Sub Committee's Report and Executive Summary

ECONOMIC REVIEW COMMITTEE:
SUB-COMMITTEE ON POLICIES RELATED TO TAXATION, THE CPF SYSTEM, WAGES & LAND

CONTENTS

PREFACE

EXECUTIVE SUMMARY

SUMMARY OF KEY RECOMMENDATIONS

PART I: PAST TRENDS, CURRENT SITUATION, FUTURE CHALLENGES

Review of Tax Changes since 1985

• Introduction
• 1986 Economic Committee
• Global Trend Towards Lower Direct Income Taxes
• Direct Income Tax Rates
• Indirect Tax: Goods & Services Tax
• Tax Incentives
• Conclusion

A Growth-Oriented Tax System

• Introduction
• Progressive Tax System
• Growth-Oriented Tax System
• Avoiding Budget Deficits
• Conclusion

PART II: DIRECT TAXES

Corporate Income Tax

• Introduction
• Corporate Income Tax Rate
• Group Relief
• One-tier Corporate Tax System
• Taxation of Foreign Source Income
• Carry-back of Losses
• Tax Treatment of Intellectual Property
• Withholding Tax
• Tax Measures for Enterprise Development
• Conclusion

Personal Income Tax

• Introduction
• Personal Income Tax Rates
• Tax Exemption for Interest Income & Foreign

Source Personal Income Remitted Back to Singapore

• ‘Days-in Days-out’ Scheme
• Employers’ Contribution to Overseas Private

Pension Funds

• Taxation of Stock Options
• Estate Duty
• Conclusion

PART III: INDIRECT TAXES

Goods & Services Tax

• Introduction
• The Need to Rely More on GST
• Package to Offset Impact of GST Increase
• Conclusion

Car Taxes & Charges

• Introduction
• Current Situation
• Rising Aspirations to Own Cars
• Lower the Costs of Car Ownership
• Conclusion

PART IV: OTHER PROPOSALS

Tax Incentives

• Introduction
• Manufacturing Sector Incentives
• Services Sector Incentives
• Conclusion

Using Capital Markets to Finance Bankable

Projects

• Introduction
• Using the Capital Markets
• Conclusion

ANNEXES

A. List of Recommendations of the Sub-Committee

B. Terms of Reference of the Sub-Committee and

Working Group

C. Composition of the Sub-Committee and Working

Working Group

D. Resource Persons

E. Secretariat (Taxation Working Group)

Chart

6-1 Price of Car to Per Capita GDP Ratio

6-2 Car Ownership in Singapore vs. Other Major Cities

Table

2-1 Ratio of Tax Burden of High-Income to Low-Income

Households

4-1 Time Apportionment Schemes in Other Countries

4-2 Structure of Estate Duty

Box

3-1 Main Corporate Taxation Models

4-1 Taxation of Stock Options

5-1 GST Rates Around the World

PREFACE

EXECUTIVE SUMMARY

KEY PRIORITY - CREATING JOBS

1. Creating jobs is our key challenge for the future. We are living in turbulent times. Many Singaporeans experienced the pain of retrenchment and unemployment for the first time in their lives during the recent recession. Not since the last recession in 1985/86 has unemployment been such a major problem.
   
   
2. Part of the reason for the recession has been the slowdown in the US economy and in the global electronics industry. But that is not all. The world has changed. Competition is sharper. Even as the Singapore economy recovers, life will not be the same. Many old jobs will not return, as some business activities will shift to lower-cost countries such as China. Our competitiveness is also being eroded as many countries, including the developed ones, are improving their infrastructure, business laws, regulations and tax systems. There is greater uncertainty in the region, making it more challenging for Singapore as a business hub.
   
