Income Tax (Amendment No. 2) Bill

Order for Second Reading read.

3.00 pm

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

The Income Tax (Amendment No 2) Bill 2016 covers two sets of amendments. The first set of amendments allows Singapore to implement the Common Reporting Standard (CRS), an internationally agreed standard for automatic exchange of financial account information. The second set of amendments gives effect to the changes announced in the 2016 Budget Statement to the Productivity and Innovation Credit (PIC) scheme.

The draft Bill on the first set of amendments was released for public consultation from 1 to 18 March 2016. The Ministry of Finance (MOF) has evaluated all the feedback received and, where relevant, accepted the suggestions.

Madam, let me explain each of the two sets of amendments in turn. The first, in relation to the implementation of the CRS.

Singapore is firmly committed to upholding internationally accepted standards for the exchange of information under the CRS. Members might recall that in 2014, the Global Forum on Transparency and Exchange of Information for Tax purposes, of which Singapore is a member, and the Group of 20 (G20) major economies, endorsed automatic exchange of information (AEOI) under the CRS as a global standard, and asked all members to commit to a timeline of 2018 or earlier for implementation. The CRS sets out the financial account information to be exchanged, the financial institutions (FIs) required to report, the different types of accounts and taxpayers covered as well as the customer due diligence procedures to be followed by FIs.

Singapore had announced in November 2014 that we would implement the CRS to commence AEOI by 2018. To date, more than 90 jurisdictions, including major financial centres, such as Dubai, Hong Kong, Luxembourg and Switzerland, have also endorsed the CRS and committed to implementation timelines of 2017 or 2018. The proposed amendments in this Bill will enable FIs to put in place necessary processes and systems to collect CRS information from 1 January 2017, in order to meet our timeline to commence first exchange of information under the CRS in 2018.

Clauses 4 and 5 of the Bill make amendments in relation to existing provisions in the Income Tax Act, which had previously been introduced in 2013 to implement the Singapore-United States Foreign Account Tax Compliance Act Inter-governmental Agreement (FATCA IGA). The provisions introduced in 2013 provide the Inland Revenue Authority of Singapore (IRAS) the necessary information-gathering powers to fulfil Singapore's role in facilitating FATCA-compliance under the Inter-Governmental Agreement (IGA). These powers include the routine collection and transmission of relevant information as well as enforcement powers to sanction non-compliance. The amendments in this Bill make clear that these existing provisions are also applicable to any other AEOI agreement that is in accordance with the CRS. This will enable Singapore to sign Competent Authority Agreements (CAAs) with other jurisdictions to implement AEOI under the CRS.

Second, the amendments in clause 8 empower FIs to collect and retain the CRS information for all non-Singapore tax residents, instead of only from tax residents of jurisdictions with which Singapore has an AEOI agreement. This is known as the "Wider Approach". The Wider Approach is an effective approach preferred by our FIs because it removes the need for them to repeatedly review whether the accounts are reportable each time Singapore enters into a new Competent Authority Agreement. The Wider Approach has been adopted by many jurisdictions, such as the United Kingdom (UK), Sweden, Japan and Korea.

Mdm Speaker, I wish to make it clear that while FIs are empowered to collect and retain the CRS information for all non-Singapore tax residents from 1 January 2017, they will only need to transmit to IRAS the information relating to tax residents of jurisdictions with which Singapore has signed a Competent Authority Agreement, for IRAS to implement AEOI under the CRS accordingly. Clause 9 of the Bill provides for this.

The amendments also ensure effective implementation of the CRS, including vesting in IRAS the necessary administrative powers to do so. The changes include mandating the electronic filing of returns and information and are provided for in clauses 2, 6, 7, 8, 9 and 10 of the Bill.

Next, Madam, I will deal with the changes to the Productivity and Innovation Credit (PIC) scheme. These were announced in the 2016 Budget Statement. The key changes are as follows.

First, as we move towards more targeted measures under the Industry Transformation Programme as announced during the recent Budget, the PIC cash payout rate will be lowered from 60% to 40% for qualifying expenditure incurred on or after 1 August 2016.

Second, to streamline and expedite processing of PIC cash payout applications, electronic filing of PIC cash payout applications will be made mandatory from 1 August 2016. The PIC changes are provided for in clauses 2 and 3 of the Bill. Mdm Speaker, I beg to move.

Question proposed.

Mdm Speaker: Mr Louis Ng.

3.07 pm

Mr Louis Ng Kok Kwang (Nee Soon): Madam, I stand in support of the Bill. I will focus my speech on the Productivity and Innovation Credit (PIC) Scheme.

