KPMG’s Singapore Budget 2022 proposal highlights ESG, global tax and enterprise support measures
- S$1b Green Energy Investment Fund, Green Financing Bank and laws against greenwashing among proposals for Singapore to be key ESG hub
- Also proposed are measures to boost Singapore’s competitiveness ahead of new global tax rules
- Other recommendations include supporting businesses post COVID-19, building supply chain agility and driving the nation’s 5G roll-out
- These proposals are part of a 3C framework devised by KPMG for Singapore to “Catch the Sun”, “Chart New Orbits” and “Strengthen the Nation’s Core”
20 January 2022, Singapore – With several priorities for Singapore at the fore — from economic recovery to climate change, KPMG in Singapore proposes that Budget 2022 takes Singapore in bold directions to become Asia’s environmental, social and governance (ESG) leader and a destination of choice for multinational corporations amid an evolving global tax landscape. With sustainability a top priority, we are calling for a green financing bank to fund sustainable infrastructure projects in Singapore and Asia , more investments into alternative sources of renewable energy and tougher laws against greenwashing.
KPMG’s ‘3C framework’ (Catching the Sun, Charting New Orbits and Strengthening our Core) for Budget 2022 is also a response to the new global tax rules and its impact on businesses. The proposed global tax policies aim at raising Singapore’s business competitiveness and drive continued growth, including a refundable R&D tax credits scheme for companies and incentive packages for those multinational corporations (MNCs) and high-growth businesses which are still eligible to enjoy such benefits under the rules of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (“BEPS”) Pillar Two rules.
Alongside these, supporting enterprises in their post-pandemic efforts to transform and grow remains critical. This includes measures to tackle immediate cash flow issues concerns, as well as ways to boost the mergers and acquisitions (M&A) landscape and position Singapore as a place for nurturing of unicorns. To become a resilient, purpose-driven and growth-oriented economy in the new normal, Singapore will also need to strengthen its supply chain agility and resilience, chart robust strategies for trade and tourism, while building on its core strengths in wealth and asset management, and technology innovation (which includes the 5G rollout).
Mr Ajay Kumar Sanganeria, Partner, Head of Tax, KPMG in Singapore, said: “Budget 2022 will need to address several upcoming challenges. Climate change has become a top priority for countries and companies; the impending global tax could affect multinational corporations' decision to locate in Singapore, while supply chain concerns and border restrictions will still be top of mind. Yet, Singapore needs to continue to innovate to stay attractive, and it has to position itself as a choice destination for green finance, wealth and asset management, as well as technology.
KPMG's Budget 2022 proposal takes a practical look at all these competing demands, suggesting both immediate incentives and longer-term measures that Singapore's fiscal policy could consider. In the near future of work, Singapore's focus will need to involve building a progressive economic and tax structure that allows the country to take bold steps to grow, while mitigating transition pains and ensuring that no one is left behind. This will be the recipe for building lasting success in an economic sunrise.”
Please refer to KPMG's Budget 2022 Proposal for more details on our recommendations.
Below is an executive summary of KPMG’s Budget 2022 Proposal divided into the following sections.
Catching the Sun
1. Advancing Singapore’s ESG agenda
2. Harnessing global tax opportunities
Charting New Orbits
3. Building supply chains for the future through resilience and agility
4. Setting a course of recovery for trade, travel and tourism
Strengthening our Core
5. Fuelling enterprise expansion and attracting unicorns
6. Singapore’s rise as a wealth and asset management hub
7. Driving technology innovation in a future shaped by 5G
1. Advancing Singapore’s ESG agenda (page 6 of proposal)
ESG has become a top priority among governments and corporates around the world. Securing Singapore’s future as a leading global ESG player will require the country to establish itself as a sustainable finance hub in Asia, while demonstrating its determination to go net zero and combat greenwashing.
a) Getting tough against greenwashing
To steer companies towards effective and reliable ESG disclosures amid increasing stakeholder expectations, we recommend that authorities implement legislation requiring independent assurance of ESG data that are material to investors. This could take the form of large-scale verification processes embedded in open digital platforms with the costs borne by the government and corporates.
b) Financing the region’s sustainable infrastructure projects
A key lever for becoming a sustainable finance hub in Asia is the country’s ability to provide green finance, and for the Singapore Exchange (SGX) to become a preferred issuer of green bonds.
