The 2018 Singapore Budget Statement, announcing various tax changes, was delivered by Finance Minister Heng Swee Keat on 19 February 2018 – highlighting a record budget surplus of S$9.61 billion for Financial Year 2017 and GDP and productivity growth from previous years.

Below, we discuss how these changes may impact businesses and individuals, including:

1. income tax announcements for corporate and individual taxpayers,
2. goods and services tax (GST) rate increases, and the impact on the digital economy from the introduction of import GST for services,
3. stamp duty rate increases for property purchases,
4. sector-specific tax announcements for the fund industry, financial sector and debt market, and
5. other key tax announcements.

While some tax changes may appear conservative in comparison with the economy’s bullish growth, it reflects the Government’s efforts to be prudent and address long term challenges whilst laying the foundation for Singapore’s future.

A. Income Tax Announcements

1. Changes for Corporate Taxpayers

Key corporate income tax announcements are as follows. Measures were announced during the Budget to bolster research and development (R&D) conducted in Singapore and Singapore’s Intellectual Property (IP) tax regime. These measures include increasing existing tax deductions for:

• payments made by businesses to license IP for commercial use,
• IP registration costs, and
• expenditure incurred on R&D carried out in Singapore.

These tax deductions would go toward supporting corporations, big and small, in their efforts to innovate, which we note is one of the goals in this year’s Budget.  

i. Research & Development and IP in-licensing

Of particular interest would be the enhanced deductions for qualifying expenses incurred on eligible R&D conducted in Singapore. This enhanced tax deduction is significant – not only does it grant a 250% deduction on staff costs and consumables incurred on qualifying R&D activities performed in Singapore, it also has no monetary cap on expenditure. The proposed enhancement will take effect from Year of Assessment (YA) 2019 to YA 2025.

Without this enhancement, the tax deduction rate would have fallen to 150% from the 400% under the now-lapsed Productivity and Innovation Credit (PIC) Scheme. Under the PIC Scheme, companies could have claimed up to 400% of tax deductions up to S$400,000 or 60% cash pay-out up to S$100,000, for making investments in innovation and productivity improvements.

Another measure which could prove useful is the enhancement of the tax deduction (from 100% to 200%) for costs on IP in-licensing. The tax deduction for qualifying IP in-licensing costs incurred for each year will be enhanced from 100% to 200% for the first S$100,000. The change will take effect from YA 2019 to YA 2025. However, we observe that this enhanced tax deduction would have had a greater impact had there been no restrictions imposed. With the lower expenditure cap and the exclusion of related licensing payments from this tax deduction, the practical utility of this enhancement may be limited.

ii. Intellectual Property Development Incentive (IDI)

The IDI was announced during last year’s Budget 2017. However, no further details have been released and the Budget this year did not address the IDI. With the removal of IP income from the Development and Expansion Incentive and Pioneer Incentive, corporations with structures involving IP holding entities would be keen to find out about the details of this new IDI, which may provide concessionary tax rates on income from qualifying IP rights.

The Economic Development Board had announced last year that the introduction of the IDI would be deferred to a later date expected in late 2017. However as mentioned, no further updates or announcements have been made. Pending the release of the full details of the incentive, it is expected that the IDI will incorporate the “BEPs-compliant modified nexus approach”.

Simply put, this is a substance-based test. This is not surprising as it is important for authorities to ensure that Singapore’s tax incentive regime is compliant with the Action Plan on Base Erosion and Profit Shifting.

iii. Other Corporate Income Tax Announcements

Other tax changes include:

• Enhancement and extension of the Corporate Income Tax (CIT) Rebate. For YA 2018, the CIT rebate is enhanced from 20% to 40% of tax payable and the rebate cap is raised from S$10,000 to S$15,000. The rebate is also extended to YA 2019, but at a reduced rate of 20% of tax payable, capped at S$10,000.
• Downward adjustments to the Partial Tax Exemption (PTE) on chargeable income and the Start-up Exemption (SUTE). Under the SUTE Scheme, the broad based tax exemption will be adjusted to 75% (down from 100%) of the first S$100,000 chargeable income and 50% on the next S$100,000 (down from S$200,000) chargeable income. Under the PTE Scheme, there is no change to the 75% exemption on the first S$10,000 of chargeable income, though the 50% exemption on the next S$190,000 of chargeable income is a reduction of the S$290,000 amount previously. These changes will take effect on or after YA 2020.
• Enhancement and extension of tax deduction for costs of protecting IP. The scheme will be extended till YA 2025. Tax deductions would also be enhanced from 100% to 200% for the first S$100,000 qualifying IP registration costs incurred for each YA with the changes to take effect from YA 2019.
• Enhancement of Double Tax Deduction for Internationalisation Scheme. The S$100,000 expenditure cap for claims without prior approval from IE Singapore or Singapore Tourism Board (STB) will be raised to S$150,000 per YA. This change will apply to qualifying expenses incurred on or after YA 2019 with further details to be released by IE Singapore and STB by April 2018.

However, these changes involve relatively low monetary amounts and lower expenditure caps. Therefore, they may be of greater interest to Small and Medium Enterprises.

