Mr Speaker, I had previously spoken, on multiple occasions, about the importance of government policy support to further orient our economy toward knowledge-intensive industries. A few months back, I did so in the context of proposed amendments to the National Productivity Fund, where I stressed how financing for R&D should be clearly directed toward onshore investments and technology adoption. And in response to DPM Wong’s budget speech this year, I also specifically touched on how research and development (R&D) credits—being explicitly exempted from the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 framework—may be exploited as a potential loophole by multinationals.
Today, I hope to begin by revisiting the earlier issue of R&D credit loopholes in light of the provisions in this Bill. I will then move on to the broader topic of how we plan to continue providing incentives for corporations to locate in Singapore, in the wake of a full rollout of BEPS.
Potential loopholes in the new Approved Royalty Initiative
Clauses 10 through 12 make amendments to Sections 37 and 39 of the original Act, and also introduce a new Section 40. These all deal with a new Approved Royalty Initiative (ARI) scheme, which spells out tax benefits for royalties, as well as technical assistance fees or contributions to R&D costs. These amendments set out specific protections associated with intellectual property.
To be clear, intellectual property (IP) has value, and should be appropriately remunerated—a point that I had also made previously, on two occasions, in this House. But in those speeches, I had also suggested that there is a tendency for producers of IP to seek protection that would allow them to secure intellectual monopolies, and that not every class of IP is deserving of equal protection.
In the context of this Bill, then, my first concern is whether the granting of tax concessions for royalties may be justified. In my mind, providing such relief for royalties received by small, independent producers of IP is entirely reasonable, since the amounts involved are typically modest, and are likely to constitute a very paltry supplementary income for artistes involved in creative work, for which we would like to encourage in Singapore (at this point, I declare that, for many years, my family received royalties associated with several musical compositions by my father, although we have since allowed these to lapse).
However, it is less clear that tax relief for royalties received at the corporate level—especially in large multinationals (MNCs)—are as easily justifiable. True, we wish to encourage creativity and innovation, and tax exemptions are one way to do so. Indeed, tax incentives offered at the preproduction stage are an important way to encourage taking on activities, such as R&D, that carry uncertain payoffs. But royalties received by large corporations occur after the fact, and moreover, are likely to already be subject to corporate taxation in other jurisdictions in which the MNC operates in. While it is true that corporations consider the full expected return from their investments even before embarking on any innovative effort, it is unclear why Singapore should be the jurisdiction that offers such an ex post writeoff, if others do not.
A second concern has to do with how the new ARI scheme differs from the existing programs. What was the take-up rate of the old ARI, and how does the Ministry believe that the new scheme improves on the old? Relatedly, how does the new ARI differ from the Pioneer Industry, Pioneer Service, and Development and Expansion incentives that also appear to fall under the Economic Expansion Incentives Act?
My third—and perhaps the greatest concern—has to do with the risk that the expanded scope of the new ARI seems to now offer tax exemptions to non-resident persons, as opposed to being limited to the current treatment, where royalties qualify for tax concessions only if they are earned in Singapore by either residents or permanent establishments here. Section 40B, for instance, states that “relevant royalties, fee or contributions… are payable to a non-resident person during the period of approval for that activity”.
If this is true, I am concerned that the provision may inadvertently become a means for international companies to use the R&D tax credits as a means of skirting their BEPS 2.0 minimum tax obligations, with little direct benefit to Singapore. The mechanism would entail MNCs booking royalties received from their R&D activities in Singapore for the purpose of qualifying for the tax writeoff, even when such IP are unrelated to income earned or derived in Singapore, as was previously the case. If so, then we would have merely facilitated a continued race-to-the-bottom in tax competition, where governments no longer compete to set the lowest tax rate, but grant the most lavish R&D tax credits.
To get a foretaste of what this could imply, it is instructive to look at Ireland. Due to the overwhelming presence of multinationals booking IP activity and income—often classified as “intangibles”—in Ireland, there has been an increasing divergence in Irish Gross Domestic Product (GDP)—which measures all economic activity recorded within the country’s borders—and Irish Gross National Income (GNI), which nets out foreign income, including profits sent abroad. Further accounting for the depreciation of IP reveals—by one calculation—GNI that is only a little more than half of official GDP. These distortions provide an inaccurate picture of genuine economic progress in the country, and perhaps more critically, provide few jobs or income to Irish citizens. The artificial, almost comical nature of the phenomenon has even been dubbed “leprechaun economics” by Nobel Prize-winning economist Paul Krugman.
Sir, my hope is that nobody will start to question whether Singapore’s hard-won economic progress is actually Pontianak or Hantu economics, and hence by the same token, I trust that the treatment of royalties in the new ARI scheme will not inadvertently give rise to the same pathology.
Preparing for BEPS
Allow me now to move on to the broader context of the Bill, which has to do with our nation’s preparedness for the rollout of BEPS 2.0. As this House is well aware, the agreement continues to grind inexorably forward, most recently making significant progress on negotiations pertaining to Amounts A and B of Pillar One, and the Subject to Tax Rule (STTR) of Pillar Two. The onus is thus on us, as a nation, to prepare our economy, companies, and workers to thrive beyond 2024.
Will the Ministry therefore share with this House whether it has made progress in projections of the potential revenue impact, should the agreement proceed as planned? The MOF had previously explained that “Pillar 1 will result in a loss of revenue” while the minimum effective tax rate top-up could “result in higher tax revenue” if there is limited flight in existing economic activity. I appreciate that it is impossible to fully predict, with much precision, what the net revenue outcome will be. But surely the Ministry has at least outlined revenue implications based on several possible scenarios? If so, would the MOF share their homework with this House?
More generally, it would be useful to understand the government’s strategy for, and plans to, attract and retain foreign investments, going forward. The Ministry indicated that Singapore will “need to strengthen non-tax factors to stay competitive in a post-BEPS world”. What does the government have in mind in terms of these non-tax factors, beyond the usual arguments that we offer a skilled workforce, cutting-edge infrastructure, and secure investor protections? After all, these elements have been unchanging value propositions for a while now, and if there are changes at the margin that diminish our attractiveness, we must surely offset this by improving something that we have hitherto not been able to offer.
My Speaker, the stipulations in this Bill are another small step forward for preparing our economy for a post-BEPS world, and for that reason, it has my support. It is important, however, that in doing so, we do not compromise the purpose of BEPS and inadvertently become a tool for multinational tax evasion, but instead focus on the real intangibles we can offer as a nation to be an attractive destination for domestic and foreign investment, both into 2024, and beyond.