Budget 2024 should aim to help Singaporeans and businesses build capabilities to chart the next lap of growth during the year and beyond, says Ernst & Young Solutions LLP (EY).
The consulting firm released its wish list for the Budget on Jan 3 citing four key areas the government should focus on: strengthening the country’s economic competitiveness, encouraging sustainability, developing enterprises and developing the workforce.
Deputy prime minister Lawrence Wong is slated to deliver the Budget on Feb 16.
“With base erosion and profit shifting (BEPS) Pillar 2 implementation just round the corner, an uncertain economic outlook and intensified geopolitical tension, 2024 looks to be a bumpy year. More so than ever, tax measures and policies are critical enablers in supporting Singapore’s economic objectives and charting the nation’s next lap of growth,” says Soh Pui Ming, head of tax, Singapore, EY.
Strengthening Singapore’s economic competitiveness
To enhance the country’s attractiveness to companies and investors, EY recommends that the government keep an open mind and have flexibility in reassessing the country’s existing tax incentives. As it is, many jurisdictions are undergoing tax incentive reforms with the implementation of the BEPS pillar 2 around the corner.
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For instance, the Board of Investment of Thailand (BOI) introduced a relief measure in May 2023 to mitigate potential impacts from BEPS 2.0 Pillar Two on its existing tax incentive programs. This measure allows affected BOI incentive holders an option to convert their tax holiday into a preferential tax rate regime, along with an extension in the incentive period, says EY.
According to EY Asean international tax and transaction services leader Chester Wee, the measures will offer flexibility to multinational companies and enable them to smoothly transition into the new international tax environment.
In the same vein, introducing BEPS-compliant qualified refundable tax credits (QRTC) may cater to companies with diverse business models instead of offering traditional cash grants, which are usually more suited for highly capital-intensive businesses. As such, businesses that are engaged in value-added activities like those in service-oriented industries that are less capital intensive, may not be able to access such cash grants.
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“For QRTC to be effective, it should reflect the specific company’s unique business substance and type of business activities carried out. Hence, the parameters used to assess the quantum of QRTC must extend beyond capital expenditure, local business spending and headcount – and extend to include other quantitative measures, such as cost of goods sold, product or shipping volume. To be BEPS-compliant, these QRTC must be refunded as cash or cash equivalent within the four years from when they were first awarded,” recommends Johanes Candra, partner, business incentives advisory at EY.
Allowance claims made under Section 19B should also be refined once the BEPS pillar 2 measures kick in.
Section 19B grants relief to a taxpayer who incurs capital expenditure to acquire the legal and economic ownership of qualifying intellectual property rights (IPR). This is done in the form of a writing-down allowance following an irrevocable election to claim the relief over five, 10 or 15 years.
For instance, EY suggests that the government offer businesses the option to claim Section 19B allowances on a due-claim basis.
“For IPRs that are not depreciable for accounting purposes, the Section 19B allowance claim may exert a downward pressure on the effective tax rate (ETR) and result in potential top-up taxes,” says the firm.
“We suggest offering optionality to claim tax writing-down allowances, in order to give flexibility to taxpayers in aligning the jurisdictional Pillar Two effective tax rate with accounting principles. In general, flexibility is always better, and this may also help reduce compliance costs, which will be crucial in the battle to stay competitive in this day and age,” adds James Choo, partner, international tax and transaction services at EY.
Post-BEPS, the government should consider expanding their existing tax incentives to support companies in undertaking other economically productive activities in Singapore, such as commodity trading, IPR acquisitions, as well as research and development (R&D) and mergers and acquisitions (M&A) activities, Choo continues.
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The existing scope of qualifying IPRS under the Intellectual Property Development Incentive (IDI) should also be expanded from the current ones, which are patents and copyrights subsisting in software.
Instead, eligible IPRs should include other intangible assets such as plant variety rights, designs, utility models, secret formula, supplementary protection certificates and orphan drugs designations, says Candra. “This will encourage companies to invest in wider innovation and R&D efforts and strengthen Singapore’s position as a hub for intellectual property-driven investments.”
Encouraging sustainability
To further Singapore’s efforts to decarbonise industries and businesses, EY suggests more support can be provided in the form of incentives and capability development programmes that encourage early adoption of sustainability-related accounting standards.
“The international financial reporting standards (IFRS) S1 and S2 standards have significant potential to unify the fragmented landscape of sustainability-related standards. They aim to enhance transparency, comparability and consistency of sustainability reporting. Investors and stakeholders can then better assess the sustainability practices of different companies,” says EY.
Praveen Tekchandani, Singapore climate change and sustainability services leader at EY adds that the government should provide “targeted support to help companies to early adopt the standards, such as grant incentives and capability development programmes, capped at an expenditure level. Early adoption of the standards would help to greatly increase the robustness and credibility of sustainability disclosures by listed and non-listed Singapore companies.”
Investment allowances for green data centres should also be provided, suggests EY, for the benefit of companies wishing to set up their own data centres in Singapore.
“There are currently no government-funded tax measures to support companies that are investing in green data centres. We believe that such measures will catalyse investments in green data centres in Singapore and strengthen the nation’s domestic computing capacity. This is also in line with Singapore’s Digital Connectivity Blueprint,” says Chai Wai Fook, partner, tax services at EY.
A further liberalisation of the GST treatment for carbon credits, renewable energy certificates and similar products was also proposed to enhance Singapore’s attractiveness as a carbon credit trading hub.
“As companies continue to increase their activities in relation to carbon credits and procure related services, the current GST treatment of disallowing the input tax claims will inevitably increase their business costs. The impact can be significant, especially for carbon trading companies, and inhibit Singapore’s ambition to be a carbon services and trading hub,” notes Chew Boon Choo, partner, indirect tax – GST at EY.
Other suggestions aimed at boosting sustainability include the enhanced deduction on the purchase of carbon credits for their sustainability agenda as well as funding support to incentivise businesses to strengthen their sustainability capabilities.
The inclusion of carbon credits and transition credits as designated investments for funds tax incentive schemes, liberalisation of tax deduction and grant or withholding tax exemption for green investments, tax exemptions on distributions from green investments, the encouragement for the early adoption of electric vehicles (EV) and the introduction of social impact bonds were other suggestions floated.
Developing enterprises
The following proposals were focused on supporting enterprises through the different stages of their growth, anchoring high-value activities and capabilities to develop the Singapore local ecosystem, and helping companies develop innovation and sustainability capabilities.
Refining the R&D regime in terms of enhancing R&D deductions and refining section 13W which provides upfront certainty of non-taxation on gains from the disposal of equity investments were suggested.
Developing Singapore’s workforce
In Budget 2024, EY hopes to see the government focusing on continued investments in Singapore’s human capital through upskilling and attracting top talent.
This may come in the form of enhanced measures for workforce transformation, tax relief for personal development and more support for families and individuals given the rising cost of living.
