Income Tax (Amendment) Bill

Order for Second Reading read.

2.07 pm

The Second Minister for Finance (Mr Lawrence Wong): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 2020 covers 39 amendments. Of these, 25 arise from the Financial Year or FY 2020 Budgets and the Ministerial Statement by the Deputy Prime Minister and Minister for Finance, Mr Heng Swee Keat, on 17 August 2020. Another 14 amendments arise from the periodic review to refine or clarify Singapore's income tax regime.

We have sought views from the public on the draft Bill earlier this year. MOF has evaluated the feedback received and incorporated them where they are relevant to the Bill. We thank the contributors for their inputs.

Let me start with the key amendments that give effect to the announcements made at the FY2020 Budgets and the Ministerial Statement earlier this year.

First, to help companies with cash flow, a Corporate Income Tax Rebate of 25% of tax payable, capped at $15,000 per company, is granted for Year of Assessment or YA 2020. Clause 56 of the Bill provides for this amendment.

Second, also to help businesses with cash flow, qualifying deductions for YA2020 may be carried back up to three immediate preceding YAs, instead of one immediate preceding YA. This allows businesses to get a refund of up to $17,000 of income tax paid for YA2017 to YA2019. Clauses 29, 34, 35, 36 and 39 of the Bill provide for this amendment.

Third, to continue encouraging our firms to internationalise, the Double Tax Deduction for Internationalisation scheme has been extended until 31 December 2025. The scope of the scheme has also been enhanced to cover more qualifying expenses. Clauses 17, 19 and 20 of the Bill provide for these amendments.

Fourth, to continue encouraging companies to consider mergers and acquisitions or M&A for growth and internationalisation, the M&A scheme has been extended to cover qualifying acquisitions made on or before 31 December 2025. Clause 41 of the Bill provides for this amendment.

Fifth, prescribed payouts received by individuals, businesses and employers under certain schemes announced this year, like the Self-Employed Person Income Relief Scheme, COVID-19 Support Grant and Jobs Support Scheme, will be exempt from income tax. This will allow citizens and business owners to benefit from the full amount of the support measures, without having to pay tax on them. Clauses 16, 22 and 60 of the Bill provide for these exemptions and amendments relating to these exemptions.

Next, as highlighted earlier, MOF regularly reviews and refines the income tax regime. So, let me now touch on several key amendments amongst those arising from this periodic review of the tax regime which are found in the Bill.

First, to further deter tax avoidance arrangements, we will introduce a surcharge equal to 50% of the amount of additional income tax payable as a result of the adjustments by the Comptroller of Income Tax to counteract tax avoidance arrangements.

Currently, the tax avoidance rules only allow the Comptroller's adjustments to restore taxpayers to their initial tax position, as if the tax avoidance arrangement had not been entered into. This is insufficient to deter aggressive taxpayers from taking the risk of later adjustments made by the Comptroller to counteract the tax avoidance arrangement.

As a related amendment, we will also amend the Stamp Duties Act to introduce a surcharge equal to 50% of the amount of additional stamp duties payable as a result of adjustments made to counteract the tax avoidance arrangement.

Clauses 30, 31 and 63 of the Bill provide for these amendments, and a similar amendment is proposed for the Goods and Services Tax (Amendment) Bill which we will discuss later.

Second, to encourage taxpayers to enjoy the convenience of digital services, and to allow them to get refunds faster, MOF will be allowed to prescribe in subsidiary legislation that tax refunds by the Comptroller of Income Tax to companies are to be made via electronic means.

An assessment of the readiness of companies will be made in 2021, and exceptions will be provided where needed.

Clause 5 of the Bill provides for this amendment. And a similar amendment is also being proposed for the GST (Amendment) Bill 2020 for refunds of GST by the Comptroller of GST to GST-registered businesses.

Third, the ITA is amended to clarify the application of the section 37B adjustment factor.

The section 37B adjustment factor should be applied when offsetting any unabsorbed capital allowances, losses and donations in respect of income that is subject to tax at one rate, against income subject to tax at another rate, whether within the same YA or across a different YA.

For example, say there is a $1 million loss arising in respect of income taxed at 10%, the tax savings should be $100,000. Without applying the section 37B adjustment factor, this loss will give rise to $170,000 tax savings if it is offset against income taxed at 17%. But with the section 37B adjustment factor, we ensure that the tax savings from this loss remains at $100,000 regardless of the tax rate of the income it is eventually offset against.

I should clarify there is no change in policy intent or even in practice. But this amendment seeks to ensure that the section 37B adjustment factor applies in all scenarios, and it is consistent with existing practice. We have provided a validation clause to provide certainty that past applications of this adjustment factor were valid, and that unabsorbed capital allowances, losses and donations brought forward from prior years will continue to be preserved at their tax savings value in line with the policy intent.

Clauses 37, 38, 39, 42 and 66 of the Bill provide for these technical amendments. Mr Speaker, I beg to move.

Question proposed.

Mr Speaker: Assoc Prof Jamus Lim.