KPMG recommends that Singapore sets up a green financing bank to fund sustainable infrastructure projects in the region. Even though most banks and multilateral agencies have started lending with an ESG lens, it will still take a few years before their portfolios decarbonise, given the nature of their lending to various sectors of the old economy. To plug the gaps, a green financing bank set up can develop a framework to identify and qualify projects to be supported. It can also develop a research and development line of credit to help fast track innovation and pilot use cases in emerging areas of storage, hydrogen and energy efficiency. Finally, the green financing bank can also drive more ESG investments by facilitating capability building and knowledge sharing across industry verticals.
The Singapore Exchange also needs to become the preferred location for the issuance of green bonds. Benchmarks from different issuers in Singapore could attract more regional players here. The Singapore government can further stimulate green lending by defraying issuance costs for green bonds for a period of 12 months to fast-track issuance by infrastructure companies. In addition, authorities can provide a 10 per cent concessionary rate of tax for financial institutions on interest income from loans for acquiring and developing green properties, coupled with tax exemptions for investors on income derived from green bonds.
c) Invest in alternate energy sources
The recent global energy crisis has signalled an urgency for Singapore to seek out alternate sources of energy supply. KPMG proposes setting up a S$1 billion Green Energy Investment Fund to drive green innovation and low carbon tech adoption through to 2030. This will incorporate multiple initiatives in these areas to strengthen Singapore’s energy security and help scale its net-zero ambitions.
The proposed fund will be a step up from the S$10 million that Singapore has already pumped into low carbon research and the S$55 million for projects in hydrogen and carbon capture, utilisation and storage. The new S$1 billion fund could be in the form of partnership with the government and the private sector, with strong involvements from academic institutions and research agencies.
d) Encourage landlords to have green buildings with up to 200 per cent tax deductions
To step up the push for green buildings, we propose tax deductions of as much as 200 per cent and loans to spur both supply and demand of green buildings. Many landlords have been hesitant to retrofit older buildings to make them more energy efficient, especially since the pandemic has led to cash flow concerns. With green leases currently present in a limited capacity in the commercial and industrial sectors, we propose a 200 per cent tax deduction on financing costs and a property tax rebate of 30 per cent for commercial, industrial and residential property owners if they enter into green leases with tenants, occupy green properties or use these properties for business purposes themselves.
Other proposed measures aimed at property owners and developers:
· 50 per cent exemption on taxable gains from the sale of green buildings
· GST rebates on imported green related equipment and raw materials
· 200 per cent tax allowance on capital expenditure (including professional fees) on green initiatives to retrofit existing buildings
· Extension of the Building Retrofit Energy Efficiency Financing scheme beyond its expiry in 2023
2. Harnessing global tax opportunities (page 12 of proposal)
The new international tax rules could have a significant impact on Singapore since the country offers a range of tax incentives, which primarily results in reduced corporate income tax rate below the prevailing statutory corporate tax rate of 17 per cent, for a range of qualifying activities. Many MNCs also use Singapore as a regional or global hub. There are, however, opportunities to attract MNCs to relocate operations from other foreign jurisdictions with high-taxed profits into Singapore so as to blend in with any pre-existing low-taxed profit pools. This might result in simplified group structures or transaction flows, while preserving the benefits of pre-existing Singapore tax incentives.