   
3. Our strategy must be to create new economic activities, bring in new investments and increase economic growth, so as to create good, well-paying jobs for Singaporeans. We need a comprehensive plan to develop new capabilities for Singapore, stay competitive in areas of existing strength, and develop new industries with growth potential. One major component of this strategy is to restructure the tax system. A TAX SYSTEM
   
   TO GROW THE ECONOMIC PIE
   
   
4. Our tax system should help to grow the economic pie for all to share. We need to reduce taxes on income (direct taxes) to encourage and reward hard work, enterprise and investment, while making up the shortfall in government revenue through taxes on consumption (indirect taxes). This is the best way to help all Singaporeans have good jobs and better living standards in the years to come.
   
   
5. Our tax structure is losing competitiveness because developed countries, including Australia, Germany, Ireland, the Netherlands and the UK are already lowering their income tax rates. Others will follow. The premium that Singapore offered investors in the past through lower income tax rates is being eroded.
   
   
6. Businesses will go where they earn the best after-tax returns on their investments. Further, in the knowledge-based economy, talent is the key to business success. Companies are increasingly locating high value-added activities in places where top management and the highly-skilled are willing to live and work. For such individuals, personal income tax, though not the only factor, is a key influence on where they choose to go. Attracting and retaining such people and activities is critical to our economic prosperity and future job creation.
   
   
7. Singapore therefore needs to cut income taxes decisively. We recommend significant immediate reductions in corporate and personal income taxes, for income earned in 2002. Over the medium term, we recommend a target of 20 percent to be achieved within 3 years for both the corporate tax rate (from 24.5 percent) and the top marginal personal income tax rate (from 26 percent), with corresponding cuts across income bands. These cuts send a strong signal of Singapore's intention to be an international hub for business and talent.
   
   
8. Fundamental changes are also needed in the corporate tax system to keep our business environment attractive. We recommend introducing group relief provisions, so as to give companies the flexibility to start new activities through subsidiaries. We recommend retaining our current system of taxing foreign source income but liberalising the conditions for granting of foreign tax credits so as to make our foreign tax credit system more effective in eliminating double-taxation. We also recommend shifting from a full-imputation system to a one-tier corporate tax system. 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.
   
   
9. Growth in the knowledge-based economy is driven by investments in intellectual property and other intangible assets, which are as critical as physical assets. To build up our capabilities in this area, we recommend giving more liberal deductions for research and development expenses incurred in the creation of intellectual property. We also propose that the writing down allowance for acquisition of intellectual property be given automatically, similar to the current practice for physical assets. To reduce the cost effect of withholding tax provisions, especially on fees and royalties, we recommend forming a consultative body, with representation from the private sector, to review and rationalise the system of withholding tax.
   
   
10. The cut in corporate tax rates will result in a significant tax savings for small and medium enterprises. Many of these companies will pay effective tax rates of between 5~10 percent. To encourage consolidation in heavily fragmented industries, we recommend giving a tax deduction, targeted at small and medium enterprises, for the front-end costs incurred in merger and restructuring exercises. We also recommend giving tax deductions for selected expenses incurred prior to starting new businesses as well as expenses incurred in the listing of companies to help promote enterprise development.
    
    
11. Besides lowering personal income tax rates, other changes are required to lighten the burden on individuals. We recommend exempting tax on interest income earned in Singapore and overseas income remitted back to Singapore. We should also make changes in the tax treatment of stock options to strengthen the entrepreneurial culture and compete effectively for talent.
    
    
12. To further enhance Singapore’s attractiveness as a talent hub and centre for management of Asian business activity, we recommend not taxing earnings attributable to the time spent outside Singapore for employees who spend a significant amount of time working abroad. This would apply to ‘temporary tax residents’, who have not been living in Singapore for a long period before their current jobs. To improve our attractiveness vis-à-vis other countries, we also recommend that employers’ contribution on behalf of expatriates into overseas private pension funds be exempt from tax.
    
    
13. We propose to lower car ownership taxes gradually and shift the balance of car taxes towards usage charges. This would reduce the tax burden on car-owning families, and allow more people to own cars while keeping congestion at an acceptable level.
    
