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A collection of insights from

key members of the tax community to

mark 70 years of income tax in Singapore

Initiated by:

With contributions from:

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Published by Tax Academy of Singapore

© Tax Academy of Singapore and SMU – TA Centre for Excellence in Taxation 2017

All rights reserved. No part of these articles may be reproduced or transmitted in any form or by any means, including photocopying and recording, or storing in any medium by electronic

means and whether or not transient or incidentally, without the written permission of the copyright holder.

These articles are for exclusive use by the Tax Academy and SMU – TA Centre for Excellence in Taxation (SMU – TA CET). They do not in any way represent the official views

of the Tax Academy, SMU – TA CET or any other person or authority. The authors, the Tax Academy and SMU – TA CET are not responsible for the results of any actions or omissions

taken on the basis of information in these articles, nor for any errors or omissions. The authors,

the Tax Academy and SMU – TA CET expressly disclaim any liability to any person, in respect of anything done or omitted to be done by any such person in reliance on any part of the

contents of these articles.

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ABOUT THE AUTHORS

Chew Boon Choo

Boon Choo is a Tax Partner with Ernst & Young Solutions LLP – Indirect Tax Services. With over 18 years of experience in GST, Boon Choo possesses practical expertise in advising

clients on the GST implications of various transactions, handling GST audits and conducting GST reviews and training. Boon Choo is a regular presenter at EY Singapore’s GST

workshops.

Chua Kong Ping

Kong Ping is a Senior Manager with Deloitte Singapore and is primarily responsible for tax

technical research, learning and training for the Business Tax practice. He also devotes a

significant amount of his time advising key financial services clients of the firm on taxation matters. In his tax technical role, Kong Ping is responsible for, amongst others, keeping

Deloitte’s tax practitioners as well as her clients abreast of developments in Singapore income tax. He teaches at the Tax Academy of Singapore and is an Accredited Tax Advisor

(Income Tax) with the Singapore Institute of Accredited Tax Professionals. Kong Ping also regularly contributes opinion pieces on topical tax issues for a variety of publications and

periodicals such as International Tax Review, International Fiscal Association and the Singapore Business Times.

Swati Gupta

Swati Gupta is a Business Tax Manager based in Deloitte South East Asia’s Singapore Office. Swati has over 8 years of experience in corporate tax, working with Deloitte in Singapore, UK and India. Her experience spans across a number of clients advising on a range of international tax issues including Permanent Establishment, withholding taxes, corporate restructurings and post-acquisition restructurings.

Gurbachan Singh

Gurbachan Singh is the managing partner of GSM Law LLP. He is regarded as one of Singapore’s leading tax lawyers and is consistently ranked highly in legal publications such

as Asia Pacific Legal 500. Mr Singh has about 40 years of tax experience, having worked as a State Counsel at the Singapore Revenue and in private practice. Mr Singh has represented

clients in contentious tax matters as well as succession and estate planning for HNW families. He sits on the boards of numerous companies and is a member of a number of professional

associations and societies.

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Kor Bing Keong

Bing Keong is a Tax Partner with Ernst & Young Solutions LLP - Indirect Tax Services. He

has more than 20 years of professional experience in GST consulting and compliance work. He also conducts GST workshops on a regular basis.

Bing Keong is an Accredited GST Advisor with the Singapore Institute of Accredited Tax Professionals Limited (SIATP).

Lee Tiong Heng

Lee Tiong Heng, tax partner of Deloitte Singapore, has more than 20 years of tax advisory

and compliance experience. He has extensive experience in tax consultancy and planning

services including tax M&A work, corporate restructuring, cross-border transactions, tax

ruling requests, taxation negotiation with the tax authorities and Singapore tax incentives and grants applications from the Singapore government authorities. Tiong Heng leads the Global

Investment and Innovation incentives service line of Deloitte Singapore and Southeast Asia. He is also Deloitte Singapore’s leader for technology, media and telecommunications (TMT)

and the middle market/growth enterprise leader for tax.

He is a fellow member of the Institute of Chartered Accountants of Singapore and he is also

an accredited tax adviser with the Singapore Institute of Accredited Tax Professionals.

Leung Yew Kwong

Yew Kwong is Principal Tax Consultant at KPMG. Prior to his present appointment, he was Chief Legal Officer and Chief Valuer at IRAS and was a tax lawyer at WongPartnership.

Liew Li Mei

Li Mei is a Business Tax Partner based in Deloitte South East Asia’s Singapore Office. She has more than 16 years of experience and serves multinational and local clients in a variety of industries on Singapore corporate tax and cross-border tax issues. Li Mei also spent a number of years in Deloitte US, where she was the Singapore desk leader in our International Core of Excellence (ICE) program.

Richard Mackender

Richard Mackender is an Indirect Tax Partner based in Deloitte South East Asia’s Singapore

office. He has more than 19 years of experience, starting his career in Deloitte’s UK firm and

moving to Singapore in 2003. Richard leads Deloitte’s indirect tax practice in South East Asia. He has a particular interest in tax and technology and has written a number of articles

on the topic. He serves clients across industry sectors, but primarily serves multinational clients and advises on Singapore and regional indirect tax issues.

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Tan Kay Kheng

Mr Tan Kay Kheng is a Partner and the Head of Tax Practice at WongPartnership LLP. He

holds degrees in law, accountancy and taxation, including a Master of Taxation from UNSW. He was admitted to the Singapore Bar in 1990 after graduating from NUS. He is a Fellow

member of CPA Australia and the Singapore Institute of Arbitrators, a Chartered Tax Adviser with The Tax Institute and an Accredited Tax Adviser (Income Tax) with the Singapore

Institute of Accredited Tax Professionals (SIATP). Kay Kheng currently serves on the board of SIATP and the divisional council of CPA Australia. He was previously a member of the

Accounting Standards Council and the Board of Directors at the Tax Academy of Singapore.

Tang Siau Yan

Tang Siau Yan is the Assistant Commissioner of the Tax Policy and International Tax Division of the Inland Revenue Authority of Singapore (IRAS). The Tax Policy and International Tax

Division is responsible for reviewing changes to income tax rules and policies and providing technical guidance to other divisions in IRAS. The Division also represents Singapore in

various international taxation matters, including the negotiation of tax treaties and advance

pricing arrangements.

Tan Tay Lek

Tay Lek is a partner with the Corporate Tax Advisory unit of PricewaterhouseCoopers

Singapore Pte Ltd and has more than 20 years of corporate and international tax experience. He works on clients across different industries including those in industrial manufacturing,

fund management and aircraft leasing. Having worked his way from a junior audit assistant to professional tax practice to an in-house tax role and finally back to professional practice,

Tay Lek has accumulated significant experience in different areas. He regularly shares his experience in the courses he conducts at the Tax Academy and in contributing articles such

as the one you are reading. He is an Accredited Tax Advisor of the Singapore Institute of Accredited Tax Professionals.

