3 ways Singapore can elevate its growth and competitiveness through taxation

Singapore’s BEPS adoption has spurred calls for tax reform in the 2024 budget.

Experts have called for a progressive, yet strategic, approach to tax reform in the upcoming budget in response to the country's adoption of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

Ajay Kumar Sanganeria, partner and head of tax at KPMG Singapore, said several jurisdictions regionally and globally have already adjusted their tax systems to respond to the BEPS Pillar Two initiative.

According to the KPMG expert, the BEPS Pillar Two initiative stipulates a global minimum tax of 15% for multinational enterprise (MNE) groups with revenues exceeding €750m ($1.1b).”

“To maintain its position as a top foreign direct investments (FDI) destination, Singapore should consider a similar proactive approach. This will not only ensure compliance with global standards but also enhance Singapore’s competitiveness while bolstering its standing on the international stage as well,” Sanganeria said.

To counterbalance the possible impact of the BEPS adoption, Sanganeria and Harvey Koenig, partner for Energy & Natural Resources and Telecommunications, Media & Technology, and Tax at KPMG in Singapore, highlighted three ways Singapore can elevate its growth and competitiveness.

First is by maintaining a competitive tax regime to stimulate economic growth.

Sanganeria underscored that whilst Pillar Two will have an impact on tax incentives for larger multinational enterprise (MNE) groups, it will continue to remain relevant for smaller multinational businesses.

“It is important to continue to maintain and enhance our existing suite of tax incentives to attract and anchor these smaller businesses that could become the next generation of business giants. To further enhance Singapore’s allure among multinational corporations and high-earning entities, Singapore should continue to enhance the competitiveness of its corporate tax system,”  Sanganeria said.

“The crux of this strategy lies in aligning tax and accounting more closely where feasible so that businesses don’t end up with effective tax rates significantly beyond the global minimum tax rate of 15 per cent in the absence of tax incentives. This will entail, for example, introducing tax rules on productive assets to allow tax allowances for buildings, fittings and fixtures, and writing down allowances for a wider range of intellectual property assets such as customer lists and other marketing intangibles,” Sanganeria added.

Apart from enhancing and introducing new cash grant schemes,  Koenig said Singapore should also consider new incentives, potentially under categories like Qualified Refundable Tax Credits (QRTCs) or Marketable Transferable Tax Credits (MTTCs) that are specifically allowed under the Pillar Two framework. 

The KPMG experts said it is also important for Singapore to review its tax incentive schemes to sustain the inflow of wealth and funds.

Sanganeria has recommended the renewal of tax incentive schemes affecting family offices without adding extra-economic conditions such as a minimum business spending requirement of $200,000, a minimum fund size requirement, or a minimum professional headcount requirement. 

“Stricter qualifying conditions could hinder growth in Singapore’s asset and wealth management industry, especially with increasing competition from regional financial centres,” Sanganeria commented.

Lastly, the experts advised the government to avoid double taxation to boost Singapore’s innovation capabilities.

“To boost Singapore’s standing as an innovation leader, the government should also adjust the tax treatment of equity-based compensation. Instead of imposing an exit tax on a deemed vest/exercise basis, the government should consider aligning sourcing of employment income arising from equity-based compensation (such as stock options) over the grant-to-vest period,” Sanganeria said.

“This method not only aligns with OECD guidelines but also prevents foreign employees from being taxed twice on the same income. In the long run, it supports Singapore’s goal of becoming a hub for innovation as this will boost Singapore’s standing of being open to talent,” the KPMG Sanganeria added.