    AVOIDING BUDGET DEFICITS
    
    
14. Government expenditure in Singapore, currently at 18 percent of GDP, is one of the lowest in the world. Over time, expenditures on healthcare and other social requirements are likely to rise because of higher costs, rising expectations and an ageing population.
    
    
15. The package of lower income tax rates and other pro-growth tax measures will significantly reduce government revenue. Unless we make up at least part of this revenue loss, our ability to spend on security, social and infrastructure needs will be compromised, and we will be at a real risk of a structural budget deficit.
    
    
16. Given the uncertainties in the global economic and security climate over the medium term, it is important to make up at least part of the revenue loss from the direct tax reductions as early as possible. We should continue to shift towards indirect taxes, a direction which was already set out in the 1986 Economic Committee Report. The government introduced the Goods and Services Tax (GST) in 1994 at 3 percent. The GST has proved a resilient and important source of revenue, which has enabled us to bring direct taxes down from around 30 percent when the GST was introduced to around 25 percent today.
    
    
17. We recommend that GST be raised from 3 percent to 5 percent in 2003. Even with the proposed increase to 5 percent, we will continue to have one of the lowest GST rates in the world. The GST should continue to be applied across-the-board on all goods and services, with as few exemptions as possible, as is presently implemented.
    
    
18. Overall, the proposed tax changes will appreciably reduce the government’s projected annual budget surpluses. But they will allow the government to continue to budget for modest surpluses over the business cycle. They are critical to achieve the objective of higher growth, more jobs and better income for all Singaporeans.
    
    PACKAGE TO OFFSET IMPACT OF GST INCREASE
    
    
19. It will take time for the tax changes to bring in more and better paying jobs. In the meantime, Singaporean households, especially lower income ones, would be affected by the proposed GST increase. To help cushion the impact on them, we strongly recommend that the government provide an offset package to help Singaporeans adjust to the GST increase. In 1994, a similar package of measures lasting 5 years was implemented to offset the GST payable by households, and helped greatly in getting the new tax accepted.
    
    
20. The offset package should ensure that most households, especially lower-income households, are no worse off during the transition. Besides assistance to households, the government should pay particular attention to the impact of the GST increase on education, health care and public transport, and offset or moderate them appropriately. In addition, the government should set up a committee to combat profiteering and undue price increases, similar to what was done in 1994.
    
    
21. The GST rate increase constitutes an important limb of the entire economic restructuring package. It ensures that our drive to be competitive will not compromise the capacity of government to provide key goods and services to citizens. Helping Singaporeans through this transition should be a major concern of the government.
    
    
22. 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.
    
    
23. 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 pie and benefit all Singaporeans.

SUMMARY OF KEY RECOMMENDATIONS

PAST TRENDS, CURRENT SITUATION, FUTURE CHALLENGES

PART I

CHAPTER 1: REVIEW OF TAX CHANGES SINCE 1985

INTRODUCTION


1. The last major strategic review of Singapore’s tax system was by the 1986 Economic Committee. It recommended both short and long-term measures to bring Singapore out of the 1985/86 recession, and to strengthen the foundations for sustained longer-term growth. This chapter reviews and evaluates the progress of tax policy developments in Singapore since 1985, taking into consideration the changes in the external environment over the last decade.


1986 ECONOMIC COMMITTEE



2. The 1986 Economic Committee recommended the following key changes in the tax system to create a more conducive business environment to support hard work and enterprise, and nurture both MNCs and local companies:
   
   
   

   a.	Tax reductions totalling about $1.2 billion. This included a cut in the corporate tax rate from 40 percent to 30 percent (with further reduction to 25 percent as soon as the revenue position permits), a cut in the top marginal tax rate to 30 percent, and a 30 percent across-the-board investment allowance for expenditures on capital equipment and machinery.
   b.	Shift from direct to indirect taxes as the main source of Government revenue. Specifically, the Report stated that:
   c.	"Government should shift from direct to indirect taxes as its main source of revenue. Consumption taxes such as retail sales taxes may be administratively more difficult to collect but are economically preferable to income taxes. They do not penalize companies which are making profits or persons who are putting away savings. Tax is paid only when money is spent on consumption items, not when the money is invested in productive capacity"
   d.	Remove the existing bias that favours manufacturing activities in our tax incentive schemes. Tax incentives should be broadened, to be enjoyed by both services and manufacturing firms.
   e.	Move towards a uniform, low corporate and personal income tax regime with minimal selective tax incentives as a long-term goal.