Cindy Wong

Ms Cindy Wong is currently a Group Tax Specialist with the Inland Revenue Authority of

Singapore. She is involved in policy reviews on corporate tax issues and handles tax assessment matters for large corporations that have been awarded tax incentives by the

Singapore Government. Since joining IRAS in 2001, Cindy has been engaged in a broad spectrum of tax work on individual and corporate income tax. Cindy holds a Bachelor of

Accountancy with 1st Class Honours from the Nanyang Technological University and a Masters in Law and Accounting (with Distinction) from the London School of Economics and

Political Science. She is also an Accredited Tax Professionals with the Singapore Institute of Accredited Tax Practitioners. She is one of the trainers for the Advanced Tax Programme

conducted by the Tax Academy.

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Yong Sing Yuan

Ms Yong Sing Yuan is currently a Tax Director in the Inland Revenue Authority of Singapore

dealing in advanced pricing arrangements and mutual agreement procedures relating to transfer pricing issues. She has experience in tax policy work and international taxation

matters. Sing Yuan holds a Bachelor of Accountancy with Honours from the Nanyang Technological University and a Master of Advanced Studies in International Tax Law with

Honours from Leiden University. She is also an Accredited Tax Advisor with the Singapore Institute of Accredited Tax Professionals. Sing Yuan is the course advisor and one of the

trainers for the International Tax Programme conducted by the Tax Academy. She has also

contributed to external journals such as the Bulletin for International Taxation by IBFD.

Zhu Lin

Zhu Lin graduated from the National University of Singapore in 2015 and was called to the

Singapore Bar in 2016. She has assisted in a number of tax and estate planning matters since joining GSM Law LLP in 2016.

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TABLE OF CONTENTS

70 Years of Taxation

The Context of the Birth of the 1947 Income Tax Ordinance and its Imprint ,,,,,,,...1

Taxes and the Singapore Success Story – How Singapore Uses Tax as a Tool for Economic Development ,,,,,,,,,,,,,,,,,,...,,,,,,................................ 6

Singapore’s GST: Past, Present and Future ,,,,,,,,,,,,,,,,,,.,... 11

A Snapshot of Income Tax Cases – Trends and Highlights over 70 Years ,,.,,,., 18

Taxes for the Future

Exchange of Information: Evolution and Changes in the Law and Obligations Under

Singapore’s Exchange of Information Regime ,,,,,,,,,,,,,,,,,,, 21

The Digital Economy and the Challenges and Opportunities for Taxation ,,,,,..,... 25

Making the Tax System Easier for Small and Medium Enterprises ,,,,,,,..,,... 29

Tax Challenges for Singapore and the Global Economy ,,,,,,,,,,,..,,,. 33

The Future of Income Tax in Singapore ,,,,,,,,,,,,,,,,,,,.,,.. 36

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The Context of the Birth of the 1947 Income Tax Ordinance and its Imprint

Leung Yew Kwong

Early history

The introduction of income tax in Singapore in 1947 was a rather swift affair. In considering its introduction, the governors of the Malayan Union1 and the Colony of Singapore2 jointly

appointed a British tax expert, Mr R B Heasman, to advise whether income tax would be a practical basis for the taxation policy of Malaya and Singapore.3 Mr Heasman duly arrived in

Malaya in February 1947. He presented his report, together with the draft Income Tax

Ordinance, to the governors on 22 July 1947. The so-called ‘Heasman Report’ was published

on 19 August 1947.

A joint committee was appointed by the governors to consider the findings of the report. The committee presented its report on 4 November 1947, and a number of the provisions in the

draft Income Tax Ordinance were modified.

The Income Tax Ordinance (No. 39 of 1947) was then enacted by the Singapore Legislative

Council. At the same time, in the Federation of Malaya, the Income Tax Ordinance (No. 48

of 1947) was also enacted. Both ordinances came into operation on 1 January 1948.

Mr Heasman’s task in drafting the Income Tax Ordinance was no doubt assisted by the 1922 Model Colonial Territories Income Tax Ordinance.4 The Model Ordinance was prepared

earlier in London, during the inter-war period, by a committee appointed by the British

government to coordinate tax policy in colonies still governed directly by the UK.

The introduction of income tax in the British colonies after World War Two seemed to have

been directed by the Colonial Office in London.5 That would not be surprising as in the

immediate aftermath of the war, the UK would not have been in a position to bear the brunt

of the costs of administering its far-flung colonies. The British efforts in pushing to levy domestic income tax in its colonies also saw Hong Kong enact its Inland Revenue Ordinance

in 1947.6

1 The Malayan Union as a federation of states in peninsular Malaya, was promoted by the British authorities after the war. The short-lived proposal was opposed by political forces in Malaya. Eventually, it was abandoned in favour of the Federation of Malaya. See CM Turnbull, Constitutional Development 1819–1968 in Ooi Jin-Bee and Chiang Hai Ding (eds), Modern Singapore, 1969, University of Singapore. 2 After the war, Singapore was separated from Penang and Malacca by the Straits Settlements (Repeal) Act 1946 and was given a new constitution by the Singapore Colony Order in Council of 1946. See CM Turnbull, Constitutional Development 1819–1968. 3 See [19] of T Ltd v Comptroller of Income Tax [2006] 2 SLR(R) 618. 4 See [35] of Comptroller of Income Tax v AQQ and another appeal [2014] 2 SLR 847. 5 On 5 February 1947, Reginald Sorensen (Labour MP) asked the Secretary of State for the Colonies in the British Parliament to identify the British dependent territories that did not levy income tax and to explain what was being done in those territories to establish an income tax system. See Michael Littlewood, Taxation without Representation: The History of Hong Kong’s Troublingly Successful Tax System (2010, HKUP), p 84. 6 See Michael Littlewood, Taxation without Representation: The History of Hong Kong’s Troublingly Successful Tax System (2010, HKUP), p 77.

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However, there was substantial opposition from commercial and business groups against the

introduction of the income tax.7 Despite calls for a delay in the implementation of income tax,

the Ordinance nevertheless came into operation on 1 January 1948. The initial tax rate from Year of Assessment (YA) 1948 to YA 1950 was 20%. It was raised to 30% from YA 1951,

and to the highest rate of 40% from YA 1959. The first reduction in the tax rate only came in YA 1987, with a drop to 33%, and it has been gradually reduced since then to the current

17%.

