Looking to 2023: What Valentine’s Day present to expect in Budget 2023
| By Associate Professor Simon Poh |
We are continuously living in a “VUCA” world that is fraught with volatility, uncertainty, complexity and ambiguity. The events that unfolded in the last three years, including the COVID-19 outbreak, the Ukraine war and the recent hyper-inflation trends observed worldwide, provided a testimony and added a new dimension to this phenomenon.
On the local front, Deputy Prime Minister and Finance Minister Lawrence Wong has announced that Budget 2023 will be his “Valentine’s Day present to all”, having chosen 14 February to deliver his annual Budget Statement this year. He has also promised additional measures to help Singaporeans, particularly the more vulnerable and lower-income group, cope with inflation and the rising cost of living. Hence, I expect him to go for the low-hanging fruits and further enhance popular pay-outs such as the household utilities credit, Goods and Services Tax (GST) and Community Development Council, or CDC, vouchers, which have proven to be effective schemes that dish out direct help to those in need.
From the international standpoint, uncertainty continues to clout the tax landscape. The OECD’s Base Erosion Profit Shifting (BEPS) project – which aims to address corporate tax planning strategies used by multinational enterprises (MNEs) that take advantage of loopholes and inconsistencies in tax laws – has since progressed to BEPS 2.0, with the initial ambitious target of implementing both Pillars 1 and 2 by 2023 now delayed.
Pillar 1 seeks to re-allocate taxing rights to market jurisdictions and this involves a fundamental change to conventional international tax rules. Pillar 2 aims to introduce a global minimum effective tax rate of 15 per cent for multinational enterprises with a global turnover in excess of €750 million (S$1.15 billion). However, there are complex implementation rules that need to be ironed out, so the implementation of the second pillar is now likely to be delayed until 2024 or 2025. Hong Kong, which originally announced a 2023 implementation, has since delayed the timeline to 2024 at the earliest, in line with the delay in other jurisdictions, including the EU which had strongly committed to swiftly implement these new tax rules.
Singapore has been actively involved in the ongoing international negotiations on both pillars. It is inevitable that the Singapore government, just like other small hub economies such as Hong Kong and Switzerland, will lose tax revenue, particularly when Pillar 1 is implemented. However, as a small and open economy which trades with the world’s major economies, and as a good international citizen, Singapore has openly supported these tax reforms which strive to achieve a fairer and more certain tax environment. In response to Pillar 2, the Singapore government announced in last year’s Budget in February 2022 that it will explore the feasibility of introducing a Minimum Effective Tax Rate (METR) in order to safeguard its taxing rights and abide by international tax standards. In that scenario, MNEs that are within the scope of Pillar 2 and hence subject to paying higher taxes (up to an effective tax rate of 15 per cent in every jurisdiction that they operate), may then decide to remain in Singapore if they are indifferent on which authorities their top-up tax should be paid to. This is particularly so if they consider Singapore an attractive location based on non-tax considerations. There is therefore merit in arguing that corporate tax revenue may actually increase for the Singapore government as a result of implementing Pillar 2.
On BEPS 2.0, it is hoped that on Budget Day, Mr Wong can provide more certainty to MNEs within the scope of Pillar 1 and/or Pillar 2 by announcing firstly, the implementation dates for both pillars, the government’s decision on the METR and its implementation date. While these implementation dates may not be imminent, an advance announcement helps businesses to allocate enough time and personnel resources to amply prepare for them. In terms of possible timelines, 1 January 2024 may be a good date to implement Pillar 2, whereas Pillar 1 would need more time, and could likely take effect on 1 January 2025. Since the METR is meant to be aligned with the Pillar 2 rules, it follows logically that the implementation dates for both should be the same. After all, I believe the Inland Revenue Authority of Singapore would have had enough time over the past year to study the METR proposal thoroughly and actively consult the industry stakeholders to be ready to roll out the details together with those of Pillar 2.
Like it or not, Pillar 2 does diminish the attractiveness and effectiveness of tax incentives that have been used by countries and jurisdictions worldwide to attract foreign investments, in so far as it applies to MNEs within scope. For smaller MNEs as well as local small and medium enterprises that are not impacted by Pillar 2, life goes on as normal. They will continue to benefit from eligible concessionary tax rates as well as the low effective corporate rate which can still be substantially lower than the current headline tax rate of 17 per cent, after considering the partial tax exemption. Hence, I envisage that tax incentives will continue to be relevant and have a role to play in Singapore, even with the implementation of BEPS 2.0. However, under the international radar, I expect the Singapore government to continue to vigilantly review our tax incentive regimes to ensure that they remain relevant and competitive while complying with international standards.
Moving forward, tax factors are expected to play a less important role in attracting foreign investments into a country. To this end, Singapore should continue to leverage the many favourable non-tax factors that it already commands and try to double down on these areas to ensure that we continue to maintain our competitive edge. Here, I am referring to Singapore’s strategic location, political and tax regime stability, quality workforce, pro-business environment, global (including digital) connectivity, reliable legal system and strong infrastructure. To continue to grow our economy with the ultimate aim of raising living standards for Singaporeans, it is imperative that foreign investments continue to stream into Singapore, contributing to substantive economic activities and creating good jobs for them.
Our overall tax regime, meanwhile, must continue to be simple, fair, progressive and yet sustainable. We have taken the bold step to increase the GST rate to 8 per cent this year. This rate will be further increased to 9 per cent, barring any unforeseen external shocks such as a global recession. We have also, in last year’s Budget 2022, hiked personal tax rates, property taxes as well as taxes on luxury cars. These should bode well for the nation’s tax coffers, particularly if we can avert a global recession this year.
Apart from support measures to help businesses and individuals, particularly the vulnerable ones, cope with inflation, I do not expect any drastic changes to our overall tax system, except for some minor tweaks to certain tax policies.
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 2023 is a series of commentaries on what readers can expect in the new year. This is the fourth instalment of the series.
Click here to read Professor Prakash Kumar's commentary on the search for science-based solutions to ensure food security.
Click here to read Associate Professor Jeremy Lim, Dr Bryan Chow and Dr Anne Goei's commentary on the lessons learnt from the COVID-19 pandemic.
Click here to read Associate Professor Benjamin Tee's commentary on rethinking growth through the crucible of crises and how institutes of higher learning are in a critical position to lead the charge.