Looking to 2022: An inclusive and forward-looking Budget on the tax front
| By Associate Professor Simon Poh |
Singapore’s tax regime continues to evolve while striving to be simple, fair, progressive and yet sustainable, taking into account both international and local developments, particularly structural changes in society in the case of the latter that will see public spending surge over the next decade.
It will be an understatement to say that there is a lot of uncertainty in the tax landscape in the current year and beyond. However, some uncertainty has been removed given the latest Budget Statement unveiled by Finance Minister, Mr. Lawrence Wong, on 18 February 2022.
International Developments
There are active ongoing discussions under the OECD Base Erosion Profit Shifting (BEPS) project to address tax challenges arising from the digitisation of the economy, by now commonly referred to as BEPS 2.0. There were concerns that Singapore’s corporate tax revenue may be adversely impacted.
Under Pillar 1, some profitable multinational enterprises (MNEs) will need to re-allocate profit from where activities are conducted to where consumers are located. Pillar 1 is expected to reduce the tax revenue for Singapore given its small domestic market and the extent of activities conducted in Singapore by MNEs.
Pillar 2 introduces a global minimum effective tax rate of 15 per cent for MNEs with a global turnover in excess of €750 million (S$1.15 billion) that operate in jurisdictions that are subject to an effective corporate tax rate of less than 15 per cent will have to top up the taxes paid in those jurisdictions in their “home” jurisdiction. The top up will be based on the difference between the corporate minimum tax of 15 per cent and the effective tax rate suffered in that other jurisdiction
The government had previous indicated that when international tax rules are changed, it will consider making changes to our corporate tax system. In response to Pillar 2 recommendations, the Finance Minister announced in his Budget Speech that the government may explore the feasibility of introducing a Minimum Effective Tax Rate (METR) to top-up the effective tax rate of MNEs to 15 per cent. The rationale is that given the certainty of affected MNEs having to pay this minimum effective tax of 15 per cent somewhere, the government should just change the corporate system to collect this METR instead of relinquishing its right to tax to another jurisdiction. If this happens, then the CIT revenue collected, at least from the MNEs affected by Pillar 2, may actually go up.
Local Developments
With rising government expenditure mainly on people and social infrastructure, particularly in healthcare, there is a need to ensure that the government has sufficient recurring tax revenue to cope with these challenges.
We knew that a 2 per cent GST hike is imminent. The question was when rather whether it will happen and if so, whether it is at one go. The Budget Statement revealed that the GST rate will be increased first to 8 per cent in January 2023 and then to 9 per cent in January 2024.
Many expected the hike to take place as early as July this year, and also for the rate increase to happen in one go, taking a leaf from what happened 15 years ago in Feb 2007. This is especially so after Prime Minister Lee Hsien Loong’s signal in his New Year Message and the better than expected economic growth of 7.6 per cent in 2021. So it was indeed welcome relief to learn that the hike will not take place this year.
There is another bonus as the increase will be staggered through two phases, thus alleviating the pain that consumers will otherwise suffer in addition to having to cope with high costs and inflation. For businesses, the impact of the delayed and phased increase should also be positive overall, particularly for the smaller businesses and certain specialised industries where they are unable to claim back the GST on their purchases and expenses. However, with the phased increase, they do need to go through two increases and that means higher compliance costs for them.
The current hike is also accompanied by a substantial Assurance Package to help delay the impact of the GST hike by up to 5 or 10 years for the middle and lower income group respectively. It is heartening to learn that the originally planned $6 billion GST Assurance Package will now be topped up by $640 million to ensure that sufficient assistance is channelled to those in most need.
Faced with increasing calls for the government to consider more types of wealth taxes, the Finance Minister had indicated four months ago that the nation will continue to study how it can expand its wealth tax system to address both income and wealth inequality.
Ideally, it will be most equitable to levy a pure wealth tax that is computed based on a prescribed percentage of an individual’s net wealth, i.e. after netting off their liabilities such as loans against all their assets such as cash and both movable and immovable properties. This can be a one-off exercise or done on an annual basis. But this will be hard to administer given how difficult and subjective it can be when attempting to value assets at different times. But the overarching concern is the mobility of both talent and certain assets. I am glad that the Minister did not go this route given the experience by other nations that implemented such a tax.
Practical considerations will override any over-emphasis on achieving fairness in designing an overall wealth tax system that effectively works. These include ensuring that the tax cannot be easily avoided especially by those with more means, balancing between progressivity and staying competitive to continuously grow our economy and striving to add to our revenue adequacy and resilience.
Measured against these criteria, the Minister had opted for the low hanging fruits by introducing a suite of wealth taxes that include personal income tax, property tax and vehicle tax. Complementing the GST increase with additional income and wealth taxes help to reduce the burden of over-reliance on GST to bring in revenue. The additional tax burden will only affect those who can afford to pay these additional taxes, whether it is income tax for individuals with more than $500,000 taxable income, property tax for higher-valued residential properties or additional registration fees for luxury cars with open market value exceeding $80,000.
About the author
Associate Professor (Practice) Simon Poh is from the Department of Accounting at NUS Business School. He specialises in all areas of tax and conducts taxation courses for both undergraduates and external adult learners. Besides teaching, Assoc Prof Poh continues to be active in the tax profession. Among other appointments, he serves as a Member of the Income Tax Board of Review, an administrative tribunal established for the purpose of hearing appeals against income tax assessments made by the Comptroller of Income Tax.
Looking to 2022 is a series of commentaries on what readers can expect in the new year. This is the sixth instalment of the series.
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