Strategic moves towards future growth and competitiveness

Ajay Kumar Sanganeria, Partner, Head of Tax, KPMG in Singapore

Harvey Koenig, Partner, Energy & Natural Resources and Telecommunications, Media & Technology, Tax, KPMG in Singapore

As we navigate the complexities of a rapidly evolving global economy, Singapore once again stands at a crossroads. The city-state needs to continue attracting foreign direct investments (FDI) while also adapting to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative. This calls for a progressive, yet strategic, approach to tax reform – a key consideration for the upcoming 2024 Singapore Budget.

The BEPS Pillar Two initiative, which stipulates a global minimum tax of 15 per cent for multinational enterprise (MNE) groups with revenues exceeding 750 million euros (S$1.1 billion), is prompting jurisdictions worldwide to re-evaluate their fiscal strategies. Several jurisdictions regionally and globally have already adjusted their tax systems to respond to these guidelines. To maintain its position as a top FDI destination, Singapore should consider a similar proactive approach. This will not only ensure compliance with global standards, but also enhance Singapore’s competitiveness while bolstering its standing on the international stage as well.

To elevate Singapore’s growth and competitiveness, three areas are crucial:

1. Maintaining a competitive tax regime to stimulate economic growth,
2. Reviewing tax incentive schemes to sustain inflow of wealth and funds, and
3. Avoiding double taxation to boost Singapore’s innovation capabilities.

Singapore is renowned for its transparent, trustworthy tax system, underpinned by strong government support and attractive business tax incentives. These qualities have consistently made it an attractive destination for investment. While Pillar Two will have an impact on tax incentives for larger MNE groups, it will continue to remain relevant for smaller multinational businesses. It is therefore important to continue to maintain and enhance our existing suite of tax incentives to attract and anchor these smaller businesses that could become the next generation of business giants.

At the same time, for larger MNE groups, the global competitiveness landscape cannot be ignored. Countries will continue to offer various fiscal incentives – tax and non-tax – to target high-growth investments. To further enhance Singapore’s allure among multinational corporations and high-earning entities, Singapore should continue to enhance the competitiveness of its corporate tax system.

The crux of this strategy lies in aligning tax and accounting more closely where feasible, so that businesses don’t end up with effective tax rates significantly beyond the global minimum tax rate of 15 per cent in the absence of tax incentives. This will entail, for example, introducing tax rules in relation to productive assets to allow tax allowances for buildings, fittings and fixtures (which are currently restricted to certain types of buildings that involve land intensification), and writing-down allowances for a wider range of intellectual property assets such as customer lists and other marketing intangibles. This will enable Singapore to retain its competitive edge while demonstrating its unwavering commitment to compliance with international tax standards.

In this regard, besides enhancing and introducing new cash grant schemes, Singapore should consider new incentives, potentially under categories like Qualified Refundable Tax Credits (QRTCs) or Marketable Transferable Tax Credits (MTTCs) that are specifically allowed under the Pillar Two framework. Spanning activities from research and development to sustainability, such incentives have been implemented in other jurisdictions and could offer compelling alternatives to existing schemes. Given their “protected” treatment under the global minimum tax framework, these incentives could offer increased tax certainty, a highly valued attribute for international investors, while also enhancing Singapore’s competitiveness.

Well-crafted tax incentive schemes play a crucial role in attracting family offices, fund managers and international investors, ensuring a consistent inflow of foreign investment into Singapore.

Family offices, particularly in Asia, have become a formidable force in the fund management scene. The surge in wealth in this region has led to many direct investment opportunities, significantly shaping the venture capital and private equity sectors. However, as these entities grow in influence and numbers, the conditions for tax incentive schemes dedicated to single family offices have also become increasingly stringent. These conditions include tiered business spending requirements, minimum capital deployment requirements, and rules about non-family member investment professionals.

In addition, single family offices are not allowed to hold controlling stakes in private equity and venture capital investments if family members hold executive or managerial roles. This rule could come across as counterintuitive, as investors often take on strategic roles in operations in these spaces. These complexities highlight the urgent need for a thorough review of the tax incentive schemes affecting family offices.

Furthermore, as we near the December 2024 deadline for renewing Singapore’s fund vehicle tax exemption schemes, it is important to consider how the asset and wealth management sector will be affected. Many funds in this space are not expected to fall within the scope of Pillar Two of BEPS 2.0 and would therefore not be affected by the implementation of global minimum tax.

We recommend renewing these tax incentives without adding extra economic conditions such as a minimum business spending requirement of S$200,000, a minimum fund size requirement, or a minimum professional headcount requirement. Stricter qualifying conditions could hinder growth in Singapore’s asset and wealth management industry, especially with increasing competition from regional financial centres.

To boost Singapore’s standing as an innovation leader, the government should also adjust the tax treatment of equity-based compensation. Instead of imposing an exit tax on a deemed vest/exercise basis, the government should consider aligning sourcing of employment income arising from equity-based compensation (such as stock options) over the grant-to-vest period. This method not only aligns with OECD guidelines but also prevents foreign employees from being taxed twice on the same income. In the long run, it supports Singapore’s goal of becoming a hub for innovation as this will boost Singapore’s standing of being open to talent.

The strength of Singapore as a global investment magnet depends on the adaptability of its tax system. These measures not only uphold Singapore’s enduring appeal to international companies, investors and talent but also underscore its steadfast commitment to global tax compliance. As we look ahead, we must consider how these strategic moves will shape Singapore’s future as a competitive regional hub.