Rescuing a Foundering Global Compact

Mr Speaker, this Bill has two main arms: the first implements changes to the Income Tax Act that are consonant with announcements made in this year’s budget statement, and the second amends the Multinational Enterprise (Minimum Tax) Act (MMTA) to align it with the latest Side-by-Side package.

I will confine my remarks on the domestic aspects of the Bill mainly to those related to corporate tax relief, before turning to the international dimensions concerning updates to Base Erosion and Profit Shifting (BEPS 2.0) project. My honorable friend, Louis Chua, has addressed the Bill’s more domestic elements, as they relate to AI adoption, as well as household tax relief.

Supporting businesses through rough waters

The Bill (and Budget) provides additional support for firms based here in several ways: with measures to support the rollout of artificial intelligence technology in their business, extending corporate income tax rebates for firms that hire locals, and extending withholding tax exemptions for the financial sector, among others. 

The global economic environment is undeniably uncertain, and I am sure that companies here appreciate any additional support they get. Many of these proposals have also undergone a process of public feedback, and a number of these suggestions have been accepted. The measures are therefore largely unobjectionable.

However, I wish to offer some additional perspective on the proposed tax remission and associated cash grant, before making a more general point about the tax treatment of corporate, relative to personal, income.

The government has stated that the motivation for the 50 percent corporate income tax rebate, provided for in Clause 31, was to lend businesses a helping hand as they navigate the economic challenges arising from the ongoing conflict in the Middle East. I also note that the rebate is slightly more generous than had previously been announced in February; up from 40 percent, in recognition of the rising energy costs and cash-flow challenges faced by small and medium enterprises (SMEs).

Let me first observe that different fuel prices have actually gone in opposite directions: while petrol prices did, indeed, spike up in September after a period of easing, diesel prices have remained low. While diesel remains more expensive in absolute terms, one wonders whether the divergent trend was due to government action, which would come over and above the cash relief granted to car and taxi drivers since April. If so, this would amount to a subsidy for industrial and military vehicles and taxicabs, which is not enjoyed by, say, drivers of commercial private-hire cars. 

Moreover, as other observers have pointed out, the nature of tax-based relief is that such support will only be enjoyed by profitable firms. However, given how local business closures have jumped by close to 13 percent this year to date, it would be unsurprising if a large share of SMEs are currently struggling mightily to make ends meet, and operating under lossmaking conditions. I believe many in this House would have had residents share that their own businesses have not been making any money.

Now, I’m aware that IRAS allows carry-back relief for up to a year, and other schemes—such as a whole suite of financial support and capability development programs—are in place to channel financing to local firms, on request. But we must recognize that insofar as this particular relief is concerned, lossmaking firms are excluded.

It is perhaps for this very reason that the government has chosen, in the new Section 92M, to  also introduce an additional $2,000 cash grant, available to SMEs. I believe that this amount was also increased, from the original $1,500 previously announced during the Budget.

The question, then, is whether this $2,000 is a sufficient lifeline for lossmaking firms, one that is broadly proportional to the extent of support received by profitable firms. Will the government share: How was this amount arrived at? How many firms are expected to receive this cash injection, versus the number that are estimated to benefit from the tax writeoff? Is the grant—listed at $2,000 in the legislation—distinct from the SME 2026 SME cash grant currently listed on the IRAS website, which is capped at $2,500?

One final point, pertaining to Part 3 of the new Section 92(M). The qualification criteria appears to be so long as there is one local employee on the payroll, as defined in Part 7. I am left to wonder why this is not tiered, such that businesses with more local employees may enjoy even larger grants. After all, assuming that the 2026 SME Cash Grant is a distinct payout, IRAS appears to have adopted this incremental approach there.

Allow me to make a more general observation. In my view, most of the Budget’s corporation-oriented initiatives have provided financial support to companies in the form of tax relief. In contrast, the most visible household initiatives have relied on transfers, principally in the form of coupons and vouchers. In principle, these two forms of support are comparable; indeed, a long tradition in economics speaks of their equivalence.