GLOBAL TREND TOWARDS LOWER DIRECT TAX RATES

1. The external environment has changed dramatically since the 1986 Economic Committee review. Globalisation and rapid technological advances have paved the way for an increased international flow of good and services. Since 1985, world exports have been growing well in excess of world GDP, while global FDI inflows have increased over twice as fast as world exports. New players in the global economy are strengthening their capabilities to compete with countries ahead of them, including Singapore. The most important new player is China. With its low costs and huge domestic market. China has been pulling away investments that could otherwise have located in Singapore or the region.
   
   
2. In today’s integrated world, capital and skilled labour are more and more mobile and therefore less and less likely to stay put and pay taxes that are higher than those levied elsewhere. Investors and entrepreneurs can easily shift jobs, goods and capital to lower-tax environments. Studies have found that the average effective tax rates of countries have a significant influence over a MNC’s choice of investment location, and the amount of capital invested there. As a result, many countries have been trying to make their tax systems more competitive by removing tax barriers and reducing tax rates to attract mobile capital and talent.
   
   
3. In recent years, the OECD and EU countries have been leading the drive for lower tax rates, as they seek to narrow the tax rate 'gap' between themselves and the less developed countries. Between 1997~2002, for example, the average corporate tax rate for OECD and EU countries was reduced by about 5 percentage points.
   
   
4. At least 15 countries lowered their corporate tax rates in the last two years, including Australia, Canada, France, Germany, India, Ireland, Korea and Switzerland. Germany implemented a comprehensive tax reform programme in Jan 2001 to simplify the tax system and reduce the corporate tax from 40 percent to 25 percent, a massive 15 percentage point cut. Ireland will be moving to a standardised rate of 12.5 percent by Jan 2003. In the region, Hong Kong is maintaining its low corporate tax rate of 16 percent.
   
   
5. Many of these countries offer generous tax breaks for both corporates and individuals on top of these basic rates to attract investments. Further cuts in tax rates are also likely. French President Jacques Chirac has recently proposed a package of tax cuts, including reductions in income taxes by a third. The Japanese government is considering tax rate cuts to stimulate the economy. The Keidanren has recommended a cut in the corporate tax rate from 40 percent to 20 percent.
   
   
6. Competition for human capital is intensifying. Companies scour the world and are willing to pay a premium for top-quality people. Hence, countries around the world are also lowering their personal tax rates to attract and retain talent, and encourage hard work and enterprise. Germany, Ireland, Malaysia and the US are among the countries that have cut their personal tax rates in recent years. Hong Kong’s personal tax rate of 15 percent is one of the lowest in the world. Because there is no tax on earnings outside Hong Kong, a large number of expatriates in Hong Kong end up paying income taxes at well below the 15 percent tax rate.
   
   
7. Increasingly, many companies are locating their high value-added activities in places where top management and the highly skilled are willing to live and work. Although our personal tax rates are low compared to many of the industrialised countries, they may not be competitive enough to retain and attract the top tier of global talent, especially since many of these countries are also offering generous tax concessions, thus mitigating our advantage in terms of lower tax rates.
   
   
8. We are, therefore, facing increasing competition, not only from developing countries such as China with their low labour and land costs, but also from developed ones such as the US and Europe.
   
