Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill

Order for Second Reading read.

12.03 pm

The Minister of State for Trade and Industry (Mr Alvin Tan) (for the Minister for Trade and Industry): Sir, I beg to move, "That the Bill be now read a Second time."

The Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill amends the Act to provide for tax incentive changes which were introduced in Budget 2022 and Budget 2023. There are a total of six sets of legislative changes contained in the Bill. Let me first elaborate on the changes announced at Budget 2022.

The Ministry of Finance (MOF) had announced at Budget 2022 the discontinuance of the Integrated Investment Allowance (IIA) scheme after 31 December 2022. This IIA scheme, which was introduced in 2012, was intended to incentivise manufacturers to adopt twin models of their operations between Singapore and Iskandar Malaysia in Johor, or the islands of Batam, Bintan and Karimun in Indonesia. However, administrative complexities of tax computation in different jurisdictions made it challenging to operationalise the scheme.

As the IIA scheme was allowed to lapse after 31 December 2022, clause 16 deletes Part 9 of the Act to remove references to the IIA scheme while clause 19 provides for consequential amendments to the Income Tax Act 1947.

The second tax incentive scheme to be amended pertains to the Approved Foreign Loan (AFL) scheme.

First, clause 7 will extend the AFL scheme to 31 December 2028. Second, new section 35(2) and (4) are inserted by clause 8 to enhance the powers of the Minister for Trade and Industry and the Minister for Finance.

Today, an AFL incentive recipient incurs a debt payable to the Government if the recipient contravenes a condition of approval or section 34 by selling, transferring or disposing of equipment that was purchased and financed from an approved foreign loan without the Minister for Trade and Industry's permission. This debt arises even when the company has already delivered its economic commitments as part of the AFL support or when the contraventions were unintentional or when any decision to sell, transfer or dispose of the equipment was reasonable and not of wilful intent.

With the new amendments, the Minister for Trade and Industry may decide whether to revoke the approval for the loan where any relevant contravention has taken place. If the approval is revoked, a debt to the Government arises. But the Minister for Finance may waive the debt in whole or in part if the Minister for Finance is satisfied that the recipient did not knowingly or intentionally contravene the condition or section 34.

This legislative change allows debt liabilities to be imposed in a more targeted manner.

The third tax incentive scheme is the Approved Royalties Incentive (ARI) scheme. The legislative amendments in clauses 2, 10 and 12 will extend the scheme by five years to 31 December 2028 and enhance the administration of the ARI scheme by shifting from an agreement-based approach to an activity-based approach from 1 April 2023.

Under the agreement-based approach that was in place before 1 April 2023, companies were required to obtain the Economic Development Board (EDB)'s approval for every addition of an agreement or variation of an agreement in the ARI certificate. However, as the use of intangible assets and intellectual property has become more pervasive, we need a more flexible approach to respond to companies' investment interests.

Under the activity-based approach, the scope of the approved activity is specified in the certificate. Companies will enjoy tax exemptions or concessionary withholding tax rates for royalties, fees or contributions payable under all agreements entered into for the purpose of the approved activity. Companies will not need to undergo the onerous administrative process of seeking new approvals each time a new agreement is reached or an existing agreement is varied.

To be clear, this is not a relaxation of the scheme. We will still clearly define the activities which are supportable under the ARI incentive and companies that make claims under agreements which are not covered by a supportable activity will still have their claims rejected and must pay the full prevailing withholding tax.

Sir, please allow me to elaborate next on the tax incentive changes announced at Budget 2023.

The Pioneer Certificate (PC) scheme and the Development and Expansion Incentive (DEI) scheme will be extended by five years to 31 December 2028. Clauses 3 and 5 will effect the extension of the PC scheme while clause 6 will effect that of the DEI scheme. Both schemes remain relevant and effective in anchoring desired investments in Singapore.

The fifth set of legislative amendments applies to the Investment Allowance (IA) scheme.

The amendments to the IA scheme include (a) the extension of the IA scheme by five years for certain qualifying activities by clause 14(d) and 14(e); and (b) the removal of the qualifying activity of aircraft maintenance, repair and overhaul services, given it has been assessed to be no longer relevant and the power to approve such projects lapsed in 2015. Clauses 13, 14(a), 14(b) and 14(c) remove references to this qualifying activity.

