70% risk-share under the Trade Loan for enterprises venturing into certain emerging markets such as Brazil and Bangladesh. These changes on top of enhanced M&A tax benefits announced in previous Budgets such as the 5-year renewal of the M&A allowance scheme to cover qualifying acquisitions on or before 31 December 2025 would also help Singapore companies to expand through M&A.
Advancing Our National Agenda-Sustainable Development
To continue riding on the coattails of the positive momentum gained from the nation’s economic recovery and to better position the country for the continual upturn of the economy, the Government has stated its intention to continue advancing its national agenda on sustainable development (a critical objective that needs to be achieved for the country’s success in the future). As such, it is not difficult to fathom that the country will be ramping up the deployment of the necessary infrastructure and technology in green energy and continue to explore meaningful collaborations in specific areas within the green energy space. In order to move decisively to achieve the aforesaid agenda, funding is required and it has been announced that Singapore will need a higher carbon tax. The current carbon tax of S$5 per tonne will be raised to S$25 per tonne in 2024 and 2025, and S$45 per tonne in 2026 to 2027, with a view to reaching up to S$80 per tonne by 2030. To alleviate such rising costs, the Government will, from 2024, allow businesses to use high-quality international carbon credits to offset up to 5 percent of taxpayers’ taxable emissions.
Meeting Our Fiscal Challenges
The economic fallout from COVID-19 has severely stressed the finances of many governments, leading many to believe that affected countries may significantly increase their tax rates or otherwise adjust their fiscal systems to boost tax revenues.
Singapore has fared better – tax collections for the financial year (“FY”) 2021 (from 1 April 2021 to 31 March 2022) by the Inland Revenue Authority of Singapore are expected to hit S$58.5 billion, about 18% more than the level in the previous FY. The overall budget position has greatly improved from a deficit of S$64.9 billion for FY 2020 to an expected deficit of S$5 billion for FY 2021. Like others, however, the nation faces significant fiscal challenges ahead.
BEPS – Pillars 1 and 2
On the corporate tax front, the Government is addressing Pillars 1 and 2 of the Base Erosion and Profit Shifting initiative, or BEPS 2.0. Minister Wong explained that Pillar 1 involves the re-allocation of taxing rights of the largest and most profitable Multinational Enterprises (“MNEs”) from where they conduct their substantial activities to where their customers are. MNEs within the scope of Pillar 1 which conduct operations in Singapore can be expected to pay more taxes in the jurisdictions of their major markets and less taxes in Singapore, which has a small domestic market. Although discussions on the exact implementation of Pillar 1 are still ongoing, it is clear that Singapore will stand to lose tax revenues.
On the other hand, Pillar 2’s Global Anti-Base Erosion (or GloBE) Model Rules are intended to limit international corporate income tax competition. GloBE rules work by introducing a global minimum effective tax rate of 15% for MNE groups with annual global revenues of 750 million euros or more. If a MNE group in Singapore is taxed at an effective tax rate of say 10%, the home jurisdiction will require the group to pay an additional 5% in tax there.
In response to a parliamentary question last year, the Minister had said there are about 1,800 MNEs group in Singapore that would meet the revenue criteria, and the majority of them are expected to have group effective tax rates below 15% in Singapore – this is as a result of tax reliefs and, for a smaller number of them, tax incentives, both of which lower the effective tax rate to below the 17% headline corporate tax rate.
For such MNE groups, the Minister announced that Singapore will adjust its tax system. To this end, the Government is exploring a top-up tax called the Minimum Effective Tax Rate (“METR”). While the short-term effect of the tax top-up might be additional tax revenue for the country, the response of other governments and companies will ultimately determine the impact of Pillar 2. Future Budgets would also likely address enhancements to Singapore’s economic competencies, such as labour markets and financial / legal systems, in order to set itself apart as an attractive hub for businesses.
More time will be needed to study the issues arising from Pillars 1 and 2, and changes to the corporate tax system will be announced when they are ready.
Corporate Tax Changes
Apart from exploring the introduction of METR into the corporate tax regime, specific corporate tax changes were also made for certain key economic sectors such as financial services, fund management and transport sectors.
These include the extension of withholding tax exemption for container lease payments made to non-residents under operating lease arrangements, ship and container lease payments made by specified Maritime Sector Incentive (“MSI”) recipients to non-residents under finance lease arrangements, as well as specified payments in the financial sector.
The Tax Framework for Facilitating Corporate Amalgamations has also been extended to licensed insurers, among various sector-specific tax changes.
A fairer and more resilient tax system
While there is uncertainty surrounding the net impact of the two Pillars, the Minister made it clear that the need for higher tax revenues is pressing. Additional tax revenues will serve to meet growing spending needs in healthcare and social care for an ageing population, and for investments to future-proof human capital and social infrastructure. It was explained that the additional revenue from the GST hike of 2% – estimated at S$3.5 billion annually, about 0.7% of gross domestic product – will not be sufficient to meet the additional healthcare spending needed. Hence, the need for the rate increases for personal income tax, property tax and vehicle tax that were announced. Together, these tax changes will strengthen the tax structure to make it more resilient. The changes have also been designed to make the tax system fairer, where those with greater means will contribute more taxes.
GST Hike
On the timing of the GST hike, the Minister delivered some good news. Assuring Singaporeans that he has considered the overall situation – the pandemic, state of the economy, and their concerns over rising prices – he announced that the rate increase will be delayed to 2023 and phased in over 2 years. The GST rate will be raised from 7% to 8% on 1 January 2023, and from 8% to 9% on 1 January 2024.