Pan-Malayan operation

The income tax regime introduced in 1948 operated on a pan-Malayan basis, such that a

taxpayer with income from both the Federation and the Colony and who was resident in either territory, needed only to make a single return for their total income. A single assessment was

made on that income.8 The collected taxes were allocated between the two governments. Mr Heasman became the first Comptroller-General of Income Tax for both the Federation of

Malaya and the Colony of Singapore.

The ordinances in both the Federation and the Colony were virtually identical, save for some

minor deviations to suit local conditions.9 In later years, there were inevitable independent

developments in the income tax legislation in the two jurisdictions.10

A common law approach

As with UK income tax legislation, the basic tax concepts of the 1947 Ordinance – including “source of income”, “remittance of income”, “trade” and “income/capital distinction” – were

left very much to common law development.11 Indeed, the Comptroller-General’s report for the year 1949 pointed to the “considerable measure of guidance and assistance from the

long series of Court decisions on taxation in the United Kingdom”.

While there were significant variations from the UK legislation, Singapore tax practice very

much followed that of the UK. This is not surprising as the early income tax officials and

practitioners were British expatriates.12 For example, the concept of “source of income” in

7 See N Sengupta, Singapore, My Country: A Biography of M Bala Subramanion (2016, WS Professional). M Bala Subramnion is a former Postmaster-General in Singapore. CM Turnbull in her book Dateline Singapore: 150 years of The Straits Times (1995, Singapore Press Holdings) devoted six pages to the controversial birth of income tax in Singapore. 8 Section 97 of the 1947 Income Tax Ordinance provided for a single assessment where a taxpayer has income earned in the Colony of Singapore as well as in the Federation of Malaya. 9 In paragraph 22 of the Heasman Report, it was pointed out that “unilateral action or wide differences in scope [between the income tax legislation of Malaya and Singapore] would, it is thought, give rise to considerable complications”. 10 For an account of the early development of the tax in Malaya, see Ern Chen Loo and Margaret McKerchar, The Impact of British Colonial Rule on the Malaysian income tax system, (2014) 12 eJournal of Tax Research 238. 11 See Andrew Halkyard and Stephen Phua Lye Huat, Common Law Heritage and Statutory Inversion – Taxation of Income in Singapore and Hong Kong, [2007] SJLS 1. 12 The first three Comptrollers of Income Tax, namely Dudley H Tudor, GT Holloway and NV Casey, were expatriates. Their names and that of Hsu Tse-Kwang (the first local Comptroller) live on, as meeting rooms on the top floor of Revenue House have been named in their honour. The first Comptroller, Tudor was the Collector of War Tax for the Straits Settlements before the Japanese occupation. In 1939, Mr Goh Keng Swee (later Deputy Prime Minister of Singapore) became a tax collector in the then War Tax Department, which had its

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Singapore is captured by the words “income accruing in or derived from Singapore” in the

charging provisions in section 10(1), which are quite different from the charging provisions in

the UK legislation. On the other hand for many years, tax was imposed upon a trade exercised within the UK.13 Such UK legislation gave rise to the use of the concepts of “trading

in” versus “trading with” in determining the geographical source of income in the UK.14 Despite the differences in the charging provisions of the Singapore and the UK legislation,

the looseness in the use of the concepts “trading in” and “trading with” persists today in Singapore in discussions concerning whether income is “sourced” in Singapore.

While on the subject of the source of income, it may be opportune to also mention a common

law source doctrine that stipulates that as income tax is a charge of income from defined

sources, there can only be a charge of income to tax if the relevant source still exists in the

year of charge.15 That this principle survives is evidenced by express statutory provisions that specifically allow the taxing of “post-cessation” income , even where the source of income

has ceased to exist.16

With increasing cross-border transactions in the modern business world, it is inevitable that

the common law ‘source of income’ provisions from which income tax liability emanates, would see legislative intervention. Deemed source rules were introduced or expanded in

1977 by the insertion of sections 12(6) and 12(7) with corresponding withholding tax provisions, to facilitate tax collection for income due to non-residents.17 Withholding tax is

sometimes referred to as “deduction of tax at source”. It was first introduced in the UK in 1803

to collect tax before it reached anybody who may have been personally interested in minimising its amount.

The “remittance” limb of the charging provisions in section 10(1) as captured by the words “income N received in Singapore from outside Singapore”18 was also subject to common law

developments.19 One development was the doctrine of first receipt, which postulates that “income” is only received once by a taxpayer. Once income is received overseas by a

taxpayer, any subsequent remittance of the money by that taxpayer to Singapore is not in

office on the ground floor of Victoria Memorial Hall. See Tan Siok Sun, Goh Keng Swee – A Portrait, (2007) Editions Didier Millet, pp 38–39. 13 See Soon Choo Hock, Tax Jurisdiction of Singapore (1985) 27 Mal LR 29 at pp 32-33, and the Income Tax Board of Review case of TTT v Comptroller of Income Tax (1995) 2 MSTC 5189. The committee appointed by the Governor of the Colony of Singapore to study the Heasman Report had earlier argued for replacing the words “accruing in” with “arising in”, which were clearer, but to no avail. The words “arising in” appeared in the Hong Kong and Ceylon ordinances. 14 See the Australian case of Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (1922–23) 33 CLR 76 at 93, where Justice Higgins noted: “The source from which income is derived, or the place where it is earned, is, of course, not necessarily identical with the place where the business is carried on”. 15 See Brown v National Provident Institution [1921] 2 AC 222. 16 See section 10(25) of the Income Tax Act, where the words “whether or not the source from which the income is derived has ceased” can be found. 17 See ACC v Comptroller of Income Tax [2011] 1 SLR 1217. 18 The word ‘colony’ was used instead of ‘Singapore’ in the 1947 Income Tax Ordinance. 19 See Liu Hern Kuan, Foreign-Sourced Income – The Received Basis of Income Taxation [1993] SJLS 57. The Committee appointed by the Governor of the Colony of Singapore to study the Heasman Report, had earlier argued for the omission of the remittance limb from the charging provisions on the ground, among others, that most income arising outside Singapore would have borne income tax and there will be double taxation unless it is exempted or complicated machinery for relief was put into effect.

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the nature of “income”.20 This doctrine emanated from British India, where income tax was

introduced much earlier, in 1860. 21 Such doctrine provided an easy route to avoiding

Singapore tax under the “remittance” limb of the charging provisions, as income could first be deposited in an overseas bank account before being remitted back to Singapore as money

and not as income.

The thwarting of the doctrine of first receipt came in the form of the “deemed remittance” rules,

which were inserted in the legislation in 1995 and which now appear in section 10(25) of the Singapore Income Tax Act. To overcome the doctrine that income cannot be received twice,

the words “any amount from any income” were used in the legislative amendment introducing

the “deemed remittance” rules. The receipt of money in Singapore does not therefore have

to be in its nature as income, at the time of receipt, for tax to be charged.