Separately, shoring up on factors to attract MNCs and manufacturing giants will become more critical. This will include developing special incentive packages targeted at these companies with clear tax and non-tax measures. These serve to promote Singapore as a regional headquarters of choice and a location for factories of the future. The OECD’s BEPS Pillar 2 proposals target large multinationals and not all businesses will be affected. Hence, Singapore should do more to lure and anchor Asian high-growth businesses that fall below the €750 million threshold, so as to build a new engine of growth for the country.
Amid intensifying competition in a post Covid world, businesses are unlikely to step back from R&D and innovation efforts. Replacing the existing R&D enhanced tax deductions with a refundable R&D Tax Credits scheme would cushion the impact of the global tax rules while ensuring that such efforts continue. R&D Tax Credits, which are offered in some European countries, may not have an adverse impact on the calculation of effective tax rates. Another initiative would be to mirror the ability to claim writing down allowances for corporate tax purposes on a broader range of intangible assets, such as goodwill, marketing, and other similar exclusive contractual rights.
b) Enhanced Regional HQ incentive for MNCs
Expanding the current range of incentives and offering new grants will ensure that MNCs see continued benefits in locating offices in Singapore. KPMG is proposing an Enhanced Regional HQ incentive which includes concessionary tax rates of 10 per cent for income from regional HQ functions for businesses that still benefit from tax incentives. With a greater use of artificial intelligence (AI) and automation, the package should include grants for investments into regional HQ function transformation efforts and the establishment of Centres of Excellence for core capabilities.
With hybrid work becoming a norm, employees who may be based outside of Singapore should be considered as full-time employees in evaluating whether a company meets the incentive milestone commitment, as long as certain specific conditions are met.
c) Incentive packages to attract high-growth companies and ‘factories of the future’
Businesses, in considering their investment locations, will factor in the available incentives in a country in their cost-benefit analysis. Singapore should ensure that the financial grants and tax incentives it offers are easily communicated to potential investors. This can take the form of specialised, targeted packages with both tax and non-tax measures. Our proposal comprises a High-Growth Incentive package led by the Enterprise Singapore and the Economic Development Board for promising companies that show clear scalability for the international market. This package includes:
- Concessionary tax rates of 10 per cent for qualifying income
- Grants to anchor R&D activities in Singapore
- R&D enhanced tax deductions for R&D performed outside Singapore (currently the scheme is only available for R&D carried out here)
- Double tax deductions for overseas marketing, promotion and set-up costs
Another package aimed at transforming the local manufacturing scene is the “Factory of the Future” incentive. Singapore businesses are increasingly turning towards cutting-edge technologies to improve their processes and produce high-value goods. Meanwhile, global tax changes are also prompting businesses to speed up their supply chain realignments. To anchor advanced manufacturing or pilot plants here, we propose:
· Enhanced (100 per cent) investment allowances for businesses in industries that tend to be capital expenditure heavy. They tend to be loss-making in their early years and unable to benefit from concessionary tax rates.
· Grants to invest in pilot plants, cutting-edge equipment, state of the art logistics systems and Industry 4.0 automation plants and property tax exemption for related capital expenditure costs incurred on such machinery
· Land Intensification Allowance for investments in construction and building costs regardless of the industry or gross plot ratio as long as productivity enhancement benchmarks are met
3. Building supply chains for the future through resilience and agility (page 19 of proposal)
Global supply chains are still reeling from the impact of shipment delays, container shortages and constrained production capacity. Meanwhile, rising costs for raw material, shipment, labour and fuel have placed increasing pressure on companies. As a key port in the Asia Pacific, Singapore will have to take the lead in the global recovery. Demand worldwide is likely to fluctuate as the virus situation evolves, and Singapore will have to be armed with strategies to protect and diversify its supply chains.
a) Setting up Cognitive Decision Centres for supply chain visibility
Investing in Cognitive Decision Centre that tap predictive toolsets will allow Singapore to boost its visibility of supply chain, identify potential shortfalls and react quickly. To incentivise global and regional companies to set up such centres here, we propose extending grants for feasibility studies to be conducted and SkillsFuture grant support to help them build their capabilities at the centres.
