Income Tax (Amendment) Bill

Order for Second Reading read.

5.40 pm

The Senior Minister of State for Finance (Ms Indranee Rajah) (for the Second Minister for Finance): Mr Speaker, on behalf of the Second Minister for Finance, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 2017 covers eight income tax changes announced in the 2017 Budget Statement as well as 28 tax changes arising from the periodic review of our income tax regime. Of the 28 non-Budget proposed tax changes, 16 changes are proposed refinements to the income tax regime while the remaining 12 changes are technical amendments to remove obsolete provisions or to provide clarification on the law.

We sought views from the public on the draft Bill from 19 June to 10 July 2017. The Ministry of Finance (MOF) has evaluated the feedback received and, where relevant, taken the suggestions in.

Sir, the Minister for Finance had, in his Budget 2017 Statement, introduced several tax measures to help companies and individuals cope during a period of economic uncertainty. The tax measures have already been debated in this House, but I will highlight the key ones.

First, the existing Corporate Income Tax (CIT) rebate for Year of Assessment (YA) 2017 is enhanced by raising the cap from $20,000 to $25,000, while keeping the rebate percentage unchanged at 50%. The CIT rebate will also be extended to YA2018, at 20% of tax payable, capped at $10,000. This will help companies navigate through the economic uncertainty and continue with restructuring. Clauses 39 and 40 of the Bill provide for the change.

Second, to ease compliance, taxpayers will be able to claim a tax deduction for the full amount of payments made under Cost Sharing Agreements for qualifying research and development (R&D) projects without the need to provide a cost breakdown from YA2018. Clauses 11 and 14 of the Bill provide for the changes.

Third, to provide relief to individuals who pay income tax, a Personal Income Tax rebate of 20% of tax payable will be granted to all individual tax residents for YA2017, capped at $500 per taxpayer. Clause 46 of the Bill provides for the change.

Sir, as mentioned, MOF also regularly reviews and refines the income tax regime. I shall now outline two key changes arising from MOF’s periodic review of the tax regime.

First, we will require businesses to maintain Transfer Pricing Documentation (TPD). Transfer Pricing refers to the pricing of transactions among related parties, which, in turn, determines the allocation of profits among these parties. TPD are records kept by businesses to show that they have priced their transactions with related parties at the equivalent of what they would have transacted with unrelated parties in similar circumstances. This arm’s length principle is an internationally accepted tax standard.

Since 2006, under the Inland Revenue Authority of Singapore's (IRAS’) guidelines, IRAS has been encouraging businesses to maintain TPD. Many businesses currently do so. With effect from YA2019, businesses will be required to maintain TPD. Jurisdictions, such as Canada, China, Germany, Korea and the United States (US) also have such requirements.

Requiring businesses to maintain TPD demonstrates our commitment to uphold international standards and ensures that the profits taxed in Singapore are commensurate with the functions, assets and risks undertaken by businesses in Singapore.

When transactions between related parties are appropriately priced, profits are correctly attributed to the jurisdictions involved in the transactions. Domestically, TPD ensures that we are collecting the due taxes which are attributable to Singapore. Internationally, TPD serves as useful evidence to other tax authorities, which our businesses can use to show that they have complied with the arm’s length principle for cross-border related party transactions. TPD will help our businesses minimise and manage cross-border tax disputes as they go global.

To limit the compliance burden for smaller businesses, this requirement will apply to businesses only if they have gross revenue exceeding $10 million and significant related party transactions. We expect this requirement to apply to fewer than 5% of companies, many of which have already been maintaining TPD. Clause 21 of the Bill provides for the change.

Second, with effect from 1 January 2018, the Government will raise the maximum amount that an employer can voluntarily contribute to his employee’s MediSave account under the Additional MediSave Contribution Scheme from $1,500 to $2,730 per year. Accordingly, we will increase the maximum amount of tax-exempt voluntary contributions made by employers to employees’ MediSave accounts, and the tax deduction allowable to the employer for these voluntary contributions. Similarly, for eligible companies that make voluntary contributions to the MediSave accounts of the self-employed persons they work with, we will increase the maximum tax deduction allowable to $2,730. Self-employed persons will receive tax exemption on such contributions up to the same limit.

