by Eugene Lim, Providence Law Asia, LLC.
Singapore’s Budget 2018, announced 19 February, had been highly anticipated both at home and abroad, and it has certainly lived up to that promise.
Key measures announced by Singapore’s Minister for Finance Heng Swee Keat include a goods and services tax (GST) rate hike, a GST levy on imported e-services, the introduction of a carbon tax, and new tax rules aimed at further strengthening Singapore’s role as a financial and innovation hub. The government also said it will monitor international developments before further announcements on GST taxation of imported goods.
Domestically, the new budget signals how fiscal policies will be calibrated to sustainably fund spending on infrastructure, healthcare, and education to satisfy demands of an aging population, the needs of future generations, as well as maintain security.
Globally, it is a barometer of how Singapore will position herself in the emerging international tax landscape, balancing the need to be attractive to businesses while addressing BEPS and other international tax developments.
For the international audience, Singapore remains open for business and is looking to the future. The budget left Singapore’s relatively low headline corporate income tax (CIT) rate unchanged despite the need to raise taxes. Multinationals and international businesses should remain confident that Singapore’s tax regime remains business-friendly and in line with international tax norms in the post-BEPS era.
GST rate hike
The government announced plans to raise the GST rate by 2% to 9% sometime between 2021 and 2025, signaling that Singapore is prepared to take tough measures to ensure fiscal prudence.
Also, as the government has given ample notice to industry of the increase in GST, companies should have time to adjust their business activities to cope with these developments.
GST on imported digital services
Singapore’s government announced that GST will be levied on imported digital services. The tax, to be levied from 1 January 2020, is in line with the international GST trend to implement a destination principle for the supply of e-services.
B2B services will be taxed via a reverse charge mechanism. Only businesses that make exempt supplies or do not make any taxable supplies need to apply the reverse charge on the services that it imports.
This will result in an increase in GST costs for businesses that make exempt or non-taxable supplies. For example, financial institutions which rely heavily on imported digital services will have increased GST costs as a result of this development.
The taxation of B2C services will take place through an overseas vendor registration (OVR). This requires overseas suppliers and electronic marketplace operators that make significant supplies of digital services to consumers in Singapore to register for GST in Singapore.
Imported services include music and video streaming, apps, listing fees on electronic marketplaces, software, and online subscription fees.
The ability to effectively enforce the taxation of B2C transactions via the OVR regime will be a key lynchpin to ensuring the success of the new GST rules on digital services.
GST on imported goods
The new GST measures will not apply to goods imported pursuant to e-commerce transactions, though the government said it will be monitoring discussions on this topic at the international level.
Carbon tax
Singapore’s government also announced that a new carbon tax will be introduced for all facilities that produce 25,000 tonnes or more of greenhouse gases annually.
The carbon tax rate is S$5 per tonne of carbon dioxide-equivalent (tCO2e) emissions and will apply from 2019 to 2023. There are plans to increase the rate to S$10 or S$15 per tonne of tCO2e emissions by 2030. As such, the government has given businesses ample time to prepare for this tax.
The carbon tax will take the form of a fixed-price credits-based mechanism. Taxable facilities will pay the tax by purchasing and surrendering the number of carbon credits corresponding to their greenhouse gas emissions. These credits will be issued by the National Environment Agency at the prevailing rate.
The tax applies to greenhouse gas emitters that account for 80% of all greenhouse emissions in Singapore. The government will explore ways to address greenhouse gas emissions by other emitters.
The carbon tax will not apply to the use of petrol, diesel, and compressed natural gas, which are currently subject to excise duties to encourage the reduced use of these fuels.