The introduction of the “deemed remittance” rules is one of those rare occasions where the fiscal provisions came into operation effectively with retrospective effect. By use of the words

“It is hereby declared for the avoidance of doubt”22 in the Income Tax (Amendment) Act 1995, the deemed remittance rules operate as if they are part of the income tax law when it first

came into operation in 1948.

Social conditions

The 1947 Ordinance also reflected the social conditions of the time, when the participation of

women in the workforce was low. However, the phenomenal expansion of the female workforce in the last 35 years has brought changes to the tax treatment of married women.

In 1947 however, a wife’s income was taxed in the name of her husband, as a single taxing unit under the aggregation rule, which deemed a married woman’s income as that of the

husband’s.23 The prevailing doctrine was that the taxable capacity of a married couple

depended on the total income coming into the household rather than on how the income was

owned between the husband and wife.24 The aggregation rules served to thwart any income-splitting arrangement between spouses to reduce tax liability.

The tax treatment also reflected the relationship between husband and wife under English

common law. Blackstone in Commentaries on the Laws of England (1765) volume 1, chapter

15, page 442 stated the following on that relationship:

“By marriage, the husband and wife are one person in law; that is, the very being or legal existence of the woman is suspended during the marriage, or at least is

incorporated and consolidated into that of the husband; under whose wing, protection,

20 See the Indian income tax cases of Sundar Das v Collector of Gujrat [1922] ILR 3 Lah 349 and CIT v Mathias 7 ITR 48. 21 See CL Jenkins, 1860: India’s First Income Tax, [2012] BTR 87. 22 The use of the word “declare” is in line with the declaratory theory of law, with its concept that the law is declared by the judiciary. The words “It is hereby declared for the avoidance of doubt” have since been omitted, with the consolidation of section 10(25) in the Income Tax Act. 23 Section 47 of the 1947 Income Tax Ordinance. The aggregation rules followed those of the UK legislation.

For a brief history of the taxation of the income of husband and wife in the UK, see Jones v Garnett (Inspector

of Taxes) [2007] STC 1536 at [58].

24 See The Royal Commission on the Income Tax (1920)(Cmd 615), paragraph 259.

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and cover, she performs everything; and is therefore called in our law-French a feme-

covert :”

Under the Singapore income tax legislation, a married woman was first given the option for separate assessment in 1963. The option was withdrawn for YA 1965, and restored from YA 1966. The option of a separate assessment came with restrictions on the separate taxation of the unearned income (that is, investment income) of the married woman. The underlying presumption was that the husband was the breadwinner and the investment income should be taxed under the husband’s name, and the tax was not to be reduced by separate taxation under the wife’s name.

From YA 1982, a married woman could elect to have a separate assessment of her unearned income if it was derived from her earned income. In announcing the change during his 1981 Budget speech, Mr Goh Chok Tong said:

“It is clear today that many married women are capable of deriving unearned income in their own right. This, however, has not been given due recognition by our tax laws.”

It was only from YA 1994 that a married woman could have all her income (that is, both earned and unearned income) chargeable in her own name. Conclusion The evolution of tax legislation in Singapore very much reflects developments in socio-economic conditions, and bears the imprint of English common law. In this short article, it is only possible to provide a glimpse of some of the changes that have occurred since income tax was introduced. Nevertheless, it is apparent that from a perusal of the evolution of the fiscal legislation, we will able to discern the history of our society and our nation.

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Taxes and the Singapore Success Story – How Singapore Uses Tax as a Tool for Economic Development

Yong Sing Yuan

Cindy Wong As a city state with no natural resources, Singapore has come a long way. With a trading history that can be traced to the 14th century, the country is now considered a leading hub for international trade and an established financial centre. Tax policies played an important role in Singapore’s transformation from a small trading port into a First World economy. This can be seen in the way its tax policies have changed in tandem with developments in its economic strategies. The main aims of Singapore’s tax policies are to fund government spending in a sustainable manner and support the government’s economic and social objectives. In this respect, the tax system is not an end in itself but a tool to influence economic and social development. A broad-based, competitive tax system to ensure stable government revenue The tax system has long been used to support the government’s economic objectives of supporting entrepreneurship, productivity and innovation, and growing and anchoring high value–adding capabilities. Singapore has kept corporate tax rates low to promote enterprise and maintain competitiveness internationally. Chart 1 shows how the corporate income tax (CIT) rate has decreased since Year of Assessment (YA) 2001.

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20

22

24

26

28

30

Ta

x r

ate

(%

)

Year of Assessment

Chart 1 – Corporate tax rates, 2001–17

CIT rate

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Broad-based initiatives such as the Tax Exemption Scheme for New Start-up Companies25 and the Partial Tax Exemption scheme26 were introduced to reward entrepreneurs who launch new companies to pursue their business ideas, and to decrease the tax burden on small businesses. Foreign direct investment is an important driver of Singapore’s economic growth. At the same time, in view of the small domestic market, Singapore businesses need to be able to venture abroad. To facilitate inbound and outbound investment, and promote global growth, Singapore has built an extensive network of double taxation agreements with other tax jurisdictions to minimise incidences of double taxation. To date, Singapore has signed double taxation agreements with more than 80 jurisdictions. In addition, it introduced an exemption scheme for foreign-sourced income, which works as a proxy for the tax credit system, to further facilitate the repatriation of profits. Under this scheme, tax exemption is accorded to specified foreign income such as foreign-sourced dividends, branch profits and service income, subject to conditions. Besides making sure that its tax system is competitive, Singapore also has a broad-based tax system to ensure everyone pays some tax and that the tax burden is fairly shared. The goods and services tax (GST) was introduced in 1994 to maintain a wide tax base in an effort to reduce revenue volatility and enhance Singapore’s fiscal sustainability. Indeed, there has been a gradual shift in reliance on direct taxes to indirect taxes as corporate tax rates and personal income tax (PIT) rates fall. Chart 2 shows that direct tax rates have generally been reducing since YA 2001 while the GST rate has increased.

Meanwhile, to ensure that higher income earners pay a proportionately higher amount of taxes, the top PIT rate was increased in YA 2017. This followed the revamping of the property tax structure in 2014 to include more tax rate bands.

25 Subject to the fulfilment of conditions, new start-ups are exempt from tax on the first $100,000 of chargeable income and pay tax on 50% of the next $200,000. 26 Companies, except for those enjoying the tax exemption for new start-up companies, are exempt from tax on 75% of the first $10,000 of chargeable income and pay tax on 50% of the next $290,000.