The Minister also emphasised that GST in Singapore will continue to be implemented in its unique way, with its offsets and schemes that support the less well off. He announced enhancements to the permanent GST voucher scheme, and committed an additional $640million to the earlier announced S$6 billion Assurance Package. For most Singaporean households, the enhanced Assurance Package is set to provide payouts that offset at least 5 years of additional GST expenses, effectively delaying the impact of the GST increase. Lower-income households may expect the offsets to absorb up to ten years’ worth of their additional GST expenses.
Although GST is inherently a regressive tax – with low-income earners paying more GST as a percentage of their income than high-income earners – the Government has stressed that Singapore’s GST forms part of its overall tax and benefits system, which is progressive. For example, individuals who earn higher income pay tax at higher rates. It is therefore reassuring that the Government has enhanced the financial support for middle-income and low-income earners. It may also be noted that when the full rate increase is in place in 2024, Singapore’s GST rate of 9% still remains one of the lowest among jurisdictions with indirect tax regimes.
To prepare GST-registered businesses for the impending rate increase on 1 January 2023, the Government has budgeted close to S$40 million under the Productivity Solutions Grant for the application of subsidised accounting and point of sales solutions. Meanwhile the Inland Revenue Authority of Singapore has released an e-Tax Guide on 18 February 2022 on the general transition rules applicable to transactions that straddle 1 January 2023 and 1 January 2024.
Personal Income Tax
The change for personal income tax comes in the form of an increase in the top marginal personal income tax rate. From the year of assessment 2024, the portion of chargeable income exceeding S$500,000 and up to S$1 million will be taxed at 23%, while that exceeding S$1 million will be taxed at 24%. This increase is expected to affect the top 1.2% of taxpayers and generate additional revenue of S$170 million annually.
While the additional revenue from the increase appears to be insignificant – as compared with the total personal income tax collections expected of S$13.83 billion in FY 2021 – the change continues the move towards greater progressivity in the personal income tax structure. The last time when the current top marginal rate was raised was in the year of assessment 2017, from 20% to 22%. With the latest increase taking effect only in the year of assessment 2024, the top marginal personal income tax rate, though on an upward trend, is being raised in a calibrated manner. And even with the latest increase, Singapore’s personal income tax regime remains competitive, with rates much lower than most countries.
Wealth Tax
While explaining that ideally the Government would want to tax the net wealth of individuals, the Minister also spoke about the difficulty of implementing such a tax effectively – given the complexity of estimating wealth accurately and fairly, as well as the mobility of many forms of wealth. While his ministry will continue to study the experiences of other countries and explore options to tax wealth effectively, the current system of taxing wealth – through property tax, stamp duties and the Additional Registration Fee (“ARF”) for motor vehicles – will be strengthened.
To this end, property tax rates for non-owner-occupied residential properties will be increased across the board, from the current range of 10% to 20%, to 12% to 36%. As for owner-occupied residential properties, the property tax rates will be increased only for the portion of Annual Value in excess of S$30,000, from the current range of 4% to 16%, to 6% to 32%. The rate increases will take place in two steps, starting from the tax payable in 2023. It is expected that this round of property tax rate increases will generate an additional S$380 million in property tax revenue annually.
Meanwhile, luxury cars will be taxed at a higher rate to make the vehicle system more progressive. An additional ARF tier will be introduced for cars at a rate of 220% for the portion of Open Market Value in excess of S$80,000. This change is expected to generate an additional S$50 million per year.
The announcement to increase property tax rates is not unexpected in the light of what the Prime Minister said in November last year – while the Government wants to tax the wealthy in principle, it is “very hard” to do so in forms other than property taxes. Progressive tax rates for owner-occupied residential properties were introduced in Budget 2010. Then in Budget 2013, more tiers of tax rates were added for owner-occupied residential properties, and progressive tax rates were also introduced for non-owner-occupied residential properties. This latest round of rate increases demonstrates the Government’s commitment to mitigate social inequalities through its current system of taxing wealth. Meanwhile, it is hoped that an effective means of taxing net wealth can be implemented sooner than later, but without significantly impacting Singapore’s reputation as a wealth management hub.
Conclusion
As aptly mentioned by Finance Minister Mr Lawrence Wong, “No one likes to talk about taxes, but there are no painless solutions.” At the end of the day, it is inevitable that the country’s tax structure has to be tweaked to pay for the burgeoning anticipated and also recurring expenditure to fund the country’s immediate and future needs and there is no better time than now to take bold measures in Budget 2022 to strengthen the country’s competitive edge in the region, without overlooking the needs of its citizens after registering a stronger than expected economic recovery and achieving one of the highest vaccination rates in the world. We applaud the country’s efforts in helping to right the ship for Singapore to tackle today’s needs and to face tomorrow’s challenges with confidence.
Read the full commentary at Singapore Budget Commentary 2022.
Contact Our Tax Specialists for A Discussion
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Edwin Leow Director, Head of Tax edwinleow@sg.cla-ts.com |
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Shaun Zheng Director, Private Wealth and Asset Management Tax Lead shaunzheng@sg.cla-ts.com |
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Koy Su Hiang Associate Director, Business and International Tax Lead koysuhiang@sg.cla-ts.com |
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Jennifer Lee Associate Director, Goods and Services Tax Lead jenniferlee@sg.cla-ts.com |
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Gerald Lim Manager, Individual Tax Lead geraldlim@sg.cla-ts.com |
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John Chua Manager, M&A Tax Lead johnchua@sg.cla-ts.com |
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Belinda Lim Manager, Transfer Pricing Tax Lead belindalim@sg.cla-ts.com |
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