2.14 pm

Assoc Prof Jamus Jerome Lim (Sengkang): Mr Speaker, with monetary policy severely limited by near-zero interest rates worldwide, many governments have appropriately turn to fiscal policy as the primary mechanism for support for their economies.

Singapore has been fortunate. We have been able to rely on our reserves to supplement traditional fiscal policy during this trying time. Of course, prudence dictates that we not only spend wisely but also carefully examine our revenue streams. This is our fiduciary responsibility to Singaporeans to be sound stewards of our nation's fiscal balances and reserve holdings, both today and tomorrow.

The Income Tax (Amendment) Bill of 2020 implements the tax changes that were previously discussed and debated at this Government's Budget Statement together with a host of supplementary Budgets. I wish to only offer a few brief additional remarks on the general spirit underlying some of the Bill's specificities.

The Bill seeks to further bolster the longstanding stance of minimising tax avoidance. A number of amendments, in particular, the two clauses, clauses 30 and 63 explicitly take on avoidance issues. With Government expenditures heightened as a result of pandemic related spending, assuring the integrity of the revenue side on the balance sheet has become even more imperative. That said, perhaps additional clarity as to estimates of how much leakage currently exists would be helpful.

Given the rising trend in self-employment and entrepreneurship, has avoidance become more pervasive over time? If so, are there mechanisms other than the more punitively oriented surcharges dealt within this Bill to better nip avoidance in the bud? Perhaps the Minister would be willing to share if tools in artificial intelligence designed to identify anomalous patterns in data on individual tax returns vis-a-vis bank account flows or credit card usage are being deployed to better identify such potential arrears?

The Bill also introduces a number of amendments that permit allowances on capital expenditure such as in clauses 15, 27 and 56. Such relief is certainly welcomed, especially by small and medium enterprises who are facing unprecedented challenges in keeping their businesses afloat at this time.

However, it is worth noting some seeming discrepancies in the applicable duration for capital taxes. Clause 40, for instance, indicates that deductions for qualified investments are to have occurred between July 2010 and March 2020. In contrast, allowances in clause 27 are for three years whereas write-offs are for two. Perhaps, most inexplicably, clause 15 affords profit and capital gain exemptions through till the end of 2027.

Mr Speaker, these discrepancies in the timing of corporate tax relief may well be rationalisable. But I would note that a delay in increasing the burden of the major tax faced by workers, which is the Goods and Services Tax, is only fully precluded for 2021, with Minister Heng stating that the GST hike will occur by 2025. This essentially institutionalises differential treatment of capital and labour in the revised tax code. Some justification for this distinction would be very much welcomed.

It is also useful to observe that the Bill offers extremely limited relief for individual employees. Clause 16, for instance, provides exemptions for expenditures on accommodation and other necessities for those who normally are residents outside of Singapore but who have, due to COVID-19, been forced to remain here for a year. But there are precious few other cuts applicable for employees.

To be fair, the Budget has stipulated a host of direct transfers that workers enjoy – either directly via cash grants or indirectly through the Jobs Support Scheme, for example. Academic research also suggests that fiscal policy tends to offer more bang for the buck when effected as spending rather than tax cuts. Moreover, a more universal income tax cut may excessively compromise fiscal balances and thereby run at cross-purposes to the targeted transfers effected by the various Budgets.

Still, given the prevalence of COVID-19-inspired income tax reductions in many countries worldwide, it seems fair to question whether there could be room for explicit income tax relief for specific groups within society. This will apply in particular to workers within Tier 1 and Tier 2 sectors as discussed previously, such as flight crew and hotel staff for the former, and musicians and restaurant personnel in the latter. Given the relatively small size and disproportionately difficult economic circumstances faced by employees in these industries, further tax relief may be especially welcomed.

Notwithstanding these additional points of feedback, I support the Bill.

Mr Speaker: Mr Louis Ng.

2.20 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, this Bill covers a broad range of issues, including the implementation of measures announced in the Unity Budget and COVID-19 crisis measures in the later Budgets.

I have spoken up previously on our COVID-19 support measures and I am supportive of the increased financial support that we are providing in these difficult times. In this speech, I will focus instead on another important issue – tax avoidance.

This Bill proposes significant changes to strengthen our tax avoidance regime. I have three points to make on these changes.

My first point is on the test for tax avoidance arrangements.

The Bill proposes to repeal and re-enact section 33, which allows the Comptroller to disregard tax avoidance arrangements. The test for tax avoidance is set out in the case of Comptroller of Income Tax versus AQQ, which sets out a scheme and purpose approach for interpreting section 33. CIT vs AQQ remains the landmark decision for the approach to applying section 33 and has been followed in subsequent cases. The IRAS e-Tax Guide on anti-avoidance provisions also states that the Comptroller adopts an approach based on the principles set out by the Court of Appeal in the CIT vs AQQ case.

Can the Minister clarify if the existing test for tax avoidance in CIT vs AQQ continues to apply to the re-enacted section 33?

My second point is on the principles for determining tax avoidance.