The PIC scheme was introduced to encourage productivity and innovation activities in Singapore. It provides support to businesses that make investments to improve their productivity. There is no doubt that the PIC scheme has been a success. As stated by Senior Minister of State Indranee Rajah in March, since its inception until January this year, 102,000 companies, or 70%, of all active companies in IRAS' records for the Year of Assessment 2014 have benefited in one way or another from the PIC scheme. This is a pretty impressive statistic.

However, as with any scheme, there are bound to be loopholes and people are bound to try and exploit and abuse the scheme.

As previously mentioned also by Senior Minister of State Indranee Rajah, IRAS does conduct rigorous compliance programmes to review and audit PIC claims. However, only 30% of claims from years of assessment 2011 to 2015 have been investigated or audited and about 2.1% of these claims investigated required clawback. For years of assessment 2011 to 2014, IRAS has clawed back $11 million.

While the percentage requiring clawback seems low, it does represent a significant number of people trying to cheat the system or submitting inaccurate claims, perhaps unintentionally, and $11 million does seem like a sizable amount of money. Quite clearly, if we investigate and audit the remaining 70% of claims, we will uncover even more cases and have to claw back even more funds.

But what alarms me more are the other figures published in a The Straits Times' article, and I quote, "IRAS has rejected or clawed back the sums paid out to about one in three cash payout claims filed by the self-employed as the claims were inaccurate or false. The sums not given out or recovered from these dubious claims amounted to about $358 million in the last five years."

This means that IRAS is either spending a lot of resources weeding out inaccurate or false claims or spending a lot of resources trying to claw back funds already paid out. Either way, this $358 million figure points to a real need to strengthen the system.

While we are phasing out the PIC scheme, I understand that, on the ground, PIC consultants are going all out, doing whatever it is possible to source for clients and make as many claims as possible and whilst stocks last. Quite understandably, they are doing this.

This makes it even more important for us to strengthen the system and strengthen it in the right way. The fact is that many people are still trying their luck. We need to strengthen the system so that fewer people want to even try their luck. We need to strengthen the approval process and make sure people know that it is being strengthened.

We need to urgently investigate and audit more claims. We need to send a deterrent message to companies that if they try to cheat the system, they will get caught and the penalties are severe.

We need to increase the odds significantly and the current odds are in favour of the cheaters as there is only about a one in three chance of their claim being audited.

Will the Ministry also consider cutting down on providing grants to low productivity yield projects like websites or app designs? And will the Ministry consider giving out the grants in disbursements for innovation projects that need to show payoff, in terms of productivity gains and projection of sales? All of which requires information filing one year from implementation. Ultimately, we need to safeguard taxpayers' money.

We also need to take a stronger stand when it comes to PIC consultants. A PIC consultant is a person or a business entity that provides advice or assistance to businesses on PIC matters for a fee. A PIC consultant is expected to be knowledgeable about the PIC scheme and be familiar with the correct procedures when submitting PIC cash payout claims for his clients. I am sure we have all seen their claims and guarantees of cashing in on the PIC scheme and I have met numerous residents telling me stories of how they have been approached by the consultants. We need to make changes to ensure that consultants are no longer able to cheat the Government and also the companies.

The amendment in the Bill requiring the use of the electronic service is a step forward. It will help end the abuse of the system where companies sign blank PIC forms and pass them to the consultants. As we now streamline the application process, I question the need for PIC consultants to submit the application forms on behalf of their clients or applicants. Can the Ministry clarify why we continue to allow this and whether there are plans to phase this out?

I appreciate that some companies need help for PIC matters. But can IRAS not handle these enquiries directly? IRAS already states on its website that companies can contact them for assistance or clarification on PIC matters. There are even separate phone numbers for companies and the self-employed. And if the enquiry contains confidential information, they can email IRAS via myTax Mail for added security. With all these in place, is there a need for consultants to help provide advice and submit applications? I ask that this be reviewed also because I have met residents at my Meet-the-People Sessions who have been cheated by the consultants.

Madam, the PIC scheme has benefited many and as I had shared during the Committee of Supply debates, I am concerned that we are ending it. However, I am more concerned that as we get closer and closer to the end date, more and more people will try to cash in. This Bill does help to strengthen the system. But I sincerely believe that we need to do more.

Mdm Speaker, my request for the Government to review the above notwithstanding, I support the Bill.

3.12 pm

Ms Foo Mee Har (West Coast): Mdm Speaker, I wish to declare my interest as the Chief Executive Officer of the Wealth Management Institute. According to Oxfam International, lost tax revenue from money salted away offshore costs governments more than $150 billion a year. This is estimated to be enough to eliminate extreme poverty across the globe twice over. I commend the Singapore Government for its strong efforts in the anti-money laundering regime and its active cooperation with other jurisdictions through the exchange of information for tax purposes to facilitate tax compliance.

