Delivered in Parliament on 5 October 2021
Mr Speaker, I would like to first declare my interest as an equity research analyst working in a financial institution, covering the real estate industry, and I am also a Chartered Accountant of Singapore, although not a practising public accountant.
Mr Speaker, it is said that in this world, nothing is certain, except death and taxes. What we can also be certain of is that this quote from more than 200 years ago will be often repeated by politicians, even though taxes most certainly do not affect everyone in the same way.
I recognise that Income Tax Amendment Bills are introduced to Parliament with sufficient regularity, as many of the clauses relate to tax changes made in the Government’s annual budget statement. In my speech, I would like to first raise some clarifications relating to specific tax measures and tax changes that are raised in the bill, before moving on to share my thoughts on pertinent tax issues which I believe ought to be seriously considered as part of Singapore’s periodic review of the income tax system.
First, in relation to the proposed amendments included in the bill, clause 29 amends section 37 (assessable income) where the 250% tax deduction for qualifying donations made to Institutions of Public Character (IPCs) and other qualifying recipients will be extended for another two years, i.e. for donations made during the period 1 January 2022 to 31 December 2023.
While donations ought to be made on altruistic grounds, I am also supportive of the enhanced deductibility of donations, given that this will continue to encourage Singaporeans to give back to the community and to provide support for the charity sector. Singaporeans have been giving selflessly of course. Looking back at 2020, when the Government gave all adult Singaporeans regardless of income, a one-off solidarity payout of $600, many decided to donate these payouts instead.
Notwithstanding the giving surge in 2020, the persistency of COVID-19 has presented much challenges to charities this year. For most charities, donations are the primary means of funding the good work that they do, and it is important for them to ensure both the sufficiency and regularity of the donations that they receive. To better encourage sustainable giving by Singaporeans and companies here, where the habit of giving is integrated into our lives, should we not make permanent the 250% tax deduction for qualifying donations made to IPCs? This does not preclude short term enhancements in future, such as for Year of Assessment 2016 where the tax deduction granted is three times. However, with the 250% tax deduction already in place since Year of Assessment 2010, making permanent a baseline level of tax deductions for donations gives charities the assurance of this continuing support, while encouraging Singaporeans to continue supporting the causes that matter to them in a sustainable manner.
Second, clause 2 amends Section 6 (official secrecy) to allow any person authorised by the Comptroller of Income Tax access to any IRAS records and/or documents containing taxpayer income information protected under Section 6, that are necessary for the person to audit IRAS’ administration of any public scheme specified in the ninth schedule. These would include schemes such as the Jobs Support Scheme and Wage Credit Scheme, for example.
The role of IRAS is to be the main tax administrator to the Government. Yet over time, IRAS has also been called upon to go beyond tax collection, and to support the Government in disbursing various support grants to companies. I do support and believe in the importance of enabling an independent third party audit of how IRAS has been implementing these public schemes, to ensure proper accountability. This is especially in the context of COVID-19, where substantial sums of monies are involved and continue to be disbursed in some of these schemes, alongside the complex and everchanging conditions governing them.
I note in section 6 subsection 11C that authorised persons must make and subscribe a declaration of secrecy in accordance with subsection (1), must not disclose or make copies of the records or documents and would be guilty of an offence, if otherwise. That being said, my concern is less on the deliberate disclosure of information, but more on the inadvertent leakage of such information through data breaches. Giving the sensitivity of tax information, any such breaches would be disastrous, even if the negligent party was charged subsequently. In the spirit of being prudent with taxpayers information, is there a consideration to codify the requirement to retain such records or documents only for a specified period of time required to conduct the audit, and for such authorised persons to declare that all copies of tax information in their possession have been destroyed thereafter?
Thirdly, I note the creation of a new section 10P, which provides the tax treatment for cases where trading stock is appropriated for non-trade or capital purposes, and where non-trade or capital asset becomes trading stock.
I believe the new section provides for greater certainty in the timing and recognition of the tax base in such cases, given that the market value of the trading stock on the date of appropriation for capital purposes is treated as income that is subject to income tax at that juncture, and similarly, where the cost of the trading stock is its market value on the date the capital asset becomes trading stock.