These changes for voluntary contributions to the MediSave accounts of employees and self-employed persons are in line with the Government’s efforts to promote portable medical benefits. All other conditions for granting tax benefits in respect of such voluntary contributions remain unchanged. Clauses 4, 6 and 10 of the Bill provide for the changes.

The remaining legislative changes are mostly technical in nature or relate to improvements in tax administration. Mr Speaker, I beg to move.

Question proposed.

5.48 pm

Er Dr Lee Bee Wah (Nee Soon): Mr Speaker, Sir, life expectancy in Singapore is relatively high, thanks to good medical standards and access to affordable healthcare for the masses. As our Prime Minister mentioned in his National Day Rally speech, Singaporeans live up to the age of 82 on average. However, some of us may also experience an average of eight years of ill-health in old age.

There are a number of reasons that would lead to ill-health. While having poor lifestyle choices is a major reason for poor health in old age, some factors are inevitable, such as hereditary conditions or even accidents. As some of these problems can be unexpected, it is important to have sufficient savings in old age in case there is a need for medical services and treatment. This is where MediSave comes in.

This national medical savings scheme has helped to address the basic medical expenses for hospitalisation, surgeries and outpatient expenses for many Singaporeans and their loved ones.

I am, therefore, pleased to note that with effect from 1 January 2018, the maximum amount that an employer can contribute to his employee’s MediSave account that is not treated as income of the employee under the Additional MediSave Contribution Scheme will be raised from $1,500 to $2,730 per year, and the tax deduction allowable will also be raised accordingly. Hopefully, this will encourage more employers to increase contributions to their employees’ MediSave accounts. This will certainly go a long way to safeguarding the employees’ futures. This is also an attractive staff benefit that serves as a source of motivation for employees.

However, while all this sounds good on paper, I wonder how many employers would make such voluntary contributions. Aside from tax deductions, can we explore other ways to encourage employers to do so? Outreach and awareness could be one way to do so. As it is, Government schemes like MediShield are complex and not fully understood by all. Some employers may not even be aware that there is such an option, or they may be dismissive of it as an additional expense. I hope more can be done to engage employers on this aspect. Perhaps highlight and showcase those employers who support this scheme, just like what has been done for those employers who support National Service. Mr Speaker, Sir, in Mandarin, please.

(In Mandarin): [Please refer to Vernacular Speech.] It is a good idea to allow employers to top up their employee's MediSave account voluntarily. However, I wonder how many employers would make such voluntary contributions. Aside from tax deductions, can we explore other ways to encourage employers to do so? Perhaps some employers may not even know there is such an option. How can the authorities step up the publicity?

Mr Speaker: Mr Thomas Chua.

5.52 pm

Mr Thomas Chua Kee Seng (Nominated Member): (In Mandarin): [Please refer to Vernacular Speech.] Mr Speaker, this amendment Bill provides the legislative basis for the various tax incentives announced during this year’s Budget Statement. I support the amendment.

I would like to share my views on three points: corporate income tax rebate, tax deduction for R&D projects, and tax incentives for specific business hub activities.

The first pertains to corporate income tax rebate. The Government has raised the corporate income tax rebate cap from $20,000 to $25,000, with the rebate rate unchanged at 50%. The rebate will also be extended by another year till YA2018. This measure aims to help businesses cope with the challenges of economic uncertainties and the ongoing economic restructuring.

In order to upgrade, small and medium enterprises (SMEs) would need capital in different areas. Recently, I had a chat with a boss in the food and beverage (F&B) and food processing industry. He said that in the current business environment, it is not enough to just have tasty food. F&B business also need to set up a central kitchen or adopt automated production and compete on who has better selling points, such as a robot chef. Companies need to invest more in R&D. However, where does the money come from?

Based on the Singapore Chinese Chamber of Commerce and Industry’s (SCCCI's) “Annual Business Survey” this year, amongst the 700-plus respondents, two-thirds indicated that this year’s business revenue remained stable or witnessed slight improvement, compared to last year and 55% said profits were either maintained or increased. There are more areas where money is needed than areas from which money can be generated. Therefore, the corporate income tax rebate this time is very timely. SMEs can continue to work hard and plough the tax rebate into improving their business processes and uplifting their competitiveness.

My second topic is tax deduction to encourage collaboration in R&D. After amendment, the Government will adopt the “safe harbour rule for expenditure covered by cost sharing agreements”. With this amendment, the Government will liberalise the tax deduction process for R&D projects involving cost-sharing agreements.

