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How to reframe Singapore’s investment promotion strategies


Singapore must take key steps to deal with the inevitable impact of BEPS Pillar 2, such as strengthening its business ecosystem of SMEs.


In brief

  • Singapore must prepare for the impact of Base Erosion and Profit Shifting Pillar 2 recommendations that are expected to take effect in the country from 2025.
  • Key actions include continued support for SMEs to create a vibrant business ecosystem and building a future-ready pool of skilled talent.
  • It is also crucial to review the measure of success in attracting foreign direct investments as stakeholders focus more on new measurements.

The scrutiny on ensuring that large multinational enterprises (MNEs) pay their fair share of taxes has gained momentum globally. In Singapore, Deputy Prime Minister Lawrence Wong announced in Budget 2023 that the country is looking to effect the recommendations from Pillar 2 of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) from 2025 onward.

BEPS Pillar 2 specifies the introduction of a minimum effective tax rate of 15% for MNEs with annual global revenues of at least €750 million. In particular, this will impact larger organizations with a global footprint. Small- and medium-sized enterprises (SMEs) as well as startups are unlikely to be impacted by this change.

Singapore has long been deploying tax incentives as a key policy tool to attract and anchor foreign direct investments (FDI). About 80 of the world’s top 100 tech companies and many of the world’s top fast-moving consumer goods companies call Singapore home — a reflection of the country’ success in attracting the largest MNEs globally. With BEPS Pillar 2, the efficacy of tax incentives in attracting FDI from global MNEs will no longer be what it was before.

How can Singapore consolidate its appeal and reframe its investment promotion strategies?

A three-pronged approach is key. First, Singapore must continue to strengthen its SMEs to create a vibrant business ecosystem. Second, it should invest in its people to create an environment that is compellingly conducive, where investors will want to be part of and thrive in. Lastly, the country needs to rethink the measure of success in attracting FDI — away from input factors and toward output-oriented metrics — so that it is attracting investments that matter from a global competitiveness perspective.

Sustaining a vibrant business ecosystem

With the potential dampening impact of BEPS on FDIs, the key to unlock the next phase of growth for Singapore will be to drive a vibrant industry ecosystem. Catalyzing close partnerships between foreign investors and large MNEs with local SMEs such that all parties co-create levers of growth and value together will also be critical.

 

SMEs represent a significant part of the Singapore economy, making up 99% of all enterprises locally. Supporting local SMEs and ensuring that they are an equally strong pillar of the economy (in addition to being a complement to the global MNEs in Singapore) has long been an objective of the government. Leading SMEs have demonstrated exciting growth potential, judging from how some of Singapore’s homegrown brands have expanded and become regional and global companies. Having said that, more can be done for more SMEs to grow and flourish if the country were to build a truly vibrant and diverse business ecosystem.

 

Several measures in Budget 2023 are helpful. A S$4 billion top-up was made to the National Productivity Fund, with the objective of anchoring more quality investments in Singapore and supporting companies to develop new capabilities, add greater value to domestic ecosystems and upskill workers.

 

To encourage businesses to engage in R&D, innovation and capability development activities, the new Enterprise Innovation Scheme grants a super deduction of 400% for the first S$400,000 of qualifying expenses incurred on certain activities. These include R&D conducted in Singapore, innovation collaboration projects with polytechnics and institutes of technical education, registration and acquisition of intellectual property rights, and training activities. This generous level of benefits, designed purposefully to disproportionately benefit SMEs, will help ensure that the existing momentum to transform, build innovation capabilities and upskill employees continues to accelerate.

 

The government also doubled down on its efforts to develop local champions by enhancing existing schemes, such as Scale-Up X and other bespoke support for SMEs. Indeed, support for SMEs will need to move from a scheme-centric approach to an enterprise-centric one that caters to companies’ needs and challenges, as the government had readily acknowledged.

Investing in a skilled workforce

For investors, having a strong pool of skilled talent that can support the growth and operations of their companies is an important factor. With technology advancements and other forms of disruption, jobs and roles have shifted radically over the last few years. Today, the need for upskilling and capability development has never been more acute, as enterprises look to build a future-ready workforce and adapt jobs accordingly.

 

This focus on upskilling and re-skilling is not new in Singapore, starting with the Continuing Education and Training Masterplan in 2008 and then the launch of the SkillsFuture movement in 2015. Notable strides have been made, yet gaps in the nation’s talent pool continue to exist.

 

Given tight labor markets globally, the ability to quickly match job vacancies to available skill sets and identify and close gaps in skills that are in demand is critical in lubricating the job market and reducing search times. The introduction of the Jobs-Skills Integrator (JSI) recognizes this urgency, with the government envisioning a more robust training and placement ecosystem for the benefit of enterprises and workers. For the JSI initiative to be effective, a relentless push for watertight collaboration within the ecosystem of stakeholders will be key. Solving the issues with the job-skills nexus to facilitate the availability of a skilled workforce to support enterprise growth will create an attractive talent proposition that is not easily replicable.



Building a future-ready workforce not only helps address technology advancements and other disruptions, but also gives investors confidence that skilled talent is available to support their companies’ growth and operations.




Reviewing metrics and choices

While maintaining the country’s appeal to investors, it is also timely for Singapore to consider a new paradigm when measuring the success of investment promotion and industry development efforts. While incumbent metrics such as employment creation and total business expenditure are still relevant, new measurements such as sustainability, social impact and resource intensity will  be increasingly important to broader groups of stakeholders. This means that Singapore may need to recalibrate how it evaluates projects to focus on differentiating competencies and contributions that the country wants to be known for in a rapidly evolving world.

The changing global landscape presents a multitude of challenges for Singapore’s economy, requiring economic measures to be multifaceted, targeted and regularly finetuned. It is an ongoing journey — and arguably the new normal — that Singapore can neither afford to lose sight of nor be complacent about and must address with confidence head on. 

This article was co-authored by Johanes Candra, Partner, International Tax and Transaction Services — Business Incentives Advisory, Ernst & Young Solutions LLP and former EY partner Bin Eng Tan.


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    Summary

    To prepare for the expected implementation of BEPS Pillar 2 recommendations from 2025, Singapore will need to continue supporting SMEs to create a vibrant business ecosystem. Building a future-ready pool of skilled talent to support enterprise growth is also crucial as an attractive proposition for investors. In addition, the country needs to review metrics that measure the success of investment promotion and industry development efforts as stakeholders increasingly focus on new measurements such as sustainability, social impact and resource intensity.

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