Again in the context of COVID-19, companies facing economic challenges and cash flow issues may have no choice but to scale down their operations, and in so doing, dispose off their capital goods such as property, plant and equipment. May I seek confirmation from the Minister that such transactions are not caught under the new section 10P? How would the distinction be drawn between a manufacturer selling off its factory or production line, compared to a residential developer which converted its existing office building, formerly held as an investment property to strata units which are on sold to investors?
Further, I note under section 10(1)(g) of the Income Tax Act, a “catch-all” provision that taxes any gains or profits of an income nature not falling within paragraphs (a), (b), (c), (d), (e) and (f) under the preceding paragraphs. How would section 10(1)(g) factor into IRAS consideration, as to the factors used to determine whether or not such gains from the sale of what is now deemed to be trading stock, are revenue in nature?
Mr Speaker I shall now move on to speak about a number of tax issues which I believe ought to be seriously considered as part of Singapore’s periodic review of the income tax system.
First of which, is the need to consider implementing wealth taxes in Singapore. Even as COVID-19 ravages across the world, disrupting livelihoods and causing economic hardship to workers and businesses alike, rising equity markets and government stimulus mean that global wealth and the number of high net worth individuals continue to reach record highs. I am sure that members in this house will agree with me that widening wealth inequalities are undesirable over the longer term, insofar that they risk leading to tensions that impact our societal cohesiveness.
This idea is not new of course, and such taxes have been raised by The Workers’ Party in this house. During the budget debates earlier this year, DPM Heng agreed that there is scope to further review our wealth taxes. I wonder if this is actively being studied by the MOF and if so, what is the status of the study? And at a lecture at the Institute of Policy Studies in July, the managing director of the Monetary Authority of Singapore Mr Ravi Menon noted that to address the risk of growing wealth inequality, it made sense to shift the balance in Singapore’s tax structure away from taxing income towards taxing wealth, wherein property would form a major component in the Singapore context.
Again, in Singapore, where housing prices have broadly grown in tandem with the economy, high home ownership rates and public housing subsidies have in the past helped to narrow the disparity in household wealth. But these mitigating factors can only go so far.
An area that I am particularly concerned with is the divergence in public and private home prices. For example, private home prices rose 10.9% between end-2020 and end-2015, while HDB resale prices only rose by 2.4% over the same period. Even if we take into account the sharp spike in HDB resale prices year-to-date, HDB resale prices rose by 11.7% in the past five years compared to 19.7% for private home prices. This wealth gap has been exacerbated by the falling percentage of resident households who live in public housing, which has declined to 78.7% in 2020, from 80.1% in 2015, and 82.4% in 2010.
Put in other words, household wealth from property is increasingly skewed towards the top 10-20% of resident households. If left unchecked, this could lead to greater disparity in inter and intra-generational wealth.
Mr Speaker, I recognise that member Ms Foo Mee Har has also been speaking on wealth taxes, although respectfully, I do not think that any new wealth tax should be one-off in nature; while well-intended, the fear of further “one-offs” could negatively impact faith in regulatory certainty in Singapore. Rather, in principle, wealth taxes need to be recurring yet sustainable, reasonably easy to implement, and hard for the wealthy to avoid so that the middle class does not end up bearing more of the burden.
One possible solution is to raise property related taxes on homes valued above a high threshold, say, S$5 million, or for owners of multiple properties cumulatively worth above S$5 million. I have used this value as a starting point for discussion, so as to not penalise the majority of Singaporeans especially the aspiring middle class. As home valuations are well documented in Singapore, this will help with policy implementation, before we consider wealth taxes on net worth which more comprehensively captures the wealth of the ultra-wealthy. This also means that for the vast majority of Singaporeans who reside in HDB flats, there will be no wealth tax applied to them.
The imposition of such a tax could generate legitimate concerns, one of which pertains to Singapore’s status as a financial centre and wealth management hub. Yet one also has to bear in mind that Switzerland, as a key financial centre and wealth management hub globally today, is one of the countries that actually has a net wealth tax.