But these two choices may also engender rather different behavioral responses. While both ease financial constraints, tax relief makes it clear that the originator of the funds are the firms themselves. In contrast, the provenance of vouchers is muddied; it is less evident that these, likewise, also originate from tax revenue, collected from households, before being redistributed back to them. They may come across as an entitlement, lavished by the generosity of the government. It also fosters a sense of dependency, a coupon culture. Once granted, people come to expect them, year after year. This makes them harder to remove, even when the policy need has long passed.

This is another reason why the Workers’ Party has harped on about budget marksmanship. My other Party colleagues, as well as myself, have previously explained why structural levers are preferable to ad hoc voucher schemes for addressing costs of living increases, and how the timing of the GST hike may have unintended consequences, such as contributing to inflation. My argument here is distinct from these. Collecting monies when they are not needed yet—before turning around and returning them—may seem innocuous, but the subtle shifts in mindset and distortions in expectations are more pernicious than they may first appear.

Expanding the scope of philanthropy

I wish to also offer a suggestion concerning the incentives in the Bill designed to nurture philanthropic activity. This is a laudable goal; indeed, one of the motivations that the Workers’ Party alluded to for proposing a wealth tax was to encourage the wealthy to give back to society. I had developed that idea further, during the debate surrounding the amendments to the Business Trusts Act in 2022, by suggesting that such trusts can evolve to become vehicles for encouraging a culture of philanthropy, by making them grantmaking institutions.

While I accept that an involved treatise on the merits of further developing our philanthropic institutions goes beyond the scope of this Bill, I would simply note here that the tax benefits made available by Clause 11 are limited to Institutions of Public Character (IPC).

I can see why IPCs—with an explicit requisite that their activities benefit Singaporean society, and being subject to more stringent reporting requirements that limit abuse—are the gold standard for such giving. And I have little doubt that the largest donors will continue to channel their charitable contributions through such institutions.

But smaller charities in Singapore aren’t exempt from regulation, either, and often these are the ones are most in need of assistance. While their mandates may be narrower, these smaller outfits typically do not pursue IPC status not because their work doesn’t clearly benefit the community, nor because they are engaged in activities that they would rather avoid scrutiny over.

Rather, it is because, being small, they can ill-afford the additional burdens associated with compliance necessary to attain IPC status. I therefore urge the government to consider expanding the scope of tax-deductibility, to include non-IPC charities that have a demonstrable record of sound operations and clear contributions to Singaporean society as a whole. Beyond providing crucial support to nonprofits that are often in greatest need of help, doing so may also lead to more donors contemplating philanthropic giving, since the universe of charities they may offer to help will no longer be as limited.

The new Side-by-Side regime should leave our multinational minimum taxes largely unaffected

Let me move on to the international aspects of the Bill. Sir, I am aware that the revisions to the MMTA were necessitated by the adoption of the Side-by-Side (SbS) package negotiated among the members of the OECD/G20 Inclusive Framework.  This, in turn, has largely been the result of the recalcitrance of the United States to concede to GloBE rules, and its insistence on retaining its own minimum tax regime for multinationals corporations (MNCs). I had alluded to the possibility of such a compromise in my speech on the analogous income tax bill debated in this House late last year.

So here we are, confronting revisions to the MMTA. I believe that the proposed changes may, paradoxically, work to our advantage. After all, our qualified domestic minimum top-up tax remains unaffected by the SbS framework. The main change, relative to last year, is that Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) jurisdictions will no longer be able to take a second bite of the tax pie. But so long as we faithfully implement our domestic topup tax, we are assured of our own minimum collections.

Thankfully, the eroding foundation of GloBE rules in BEPS has yet to trigger a complete surrender to less multilateral regimes, such as an EU-wide digital services tax.

Nevertheless, it would perhaps be valuable, at this junction, for the government to share whst it expects the effective tax rate for MNCs to be after this proposed iteration of the MMTA, especially relative to SMEs.

Notwithstanding these clarifications, I support the Bill.

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