b) Accelerating digital transformation for sectors hit by global disruptions
More support through tax incentives and dedicated programmes to nudge companies towards accelerating supply chain digital transformation will also be needed, alongside the need to recruit talent that can drive technological change. Micro and small enterprises will benefit from having shared digital platforms to boost their productivity. Meanwhile, a higher percentage of financial support, such as enhanced tax deductions, can be offered to companies that wish to acquire new Enterprise Resource Planning (ERP) systems as part of their transformation. The manufacturing sector, in particular, will be looking for the extra boost as they are among the industries most exposed to global supply chain disruptions. A higher percentage of financial grant support and enhanced deduction can be considered for companies most affected by the pandemic.
c) Grants and loans for companies to tap just-in-case principles in improving supply chain agility
Historically, supply chains have relied on minimal inventory and lowest material cost with the use of “just-in-time” methodology. But increasingly, adopting a “just-in-case” agile methodology will be crucial to build flexibility and resilience. This will require companies to increase their inventory levels and source materials from more expensive locations, which means a need for more working capital. To improve ease of access to credit and relieve the cost pressures on businesses, we are calling for the government to offer these companies financial grants and working capital loans.
4. Setting a course of recovery for trade, travel and tourism (page 24 of proposal)
Singapore is well-poised to recover from the COVID-induced setback to hard-hit sectors such as travel, trade and tourism. However, the acceleration towards digital adoption and seismic shifts in consumer behaviour amid the pandemic have left some businesses in the retail and consumer sectors behind. Many find that they are unable to deliver omni-channel success, as significant investments in infrastructure are needed.
a) Tax incentives to spur business recovery in hard-hit sectors; extending property tax rebate and rental support packages
As Singapore makes progress on its economic recovery, the government can consider measures to help businesses with expenses for international market expansion and investment development activities, such as through enhancing the Double Tax Deduction Scheme for Internationalisation (DTDi). The DTDi could be expanded to include (i) additional categories of expenses, such as COVID-19 travel related costs and (ii) enhanced 400 per cent deduction on existing qualifying expenses for businesses in trade, travel and tourism sectors. Currently, the scheme offers a 200 per cent tax deduction on eligible expenses. In addition, extending property tax rebate and rental support packages will help to alleviate the cash flow concerns for badly hit businesses.
b) Enhance capital allowance and tax deduction claims for digitalisation initiatives
To encourage businesses to step up digitalisation efforts and expand their service offerings, the government can alleviate their cash tax burden by enhancing the capital allowance and tax deduction claims on such initiatives. Enabling the use of digital ecosystems will foster resilience and set businesses on the right path to recovery. The Singapore Tourism Board could also set up a one-stop shop online marketplace for tourism and hospitality players to sell travel packages to tourists. This not only helps tourists book packages easily but also helps local businesses get more publicity and visibility.
5. Fuelling enterprise expansion and attracting unicorns (page 27 of proposal)
In the immediate term, cash flow will remain a focus for businesses amid increasing costs on all fronts and manpower limitations. These factors are expected to impact businesses and their ongoing transformation efforts to become more productive and sustainable. Despite this, many are eager to capitalise on M&A and organic growth strategies to seize new opportunities. It will be key to provide more targeted financial support, with a more gradual phasing out of these measures when the economy picks up. The recent introduction of the Singapore Exchange’s SPACs listing framework is a positive step towards attracting fast-growing companies here. Singapore will need to continue to support unicorns to thrive, as this will not only add vibrance to the entrepreneurial ecosystem but also bring benefits to the economy.
a) Financial support measures to relieve immediate cash flow issues for businesses
Financial support from the government in the form of rent relief, cash grants, wage support and temporary bridging loans continue to be effective measures to relieve cash flow issues. Some measures that could help alleviate tax outlays are an extension of corporate tax rebates with special rules allowing carry forward of unutilised credits to future years. The government could also explore allowing tax deferral on application by companies whose cashflow are adversely affected by the pandemic. For example, the payment of corporate income tax may be deferred by six to 12 months, coupled with longer instalment plans.