Let us also remember that not only does Singapore not have a wealth tax, there is no capital gains tax, no tax on dividends, no inheritance tax, no estate duties, and has one of the lowest effective personal income tax rates globally.
Yes there could be implementation challenges, and a wealth tax could take many forms, be it a net wealth tax like Switzerland, a property gains tax or an inheritance tax to name a few. And yes having a wealth tax alone will not eliminate widening wealth inequality in Singapore, but do we truly want to have a tax system where our low to middle income workers pay more in income taxes than a trust fund baby living off his grandparents inheritance?
The second issue is to raise the level of progressivity in our corporate income tax regime to better support our local SMEs.
I do recognise that there are features in our current corporate taxes that better benefit SMEs. Corporate income tax rebates being capped at a dollar amount, $15,000 for YA2020 for example would mean large MNCs would not disproportionately benefit from the corporate income tax rebate of 25% that was given.
In 2018, Hong Kong implemented the two-tiered profits tax rates regime to relieve the tax burden for SMEs in particular. In Singapore, we do have the tax exemption scheme for new start-up companies and the partial tax exemption for all companies which have a similar effect. Yet it was in the same year in Budget 2018 that the Government announced tighter restrictions around these schemes. For an SME making $300,000 in chargeable income for example, total corporate income tax paid before any rebates would be close to $34,000 or an effective tax rate of 11.2%, compared to around $25,000 or an effective tax rate of 8.4% based on prior rules.
Even as other support for companies to build capabilities is being strengthened, I hope the Government would consider providing greater tax relief to our SMEs, such as by raising the tax exemption limits, given the challenging domestic trading conditions brought about by Covid.
I recognise that Finance Minister Lawrence Wong said that “effective tax rates for SMEs are much lower than the effective tax rates for non-SMEs in Singapore. That is a fact”. But what is also a fact is that SMEs paid S$4.8 billion in corporate income tax out of profits before tax of S$44 billion for YA2019, vs. non-SMEs which paid S$11.5 billion in corporate income tax out of profits before tax of S$459 billion. And as I shared in my speech in July this year, SMEs accounted for a mere 9% of total profits before tax in YA2019, yet they contributed an outsized 29% of corporate income tax paid.
I appreciate the Ministry of Finance has its way of calculating effective tax rates, which the Finance Minister has clarified, is based on a definition of chargeable income that is also different from that per section 38 of the Income Tax Act. So using the data as provided to my PQ yesterday, based on the subset of profit-making firms in YA2019, SMEs accounted for 20% of accounting profits before tax, 22% of chargeable income but 30% of corporate income tax paid. So similarly the conclusion can still be made that SMEs collectively paid more tax per dollar of either pre-tax profits or chargeable income, as compared to non-SMEs.
Ultimately, what companies report in their financial statements to shareholders are accounting profits, which are audited based on Singapore’s Financial Reporting Standards, which are of course modelled after IFRS. And the use of accounting profits as a meaningful basis of comparison on tax rates is made all the more relevant, given the fact that pillar two of the G20/OECD BEPS 2.0 proposal, is quite simply, using financial accounting income for the determination of tax base, with only a small number of adjustments allowed.
This brings me to my third point, in that in the fullness of time, I do hope that the Government will safeguard its taxing rights and view the global minimum tax reforms as an opportunity rather than a threat given Singapore’s strong non-tax advantages and attractiveness to MNCs. I recognise that a lot of details on BEPS implementation are still being ironed out. But given the current average effective corporate tax rate is close to 3% as shared by Minister Lawrence Wong, technically it would seem that even a small shift towards the proposed global minimum rate of 15% would result in much higher corporate tax receipts for the Government. Tax receipts which can then be used to reinvest in our people, and our local companies.
To conclude Mr Speaker, notwithstanding my clarifications on the bill, I support the amendments. Our tax policies send a strong signal about the kind of growth we want to pursue, and the kind of society we want to build. In the face of rising inequality and the economic and social disparities that were brought to the fore by Covid, we have a moral imperative to enhance progressivity in our tax system, and ensure that any tax changes we propose bring us closer towards achieving quality growth and an inclusive society.