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How Budget 2023 propels Singapore forward with poise and confidence

Budget 2023 helps Singapore address increased business costs, manpower woes and the potential impact of BEPS 2.0 once it kicks in.


In brief

  • Government support announced in Budget 2023, such as the new Enterprise Innovation Scheme, can help companies address increased costs and manpower woes.
  • The implementation of BEPS 2.0 will present challenges to Singapore’s use of tax incentives to attract new investments.
  • To preserve the country’s tax integrity, a Domestic Top-up Tax will be implemented in 2025.

Coming off the pandemic, the Singapore government is facing the imperatives of managing inflationary pressures, mitigating societal challenges and maintaining the nation’s competitiveness in the global arena. Looming in the background is the expectation that constitutionally, the government is expected to keep a balanced budget during its term.

Deputy Prime Minister (DPM) and Finance Minister Lawrence Wong was swift in delivering the carefully laid out plans centered around moving Singapore forward.

Maintaining Singapore’s competitiveness

Singapore has been one of the best places in the world for business and remains so. Based on the International Institute for Management Development’s World Competitiveness Ranking 2022, Singapore ranked first among 63 countries in 2022 in terms of international trade, with an overall country ranking at third place. The country has also been commended for its balanced handling of the pandemic, which added to its allure as a place to center business operations.
 

The Occasional Paper on Medium-Term Fiscal Projections released by the Ministry of Finance noted that the base erosion and profit shifting (BEPS 2.0) initiative spearheaded by the Organisation for Economic Co-operation and Development could result in a net fiscal impact that “may not be favorable” to Singapore.1
 

Indeed, BEPS 2.0 impedes Singapore’s use of tax incentives to attract new investments, potentially impacting the nation’s competitiveness. Pillar 1 aims to reallocate tax revenue from where activities are conducted to where consumers are located, impacting small economies like Singapore. Under Pillar 2, large multinational enterprises (MNEs) with an effective tax rate (ETR) in Singapore less than the global minimum corporate tax rate of 15% may see other jurisdictions collect the difference of up to 15%.
 

DPM Wong announced that the implementation of Singapore’s Domestic Top-up Tax (DTT) is currently planned for 2025, subject to further alignment with broader international developments. The DTT will be required to preserve Singapore’s tax integrity once BEPS 2.0 is implemented and seeks to top up the MNE’s Singapore ETR to 15%.
 

Both the Pioneer Certificate Incentive and Development and Expansion Incentive award schemes will be extended to 31 December 2028. This continues to encourage companies to anchor high value-added activities in Singapore. Although the effectiveness of these schemes after the DTT implementation would need to be evaluated, the government is keeping the toolkit comprehensive and tax incentives available for companies that find them useful. Companies can assess these incentives in conjunction with other available industry development schemes.
 

Transformation amid slower growth and higher costs is challenging. In a recent Singapore Business Federation survey, 97% of businesses expect inflationary pressures to persist in 2023.2 The top challenges faced by businesses include increases in business costs as well as the availability and retention of manpower.

There is no silver bullet for the long-standing manpower woes of businesses. Budget 2023 provides support measures, such as Jobs-Skills Integrators, employment credits for hiring senior workers, people with disabilities and ex-offenders as well as a top-up for the Progressive Wage Credit Scheme by S$2.4b. Businesses should take the opportunity to make the most of available government support.



Companies should make the most of available government support to addres increased business costs as well as challenges in manpower availability and retention.



Staying ahead of the curve

To further enhance productivity, innovation and workforce quality for businesses to stay competitive in the new environment, DPM Wong announced a new Enterprise Innovation Scheme (EIS). The EIS appears to have taken its roots from the expired broad-based Productivity and Innovation Credit (PIC) scheme. 
 

In contrast to its predecessor, the EIS focuses on innovation and is more targeted. It offers an enhanced tax deduction for qualifying expenditure incurred on activities related to R&D in Singapore; registration of intellectual property (IP); acquisition and licensing of IP rights; qualifying training programs as well as innovation with polytechnics, the Institute of Technical Education and other qualified partners.

 

The EIS cash conversion option is also a step in the right direction, particularly because it targets firms that have yet to turn profitable and are unable to maximize the tax deduction benefit. With the EIS spanning across the years of assessment 2024 to 2028, we hope for the modest 20% cash conversion ratio and S$20,000 cap each tax year to be further enhanced in future Budgets. By comparison, the cash payout under the PIC scheme in its year of expiry was capped at S$40,000 each tax year.  

 

Any increase to Singapore’s corporate income tax (CIT) rate, which remains one of the most competitive globally, must be weighed against the need to attract foreign investments. Despite an overall projected fiscal deficit of S$2b and S$400m for financial years 2022 and 2023 respectively, Singapore’s headline CIT rate remains unchanged at 17%. Instead, the government has judiciously used the levers of asset-related and “sin” taxes, for example, by increasing buyer’s property stamp duty rates, making vehicle registration fees more progressive and increasing excise duties across all tobacco products. These are expected to generate S$800m in additional revenue each year.

 

While there were no enhancements to existing schemes to support businesses in their transition as part of the Singapore Green Plan 2030, the country’s resolve to be resilient in the face of the existential threat of climate change remains clear in the Budget.

 

Budget 2023 reflects the government’s gumption in managing trade-offs necessary to propel the nation through the current economic strain felt by Singapore households and businesses alike. We share DPM Wong’s confidence that the nation will emerge a stronger economy as we rally as one people to build the Singapore we want for tomorrow with poise and confidence.
 

This article was co-authored by Sandie Wun, Partner, International Tax and Transaction Services, Ernst & Young Solutions LLP and former EY partner Russell Aubrey.


Summary

Once BEPS 2.0 is implemented, Singapore will face a greater challenge in using tax incentives to attract new investments. In response, the government has announced that a Domestic Top-up Tax will be implemented in 2025 to preserve the country’s tax integrity. To address increased business costs and manpower woes, companies should make the most of government support announced in Budget 2023, such as the new Enterprise Innovation Scheme.

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