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Singapore may need to re-evaluate tax incentives in post-BEPS 2.0 world: Deloitte

With developments to the Base Erosion and Profit Shifting framework, tax incentives for businesses may need to be re-evaluated.

Deloitte is calling for a re-evaluation in tax incentives for businesses amidst ongoing developments to the Base Erosion and Profit Shifting (BEPS) framework.

In its Jan 18 note, Deloitte says that in the lead-up to the Singapore Budget 2023, its recommendations include studying what other tax jurisdictions are doing or intend to do in response to BEPS, and re-evaluating Singapore’s incentive landscape amidst these ongoing changes in the tax universe.

BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to locations with no or low tax rates and no or little economic activity.

According to the Organization for Economic Co-operation and Development (OECD), domestic tax BEPS due to multinational enterprises exploiting gaps and mismatches between different countries' tax systems affects all countries. BEPS practices cost countries US$100 billion ($131.16 billion) to US$240 billion in lost revenue annually, which is the equivalent to 4% to 10% of global corporate income tax revenue.

Since 2013, there have been concerted efforts to strengthen international cooperation in taxation matters, to stamp out harmful practices and combat tax avoidance by multinational enterprises (MNEs).

Singapore is one of over 135 economies that is working on the OECD and Group of Twenty’s (G20) inclusive framework on BEPS to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.

The current project, referred to as BEPS 2.0, has proposed tweaks to tax measures including introducing expenditure-based rather than income-based tax incentives, and a targeted activity incentive framework rather than a broad-based incentive framework.

Deloitte says its recommendations are provided based on the expectation that the government will continue to assist households, workers, and businesses to identify and seize new opportunities in the face of uncertainties and volatility.

“Singapore’s gross domestic product (GDP) is expected to grow at a slower rate of 0.5% to 2.5% in 2023 amidst continued global supply and energy disruptions. The slower growth forecast, however, should have no significant impact on long-term strategies for transitioning to a more digital, inclusive, and green economy,” says regional managing partner for tax and legal Low Hwee Chua.

“We expect Budget 2023 to address key challenges such as maintaining the economy's competitiveness and keeping living expenses manageable in an inflationary environment,  among others,” he adds.

In response to Pillar Two of BEPS 2.0, the Singapore government announced that it will consider implementing a Minimum Effective Tax Rate (METR), which would top up a multinational enterprise group’s effective tax rate in Singapore to 15%.

“The BEPS 2.0 project initiated by the OECD has achieved a significant milestone with EU Member States reaching a preliminary agreement on Pillar Two, which calls for a minimum level of taxation for large multinational groups. Pillar Two and its potential impact are high on many large multinational groups’ agendas, and this is expected to increase,” explains Liew Li Mei, International Tax Leader.

Deloitte notes it understands that there is “no desire” to introduce the METR in Singapore as a matter of urgency, and supports this approach as it would not be in the country’s best interest to be the first mover in enacting Pillar Two rules domestically.

Instead, it believes it would be more “prudent” to wait until international consensus on domestic implementation options are formed, while studying the impact and design of  the rules in the meantime. This will give Singapore — which currently provides many tax incentives as one of the key policy tools to attract foreign investments — the ability to quickly enact the rules when required.

“Given that tax incentives and grants are part of Singapore’s investment and tax ecosystem and in view of the OECD report on tax incentives and the GloBE rules, additional work to review,  evaluate and formulate a streamlined response on suggested mechanisms to these would be required in a post-Pillar Two environment,” says Liew.

To address this issue, Deloitte proposes that the Singapore government commissions a study or analysis of what similar tax jurisdictions are doing or plan to do in response to a post-BEPS environment. “This study could explore the potential pros and cons of using Qualified Refundable Tax Credits (QRTCs), Research and Development (R&D) tax credits and other fiscal and non-fiscal support to attract investments,” says Yvaine Gan, global investment and innovation incentives leader.

Meanwhile, for individual taxpayers, the Singapore government could consider introducing additional personal reliefs or increasing the current quantum amounts of relief to assist with the  current challenges of caring for both elderly parents and young children, as well as to cope with the rising cost of living,” says global employer services tax leader Sabrina Sia.

“Given that the total amount of personal tax relief that an individual can  claim is capped at $80,000 per year of assessment (YA), any such increase of relief quantum or  introduction of a new relief will be more beneficial to the lower and middle-income groups who are  more in need of support, while limiting the benefits to high-income earners to ensure progressivity in taxes,” Sia explains.

On the sustainability front, Deloitte is recommending that the Singapore government further invest in the green upskilling of the workforce, along with the creation of “good green jobs” among other suggestions.

“We recognise the formation of the Career Conversion Programme for Sustainability Professionals, amongst other programmes, and we encourage further investment also in supporting the incorporation of green skills into existing jobs that are not traditionally green in nature,” says the firm.

It continues: “As our economy shifts and we face the indubitable reality of certain industries becoming sunset industries, we must do more to protect workers who will be most affected by the transition to alleviate their concerns and any material repercussions.”

“The transition to a green economy is a monumental task, the success of which hinges on the capability and ambition of our workforce to evolve as required,” it adds.

Other suggestions within its report include refining the country’s tax rules for employee share schemes, granting a full remission for GST incurred, revisiting the GST registration thresholds for suppliers of remote services, as well as introducing standardised tax deductions for employees working from home.

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