International clients should choose to bank in Singapore on the strengths of our broad and deep capabilities in financial products and services, strong regulatory regime and rule of law, and not because they think they can abuse our laws to evade paying tax.

I support the proposed amendments to the Income Tax (Amendment No 2) Bill to allow Singapore to implement the Common Reporting Standard (CRS) with effect from 1 January 2017, a move that improves our international tax compliance. This is in line with Singapore's commitment to commence automatic exchange of financial account information (AEOI) in 2018.

Madam, whilst this remains the goal that Singapore must pursue, we should be under no illusions about the complexity of CRS implementation. The way forward will be difficult and will require us to navigate obstacles with great skill, cleverness and caution. I would like to highlight four areas of concern.

First, we should be mindful of the impact of CRS on Singapore's competitiveness as an international financial centre. Many industry participants are concerned that an overly enthusiastic response at this early implementation stage, imposing more than the required obligations on Financial Institutions (FIs) may hurt the competitiveness and growth of our wealth management industry. It is important to observe the pace adopted by other jurisdictions and consider a measured approach at a prudent pace. Not all countries have signed up, and those which have signed may implement Competent Authority Agreements (CAAs) at a different pace. Could the Minister share the impact on Singapore's competitiveness if other financial centres adopt a different approach? How can we ensure a level playing field among all major financial centres, including Dubai, Hong Kong, Luxembourg and Switzerland, to minimise regulatory arbitrage?

Second, the implementation of CRS and AEOI will add significant compliance costs to FIs. To avoid FIs being overwhelmed by the administrative burden of CRS implementation and the complexity of system enhancements, they will need clear guidance to enable a consistent interpretation of requirements. The industry expects the Monetary Authority of Singapore (MAS) to issue guidance notes that set a reasonable industry standard that strives to balance responsible global compliance with reasonable expectations of responses from FIs. Burdensome complexity brings with it the risk of non-compliance and its accompanying cost of penalties.

Madam, the guidance must be sufficiently meaningful so as to enable FIs to determine tax residency consistently across banks. For example, it is common for FI clients to maintain multiple residences or they may travel so frequently that they have no tax residency status. Another example is how will information that Singapore receives on offshore income of Singapore resident taxpayers be used, collected and shared? Different FIs may hold differing reading of the same individual's tax status. So, I would like to ask the Minister how we could take a more nuanced approach that would provide greater clarity for industry players to deal with issues of tax residency.

FIs should be expected to do the necessary due diligence to establish the clients' tax residency. But, to a large extent, FIs will have to rely on their clients' declarations or what their clients declare to them. Is that good enough, or will the FIs be expected to corroborate those declarations, and how far are they expected to go to do so? To what extent will FIs be culpable for inaccurate declarations?

Third, we must ensure that a robust process is in place to determine the readiness of bilateral partners of CAAs before bilateral information exchanges commence. Not every country is as ready as we are to deal with transparency, and we have a duty to the clients we serve to safeguard their privacy against abuse.

Tax information can be misused for a variety of nefarious ends, including criminal enterprise, political corruption and social chaos. We have heard of cases where tax information is misused to achieve political objectives or leaked to criminals.

I would like to ask the Minister to provide assurance that our authorities are, indeed, in a strong position to determine that our CRS partners have strong rule of law, the ability to ensure the confidentiality of information exchanged and prevent its unauthorised use before signing CAAs for information exchanges. Also, how do we ensure there is full reciprocity with AEOI partners in terms of information exchanged?

Even if we do all this well, it is still important for us to communicate skillfully and clearly to international clients who bank in Singapore how rigorously we will safeguard their interests, so that they are assured that their information will not fall into the wrong hands. To this end, I would like to ask the Minister to lay out clearly how Singapore will prioritise the countries that we sign CAAs with, together with estimated timelines. One input that the Government may consider referencing is published corruption indices by independent international organisations, such as Transparency International, which will be well-known to all stakeholders.

Last but not least, Madam, with the advent of information exchanges for tax compliance, we need clarity on an individual's right to privacy protection under our laws. In my speech in 2013, I spoke on the amendment that gives IRAS the right to access information protected under the Banking Act and the Trust Companies Act for Exchange of Information, without having to first obtain a Court Order.

Madam, at the time, I voiced concerns that this amendment may undermine the confidence that clients and investors have in Singapore's banking privacy laws. I was assured by the then Senior Minister of State Josephine Teo that robust safeguards have been put in place by IRAS, including the need for foreign jurisdictions to explain why the request is being made, identify the taxpayer under investigation or assessment, and declare that it has pursued all available means in its own jurisdiction to obtain the information.