Last year, the SCCCI undertook a study that looked into the innovation efforts of SMEs. Less than one-third of SMEs committed resources into innovation. Amongst these, close to 40% rely on their internal resources to innovate. Collaborating with external research institutions is rare. Between businesses and research institutions, one understands the market, while the other specialises in deep technical research. Each should play to its own strengths, complement each other and achieve a win-win situation. SMEs lack research talents. Hence, they need to leverage external resources to strengthen their R&D abilities. I believe that liberalising the tax deduction process for R&D projects will encourage more SMEs to actively collaborate with research institutions.

In this area, trade associations can play a leading role to encourage their member companies to collaborate on undertaking innovation and R&D. For example, the Singapore Food Manufacturers’ Association (SFMA) initiated the “Great Singapore Food Gifts Award” three years ago, encouraging local enterprises to develop innovative food concepts and improve in their creative packaging. Recently, the SFMA also launched the “Food Innovation Product Award”, enabling food manufacturers and tertiary students to collaborate and co-create new and innovative food products. This is a good initiative worthy of being emulated by other trade associations.

My third topic is specific business hub activities. Amongst the 25 tax measures that have undergone changes in this Bill, quite a number are refinements to the existing tax incentives for specific business hub activities, including infrastructure financing, project financing, commodity trading, maritime, finance, insurance and aircraft leasing. The booming development of these industries can also push the development of the other sectors.

The hottest topic these days is the “One Belt, One Road” initiative, the key of which is the interconnectivity of infrastructure, finance and trade. Being the major transportation, financial and trade hub for the region, coupled with its superior geographic location and favourable tax incentives, Singapore has attracted many foreign businesses and multinational corporations to invest in Singapore and use Singapore as a base to offer their products and services to reach an even larger regional market. This is the trend and I hope local companies can grasp these opportunities. Since local businesses are familiar with the Association of Southeast Asian Nations (ASEAN) markets, and have extensive connections, they can, therefore, work with Chinese companies and explore third-party markets together.

Mr Speaker, Sir, these are times where opportunities and challenges co-exist. In the new economic order, our local businesses need to leverage on their strengths and incorporate external resources. It was with this positioning that our Pioneer Generation successfully created an economic miracle. Today, we can leverage the same positioning and open new doors for Singapore’s future economy.

Mr Speaker: Ms Thanaletchimi.

5.59 pm

Ms K Thanaletchimi (Nominated Member): Mr Speaker, Sir, I rise in support of the Bill.

The amendments relating to third-party voluntary contributions to the MediSave accounts of private sector employees and self-employed persons (SEPs), is a much-anticipated move. The increase in the maximum tax deductible amount for both employers and self-employed persons would encourage voluntary contribution towards MediSave. This is essential for the self-employed persons to build up their MediSave account as well as to encourage companies to make voluntary contribution for their contract employees. One of the several concerns that the Labour Movement has on freelancers who are on contract for services is the long-term savings adequacy of these individuals, especially for their medical care and retirement.

These amendments are timely as we see a gradual statistical increase in self-employed and freelance numbers. These will surely encourage employers and companies, especially larger organisations, to help their employees and self-employed professionals, like taxi drivers, insurance agents and freelancers, to build up their MediSave and help these individuals build better safeguards for future healthcare costs.

This is also certainly in line with the Government's move to place greater emphasis on health management and healthcare. I, indeed, hope that there will be regular reviews of the adequacy of the long-term MediSave savings and such tax reviews to allow for tax exemption, if required, so as to encourage more of such categories of individuals to top up their MediSave accounts. This is essential as the healthcare cost continues to rise with the rising demands of an ageing population.

As for clause 12 in the Income Tax (Amendment) Bill to amend section 14DA, tax-exemption for R&D is important in encouraging innovation even in a slowing economy to empower the continual transformation of our industries and economy. We cannot afford to put off or delay development in R&D. Instead, we need to do all we can to encourage such efforts in the hope of making great breakthroughs.

While I welcome the proposed changes to both corporate and income tax rebates despite and in light of economic uncertainties, I would also like to take this opportunity to suggest further review and consideration of the following.

Firstly, I would suggest additional tax rebates for vulnerable groups, such as caregivers, as the last review was done in YA2015. This would be of great financial relief to those caring for the aged and persons with disability, in addition to the relief that comes from the setting up of the Disability Caregiver Support Centre, as planned in Budget 2017.