Other measures include allowing a deferral of distribution of taxable income by S-REITs and the carry back of tax losses to pre-COVID-19 periods. Accelerating capital allowance claims for the next two years of assessment will allow companies to minimise their tax liabilities during this difficult period.
b) Enhance M&A support schemes to help local enterprises grow and expand
In the wake of the pandemic, government agencies can play a more active role to facilitate discussions on M&A and enable deals to take place. This includes providing support for M&A activities in targeted sectors. Facilitating successful M&As would enable companies to gain bigger financial strength and capabilities to succeed locally and regionally. We are proposing to enhance grants for M&A deal evaluation costs, including financial, tax, legal and commercial due diligence fees as well as those for post-deal integration costs. Tax deductions on abortive deal costs and other related costs should also be considered. Other measures that could spur enterprises towards expansion include allowing group relief and carry back of M&A allowances, bringing back stamp duty reliefs on qualifying M&A transactions and enhancing fund incentives schemes to facilitate capital investments.
c) Make Singapore the place for unicorns to invest and set up their base through targeted grants and tax incentives
Currently, fast-growing companies in some of the “hot sectors” may find that they do not necessarily fall within various government programmes, incentives and schemes. Many thus face challenges in getting the support they need. We recommend creating a closer public and private collaboration to bridge this gap and extending these schemes to non-Singapore companies if they contribute sufficiently to Singapore’s GDP. Doing so will help to create employment and upskill the Singapore workforce.
The government can encourage investments in potential unicorns through more targeted grants and consider providing tax deductions or tax rebates for private enterprises with failed investments in these unicorns. These will support the entrepreneurial scene and entice both local and overseas entrepreneurs.
6. Singapore’s rise as a wealth and asset management hub (page 31 of proposal)
COVID-19 has fuelled the rise of digital ecosystems, including highly integrated apps that offer a one-stop-shop for a range of financial services. Financial institutions will continue to see high returns especially in wealth management and personal banking, as digital innovation breaks down the barriers for services most often traditionally reserved for high-net-worth individuals. At the same time, wealth managers are benefitting from higher transaction revenues as customers look to protect their financial investments amid COVID-19 uncertainties.
On the asset management and fund domiciliation front, Singapore will have to continue to find ways to convince investors and fund sponsors to shift over from established locations. One way it can do so is through incentives to encourage the adoption of Singapore fund vehicles other than the variable capital company (VCC).
a) Driving growth for challenger banks
Challenger banks, which describe new banking players that have emerged since the Global Financial Crisis, play a crucial role in the democratisation of wealth management for mass market. With the entrance of digital banks and continued support for digital innovation, challenger banks will continue to shape the offering of wealth management services. Wealth managers will look to partner these new entrants to improve their overall client experience. Hence the government may need to step in to regulate by building structures to ease collaboration between challenger banks and wealth managers, while reviewing competition rules to keep players motivated. Introducing government controls and regulations would assist in increasing investor confidence and allow smaller providers to gain some market share from traditional wealth managers.
b) Positioning Singapore as the choice location for domiciling funds
Singapore is already an established asset management hub. However, for Singapore to also become the default go-to location for global funds to be set up here, it will be important to find ways to convince investors and fund sponsors to shift over from established locations. One of the biggest issues is investor familiarity. The recent promotion of Singapore as a funds domicile has almost exclusively centred around the launch of the VCC. While the continued process of promotion is certainly a good thing, it is arguable that this could be expanded to include incentives to encourage the adoption of Singapore fund vehicles other than the VCC. This includes the limited partnership which has a largely untapped potential as a master pooling vehicle for Singapore. Some funding could be made to advisors based in Singapore to help with the promotion of the full suite of Singapore fund vehicles internationally.