Corporate income tax
The following measures to promote innovation by Singapore companies were announced:
- a 200% deduction for the first S$100,000 of qualifying licensing payments for intellectual property (IP) in-licensing costs[1] per year for YA2019 to YA2025
- a 200% deduction for the first S$100,000 of IP registration fees per year for YA2019 to YA2025
- a 250% deduction for staff costs and consumables incurred on qualifying R&D projects in Singapore for YA2019 to YA2025
The amount of expenses[2] that qualify for Double Tax Deduction for Internationalisation (DTDi) without pre-approval from IE Singapore or Singapore Tourism Board (STB) will be increased to S$150,000 per year starting from YA2019.
The CIT rebate will be enhanced and extended for 2 years. For YA2018, the CIT rebate will be 40% of tax payable subject to a cap of S$15,000. For YA2019, the rebate will be 20% of tax payable subject to a cap of S$10,000.
Adjustments will also be made to the Start-up Tax Exemption (SUTE) scheme for YA2020 and YA2021 to provide for a 75% exemption on the first S$100,000 of chargeable income and a 50% exemption on the next S$100,000 of chargeable income.
The Partial Tax Exemption (PTE) scheme will be adjusted from YA2020 to restrict the exemption to the first S$200,000 of chargeable income.
To encourage a spirit of giving, a 250% tax deduction for donations to institutions of a public character (IPCs) will be extended for another 3 years until 31 December 2021.
The Business and IPC Partnership Scheme (BIPS) will also be extended for another 3 years, until 31 December 2021. BIPS allows businesses that support their staff to volunteer and provide services to IPCs to enjoy a 250% deduction on associated costs incurred.
Buyers stamp duty
The top marginal Buyers Stamp Duty (BSD) rate will be increased from 3% to 4%.
The 4% rate will apply to the portion of value exceeding S$1 million for all residential property acquired from 20 February 2018. The BSD for non-residential property remains unchanged.
Singapore as a financial hub
The budget also included several tax changes aimed at the financial industry and strengthening Singapore’s role as a key financial hub, as follows:
- A new tax framework will be introduced for Singapore Variable Capital Companies (S-VACCs).[3] An S-VACC is a new corporate structure designed for collective investment schemes (CIS). It is meant to provide CIS with an alternative option to the common unit trust structure. It will accommodate a variety of traditional and alternative asset classes and investment strategies.
- Enhanced-Tier Fund Scheme [4] will be extended to all fund vehicles constituted in all forms. Besides companies, trusts and limited liability partnerships, all fund vehicles will be able to qualify for the Enhanced-Tier Fund Scheme if they satisfy qualifying conditions. This change is to cater for more diverse fund structures.
- Changes will be made to the tax treatment of exchange-traded funds (ETFs) of Singapore real estate investment trusts (S-REITs) to have parity in tax treatment between investing in individual S-REITs and via S-REIT ETFs.[5]
- The Financial Services Incentive (FSI) scheme will be extended until 31 December 2023.[6] The trading of loans and their related collaterals is a qualifying activity that is accorded a concessionary tax rate of 13.5% under the FSI Scheme. The scope of trading of loans and their related collaterals is to be expanded to include collaterals that are prescribed infrastructure assets or projects. The change will apply to income derived from 1 January 2019 in respect of new and renewed awards approved from 1 June 2017.
- The Insurance Business Development – Insurance Broking Business (IBD-IBB) scheme will be extended to 31 December 2023. Specialty insurance broking and advisory services will be incentivised under the IBD-IBB at a concessionary tax rate of 10%.
- The Specialised Insurance Broking Business scheme will lapse after 31 March 2018.
- The tax deduction for banks and qualifying finance companies for impairment and loss allowances made in respect of non-credit-impaired financial instruments will be extended till YA2024 or YA2025, depending on the financial year end of the bank or qualifying finance company.
- Various withholding tax exemptions for the financial sector have been rationalised to ensure relevance and usefulness.[7]
- The tax incentive scheme for Approved Special Purpose Vehicles (ASPVs) engaged in asset securitisation transactions (ASPV Scheme) will be extended till 31 December 2023, with exception of the stamp duty remission, which shall lapse after 31 December 2018.
