FEBRUARY 24 ― Delivered on the fifth day of the Lunar New Year, there was no doubt that many were expecting Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam to give out “hongbaos” in Budget 2015. The Budget did not fall short of expectations on the “giving” front. But what surprised many was that the minister did some “collecting” as well.
Listening to Tharman’s speech, many would have been alerted to the words “we must, therefore, strengthen our revenue base”.
So what tax rates will be raised? We know it will not be the Goods and Services Tax — at least not for this year. The usual sin taxes would hardly qualify as something that strengthens the revenue base. Could it be corporate income tax?
Mr Tharman kept everyone in suspense while revealing all the “hongbaos”. Finally, just as he was wrapping up the speech, out came the big surprise — the top personal income tax rate will be raised by a further two percentage points to 22 per cent. This means there will be a five-percentage-point difference between the top personal tax rate and the corporate tax rate, which remained at 17 per cent.
There are other tweaks to the tax-rate structure to make it more progressive. This calibrated move is to get greater revenue contributions from high-income earners without sacrificing Singapore’s competitiveness in a big way.
It is a bold move that bucks the global trend.
In the EY 2014 Outlook for Global Tax Policy survey, of the 61 jurisdictions surveyed, 57 had reported no change in their top personal tax rate since 2013. Only two reported increases. Another two reported decreases. The two jurisdictions with increases are Mexico and Sweden. But they are not our close competitors.
Our closest competitor is Hong Kong. The top personal tax rate of Hong Kong, at 17 per cent, is five percentage points lower than Singapore. But it does not have a progressive rate structure.
Hong Kong taxpayers hit the top rate of 17 per cent at an annual income level of approximately S$20,000 (RM53,330). Singapore taxpayers hit 17 per cent only at an annual income level of approximately S$160,000 to S$200,000. That said, the higher top marginal rate may have a psychological effect on the cost of doing business in Singapore.
It is not uncommon for multinationals to consider top marginal tax rate in their evaluations of whether to locate their regional headquarters in Singapore or Hong Kong.
As expatriate tax costs are often borne by the companies, it increases the costs of doing business in Singapore. However, top marginal tax rate is but only one of the many factors that should drive decisions on investment locations.
In that light, the change to move towards a more progressive tax structure is a right one. Considering the personal tax structure in totality, Singapore remains competitive in the region.
While the high-income earners may have to cut back on the “hongbaos”, given higher taxes in 2017, businesses, especially small and medium enterprises (SMEs), have much to cheer about.
Helping small and medium enterprises
Introduced in Budget 2013, the 30 per cent corporate income tax rebate capped at S$30,000 was given to all companies, including registered business trusts for tax years 2013 to 2015.
The extension of the 30 per cent corporate income tax rebate by a further two years to cover tax years 2016 and 2017 is much welcomed. However, the cap is lowered to S$20,000 to benefit mainly SMEs.
The corporate income tax rebate is computed on the tax payable. Therefore, companies that are not paying taxes will not be able to benefit. Such companies may consider deferring capital allowances claims or planning their group loss relief to maximise the corporate income tax rebate.
The tight labour market and rising labour costs have been the top concerns of SMEs. It is thus heartening that Budget 2015 has included various extensions and enhancements of schemes that were introduced, over the years, to help companies manage their labour costs. These schemes include the Wage Credit Scheme, the Temporary Employment Credit scheme and the Special Employment Credit scheme.
For example, the extension of the Wage Credit Scheme for another two years (2016-17) to co-fund wage increases will help cushion the impact of cost increases. Although the co-funding is reduced from 40 per cent to 20 per cent, the extension goes a long way in helping SMEs as they restructure to move up the value chain.
SMEs often find it hard to retain good workers. However, a stable and dedicated workforce is key to growth. The extension of the co-funding will help SMEs make themselves more attractive employers.
To encourage SMEs to innovate and look beyond the domestic market, Budget 2015 also enhanced various existing tax incentive schemes such as increasing the level of support under grants of IE Singapore, expanding double tax deduction to salaries of Singaporeans posted to new overseas entities, and simplifying the applications for certain grants of SPRING Singapore.
The Government also introduced a new International Growth Scheme, where qualifying companies can enjoy a concessionary tax rate of 10 per cent for a period not exceeding five years on their income from qualifying activities.
It is hoped that the qualifying conditions and the application process would be kept simple. The feedback from many SMEs has been that while tax schemes are good in intent and purpose, they are sometimes too complex to understand and administratively burdensome.
Clearly, SMEs are a key focus of this year’s Budget and rightfully so if they were to future-proof their business. After all, SMEs are an important part of Singapore’s economy as they make up 99 per cent of our companies, employ 70 per cent of our workforce and contribute 50 per cent of our GDP.
The overall message has been consistent over the years: Singapore needs to transform to secure its future. Singaporeans need to develop deep skills and capabilities through a culture of lifelong learning. Companies need to innovate and internationalise.
Echoing Tharman’s message in Budget 2015, it is time to go beyond value adding. We must be innovative and create value to propel Singapore to the next jubilee. ― Today
*Ang Lea Lea is partner, Tax Services at EY in Singapore. The views reflected in this commentary are hers and do not necessarily reflect the views of the global EY organisation or its member firms.
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.