2. No significant Tax Changes Announced for Individuals

There were no substantial announcements made in relation to individual income tax during the Budget save for the extension of the tax deduction for qualifying donations made to Institutions of Public Character (IPCs). To continue encouraging Singaporeans to give back to the community, the 250% tax deduction on qualifying donations will be extended for another 3 years to cover donations made on or before 31 December 2021.

B. Goods and Services Tax Announcements

1. Looming increase in the GST rate

On the GST front, one of two key announcements relate to the potential increase in the GST rate by 2% (to 9%) sometime in the period of 2021 to 2025. It is noted that the announcement has been made well in advance of its implementation, giving taxpayers ample time to prepare for this increase.

2. Taxing the Digital Economy

Under the existing GST framework, no GST is imposed on imported services like digital purchases. This position represents a tax leakage and also discriminates against local suppliers, in that local suppliers are required to charge GST, whereas overseas suppliers can supply digital or remote services to customers in Singapore without having to charge GST.

The introduction of import GST for imported services seeks to avoid this tax leakage and to level the playing field between local and overseas suppliers. The measures announced to address this are as follows:

• Where there is a B2B (business to business) imported service, GST will be imposed via a reverse charge mechanism.
• Where there is a B2C (business to consumer) imported services, GST will be imposed through an Overseas Vendor Registration. It is proposed that overseas suppliers and electronic marketplace operators making significant supplies of digital services to local consumers (i.e. suppliers with a global turnover exceeding S$1 million making B2C supplies of digital services to customers in Singapore exceeding S$100,000) will be required to register for GST in Singapore.

In relation to the B2B imported services, only businesses that make exempt supplies or do not make any taxable supplies will need to apply the reverse charge. Practically, this means that the reverse charge mechanism would be of limited application since it primarily affects such businesses. These would include banks and companies in the business of letting and selling residential property. Therefore, the majority of businesses that make only taxable supplies would not be affected by the introduction of this reverse charge mechanism.

In relation to the B2C imported services, pending the announcement and confirmation of the full details, it has been proposed that the overseas vendors would be subject to the same penalties and compliance regime as domestic GST-registered persons. A question that remains is how the authorities would enforce this regime bearing in mind that these overseas vendors are located outside Singapore. We can expect Singapore to turn to jurisdictions that have introduced similar regimes to see what works and what does not. For example, some jurisdictions have explored conferring authorities the power to block access to websites. It is hoped that the costs of compliance with this new regime would not outweigh the GST to be collected.

The implementation of the reverse charge mechanism and overseas vendor registration has been proposed to take effect from 1 January 2020. We understand that an Inland Revenue Authority of Singapore (IRAS) public consultation is now underway and is scheduled to end mid-March 2018. Hence, we would expect further details (if any) to only be released after the public consultation ends and the authorities have had time to consider the response gathered.

The authors have also previously written about this issue. To read more about the proposed measures, please click here.

Amid these announcements, the online purchases of goods costing below S$400 remain outside of the GST net. No change to this position was announced during the Budget. Therefore, online purchases of goods imported into Singapore by post costing below S$400 will continue to enjoy GST relief. However, given that this position also represents a tax leakage and discriminates against local suppliers, we think some action will be taken in the future. The authorities are certainly aware of this issue but may at present, still be undecided as to measures to resolve this problem.

C. Stamp Duty Announcements: Wealth tax in another form?

The Budget announced an increase in the top marginal buyer stamp duty (BSD) for residential property from 3% to 4% with effect from 20 February 2018, applicable to Singapore residential properties with values in excess of S$1 million. Read more about the stamp duty change announced during the Budget here.

With this increase, it should be highlighted that there would also be an impact on the Additional Conveyance Duty (ACD) rates for Buyers.

ACD was introduced in March 2017 and applies to a qualifying acquisition or disposal of equity interests in a property holding entity that owns primarily residential properties in Singapore. It was introduced to address the stamp duty differential that had existed in the past between a direct acquisition or disposal of residential properties, and the indirect acquisition or disposal of residential properties via an entity. In the latter situation, stamp duty was payable on the market value of the shares of the entity at a lower rate of 0.2%.

This change follows a global trend where a number of jurisdictions have taken similar action to address this issue. Compared to some of the other major financial centres, what Singapore has done is comparatively less drastic. As a side note, IRAS issued the second edition of its e-Tax Guide on Stamp Duty: Additional Conveyance Duties on Property Holding Entities on 19 February 2018, clarifying amongst other things, the meaning of “prescribed immovable properties” and the new ACD rates following the Budget announcements.

It is also noted that this hike in BSD came amidst speculation prior to the Budget of the possible introduction (or re-introduction) of some form of wealth tax. In his Budget speech, the Finance Minister framed the move as one aimed at making the Singapore tax system more “progressive”. Compared to the introduction of a capital gains tax or the re-introduction of estate duty (abolished in 2008), this move makes practical sense as it would be less disruptive and easier to implement. Further, any introduction of a capital gains tax, estate or inheritance tax would damage Singapore's reputation and competitiveness as a hub for wealth management and financial services.