Secondly, to also consider a review and increase, of course, fee relief, which is at $5,500, as well as to review the type of approved courses, possibly linked to those approved under SkillsFuture. In addition, I would like to urge the relevant Ministry to allow for courses not directly related to current employment or profession to be allowed course fee relief for the purpose of them obtaining new skills and embrace lifelong learning for future jobs, future skills and future career.

Thirdly, consider increasing parental relief to better reflect rising cost of care and reduced family size. Though our median wage has risen beyond $3,000, it is imperative to note that as the population continues to age, the burden on children in smaller families grows exponentially, even more so, as our average lifespan increases beyond 80. I suggest we consider increasing the annual income criterion set at $4,000 for individuals with dependants to be reflective of cost of living and rising healthcare cost.

Fourthly, working mothers' child relief to be similarly extended to the fathers in recognition of shared parenting responsibility. If we are true to the values and culture of shared parenting, then the whole-of-Government policies should demonstrate the essence of cultivating such behaviours, attitudes and values of both parents caring for their children with equal responsibilities, both emotionally and financially, and, thus, the tax structure should also support such values to grow.

Lastly, the personal income tax rebates should continue as long as the Government's fiscal position remains strong. A review of the corporate income tax rebates will certainly help to offset cost of restructuring which is much needed for industries to transform. Sir, notwithstanding this, I welcome the Bill.

Mr Speaker: Mr Henry Kwek.

6.03 pm

Mr Kwek Hian Chuan Henry (Nee Soon): Mr Speaker, I rise in support of the Bill. The Income Tax Bill amendment is a timely refresh to our tax administration. In particular, I would like to support IRAS' push for strengthening regulations on related party transactions.

The world is changing quickly. The Organisation for Economic Cooperation and Development (OECD) countries are facing tremendous fiscal and economic pressures. This pressure results in increased scrutiny over the tax policies from lower tax jurisdictions, or even existing trade agreements.

Singapore today has an excellent reputation as a responsible tax jurisdiction. Nevertheless, it is important that we stay vigilant. We must not give others real or perceived reasons to cast doubts on the integrity of our tax system. The new provision to strengthen related party transaction shows that IRAS is ahead of the curve, and it strengthens Singapore's reputation as a responsible tax jurisdiction.

Some businesses might get affected with added regulations. But I have looked at this Bill's detailed implementation and I am satisfied that it is done in a measured and targeted way. As such, this amendment Bill is worthy of support.

Mr Speaker: Mr Louis Ng.

6.05 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, I welcome the amendments introduced by this Bill and, in particular, the shift from a guidance-based approach to a formal transfer pricing regime with the introduction of a mandatory TPD requirement.

This is a significant step in deterring and addressing profit-shifting behaviour, and would align our practices more closely with international tax developments under the OECD's Base Erosion and Profit Shifting (BEPS) initiative.

I have a number of clarifications to seek on the application and penalties of the proposed legislative regime.

Section 34D has been expanded to clarify how IRAS will determine whether transactions are conducted at arm's length. In practice, such determination may be difficult as there may be different interpretations when applying the principle to specific facts and circumstances of multinational enterprises' operations. There may be legitimate commercial and risk management reasons for conducting business activities within different affiliates. In addition to the guidance provided in the TPD Guidelines, will IRAS be providing reasons where it makes the determination that a transaction was not conducted at arm's length?

I understand that to assist companies in complying with the arm's length principle, IRAS has introduced an indicative margin for related party loans obtained or provided from January 2017. Would the Minister also consider prescribing a safe harbour margin for guarantees since, conceptually speaking, returns on guarantee represent the credit risk premium in a borrowing arrangement?

Next, the new section 34F(8) deems the failure to meet certain TPD requirements as offences and provides for a fine of up to $10,000. As the TPD requirement only applies to businesses with gross revenue exceeding $10 million, a fine of up to $10,000 may not represent a significant cost. How was the quantum of the fine determined, and how does it compare with similar provisions on reporting requirements?

Under the same section, the company as an entity, would be guilty of the offence of failing to meet TPD requirements. Has personal liability for officers of the company been considered as a more effective method for ensuring compliance with TPD requirements?