0

5

10

15

20

25

30

2001 2003 2005 2007 2009 2011 2013 2015 2017

Tax r

ate

(%

)

Year of Assessment

Chart 2 – Direct and indirect tax rates, 2001 – 17

Top marginal PIT

Headline CIT

GST

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Targeted tax incentives to spur economic growth As in many other jurisdictions, Singapore has used targeted incentives to accelerate growth in certain areas of its economy. This has helped the country to calibrate its economic development. Singapore’s tax strategies focus on the long-term economic outcomes the government wishes to achieve. This means identifying industries that need to be developed, capabilities that need to be built and jobs that need to be created. Tax incentives are just one tool to help achieve outcomes that otherwise would be difficult or perhaps impossible to achieve in the desired time frame. Tax incentives can be in the form of tax exemptions, tax rate reductions or expense deductions. These incentives are clearly legislated in the Singapore Income Tax Act and the Economic Expansion Incentives Act. They are administered by economic agencies responsible for the development of specific industries and sectors. The types of tax incentives and the choice of tax policies in Singapore over the years have moved in tandem with the country’s economic development. In the 1960s, Singapore encouraged both foreign and local enterprises to expand and establish their industrial activities in Singapore as one method of easing unemployment. This saw the introduction of the pioneer incentive, which provided tax exemptions and accelerated capital allowances on the purchase plant and machinery. During the 1970s, Singapore’s focus was on promoting the development of high-tech skill-intensive industries. The investment allowance was introduced to encourage investments in productive equipment, and the pioneer incentive was enhanced to make it more export-oriented. To ensure that the forgone tax was not picked up by other countries, tax-sparing clauses were included in treaties that Singapore entered into. Singapore also introduced ‘limitation of relief’ clauses in its treaties to limit treaty benefits to overseas income that was remitted back to Singapore and subjected to tax. This was to encourage repatriation of overseas income back into Singapore. Source taxation rates in Singapore’s treaties then were relatively higher. In the 1980s, efforts were made to transform Singapore into a modern industrial economy based on science, technology, skills and knowledge. This included introducing initiatives to broaden the services sector, and incentives for approved research and development activities. Financial sector incentives were also awarded. By the 1990s, local enterprises were more developed, and were encouraged to invest in the region. The idea was to develop Singapore into a regional hub. Local enterprises were allowed double tax deductions for expenses incurred in promoting export services, and in exploring and developing overseas investment opportunities. To encourage local businesses to internationalise, Singapore stopped including ‘limitation of relief’ clauses in new treaties, and sought to remove these clauses when renegotiating existing treaties. Source taxation rates were also gradually lowered. In the 2000s, Singapore continued to fine-tune its incentives to encourage the development of niche activities and sectors with high growth potential that would generate substantial economic and technological spin-offs. The economy had developed rapidly since the 1960s

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and growth was starting to stabilise. Tax exemptions such as the pioneer incentive were made even more stringent and could only be awarded to unique high-growth potential businesses that would generate substantial benefits for Singapore. The productivity and innovation credit was launched in 2010 to encourage productivity and innovation as the economy restructured. Prudent use of tax incentives to maximise economic benefits The use of tax incentives requires a country to forgo some of the taxes it would otherwise collect. Hence, in awarding tax incentives, Singapore is mindful that the activities carried out by incentive recipients are commensurate with the tax benefits offered. Such activities should produce economic spin-offs such as generating good jobs. Often, the recipients must commit to carrying out a substantial proportion of their business activities in Singapore. Singapore’s economic agencies work closely with recipients to understand their businesses well. The recipient’s efforts in fulfilling their commitments are also closely monitored. Failure to meet these commitments may result in the withdrawal of the incentive. In some cases, the tax benefit may also be clawed back from the incentive recipient. Given that tax incentives are generally used to generate levels of activity or capability that were not present to begin with, in the case of Singapore the tax forgone could be said to be nominal. In addition, tax incentives are awarded for a limited time period only. The tax incentive schemes also come with sunset clauses.27 The rationale is that an incentive should only be awarded to encourage the growth of a selected activity or capability. Once critical mass is reached and the ecosystem for the activity or capability has been attained, it should flourish on its own. The sunset clauses ensure that tax incentives are regularly reviewed for their effectiveness. Incentives that do not bring about the intended outcome may be phased out. An incentive may also be withdrawn if the intended outcome has been achieved or has lost its relevance with the passage of time. The aim is to ensure minimal overlaps in the incentives that different economic agencies must manage, and reflects Singapore’s highly disciplined overall approach to designing and implementing incentives. Singapore’s transformation as testimony to its sound tax policies Singapore’s judicial use of tax incentives and competitive tax policies has borne fruit. The Global Competitiveness Report 2016–2017 by the World Economic Forum ranked Singapore second in its Global Competitiveness Index. The ranking was based on Singapore’s performance in the 12 pillars of competitiveness: institutions; infrastructure; macroeconomic environment; health and primary education; higher education and training; goods market efficiency; labour market efficiency; financial market development; technological readiness; market size; business sophistication; and innovation.28 US-based research institute Business Environment Risk Intelligence (BERI) ranked Singapore first out of 50 major investment destinations in its BERI Report 2016-I (April 2016) in a ranking that assessed operations,

27 See http://www.mof.gov.sg/Policies/Tax-Policies/Corporate-Income-Tax/Tax-Incentives (accessed 25 April 2017). 28 See https://www.mti.gov.sg/ResearchRoom/Pages/Global%20Competitiveness%20Report.aspx?cat=Competitiveness%20Rankings (accessed 25 April 2017).

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politics and foreign exchange.29 Singapore’s gross domestic product registered a year-on-year growth of 2.0% in 2016. Today, Services-Producing Industries contribute the biggest share (69.4%) of nominal added value for the Singapore economy, followed by goods-producing industries (26.2%) and manufacturing industries (19.6%). Unemployment in Singapore remained low, at 2.1%, in 2016.30 It is said that a policy is only as good as its implementation. Sound tax policies need to be supported by well-planned and effective administration. In this respect, Singapore strives to keep its tax rules simple and its tax administration efficient. With such systems in place, Singapore was ranked eighth in the Paying Taxes 201731 survey conducted by PwC, in terms of ease of paying taxes. 32 Taxes will continue to play an important role in Singapore’s ongoing transformation. As former Senior Minister of State for Finance and Transport, Mrs Josephine Teo, said, “Singapore will continue to use its tax policies to attract investments, support entrepreneurship and to promote growth. There is a cost to developing a competitive advantage in any dimension, including tax measures”.33 The overall value proposition offered by Singapore to both local and foreign investors will be constantly redefined in tandem with macroeconomic dynamics to ensure that Singapore remains competitive, and at a cost that Singapore can afford. Disclaimer

The information and views set out in this paper are those of the authors and do not necessarily reflect the

official opinion of the Inland Revenue Authority of Singapore. Responsibility for the information and views

expressed therein lies entirely with the authors.