The last legislative amendment in clause 18 inserts a new section 61A to provide the Minister for Trade and Industry with retrospective revocation powers across all incentives under the Act in two scenarios. The first scenario is the removal of any activity, agreement, arrangement, product or other matter from a certificate or letter. The second scenario is the revocation of any approval, certificate or letter.

This amendment is aligned with the Income Tax Act 1947 and will allow the Government to respond proportionately when dealing with incentive breaches. There is no impact on tax incentive recipients who meet their conditions and commitments. Mr Speaker, I beg to move.

Question proposed.

12.10 pm

Mr Mark Lee (Nominated Member): Mr Speaker, Sir, I declare my interest as a board member and a shareholder of Crystal International Group Limited, whose group turnover is in excess of €750 million and whose related entities have received or are in the process of applying for tax incentives. Mr Speaker, Sir, in Mandarin.

(In Mandarin): [Please refer to Vernacular Speech.] Singapore is home to a vibrant and diversified corporate ecosystem. There are close to 40,000 international companies in Singapore, contributing about 30% of employment and 56% to value added over the past few years. Foreign direct investment inflow into Singapore reached $195 billion in 2022, reflecting robust growth year-on-year. MNCs are an important part of a healthy economy, driving growth sectors and working in partnership with SMEs in their value chain to deliver value to the economy.

The business community supports the Economic Expansion Incentives Scheme as this is an important aspect of our national strategy to attract and anchor MNCs in Singapore.

(In English): The latest amendment to the Economic Expansion Incentives (Relief from Income Tax) Bill seeks to enhance the existing incentives scheme by introducing a new Approved Activities scheme in place of the ARI scheme. This change includes transitional provisions to facilitate a smooth transition to support the shift to the new scheme.

This amendment is a response to the evolving complexity of business structures, which necessitates a more dynamic and robust framework for managing tax incentives. The new scheme simplifies the process for businesses to manage shared costs amongst various agreements and streamlines the administration of tax incentives by considering the operations of large companies that are engaged in multiple contracts for a fixed activity.

Nevertheless, with the shift from an approval-centric system to an activity-centric system, it becomes essential to define what constitutes an approved activity more clearly. Given the diverse and concurrent projects businesses often undertake, the Government could offer clear guidelines and examples of eligible activities. Providing this clarity will facilitate the application process, reduce duplications and lessen the need for handling exceptions.

Shifting focus to a wider perspective, Singapore's dedication to fostering a favourable tax landscape for businesses remains steadfast. This dedication is exemplified by the latest revision.

In the previous year, this Bill was amended to support companies undertaking emission reduction initiatives, encompassing investment in technology and equipment that contributes to quantifiable reductions in greenhouse gases.

This proactive change, spurred by feedback from the industry, underscores the significance of continual regulatory reviews. It ensures that our tax incentives stay in step with both national goals and the changing landscapes of business and investments.

However, it is crucial to be cognisant of broader international trends, like the forthcoming Base Erosion and Profit Shifting (BEPS) 2.0 guidelines, which pose a challenge to the effectiveness of Singapore's tax incentives, particularly for multinational enterprises with a global turnover of at least €750 million. In response to these changes, the Singapore Government has pledged to bolster non-tax benefits to preserve and enhance Singapore’s competitive appeal in a landscape that is rapidly evolving due to the new BEPS 2.0 norms.

From a competitive vantage point, these incentives remain particularly crucial especially for certain mobile activities such as finance and research and development. Such activities are pivotal and economically significant to Singapore. The stark reality is that some multinational enterprises may hesitate at the prospect of meeting the conditions of these incentives, like substantial investment thresholds and local employment quotas, if the tax benefits do not translate into significant global savings.

With this in mind, it is imperative for the Government to explore how our incentives might evolve to align with the Pillar 2 regulations of the BEPS framework. Tax professionals have identified a variety of "BEPS-protected" incentives that comply with the Pillar 2 Global Anti-Base Erosion (GloBE) rules. Therefore, studying these models could provide us with a pathway to adapt and preserve the efficacy of Singapore's tax incentives.

One viable path forward could be the introduction of Qualified Refundable Tax Credits (QRTCs). These credits would be refundable, translating into cash or cash equivalents over a four-year period. QRTCs could be strategically directed towards fostering innovation, acting as an enhancement to the current research and development (R&D) tax incentives.