D. Select Tax Announcements Pertaining to the Financial Sector

1. Developments in the Fund Industry

The Singapore Variable Capital Company (S-VACC) was announced by the Monetary Association of Singapore (MAS) during its public consultation last year, on 23 March 2017. Prior to the Budget, it was not clear how the tax regime for S-VACCs would look like. With the announcements made during the budget, it is now made clear that a S-VACC will be treated as a company and single entity for tax purposes and the tax framework for S-VACCs would be similar to other existing fund structures. The announcements are largely uncontroversial, and are welcomed as it puts S-VACC structures on an equal footing with other funds approved under tax exemption schemes for funds under the Income Tax Act (Cap. 134) (ITA). 

Notably, the tax exemption schemes under Sections 13R and 13X of the ITA and the concessionary tax rate under the Financial Sector Incentive-Fund Management (FSI-FM) scheme will be extended to the respective S-VACC and fund managers managing an incentivised S-VACC. The extension of the FSI-FM scheme to such fund managers is consistent with the broader extension of the Financial Sector Incentive Scheme to 31 December 2023, which was scheduled to lapse on 31 December 2018.

MAS will release further details of the tax framework for S-VACCs by October 2018.

In line with the move to cater for more diverse fund structures, the tax exemption under Section 13X of the ITA, i.e. the Enhanced-Tier Fund Scheme, will also be extended to all fund vehicles constituted in all forms. This change will take effect for new awards approved on or after 20 February 2018.

2. Rationalising the WHT exemptions for the Financial Sector

Interest payments made by a Singapore tax resident or a Permanent Establishment (PE) in Singapore to a non- resident of Singapore would in general be subject to withholding tax (WHT) at a rate of 15%, subject to any applicable double tax treaties that may provide for a reduced WHT rate.

There is currently a range of WHT exemptions for the financial sector. During the Budget, it was announced that a review date of 31 December 2022 will be introduced for current WHT exemptions for certain types of payments, which include “payments made under interest rate or currency swap transactions by financial institutions”.

Currently, payments made under an interest rate or currency swap transaction to a non-resident of Singapore or person without a PE in Singapore, by a financial institution is exempt from tax as stated under the Income Tax (Exemption of Interest and Other Payments for Economic and Technological Development) Notification 2000 (Notification).

If this exemption is subsequently withdrawn, it would be necessary to evaluate the likely impact of this withdrawal in light of the Singapore High Court decision in ACC v Comptroller of Income Tax [2011] 1 SLR 1217 (ACC).

The High Court in ACC held (at [33]) that there being no loan or indebtedness in an interest rate swap agreement, payments made pursuant to such an agreement would not be “in connection with any loan or indebtedness” and thus interest rate swap payments should ordinarily fall outside the meaning of Section 12(6)(a) of the ITA. It follows that such payments would not in general be subject to WHT under Section 45 of the ITA when paid to a non-resident regardless of whether there is an express WHT exemption. We note further the High Court in ACC had in fact considered the Notification. However, the High Court did not think that the content of such subsidiary legislation, made by the Minister pursuant to powers conferred under s 13(4) of the ITA, could guide the interpretation of Parliament’s intention in the language used in the ITA (at [42]).

In the absence of an exemption, one would need to consider the specific circumstances of a swap transaction in order to determine whether such payments were subject to WHT in light of the reasoning of the High Court in ACC. 

3. Qualifying Debt Security Scheme (QDS) to be Extended but QDS+ to Lapse

To support the continued development of Singapore’s debt market, the QDS Scheme will be extended till 31 December 2023.

On the other hand, the QDS+ Scheme, which was an enhancement to the QDS Scheme targeted to further incentivise specified debt securities with an original maturity of at least 10 years and Islamic debt securities, would be allowed to lapse after 31 December 2018. Under the QDS+ scheme, all investors are exempt from tax on qualifying income derived from QDS that are the aforementioned specified debt securities. 

4. Tax Transparency Treatment Extended to REIT-ETFs

Other significant announcements made for the financial sector include extending the tax transparency treatment for Singapore-listed Real Estate Investment Trusts (REITs) to Singapore-listed REITs Exchange-Traded Funds (ETFs). This is a welcome step because REITs are already tax transparent so it is logical to extend this tax treatment to ETFs.

E. Other Key Tax Announcements

For the insurance sector, the Insurance Business Development – Insurance Broking Business (IBD-IBB) Scheme will be extended till 31 December 2023 while the Insurance Business Development – Specialised Insurance Broking Business (IBD-SIBB) scheme will be allowed to lapse after 31 March 2018.

Other tax changes for businesses include the extending of the Investment Allowance scheme in respect of productive equipment to capital expenditure incurred on newly-constructed strategic submarine cable systems landing in Singapore, subject to qualifying conditions. The change will take effect for capital expenditure incurred between 20 February 2018 and 31 December 2023 (both dates inclusive).

If you are interested in understanding how these changes may affect you or your business, and how to take advantage of the various opportunities in this year’s budget, please reach out to any of our tax experts listed below.