29See https://www.edb.gov.sg/content/edb/en/why-singapore/about-singapore/facts-and-rankings/rankings.html (accessed 25 April 2017). 30 Economic Survey of Singapore 2015. 31 See www.pwc.com/gx/en/services/tax/paying-taxes-2017.html (accessed 17 Apr 2017). 32 Singapore ranked second in The World Bank’s Doing Business 2017 survey for ease of doing business. See www.doingbusiness.org/rankings (accessed 17 Apr 2017). 33 See http://www.mof.gov.sg/news-reader/articleid/1531/parentId/59/year/2015?category=Speeches (accessed 25 April 2017).

11

Singapore’s GST: Past, Present and Future

Kor Bing Keong Chew Boon Choo

The date 1 April 1994 represents a milestone in the tax history of Singapore. It is the day when the island state implemented a goods and services tax (GST). The lead up to this event was not easy. It took years of hard work and careful deliberation on the part of the Singapore government to design a pragmatic GST system. Close cooperation by the business community in devoting time and resources was also essential to implementation. Today, the GST has come a long way to become the second largest source of tax revenue collected by the Inland Revenue Authority of Singapore (IRAS). It is now timely to examine how the GST has evolved and what the future holds. Rationale for introduction A major reason for the introduction of the GST was to enable Singapore to gradually reduce its revenue reliance on direct taxes. Coinciding with the implementation of the GST, Singapore reduced its corporate tax rate from 30% to 27% and the top personal income tax rate from 33% to 30%. The rate of both of these taxes has trended downwards ever since. The decrease in income taxes has helped attract more investment and talent into Singapore. As a result, Singapore has blossomed as an international centre for business. To help cushion the impact of the GST, the government offered compensatory offset packages, where appropriate, in the form such as income tax rebates, and rebates on conservancy charges. Notably, a GST Voucher scheme was introduced in the Singapore Budget 2012 to offer permanent assistance for lower-income Singaporeans. These measures have proven effective in addressing the regressive nature of the GST, compared with the alternative approach of exempting the tax’s application to particular goods and services. Evolution of Singapore’s GST Changes in the rate The GST in Singapore was implemented at a low rate of 3% in 1994 – one of the lowest in the world. It remained at this level for almost a decade before it was raised to 4% in 2003, 5% in 2004 and 7% in 2007, where it has remained since. Trend in receipts Along with the rate increases, the amount of GST collected by IRAS has increased by more than six folds, from S$1.52 billion in the financial year ended 31 March 1995, to S$10.35b in the financial year ended 31 March 2016. GST is now the second largest source of tax revenue collected by IRAS, following corporate income tax. The chart below shows the upward trend in GST collection over the years.

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GST schemes Various GST schemes have been introduced by IRAS to simplify compliance obligations for businesses. Some of these schemes are targeted at specific industries. In total, eight general schemes and seven industry-specific schemes have been introduced in the 23 years since the GST was implemented. Other legislative accommodations In an ever-changing world economy, the Singapore government has sought to tailor the GST system and adjust legislation to keep pace with business demand and position Singapore as an attractive hub for foreign investors.

For example, a notable change was the granting of a GST concession to Real Estate Investment Trusts (REITs) and qualifying Registered Business Trusts (RBTs) that are listed in Singapore. The 2008 concession was an enhanced concession, which allowed all listed REITs and RBTs to claim GST incurred on their expenses, regardless of their GST registration status. This enhanced concession aimed to promote Singapore as a regional REIT hub and stimulate growth in Singapore’s RBT market. The aerospace industry has also benefited from legislative changes. Zero-rating relief was awarded to the supply of certain prescribed aircraft parts and repair, and maintenance services. The government also introduced the Approved Import GST Suspension Scheme, which is designed to ease the cash flow of businesses in the aerospace industry. All these changes were driven by the unique nature of aircraft parts, as well as the export-oriented and highly regulated nature of the aerospace industry. Singapore’s marine industry has also received various GST legislative accommodations, out of respect to its international and trade-focused orientation. \

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The GST today Focus of the IRAS on self-review As Singapore’s GST system matures, the audit compliance approach of IRAS has shifted to a more proactive engagement approach that encourages voluntary compliance by GST-registered businesses. Accordingly, it has introduced several important initiatives.

Assisted Compliance Assurance Programme Launched on 5 April 2011, the Assisted Compliance Assurance Programme (ACAP) is a holistic framework that helps businesses identify GST-related risks in their business processes.

IRAS is the world’s first tax administration to incentivise voluntary compliance by businesses. It has set aside S$10 million to co-fund the cost incurred by GST-registered businesses taking part in the scheme (capped at S$50,000 per participant). The fund was fully utilised on 30 June 2014.

Assisted Self-help Kit The Assisted Self-help Kit is a comprehensive self-assessment compliance package that helps GST-registered businesses review the accuracy of past GST returns and identify errors from past submissions. Participation is compulsory for all businesses applying or renewing certain GST schemes, such as the Major Exporter Scheme or Approved Import GST Suspension Scheme.

Voluntary Disclosure Programme The Voluntary Disclosure Programme aims to encourage businesses to come forward and disclose their errors voluntarily. IRAS recognises that businesses may make errors in their returns and is willing to reduce penalties on businesses that disclose errors in a timely fashion.

Transparency in tax compliance IRAS has been transparent in its approach to tax auditing, providing advance notice of the area it will focus on each financial year to encourage improved compliance by taxpayers. For example, in 2014 and 2015, the IRAS’s audit compliance efforts were focused on the logistics industry and the sale of non-residential properties. This resulted in the recovery of S$12.7 million in taxes and penalties. In 2016 and 2017, IRAS has announced that it will focus its audit efforts on large businesses. As a result of this transparency, more businesses can be expected to initiate regular self-review and maintain better compliance records.

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The GST in the future

Potential rate increases In his Singapore Budget 2015 speech, then-Minister for Finance Tharman Shanmugaratnam forecasted that government spending would rise significantly due to higher operating expenditures. The current Minister for Finance, Heng Swee Keat, affirmed this outlook in his Singapore Budget 2017 speech. The Singapore government is therefore looking at ways to strengthen its revenue base.

In Budget 2015, for example, it announced that the personal income tax of the top 5% of income earners will be increased, with effect from the 2017 Year of Assessment.