Another possible solution might be the Market Transferable Tax Credit (MTTC), which could function as an investment tax credit. This credit would bolster sustainability and innovation-driven investments. Comparable tax credits are in operation in countries like the United Kingdom, Ireland and the United States, where they are treated as income rather than mere tax deductions for GLoBE purposes.

Another way to manage the impact of BEPS 2.0 on businesses and investments is to offer more expenditure-related incentives. For example, Singapore does not offer building allowances unless they meet the conditions for Land Intensification Allowance. However, not all business activities are suited to intensify land use and certain investments do not even qualify for such allowances in the first place, such as clean rooms and even R&D facilities.

These types of investments are significant and a multi-faceted strategy is crucial to navigate the intricacies introduced by Pillar 2. Such a strategy ensures Singapore remains a top-tier destination for innovation among multinational enterprises.

In conclusion, the Government's continuous refinement of our tax incentive strategies represents and reflects our strong dedication to evolving alongside the global business and taxation landscape, reinforcing Singapore’s allure as a prime location for multinational companies (MNCs). These reforms not only appeal to MNCs but also generate a ripple effect that benefits small and medium-sized enterprises by enhancing their international ties, increasing business opportunities and fostering technological partnerships.

For a small, open economy like ours, these initiatives are critical by preserving our competitive edge and ensuring a favourable climate for sustainable economic development and the success of businesses of all scales. Mr Speaker, Sir, I support the Bill.

Mr Speaker: Assoc Prof Jamus Lim.

12.20 pm

Assoc Prof Jamus Jerome Lim (Sengkang): Mr Speaker, I had previously spoken on multiple occasions about the importance of Government policy to further orientate our economy toward knowledge-intensive industries.

A few months back, I did so in the context of the National Productivity Fund, where I stressed how funding for R&D should be clearly directed toward onshore investments and technology adoption. And in response to Deputy Prime Minister Wong's Budget speech this year, I also specifically touched on how R&D credits being explicitly exempted from the OECD's 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 of 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 roll-out of BEPS.

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 or 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 protection associated with intellectual property (IP). To be clear, 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 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 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 artists involved in creative work for which we would like very much to encourage in Singapore.

At this point, I should 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, are as easily justifiable. True. We wish to encourage creativity and innovation and tax exemptions are indeed one way to do so. However, tax incentives offered at the pre-production stage are also 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. While it is true that corporations consider the full expected returns 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 write-off, if others do not.

A second concern has to do with how the new ARI scheme differs from our existing programmes. 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.

And, finally, my third and perhaps 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 40(b), for instance, states that and, I quote, "relevant royalties, fees 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 very little direct benefits to Singapore.

The mechanism would entail MNC's booking royalties in Singapore for the purposes of qualifying for the tax write-off even when such IP are unrelated to income earned or derived in Singapore, as was previously the case. If so, then we would merely have 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 to 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, which measures all activity recorded within the country's borders, and Irish gross national income, which nets out foreign income, including profits sent abroad. Further, accounting for depreciation of IP reviews, by one calculation, gross national income (GNI) is only a little more than half of official gross domestic product (GDP) in Ireland.

These distortions provide an inaccurate picture of genuine economic progress in that 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 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.

Allow me to now move on to the broader context of the Bill, which has to do with our nation's preparedness for the roll-out of BEPS 2.0. As this House is well aware, the agreement continues to grind inexorably forward, most recently making significant progress on negotiation pertaining to amounts A and B of Pillar 1 and subject to tax rule of Pillar 2. The onus is thus on us as a nation to prepare our economy, companies and workers to thrive beyond 2024 when agreement comes into fully effect.

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? MOF had previously explained, and I quote, 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 of course impossible to fully predict with much precision what the net revenue outcome is going to 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 has 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 investment protections? After all, these elements have been unchanging value propositions for quite 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 yet been able to offer.

Mr 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 as well as beyond.

Mr Speaker: Minister of State Tan.

12.30 pm

Mr Alvin Tan: Mr Speaker, Sir, I thank Members Mark Lee as well as Assoc Prof Jamus Lim for their support of the Bill and also for giving me the opportunity to make some clarifications.

Let me start. There were a lot going on in both their speeches, so, allow me to take them one by one.

Mr Mark Lee asked for greater clarity on the activities supportable under the ARI scheme and highlighted the importance of refreshing our slate of incentives to align with BEPS 2.0 rules. These are quite similar to what Assoc Prof Lim had also mentioned.