Finally, the failure to prepare contemporaneous and adequate TPD, the failure to submit TPD within 30 days' notice, and the failure to retain TPD for five years attract the same maximum fine as submitting false or misleading TPDs. However, the latter act arguably should attract higher culpability because of the element of dishonesty. For comparison, the offence of falsification of accounts under section 477A of the Penal Code may attract imprisonment for a term of up to 10 years, or a fine, or both. Would it be appropriate to impose higher penalties for providing false or misleading TPDs to reflect the higher degree of culpability? Can the Minister provide some clarification on this?

Notwithstanding the clarifications sought, I stand in support of these amendments which signal Singapore's commitment as a responsible member of the international tax community and deter profit-shifting behaviour that undermines the integrity of the tax system, erodes tax revenues and distorts the incidence of tax burden.

Mr Speaker: Senior Minister of State Indranee Rajah.

6.08 pm

Ms Indranee Rajah: Mr Speaker, I thank the Members who have spoken in support of the Bill.

We note the various queries raised by Mr Louis Ng in respect of the TPD requirement. Singapore subscribes to the international principle that profits should be taxed where the economic activities giving rise to the profits are done. In line with this, we have adopted the international principle of arm's length pricing in our law. The arm's length principle is not new to Singapore. Under the Income Tax Act, businesses are required to transact with related parties at arm's length.

The new requirement for businesses to maintain TPD further strengthens the implementation of the arm's length principle by businesses in their tax affairs. The documentation will help them, especially when they venture overseas.

IRAS already has guidance on how it determines whether transactions are at arm's length. We will continue to revise the guidance periodically in consultation with the industry.

Under the guidance, there are various measures that IRAS has in place to minimise compliance burden for businesses to prepare TPD, such as safe harbour margins. We also note Mr Louis Ng's suggestion for introducing a new safe harbour margin for guarantees. IRAS will take this into account in its periodic review for the transfer pricing guidelines.

The arm's length principle ensures that our tax space is duly protected. As a responsible international tax jurisdiction, we firmly subscribe to the arm's length principle for cross-border transactions.

Therefore, in introducing this new requirement for TPD, the penalties for failure to comply with such requirements are in line with our clear and strong support of the arm's length principle. These penalties are higher than the existing penalties under the record keeping requirement and also comparable with the range of penalties imposed by jurisdictions with similar requirements.

While we note Mr Louis Ng's suggestion to impose personal liability on employees for failure to meet the TPD requirement, we will monitor businesses' behaviours first after the implementation of this requirement and evaluate the effectiveness of these penalties. If need be, we will strengthen them.

Er Dr Lee Bee Wah had earlier asked how many employers make voluntary contributions to their employees' MediSave account. In 2016, more than 640 companies made voluntary MediSave contributions, an 11% increase from the 580 companies that did so in 2015. In addition, 28,000 employees benefited from those contributions in 2016, a 6% increase from the 26,500 employees who did so in 2015.

Er Dr Lee has also mentioned the need for the Government to engage and encourage employers to voluntarily contribute to employees' MediSave accounts. We would like to assure Er Dr Lee that the tripartite partners have been encouraging more employers to offer voluntary portable medical benefits through making additional contributions to employees' MediSave accounts. This was included in the Tripartite Guidelines on Re-employment of Older Employees released in May 2016.

With the increase in the maximum amount of voluntary MediSave contributions that a company can make under the Additional MediSave Contribution scheme and a corresponding increase in tax deduction allowable with effect from 1 January 2018, the Ministry of Manpower and Central Provident Fund Board, together with the tripartite partners, will further reach out to all employers through website, emails, letters, seminars and talks to both raise awareness of the scheme and communicate the change and limits.

We thank Mr Thomas Chua for his support for the enhanced treatment for R&D Cost-Sharing Agreements and agree with his suggestions that companies could leverage external resources, such as research institutions and trade associations, to strengthen their research capabilities and embark on innovation and R&D activities.

We also note Ms Thanaletchimi's suggestions to enhance the various tax relief schemes for individuals as well as to extend the tax rebates for businesses and individuals. We will take the feedback into consideration in the periodic reviews of our income tax policies. Our income tax reliefs are intended to provide recognition to taxpayers rather than offset the actual expenses incurred by taxpayers. Any revision made to our reliefs will still need to ensure that our income tax regime as a whole remains resilient and progressive.

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. – [Ms Indranee Rajah.]

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