Yet, in less than three years, we are asked to consider a regime that automates the exchange of sensitive information. How will FI clients regard the rigour with which we safeguard the integrity of their tax information and the individual's right to privacy?

Mdm Speaker, in conclusion, I support Singapore's role in the vanguard of international cooperation to facilitate tax compliance. However, we need to guard against regulatory arbitrage, implementation complexity and systemic leakage and misuse of information exchange. FI clients must ready themselves for a new age of unprecedented transparency and big changes to tax regimes, as governments work hard to get what is due their peoples. In this, wealth managers can be the authorities' greatest allies in educating and advising their clients, to bring them on board, and we should work together towards a common cause.

Mdm Speaker: Senior Minister of State.

3.22 pm

Ms Indranee Rajah: Madam, I wish to thank the Members, Mr Louis Ng and Ms Foo Mee Har, for their support for the Bill.

Ms Foo Mee Har raised three points: the protection of taxpayers' confidentiality and considerations for the Singapore Government when determining AEOI partners; second, ensuring a level playing field with competitor jurisdictions, such as Switzerland and Hong Kong; and third, whether there will be more detailed guidance provided to the FIs.

As AEOI entails the transmission of information between jurisdictions, Singapore will consider entering into bilateral AEOI arrangements only with appropriate partners, subject to three conditions.

First, and as pointed out by Ms Foo Mee Har, there must be a level playing field amongst all major financial centres, including Hong Kong and Switzerland, to minimise regulatory arbitrage. These financial centres have endorsed AEOI under the common reporting standard and are committed to implementation timelines of 2017 or 2018.

Second, and as also highlighted by Ms Foo, it is critical that we protect taxpayers' confidentiality. This is why we will engage in AEOI only with jurisdictions that have strong rule of law and the ability to ensure the confidentiality of information exchanged and prevent its unauthorised use. CRS includes specific rules on confidentiality and data safeguards that must be in place before information is exchanged.

The Global Forum on Transparency and Exchange of Information for Tax Purposes has also set up an expert panel to review jurisdictions' implementation of these safeguards to ensure that AEOI takes place in a secure environment. Singapore will take into consideration the outcome of such reviews when we consider which jurisdictions to engage in AEOI with.

Third, there must be full reciprocity with AEOI partners in terms of information exchanged. These conditions are necessary to make sure that we continue to respect the legitimate expectations for confidentiality even as we implement AEOI to contribute to the global effort to tackle offshore tax evasion. In this regard, Singapore will prioritise AEOI with jurisdictions which meet the conditions stated, such as the UK and France.

We are mindful that implementing AEOI under the CRS will impose new obligations on our FIs. FIs will need to institute new procedures and configure their systems to fulfil their customer due diligence and reporting obligations under the CRS.

The Government is working closely with the financial industry in our implementation of the CRS. MOF, IRAS and MAS held a public consultation on proposed legislative amendments in March and will be releasing draft regulations for consultation by June this year. This will allow FIs to have sufficient time to make changes to their procedures and systems to comply with the CRS requirements. The regulations will detail the CRS requirements that FIs have to comply with.

Moving on to Mr Louis Ng's speech on the PIC, we agree with Mr Ng on the need to ensure that PIC claims are genuine and in order. IRAS has taken and will continue to take a strong stance against abuse of the PIC scheme, whether consultants are involved or not.

IRAS does not make it mandatory for taxpayers to submit PIC claims through consultants, and many businesses submitted the applications on their own without the help of consultants. At the end of the day, it is the company's choice as to whether to use consultants or not. But from our perspective, we would require that any information that they submit for their claims must be true and accurate.

Mr Ng noted that IRAS had investigated or audited about 71,000 claims or around 30% of the PIC cash payout claims made from years of assessment 2011 to 2015. He suggested that IRAS audit and investigate more PIC claims. IRAS takes a risk-based approach in its enforcement, and this 30% is not a fixed rule. The 71,000 claims were identified for investigation or audit based on the use of analytics and risk profiling, as well as the experience of the IRAS investigators. Of these 71,000 claims, about 44,000 claims, or 62%, were rejected upfront even before any cash was disbursed. Hence, there was no need for a clawback. About 5,500 claims are undergoing audit or investigation. Of the 21,500 claims for which investigations have been completed, 20,000 were in order and 1,500 required clawback.

I would like to assure Mr Ng that even as the PIC scheme lapses from the year of assessment 2018, IRAS will continue to conduct rigorous compliance programmes to review and audit the PIC claims. Mdm 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. – [Ms Indranee Rajah].

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