Allow me to first clarify on the ARI. There is no change in the scope and intent in terms of what the Government seeks to support under ARI with this enhancement of the approval approach from an agreement-based approach, as I mentioned earlier on, an activities-based approach.

I agree with the Member on the need for clarity over the scope of an approved activity and I wish to assure Members that this new approach will be no different from the approach that we already take for other tax incentives, such as the Development and Expansion Incentive, as I mentioned earlier on.

Given that we aim to attract investments of different profiles and across sectors, the approved activity could vary from project to project. EDB will indeed work with companies to define what approved activity would mean in the context of a particular investment. And it is in the interest of both the company as well as the Government for this to be very clearly articulated.

Mr Mark Lee also correctly noted that the implementation of Pillar 2 of BEPS 2.0 could reduce the effectiveness of certain tax incentives since multinational enterprises with consolidated annual revenues of at least €750 million would have to bear a minimum effective tax rate (METR) of 15%, wherever they operate. Assoc Prof Jamus Lim mentioned this as well. It means that we must work even harder to secure Singapore's competitiveness as an investment location.

I would like to emphasise that tax incentives still do remain an important tool for us for two reasons.

First, multinationals under the revenue threshold of €750 million are not in the scope of Pillar 2, as Members known, and will thus continue to benefit from concessionary tax rate incentives.

Second, the METR of 15% under Pillar 2 does not apply to withholding taxes, which the AFL and ARI schemes seek to reduce. I would like to assure Members that the Government maintains a high bar in terms of the commitments expected from recipients of these incentives. We will hold incentive recipients accountable for their commitments and will not hesitate to amend or withdraw the incentives in the event of breaches, especially if these beaches are wilful ones.

I would also like to thank Members for their suggestions on the different types of incentives that may comply with Pillar 2 of GloBE rules. The Government reviews and refreshes our incentive toolkit on an ongoing basis even as we strengthen our non-incentive advantages, such as the ones that Assoc Prof Jamus Lim had mentioned – our talent pool, our infrastructure, our connectivity. We will take the Members' suggestions into account during these reviews.

Companies take the total cost of the business into account. They do not look at withholding taxes just in isolation. We consider providing concessionary withholding tax only if it is a necessary to anchor the investment here in Singapore, for the benefit of Singaporeans.

To Assoc Prof Jamus Lim's question, there is actually no change in the intent of the ARI. The aim is and has always been to anchor economic benefits in Singapore. We are just making it easier to administer it for companies and that helps to spur investments into Singapore. I hope that clarifies.

We consider tax incentives notional in nature. If not for these incentives, there is actually a very real potential that these investments may not be here – in which case, then, there is just no tax to collect in the first place.

So, I fully agree on a need to strengthen our non-tax propositions and we are working hard on all of the natural advantages that Singapore has, that I think this House had mentioned and Assoc Prof Jamus Lim in the past had also mentioned. I thank both Members for their reviews.

Again, let me reiterate in closing that our tax incentives are really useful tools which our economic agencies like Enterprise Singapore, EDB and the rest, are able to use to attract new investment commitments into Singapore. We know for this that will provide intangible economic benefits in the form of value added, in the form of business expenditure. Ultimately, what we want in this House is good jobs for Singaporeans.

Among the variety of tools available, tax incentives have been one of the most economically efficient as the tax benefit is premised on the company being profitable. We have good success in securing substantive business investments and also generating positive economic outcomes.

Regardless of their country of origin or size, firms can stand to benefit from tax incentives as long as their investments are able to generate substantive economic outcomes – the ones that I had just mentioned. I hope that we can continue to anchor more firms and new capabilities in Singapore as the economy grows and as developments, including in METR, as well as BEPS evolve over time.

Through the use of these incentives, there will also be benefits generated to the local ecosystem through the transfer of tech capabilities and skillsets to SMEs, as Mr Mark Lee had mentioned and re-emphasised.

Mr Speaker, I would like to emphasise and assure Members of this House that the Government is committed to maintaining a business-friendly environment here in Singapore. We will continue to take in Members' reviews, requests and comments, and review the effectiveness our incentives regularly in order to better influence investors' investment decisions and, ultimately, help Singaporeans and Singapore businesses capture economic value generated through these investments.

We look forward to the continued support of this House in our endeavours.

12.37 pm

Mr Speaker: Any questions for the Minister of State? None.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Alvin Tan].

Bill considered in Committee; reported without amendment; read a Third time and passed.