To determine whether there was tax avoidance, again, CIT vs AQQ requires that the Court look at whether the use of a specific provision in the ITA was within the contemplation of Parliament. However, the bulk of the guidance on what constitutes tax avoidance has been provided by the Comptroller in the IRAS e-Tax Guide or in case law rather than the Parliament's clarification on whether certain uses of the ITA provisions constitute tax avoidance.

Can the Minister clarify if the arrangements listed in the IRAS e-Tax Guide should be understood as arrangements that the Parliament considers as tax avoidance?

My third point is on the comptroller's discretion in pursuing tax avoidance arrangements.

Under the current Act, the Comptroller may disregard tax avoidance arrangements. The new section 33(2) proposed by the Bill replaces "may" with "must". In response to public feedback that the Comptroller should be allowed to retain discretion on whether to take action against tax avoidance arrangements, the Ministry stated that the amendment is consistent with the strong stance taken against tax avoidance in Singapore.

While I agree with the strong approach against tax avoidance, the new section 33A(7) also provides that the Minister may "for good cause, remit wholly or in part any surcharge or interest payable under this section". The surcharge here refers to the 50% surcharge that must be paid if a tax avoidance arrangement is found on top of any penalty. The ability of the Comptroller to remit the surcharge or interest appears to be slightly inconsistent with the strong stance we have taken against tax avoidance. Can the Minister clarify under what circumstances the surcharge or interest may be remitted? What constitutes "good cause"?

Sir, notwithstanding these clarifications, I stand in support of the Bill.

Mr Speaker: Minister Lawrence Wong.

2.24 pm

Mr Lawrence Wong: Mr Speaker, I thank both Assoc Prof Jamus Lim and Mr Louis Ng for their comments and also for their support of the Bill.

Assoc Prof Lim highlighted the different durations in the schemes for the various capital allowances and profits, and I think he also compared it with the time frame for GST.

Mr Speaker, I would like to put it to the Members that there is really no basis for making such comparisons. Every scheme has to be considered on its own merit – the objective of the scheme, the time frame and then the continuous review of the scheme to ensure that it is relevant and serves its objective. That applies for each individual revenue scheme, it applies for each individual tax item and it also applies for our overall revenue base. We have to ensure that at the overall level, we have a revenue position that is sustainable in order to meet expenditures on an on-going basis, and that is what we will continue to do.

On Assoc Prof Lim's comment about tax avoidance, it is an area that we continuously look at – whether or not the leakage exists and has it become more pervasive, it is hard to quantify this but we do know that tax avoidance arrangements are becoming increasingly creative and complicated. That is why IRAS indeed uses a range of analytical tools to try and detect such cases. But we also need to future-proof our anti-avoidance rules to ensure that taxpayers are sufficiently deterred from entering into such arrangements in the first place. Hence, the amendments that are being proposed here.

Let me also now address specific questions by Mr Louis Ng with respect to some of these tax avoidance arrangements.

First, Mr Ng asked if the existing test for ascertaining tax avoidance in the landmark CIT vs AQQ case will continue to apply. The short answer is yes. What constitutes a tax avoidance arrangement does not change under the re-enacted section 33. In other words, the principles set out in the CIT vs AQQ case will continue to apply and will assist the Comptroller of Income Tax in practice.

Second, Mr Ng asked if the examples of arrangements that are provided in IRAS' e-Tax Guide should be understood as arrangements that the Parliament should consider as tax avoidance arrangements.

I should clarify, Mr Speaker, that these tax avoidance arrangements provided in the e-Tax Guide are the Comptroller's guidance to taxpayers on what he considers to be examples of tax avoidance arrangements. These examples are, in part, distilled from cases to date and are not meant to be and cannot be conclusive or exhaustive. Whether an arrangement constitutes tax avoidance will still have to depend on the facts of the case concerned and then it will go back to the provisions in the Act as well as the provisions in section 33. A taxpayer who disagrees with the Comptroller's decision may appeal to the Income Tax Board of Review and thereafter, to the Courts.

Third, Mr Ng asked if the ability to remit the proposed surcharge or interest payable under this new section 33(A) is inconsistent with our stance against tax avoidance and the circumstances in which surcharge or interest may be remitted.

Indeed, the proposed surcharge and other amendments to section 33, which we are proposing in this Bill, underscore our continued strong stance against tax avoidance. But we do provide an avenue in the law for the Comptroller to remit the surcharge or interest on the surcharge. But I would stress that this remission would be rarely and judiciously exercised. We cannot anticipate what the scenarios will be but in the event that something were to happen that is meritorious, then indeed we will have a remission provision that can be exercised. So, whether or not the surcharge or interest on the surcharge will be remitted will depend on the facts of each case, and whether such a remission is sound.

Mr Speaker, let me conclude. I think Members would agree that tax avoidance arrangements are, as I highlighted earlier, becoming increasingly creative and complicated. We need to do more to ensure that our revenue base is protected. We need to future-proof our anti-avoidance rules to ensure that taxpayers are sufficiently deterred from entering into such arrangements in the first place. That is why we are putting in place the amendments in this Bill. Mr Speaker, I beg to move.

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 Lawrence Wong].

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