Wednesday, February 23, 2022

A strategic mind map to tackle tax challenges ahead

By: Loh Eng Kiat, Tax Practice Leader at Baker Tilly Singapore
(First published on The Business Times, February 23, 2022)

 

Original narrative:

From / The Business Times

 

OVER the last decade or so, it is not often the case in Singapore that tax topics dominate the build-up to Budget Day; many practitioners including myself have generally paid more attention to the annexes that follow the full speech to decode the specific tax changes.

This year was slightly different; maybe it is the new finance minister factor; the calls for more wealth taxes; the "how soon will it be" question surrounding the known GST rate hike; discussions and government snippets provided on social media platforms and so on.

The actual speech delivered by Minister Lawrence Wong did not disappoint; it contained a series of positive and consistent messaging across the different tax types that were hotly debated. Here are my thoughts on some of these:

GST rate hike: balance between compassion and conviction

The delay of the hike till 2023, as well as staggering the increase into 2 phases, considers that many consumers may still be reeling from the economic effects brought about by the pandemic and also inflationary forces. While this obviously cushions the impact on consumers, referencing past experience, the associated administrative work (change in accounting systems, price tagging, and more) will double. There is also a need to watch for increased incidences of profiteering.

It may bear repeating that even with a 9 per cent GST rate, this would still be below the Asian average of around 12 per cent, while many European countries' equivalent GST/VAT rates range from 15 to 20 per cent. To counter this, some may point to Middle Eastern countries that have a much lower rate of 5 per cent; however, comparing with oil-rich countries may not be the most appropriate approach.

It is beyond doubt that the regressive nature of GST needs to be managed; some countries may tend to do it through a lower rate for essential items, however this can pose significant administrative problems and cause niggly disputes.

As a simple example, in India, even the matter of categorising prata (what one would imagine to be a major and consistent form of staple food in the country) became contentious when the item is sold in frozen form, attracting the question of higher GST (18 per cent versus 5 per cent, if treated as bread-like essential food). In the case of multiracial and culturally diverse Singapore, the potential for disputes of such nature cannot be overstated.

Seen in this light, the example of the very targeted approach of direct cash support for lower-income groups via the Assurance Package to help defray their increased spending and manage regressivity is sound and effective.

Avoiding a 'Fomo' reaction towards taxing the rich

While this came as a slight surprise, the announcement of the hike in the top income tax rate for individuals may reflect the government's subtle confidence that Singapore can remain attractive to high-calibre foreign talent, and that (despite their general mobility) they can look beyond this upcoming rate hike; it also strengthens the progressivity of our overall tax structure as the higher taxes collected from this group can help defray other budgetary needs such as enhanced support for the less privileged.

As things stand, this upcoming increase is set to widen the gap between the highest income tax rate for individuals (to be 24 per cent) and companies (currently 17 per cent); it could spur more self-employed individuals to consider potential tax benefits of corporatisation, since corporate dividends are tax-exempt. However, from experience, the tax authorities would likely monitor such behaviour to ensure that any restructuring is on sound basis and not solely tax motivated.

On the hotter topic of wealth taxes, the Finance Minister's reference to many European countries dropping their wealth tax regimes since 1990 may well suggest that a "Fomo" mentality ought to be avoided; any hasty introduction might erode such tax base (for example, ease of capital flight by tycoons) and consequently yield meagre or even counter-productive results. France's experience - where it is suggested in research that more than 60,000 millionaires left France over a span of slightly over 15 years - could be another reference point for further consideration.

There is still however a strong need to ensure progressivity in our fiscal framework, and the further focus on property tax rate recalibration is a sound one since recent GCB (Good Class Bungalow) deals suggest real estate ownership remains aspirational even among the newer rich. That said, trending developments could pose problems in the future; various assets have the potential to be tokenised into other forms (such as non-fungible tokens) with the corresponding taxation outcomes blurred, so property tax reform alone cannot be the silver bullet.

Moving towards a greener economy and standing tall against international tax headwinds

The somewhat higher-than-expected increase in carbon taxes clearly signals our intent towards changing behaviour and contributing to a greener economy.

The continued pressures brought about by multilateralism in the realm of corporate income tax reform remain unabated; there should be no residual doubt that Singapore must consider measures beyond mere tax incentives for multinationals to anchor their presence here. The BEPS 2.0-positioning statements in the Budget speech suggest technical resilience and preparedness within our finance ministry and demonstrate strong intent to continue punching above our weight in this era where tax sovereignty for many hub economies is somewhat diluted.

Overall, in terms of taxation, this Budget provided some light surprises but none too dramatic. In a more volatile global environment, such stability is no longer underrated and will be celebrated by local businesses and international investors alike.

 

The writer is a tax practice leader at Baker Tilly Singapore

Source: https://www.businesstimes.com.sg/opinion/budget-2022-a-strategic-mind-map-to-tackle-the-tax-challenges-ahead

 

Get in touch with the author(s):

Loh Eng Kiat
Partner & Practice Leader
Tax
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