- The Qualifying Debt Securities (QDS) scheme[8] will be extended until 31 December 2023. The QDS Plus incentive will be allowed to lapse after 31 December 2018.
Submarine cable systems
The Investment Allowance (IA) scheme will be extended in respect of capital expenditure incurred on newly-constructed strategic submarine cable systems landing in Singapore, subject to qualifying conditions.
Tobacco excise duty
The excise duty for tobacco products will be increased by 10% with immediate effect.
Initial reaction
Budget 2018 is a good budget. It is clearly aimed at ensuring that Singapore can sustainably fund future expenditures to meet her economic development needs and changing population demands.
The tax measures in the budget also support the government’s goals of promoting innovation and internationalisation by Singapore corporates as well as ensuring that Singapore continues to be a key financial hub.
It also shows Singapore’s desire to be a Global-Asia node of technology and innovation. The increase in BSD rates, however, come as an unwelcome surprise to the residential real estate sector, which is still affected by Singapore’s real estate cooling measures.
— Eugene Lim is an international tax and trade lawyer who works extensively in the Asia Pacific region, having been based in Hong Kong and China for 11 years before moving to Singapore in 2014 to head the Singapore Tax, Wealth Management, and Trade practice in one of the largest international law firms in Singapore. Eugene is currently practicing with Providence Law Asia LLC.
—— Footnotes
[1] Qualifying IP in-licensing costs include payments made by a qualifying person to publicly funded research performers or other businesses, but excludes related party licensing payments, or payments for IP where any allowances were previously made to that person.
[2] This only applies to qualifying expenses. All other conditions of the scheme remain unchanged.
[3] Key features of the tax framework are as follows: (a) an S-VACC will be treated as a company and a single entity for tax purposes; (b) tax exemption under Sections 13R and 13X of the Income Tax Act (ITA) will be extended to S-VACCs; (c) 10% concessionary tax rate under the Financial Sector Incentive – Fund Management (FSI-FM) scheme will be extended to approved fund managers managing an incentivised S-VACC; and (d) the existing GST remission for funds will be extended to incentivised S-VACCs.
[4] 13X of the ITA.
[5] The key changes are as follows: (a) tax transparency treatment on distributions of specified income received by S-REIT ETFs from S-REITs; (b) tax exemption on distributions by S-REIT ETFs to individuals; and (c) 10% concessionary income tax rate on S-REIT ETFs received by qualifying non-resident non-individuals. Application for tax transparency treatment can be submitted to the Inland Revenue Authority of Singapore (IRAS) from 1 April 2018.
[6] The FSI scheme accords concessionary tax rates of 5%, 10%, 12% and 13.5% on income from qualifying banking and financial activities, headquarters and corporate services, fund management and investment advisory services.
[7] A review date of 31 December 2022 will be introduced for the withholding tax exemptions for the following payments: (a) payments made under cross-currency swap transactions made by Singapore swap counterparties to issuers of Singapore dollar debt securities; (b) payments made under interest rate or currency swap transactions by financial institutions; (c) payments made under interest rate or currency swap transactions by MAS; and (d) specified payments made under securities lending or repurchase agreements by specified institutions. The following withholding tax exemptions will be legislated with a review date of 31 December 2022: (a) interest on margin deposits paid by members of approved exchanges for transactions in futures; (b) interest on margin deposits paid by members of approved exchanges for spot foreign exchange transactions (other than those involving Singapore dollar) for agreements entered into on or after 20 February 2018. The withholding tax exemptions for the following payments will be withdrawn: (a) interest from approved Asian Dollar Bonds; and (b) payments made under over-the-counter financial derivative transactions by companies with FSI-Derivative Market awards that were approved on or before 19 March 2007.
[8] The QDS scheme offers the following tax concessions on qualifying income from QDS: (a) 10% concessionary tax rate for qualifying companies and bodies of persons in Singapore; and (b) tax exemption for qualifying non-residents and qualifying individuals.
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