   
DIRECT INCOME TAX RATES Corporate Income Tax


9. Our corporate income tax rate has been reduced significantly over the past two decades to maintain Singapore's international competitiveness. The first major cut was in 1986, when the government responded to the Economic Committee's recommendations with a reduction in the corporate rate from 40 percent to 33 percent. Since then, there has been a series of smaller rate cuts. The corporate rate was reduced from 33 percent to 32 percent in Year of Assessment (YA) 1990, 31 percent in YA1991, and 30 percent in YA1993. It was cut by 3 percentage points to 27 percent in YA1994 in a major tax reform that included the introduction of GST. The rate was subsequently lowered to 26 percent in YA1997, 25.5 percent in YA2001 and 24.5 percent in YA2002.
   
   
10. A new tax exemption scheme was also introduced in YA2002 to help small and medium-sized enterprises grow and establish themselves by reducing their effective tax burden. Under this new scheme, 75 percent of up to the first $10,000 of the company’s chargeable income and 50 percent of the next $90,000 are exempt from tax. The remaining chargeable income is taxed at the full rate of 24.5 percent. In effect, many small and medium enterprises and start-ups are taxed at less than half of the corporate tax rate.
    
    
Personal Income Tax


11. Singapore’s personal income tax rates have also been reduced over time. Personal tax rates were cut significantly in 1986, together with the reduction in corporate tax rate, as part of the counter-recessionary package. The top marginal tax rate was cut from 40 percent to 33 percent, with corresponding reductions across all other income bands.
    
    
12. There were three subsequent rounds of tax reductions in the following years. The first was in YA1994 when the GST was introduced. The top rate was reduced by 3 percentage points to 30 percent, with proportionate reductions in other tax brackets. The second reduction in YA1997 saw a cut in the top rate from 30 percent to 28 percent, with corresponding reductions in the other rates. At the same time, the number of tax brackets was reduced from 14 to 10 to help lighten the tax burden of the middle-income group, particularly those with chargeable incomes between $25,000 and $100,000, many of whom were likely to pay substantial amounts of car-related taxes or foreign worker levy. The latest round of personal tax cuts was in YA2002 with a reduction in the top marginal rate to 26 percent, and corresponding cuts of between 2~5 percentage points in the tax rates of all other income bands.
    
    
13. Since the restructuring of the tax system when the GST was introduced in 1994, more than two-thirds of working adults in Singapore do not pay any income taxes.


INDIRECT TAX: GOODS & SERVICES TAX


14. Following the Economic Committee's recommendation to reduce reliance on direct tax and shift towards indirect tax, the Goods and Services Tax (GST) was implemented on 1 April 1994, as a tax on the final value of goods sold and services consumed locally. It was introduced at a single, low rate of 3 percent, levied across-the-board on all goods and services, except for a small group of exempt supplies, namely the sale or lease of residential properties and certain financial services.
    
    
15. When the GST was implemented in 1994, a generous offset package, comprising corporate and personal income tax reductions, rebates and subsidies was also implemented. The government also committed to keep the GST rate at 3 percent for at least 5 years.


TAX INCENTIVES


16. In the 1960s and 70s, tax incentives were mainly targeted at industrial activities due to Singapore's drive to promote and develop higher-technology and skills-intensive industries in the economy.
    
    
17. In line with the direction set out by the 1986 Economic Committee, there is now a better spread of tax incentives for both the manufacturing and services sector. More incentives for the services sector were gradually implemented in the 1980s and 90s. This included the Pioneer Status for service companies and the Operational Headquarters (OHQ) Incentive to encourage multinational companies to set up their regional headquarters in Singapore. Sector-specific incentives were also introduced to promote the financial, shipping, transport and logistics sectors. In the financial sector, incentives were implemented to encourage the establishment of Finance and Treasury Centres (FTCs) in Singapore, to develop the domestic bond market, and to promote the fund management and venture capital industries. In the trading and logistics sector, the Approved Oil Trader (AOT) and Approved International Trader (AIT) schemes were introduced to develop Singapore as a global entrepot and to promote international trading of major commodities in Singapore. To develop Singapore as an e-commerce hub, the Approved Cyber Trader (ACT) scheme was introduced in 1998 to encourage offshore trading activities conducted over the Internet.
    
