ERC’s Recommendations on Taxation Restructuring

Opening Remarks by Chairman, ERC Sub-Comm (TCWL)

Opening remarks by Mr Tharman Shanmugaratnam Chairman, ERC Sub-Committee on Policies Related to Taxation, the CPF System, Wages & Land, and Senior Minister of State ( Trade & Industry and Education ) Thursday, 11 Apr 2002, 9.45 a.m.

I am pleased to release the tax recommendations of the Economic Review Committee. These recommendations are being put forward by the ERC Sub-Committee on Policies Related to Taxation, the CPF System, Wages and Land. The main proposals in the report have been endorsed by the ERC.

2. The ERC was tasked to fundamentally review Singapore’s development strategy and formulate a blueprint to restructure the economy, even as we work our way out of the current recession. This report on restructuring the tax system is the first component of the ERC’s strategy. The Sub-Committee focused on tax proposals that would enhance our economic competitiveness, were consistent with social objectives and ensured sufficient revenue to fund government expenditures on a sustainable basis.
   
3. We accelerated our review of the tax system so that recommendations related to tax policies could be forwarded to the government for consideration in time for Budget Day on 3^rd May 2002. The Sub-Committee has considered a wide range of tax proposals, including proposals from the other six ERC Sub-Committees.

4. From the outset, the Sub-Committee focused on the challenge of creating jobs, not just for one year but for the next 5-10 years. Creating jobs, in a vastly different and more competitive environment, is Singapore’s biggest challenge.
   
5. Our most important proposal is to make a significant immediate reduction in corporate and personal income taxes, and to lower both to 20% within three years. In addition, we recommend basic changes to our tax regime to attract business activities, such as the introduction of group relief on corporate income. These measures are necessary to improve Singapore’s economic prospects in a vastly changed and more competitive environment.
   
6. The package of lower income tax rates and other pro-growth tax measures will reduce government revenue. We must make up at least part of this revenue loss through indirect taxes. Otherwise our ability to spend on security, social and infrastructure needs will be compromised, and we risk creating a structural budget deficit. We therefore recommend raising the GST rate from 3% to 5% in 2003, by which time the recession should be behind us. The proposed GST increase will make up about half of the revenue loss from income tax cuts in the medium term. Even with the increase to 5 percent, the GST rate would still be one of the lowest worldwide.
   
7. Singapore households, especially lower income ones, will be affected by the proposed GST increase. But the GST is essential if we are to cut income taxes, regain economic dynamism and generate jobs and better incomes for all Singaporeans. Helping Singaporeans adjust to the GST must be a major priority of the government.
   
8. The Sub-Committee therefore recommends that Government provide Singaporeans with an offset package to help them adjust to the GST increase, as it did in 1994 when the GST was introduced. The government should pay special attention to the impact of the GST increase on education, health care and public transport costs. We also recommend a committee to combat profiteering and undue price increases should be set up, similar to what was done in 1994.
   
9. DPM Lee, in his response to the Sub-Committee’s report, said that, "If the government decides to restructure taxes and increase GST, it will certainly implement a comprehensive offset package to help Singaporeans adjust."

10. Apart from cutting income tax rates, the Sub-Committee has examined how we could best reform the corporate tax system to position Singapore as a business hub and support the growth of local enterprises. We also studied how to further lighten the personal tax burden so as to encourage hard work and enterprise, and boost Singapore’s role as a "talent capital"
    
11. The Sub-Committee recommends introducing group relief in our corporate tax system to allow corporate groups to offset the losses of one company against the taxable profits of another company within the same group. This will give companies flexibility to start new activities through subsidiaries and contribute to a more supportive environment for innovation and risk-taking.
    
12. We also recommend a shift to a different system of corporate tax. Singapore currently has a full-imputation system, under which dividends are effectively taxed at the shareholder’s tax rate. The Sub-Committee recommends moving to a one-tier corporate taxation system, with tax imposed only at the corporate level. This would promote the effectiveness of the group relief system, encourage the use of Singapore as a hub for holding companies and remove impediments to regionalisation. It would also reduce compliance costs. Companies would be less constrained by their lack of tax credits to distribute corporate income to shareholders.
    
13. Another major recommendation concerns the treatment of intellectual property. Singapore is transiting from an investment-driven economy to an innovation-driven, knowledge-intensive economy where knowledge is a key competitive factor. The Sub-Committee recommends more liberal deduction for R&D expenses incurred in the creation of intellectual property and that the writing down allowance for acquisition of intellectual property be made automatic and across the board. Intellectual property will be as critical as fixed assets in the knowledge economy and the tax treatment of the two should as far as possible be on par.
    