The continued promotion of the VCC has increased the profile of Singapore as a place to establish a fund. However, there is room to help both fund sponsors and cornerstone investors defray the costs of exploring the use of Singapore structures more generally. Currently, a fund is able to recover a significant proportion of its establishment costs, but an investor who may incur additional legal expenses to understand exactly what the VCC is and how it works has to bear those costs himself. Tweaks to the existing grant scheme to include foreign tax and legal costs incurred by a cornerstone investor will be beneficial. The scheme could also be expanded beyond the VCC to pique interest in new fund vehicle and could be used to encourage the adoption of the Singapore limited partnership and even unit trusts and companies as well.
While Singapore has had a limited partnerships law since 2009, the government should explore a more nuanced and flexible limited partnerships law that addresses concerns that a foreign investor may have going into these structures. These include the tax position around a transfer of partnership interests and the relationship between partners in questions of conflicts of interest and fiduciary obligations.
7. Driving technology innovation in a future shaped by 5G (page 38 of proposal)
Singapore is poised to roll out 5G by 2025 and there is significant market opportunity to ramp up 5G innovations with the help of both local firms as well as foreign direct investments, along with infocomm talent across industries. These efforts should be undergirded by a reliable and progressive network infrastructure.
a) Boosting network reliability by reducing mobile taxation and encouraging network sharing between service providers
Having reliable network infrastructure is a critical need in any country that goes digital. One way network issues can be mitigated is via network sharing between 5G service providers as this expands the capacity of networks while avoiding the high costs of doing so, which would ultimately translate to better coverage and reduced costs for users. Similar to other parts of the world, the government can incentivise network sharing by promoting common or shared infrastructure and incentivising applications and software development, especially in the initial stages of deployment. Singapore could benefit from regulatory guidelines that would encourage the adoption of this approach among telcos, while balancing possible concerns over competition.
Mobile taxation can also be reduced for service providers, since industry trends show that good infrastructure availability tends to be lower in markets where operators have to make higher tax payments. Therefore, as payments for spectrum rights and licences are not deductible for corporate tax purposes in Singapore, KPMG hence proposes providing tax depreciation or writing down allowances for spectrum rights payments, which will mirror the tax treatment in other countries. Without claimable tax deductions on such payments, there will be significant additional costs for telcos which may also be passed on to consumers. A stable tax regime supporting investments can help a country’s mobile infrastructure to develop at a faster rate while encouraging investments.
b) Building the business case for 5G innovations and encouraging more developments for global competitiveness
To enhance monetisation and scalability around the 5G use cases generated within key sectors, KPMG proposes the setup of a ‘digital community centre’ which facilitates sharing of best practices and ideas, while measuring outcomes and targets of use cases to strengthen the business case. The government could also explore the potential of open-source technology applications in driving speed to market and reducing costs.
To encourage 5G innovation development and adoption, the government’s 5G innovation grant administered by the Infocomm Media Development Authority can be extended to new sectors such as healthcare, fintech and agri-tech, while being expanded to include subsidies for talent development and skills training. Refundable R&D tax credits can be introduced to enhance the effectiveness of the current R&D tax incentive for smaller technology players that have yet to generate profits. Offering refundable tax credits of up to 42.5 per cent of qualifying R&D and innovation costs can help support these smaller enterprises which are known for being nimble and with fresh ideas.
Greater collaboration can be fostered in industry ecosystems with government support taking the form of grants to set up collaborative teams or partnerships between businesses in the technology, media and entertainment, and telecommunications sector. This could include offsetting costs for engaging consultancy firms to provide their expertise. While there could be difficulties in getting competitors to share their data, the government can explore how consumers can play a greater role in facilitating information sharing, along with the balancing of data protection, transparency and security priorities, and an increased focus on ethics in AI.