    
18. Tax incentives have played an effective and important part in Singapore’s economic development. However, they complicate the tax system and increase the costs of tax administration and compliance. In addition, incentives may not be the most cost-effective way of attracting new investments, especially if they end up rewarding activities that would otherwise have located in Singapore, even at the normal corporate tax rate.
    
    
19. The alternative to maintaining an extensive menu of tax incentives is to adopt a low flat corporate tax rate that will apply across all industries. This is the approach that countries like Ireland have adopted. Ireland is moving towards a standardized corporate tax rate of 12.5% but its personal income tax rates (top marginal tax rate of 44%) and consumption taxes (standard valued-added tax, or VAT, rate of 21%) remain high. Further, many of our competitors are offering incentives through tax breaks or grants.
    
    
20. We should continue to use incentives to develop new and high-growth sectors. However, to avoid inefficiencies in allocation of resources, incentives should have sunset clauses and focus on new and innovative business activities. We should also rationalise and simplify our incentive schemes so as to reduce compliance costs.


CONCLUSION


21. There have been significant changes in our tax system since 1985. Many of these were the result of the recommendations put forward by the 1986 Economic Committee, and the decisive steps taken by the government to implement these recommendations.
    
    
22. Competition in the global marketplace has intensified. Tax rates all over the world are steadily falling. Many countries are turning to corporate and personal tax reforms as vehicles and levers for economic growth. Singapore's current tax regime is therefore no longer sufficient to sustain our competitive edge. We need to take pro-active steps to restructure our tax system to help secure sustained growth and prosperity for Singapore.

CHAPTER 2: A GROWTH-ORIENTED TAX SYSTEM

INTRODUCTION

1. Given the prevailing uncertainties in the economic environment over the medium-term, we need a tax system that helps to grow the economic pie for all to enjoy. This can be effected through across-the-board cuts in corporate and personal incomes taxes, and shifting towards greater reliance on indirect tax to make up for any shortfall in government revenue. A growth-oriented tax system is designed to promote economic growth. Faster growth, in turn, means better-paying jobs and higher standards of living for all Singaporeans. This is the best way to help the lower income groups on a sustained basis.


PROGRESSIVE TAX SYSTEM


2. Singapore has a progressive tax system. The entire personal income tax burden is borne by the top 33 percent of working adults. The remaining two-thirds do not pay any income tax.
   
   
3. Compared with other countries, Singapore has a far more progressive tax system. The total tax burden of a high-income household is about 15 times that of a low-income household. In contrast, the tax burden of high-income households is only around two times that of the lower-income in many European and US cities. This is mainly because of high consumption taxes, for example, 22% VAT in Finland, 21% in Ireland and 17.5% in the UK. In addition, most working adults in these countries pay income tax, unlike Singapore where only the top 33% pay income tax. The corresponding ratio of tax burden between high and low-income households in Kuala Lumpur and Taipei is higher than the US and Europe, but still significantly lower compared to Singapore (see Table 2-1).
   
   
Table 2-1: Ratio of Tax Burden of High-Income to Low-Income Households



Helsinki	Dublin	London	Los Angeles	New York	Sydney	Hong Kong	Kuala Lumpur	Taipei	S’pore
1.6	1.8	2.8	2.4	2.2	2.2	NA	7.5	3.8	15


From a study commissioned by the Ministry of Finance


4. After taking into account government transfers, such as CPF top-ups and Singapore Shares, the lower and middle-income households effectively pay ‘negative’ tax. For example, households in the lowest 30 percent income bracket faced an average net tax burden of -33 percent of household income in the year 2000. Those in the next 30 percent income bracket faced an average net tax burden of around -8 percent of household income.
   
   
PRO-GROWTH TAX SYSTEM


5. The concept of a progressive tax system was popular in the 1950s and 1960s when people believed that governments could increase overall societal well-being by redistributing wealth and levelling down the more successful in society through taxation. These policies have generally resulted in inferior economic performance over the last few decades.
   