14. Tax measures to promote local enterprise constitute another important dimension addressed by the Sub-Committee. With the cut in corporate tax to 20 percent, most SMEs will enjoy an effective tax rate of between 5-10 percent. This is because of the partial exemptions that companies enjoy for their first $100,000 of income.
    
15. The Sub-Committee recommends giving a tax deduction for the front-end costs incurred in merger and acquisition exercises to encourage consolidation in heavily fragmented industries. The Sub-Committee also recommends several other measures including giving a tax deduction for selected expenses incurred prior to starting new businesses and expenses incurred in the listing of companies to help promote enterprise development.
    
16. The Sub-Committee looked at a range of proposals for tax incentives to spur the development of specific industries. It supports several of these proposals, especially in new and innovative activities with significant growth potential for Singapore, and where the industries are taxed lightly around the world. We recommend that government study these specific proposals, both on their own merits and taking into account the overall impact on government revenue. Some of the key areas where we recommend enhancement or streamlining of incentives include manufacturing, financial services, info-communications and technology, international trading, and transport and logistics sectors. The Sub-Committee also proposes streamlining and rationalising the current incentives for greater ease of administration and compliance.

17. Besides a cut in personal income tax to 20%, the Sub-Committee is also making several recommendations to enhance the personal income tax regime. These are of particular importance as we move to a knowledge-based economy. Decisions on where companies locate their activities are increasingly being determined by where their top management and highly skilled professionals wish to live and work. A competitive personal income tax regime is therefore necessary to attract and retain talent in order to grow business activities to Singapore.
    
18. One important proposal for making Singapore a business hub concerns the taxation of income attributable to time spent outside Singapore. We recommend that such income be exempt from tax for temporary tax residents who have not lived in Singapore for very long. This will put us on par in this respect with jurisdictions like the UK and Hong Kong.
    
19. Employee stock options are an important tool for nurturing a vibrant entrepreneurial environment and improving corporate performance. The Sub-Committee recommends further favourable changes in the tax treatment of stock options to strengthen the entrepreneurial culture, as well as to compete effectively for talent.
    
20. The Sub-Committee recommends tax exemption on all interest income in Singapore. This proposal has particular significance in the context of the withdrawal of interest exemption from POSBank deposits. In addition, this proposal would help to stem the flow of domestic funds being transferred overseas every year by investors seeking better after-tax returns on their savings.
    
21. Many Singaporeans are working abroad, and more will do so as we continue to develop our second wing. Singapore tax residents are currently taxed on all income remitted into Singapore from abroad. The Sub-Committee recommends exempting from tax personal income from abroad that is remitted back to Singapore. Individuals will then be encouraged to bring back their overseas funds. This will have significant positive spin-offs for the financial sector and the Singapore economy.
    
22. The Sub-Committee has also addressed the rising aspirations of Singaporeans to own cars. The cost of owning and using cars in Singapore will remain high given our limited land space and the need to limit traffic congestion. The Sub-Committee felt that the current system of taxes on cars is inefficient. It over-taxes car ownership and under-taxes the usage of cars. The Sub-Committee recommends a gradual lowering of car ownership taxes, in other words ARF, excise duties and road taxes, and shifting towards a better balance between ownership charges and usage charges. The reduction in ownership taxes has to be accompanied by an increase in COEs released in order to allow for an increase in car ownership and prevent an increase in COE premiums arising from the reduced taxes on ownership. Our objective is to allow more people to own cars at cheaper cost while keeping congestion at an acceptable level.
    
23. I have given you the gist of the recommendations the Sub-Committee has made. We fully believe that the recommendations are in the best interest of Singapore and all Singaporeans. The Sub-Committee is submitting the recommendations to the Government for its consideration.
    
24. The global economic environment has changed. The economic contest has become more intense. Singapore's continued growth and prosperity would not come about without significant adjustments to our economic strategies. To succeed, we must look ahead, anticipate and adapt to the changing environment. If nothing is done, growth rates could be permanently reduced.
    
25. We have identified specific recommendations to strengthen Singapore's economic competitiveness and capabilities through adjustments in the tax system. For companies and businesses, lower taxes and the other proposed changes will encourage new investments, promote local enterprise, reduce business costs and enhance competitiveness. For individuals, lower tax burdens will reward hard work and enterprise, and hence help retain and attract talent. Taken together, the proposed changes will grow the economic pie and benefit all Singaporeans.

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