Conversely, the government may be less inclined to increase the corporate tax rate as this will discourage new business investments in Singapore. As a result, the next best option may be to raise indirect taxes.

Comparing Singapore to other countries (see graph below), the nation’s GST rate is still one of the world’s lowest even though it has existed in Singapore for more than two decades. Beyond Asia, many European countries have value-added tax (VAT) rates that exceed 20%. Having maintained a relatively low rate of 7% for more than 10 years, an increase in the rate of Singapore’s GST in the near future should not come as a surprise.

Notes: 1. Vietnam’s VAT rate is five percent for certain goods

17%15%

12%10% 10% 10% 10%

8% 7% 6% 5%

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Countries

GST rate of countries in Asia

15

Lowering the GST registration threshold

Lowering the GST registration threshold will result in higher tax revenues for the Singapore government as it requires more businesses to register and charge GST. Such an approach can also make it more challenging for businesses to avoid GST registration by setting up multiple entities.

Compared to other countries (see table below), the GST registration threshold in Singapore is relatively high. In some countries, no GST registration threshold exists at all, implying that all businesses must charge GST.

Country Compulsory GST/VAT registration threshold*

France None Germany None Italy None Korea None Netherlands None Sweden None Switzerland None Taiwan None Vietnam None Denmark S$10,000

(DKK50,000) New Zealand S$59,000

(NZD 60,000) Philippines S$53,000

(PHP 1,919,500) Thailand S$73,000

(THB 1,800,000) Australia S$79,000

(AUD 75,000) Japan S$126,000

(JPY 10,000,000) UK SGD146,000

25% 25% 25%22% 21% 21% 20% 19%

8%

0%5%

10%15%20%25%30%

GS

T r

ate

Countries

GST rate of countries in Europe

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(GBP 83,000) Malaysia S$158,000

(MYR 500,000) Indonesia S$503,000

(IDR 4,800,000,000) Singapore S$1,000,000

*Based on exchange rate on 28 March 2017.

Taxing the digital economy

Business models are changing rapidly in today’s world in response to technology. One of the most important developments is that companies are no longer confined to traditional bricks-and-mortar operations. The growing importance of the digital economy is increasing the scale of cross-border trading of goods and services, and posing new tax and regulatory challenges.

As noted by the OECD/G20 Base Erosion and Profit Shifting Project in its paper Addressing the Tax Challenges of the Digital Economy, the evolution of technology has dramatically increased the ability of individual consumers to shop online and the ability of businesses to sell without needing a physical presence in the consumer’s country. However, this adversely impacts a country’s ability to collect GST revenue and creates an uneven playing field between resident and non-resident suppliers.

In recent years, many countries have taken actions to address this issue. On 1 July 2011, Norway implemented new rules under which overseas suppliers who sell digital goods and services to Norwegian consumers are required to register for VAT in Norway and charge it on their online sales. The amount of VAT collected is then remitted to Norwegian authorities through the filing of a simplified VAT return. To encourage compliance, the VAT registration process for overseas online suppliers has also been simplified.

Since 2015, similar actions have been taken by the European Union, South Korea, Japan and New Zealand. These require overseas online suppliers to register for VAT or GST in these countries and remit the VAT or GST collected from the domestic consumers to the respective tax authorities. Australia has also announced its intention to implement similar rules on 1 July 2017.

Singapore has generally adopted a pragmatic and pro-business approach in the design of its GST system. This approach helps to reduce the GST compliance costs of taxpayers and is welcomed by taxpayers. Little did one expect that this approach has resulted in tax leakages brought forth by the digital economy. More specifically, Singapore currently does not levy GST on the following online transactions:

(1) Supplies of services (e.g. downloadable software, e-book, music) by overseas online suppliers to Singapore businesses/consumers. These services are considered as made outside Singapore and do not fall within the scope of the Singapore GST regime. Furthermore, there is no requirement for businesses in Singapore to self-account for GST on the acquisition of services from overseas suppliers as the reverse charge mechanism is currently not operative in Singapore.

(2) Sales of low value goods (e.g. sale of fashion items through online platforms or stores) by overseas suppliers to Singapore consumers where such goods are imported by post

17

or by air into Singapore and the import value falls below the GST import relief threshold of S$400.

In his Budget 2017 Speech, Minister for Finance Heng Swee Keat highlighted that Singapore is studying how it can adjust its GST system to ensure a level playing field between local businesses that are GST-registered and foreign-based ones that are not.

Following the Budget announcement and the actions taken by the international community, IRAS may consider one or all of the following measures to address the GST challenges posed by the digital economy:

a) Implementation of reverse charge for cross border business-to-business transactions where businesses in Singapore will need to self-account GST output tax on services acquired from overseas non-GST registered service providers;

b) Simplified registration for overseas suppliers/platform operators which supply goods/services to Singapore consumers through digital platforms

c) Lowering the GST import relief threshold.

With regard to (c) above, it is worth noting that many countries have a low VAT or GST import relief threshold of less than US$30. For example, the import relief threshold in the United

Kingdom is £15 while that of Austria, Germany, Finland and Netherlands is €22. Considering

that Singapore has a relatively high GST import relief threshold of S$400, the possibility should not be excluded that the government may adopt the policy of other countries in

lowering the GST import relief threshold, especially as the digital economy grows.

Use of data analytics

In today’s ever tightening regulatory environment, data analytics is playing an ever-greater

role in ensuring that taxpayers comply with their GST obligations. In its 2014/15 annual report, IRAS observed that it was now able to detect fraud and non-compliance more effectively.

This is because its investigators and auditors could more accurately match and analyse data, and identify taxpayers with higher risk profiles.

Conclusion This paper has shown how Singapore’s GST has grown in importance over the years as it matures into a stable revenue-generating fiscal tool for the government. Even more changes and developments in the nation’s GST system and accompanying legislation can be expected as the global economy and business models continue to transform. It is not a question of ‘if’ but ‘when’.

18

A Snapshot of Income Tax Cases – Trends and Highlights over 70 Years

Tan Kay Kheng

From the get-go, the Income Tax Act (the Act) was clearly intended “to impose a tax upon

incomes and to regulate the collection thereof” (short title to the Act). On this basis, income tax under this Act began life when the Act was passed by the Parliament in 1947. There has

been relatively little litigation over its interpretation. This appears to reinforce the simplicity of the idea behind the Act: to tax incomes as opposed to capital gains.

A quick search of legal databases suggests that Singapore’s tax tribunals and higher courts have only deliberated on around 150 income tax cases. This averages to about two cases a

year, not counting those that might have been lodged but were withdrawn or settled.