   
6. A growth-oriented tax system, characterised by lower corporate and personal income tax rates, will have immediate and longer-term beneficial effects on hard work, enterprise and investment. It offers companies higher after-tax returns on their capital and spurs local companies and entrepreneurs to venture into new businesses and markets.
   
   
7. We need to make a decisive shift to a pro-growth tax system because of the increasingly competitive global environment. We are up against significant odds. We face the inherent disadvantages of a small domestic market, shortage of land which leads to high costs, and the lack of natural resources. Our high costs and living standards have brought us into a new competitive league. We are up against advanced economies with deep pools of talent and accumulated expertise. At the same time, we face increasing competition from new emerging players such as China.
   
   
8. We survived and succeeded in the past through our ability to look ahead and anticipate change, and our nimbleness in moving quickly to seize new opportunities. We must continue to do so to overcome both current and future challenges. If we do nothing about our tax system now, growth rates could be permanently reduced, and everyone would be worse off. Shifting to a growth-oriented tax system gives us a much better chance of securing better jobs and higher living standards in the years to come.
   
   
AVOIDING BUDGET DEFICITS


9. We are of the view that the government should continue with its policy of financial prudence and budget for modest surpluses over the business cycle. Sound fiscal policies also underpin the success of our monetary policies to maintain a strong Singapore dollar, which allows for low inflation and high living standards for Singaporeans. Fiscal discipline is a critical factor in securing investor confidence and lays the foundation for robust economic growth.
   
   
10. Government expenditure in Singapore, currently at 18 percent of GDP is one of the lowest in the world. Over time, government spending is likely to increase as demands for more and better public services grow with rising affluence and expectations. Expenditures on healthcare and other social needs are also likely to rise because of the ageing population. By 2030, 24 percent of the population will be aged 60 and above, compared to 11 percent today.
    
    
11. Reducing income tax rates will decrease government revenue. Unless we make up at least part of this revenue loss, our ability to spend on security, social and infrastructure needs will be compromised and we will be at risk of a structural budget deficit.
    
    
12. We recommend that government seek to maintain smaller budget surpluses in the future, so as to release resources to the private sector as the engine of growth. We should also continue to shift towards indirect taxes so as to provide for a more resilient tax base and make up for any shortfall in revenue. This is consistent with the direction set out in the 1986 Economic Committee.
    
    
13. Our projections indicate that the government budget surplus would see an appreciable reduction over the next 5 years, if the corporate and personal income tax rates were cut to 20 percent and the GST raised to 5 percent. The revenue gain from increasing GST will offset less than half the revenue loss due to the cut in income taxes. Unlike the past years of high budget surpluses exceeding 5 percent of GDP, the proposed tax changes would result in a tighter budget position. However, the government would be able to maintain modest surpluses in the medium term.
    
    
14. Over time, the budget position should remain resilient in the face of potentially higher expenditure requirements as lower income tax rates stimulate enterprise and attract new economic activities into Singapore. It is difficult to quantify these longer-term fiscal impacts, but there is no reason to believe that they are trivial.


CONCLUSION


15. We recommend shifting to a pro-growth tax system to prepare Singapore for the challenges of increased global competition. This can be done by lowering the corporate and personal income tax rates to 20 percent and raising the GST to 5 percent, as recommended in subsequent chapters. Our fiscal projections indicate that a package of tax changes based on these broad parameters would allow the government to maintain modest budget surpluses in the medium term. The remaining chapters of the report provide more details of the pro-growth tax package that we are proposing to support Singapore’s next phase of economic development in an uncertain world.

DIRECT TAXES

PART II

CHAPTER 3: CORPORATE INCOME TAX

INTRODUCTION

1. To compete effectively in the next 5-10 years and beyond, we need to evolve a knowledge-based economy and a vibrant entrepreneurial culture. Our corporate and personal tax system should facilitate this economic transition by creating the best conditions to develop enterprises in Singapore and attract and retain global players. This chapter outlines the proposed changes in the corporate tax rate and structure that will keep our business environment competitive.