It would seem that taxpayers are not too litigious when it comes to disagreements with the

tax authority over their tax affairs. Having said that, it should be noted that from 2001 to 2010,

there were about 50 reported cases, averaging five a year. Does this foreshadow more tax litigation cases in future years, albeit still at a low level in terms of absolute numbers

compared to other Commonwealth jurisdictions?

What were the trends in the reported cases? In the early years after the Act came into force,

the first cases dealt with rudimentary points: whether the sending of a tax return by post to the Comptroller was sufficient compliance (Cheng Poh Seng, 1952), or whether a “person”

referred to in the Act includes a company (Humes Ltd, 1952).

However, subsequent cases turned to more substantive points. As one might expect, many

such cases involved the question of whether certain gains or profits constituted “income” such

that they would attract tax under section 10(1) of the Act. The Act does not provide a general definition of “income” or, for that matter, “capital”, so the only avenue of recourse is for the

taxpayer to seek a court ruling if it does not wish to accept the tax authority’s interpretation.

Around 50 of the reported cases centred on this aspect – the taxability of gains, on such

subjects as:

• the sale of burial plots (A B Ltd, 1957)

• dividends (A B, 1960)

• damages awarded under a judgment (Raja’s Commercial College v Gian Singh & Co,

1974)

• whether one isolated sale or transaction amounted to a business (DEF, 1961)

• interest income from overseas (Chandos Pte Ltd, 1987)

• sale of immovable properties, particularly by individuals (e.g. NP, 2007)

• late-completion interest for the sale and purchase of real estate received by the buyer

(ZT, 2009)

• stock options granted to employees generally (HY, 2006), and also relating to a

deceased employee’s estate (ABB, 2010).

Such deliberations often centred on factors that would help to decide whether a gain or profit

ought to be regarded as income or capital. Such factors are commonly called ‘the badges of trade’. Cases on the badges of trade variously involved taxpayers who were individuals (e.g.

NP, 2007) and companies (e.g. Mount Elizabeth (Pte) Ltd, 1986). These cases could also

19

focus on a particular sector such as the insurance industry (BBO, 2014) or housing

developers (T H Ltd, 1981; HQ, 1997; KE, 2006).

Alongside the cases focusing on income are many others dealing with the closely related category of deductions – and particularly the deduction of expenses. Here, the obvious

consequence of claiming deductions is to reduce taxable income. Therefore, a number of cases focused specifically on deductions. In the earlier years, the focus seemed to be on

what is commonly referred to as the “general deduction” provision in section 14(1) of the Act. Cases variously involved deliberations including those over the meaning of “outgoings and

expenses” (Re a Taxpayer (No. 3), 1956), whether expenses were incurred “wholly and

exclusively in the production of income” (X, 1958; and HLB, 1975), and on specific deduction

provisions under section 14(1) (MNO, 1961; affirmed in BFC, 2014; BML, 2017).

Later, the focus shifted to another aspect of the question of deductibility: is the expense revenue (income) or capital in nature? If it is capital in nature, the expense is not allowed as

a deduction, due to an express prohibition in section 15(1)(c) of the Act. This category of cases included those that related to the deductibility or otherwise of:

• settlement sums and legal expenses arising from litigation (KD, 2005)

• interest paid on borrowings (T Ltd, 2006)

• borrowing expenses other than interest (IA, 2006)

• the costs of acquiring and constructing premises for a proprietary club, and geomancy fees (ABD Pte Ltd, 2010; discussing also Pinetree Resort Pte Ltd, 2000)

• expenditure to obtain the rights to use the electromagnetic spectrum in the telecoms

sector (BFH, 2013)

• discounts and redemption premiums in relation to bonds (BFC, 2014)

• facility fees in relation to loan facilities not drawn down (GBG, 2016).

Other cases of interest include situations where the taxpayer had lost money due to fraud, and whether it made a difference if the fraud was not committed by an employee but someone

in management, such as a director (HV, 2000; AQP, 2013). Another case of interest concerns

the effect of tax planning, where the taxpayer chose to own an immovable property indirectly by purchasing shares in the company that owned the property instead of purchasing the

property directly (Andermatt Investments Pte Ltd, 1995). This approach helped the taxpayer to save on the amount of stamp duty that was payable, due to the different rates of duty

payable for share transfers and real estate transactions. However, the courts found that the taxpayer could not then deduct interest expenses incurred to finance the purchase, due to

the indirect manner of ownership.

A related topic to deductions is that of capital allowances. These are capital expenditure that

must be specifically allowed under the Act, as otherwise they are not considered to be

revenue in nature and cannot be deducted under section 14. The point of interest in the cases relates to what constitutes “plant” – a uniquely technical concept in tax law where apparatus

used in a business may in certain circumstances be allowed as plant. The important case is the apex court’s decision in ZF (2011) where demountable (temporary) dormitories were held

to be plant rather than buildings.

Two other recent developments may foreshadow an increase in tax litigation. The first is in

the area of international taxation. A number of cases covered the exchange of information

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(EOI) provisions in the Act, following Singapore’s adoption of the OECD standard on EOI

arrangements between different jurisdictions. Such EOI arrangements are either stand-alone

agreements or embodied in tax treaties with other jurisdictions. These cases included EOI arrangements with India (AZP, 2012; BJY, 2013; BJX, 2013; BKW, 2014), Japan (BLM, 2014;

ABU, 2015) and Korea (AXY, 2016 & 2017).

There is, however, a dearth of cases on the substantive provisions of the tax treaties, such

as how certain types of income (particularly, business income, royalties, interest and service income) would be taxed. This may be somewhat surprising considering that Singapore has

more than 80 tax treaties with other countries.

The second area relates to the general anti-avoidance rule (GAAR) in section 33 of the Act.

Although the GAAR (in its revised form) has been part of the Act since 1988, the first court

case on this subject was only decided in 2013 and 2014, in the High Court and Court of Appeal respectively. It remains to be seen whether more judicial pronouncements will be

forthcoming in an environment where many tax authorities (including Singapore’s) are actively protecting their respective tax bases in a globalised world where profits can be shifted

more easily and the erosion of a country’s tax base is consequently felt more keenly.

On the procedural aspects, the cases suggest that there are hardly any controversial issues.

Typically, a tax appeal starts at the Board of Review and advances to the High Court and finally the Court of Appeal if the losing party at each stage wishes to appeal further. Some

clarification was provided on in camera hearings being the correct mode even before the

Court of Appeal, just as for the lower courts (JD, 2006; ZF, 2011). The exceptions to the typical procedure are where the dispute centres on withholding tax (ACC, 2010) or EOI

arrangements (e.g. AXY, 2016), and the party affected (which may not be the relevant taxpayer but an alleged payor for withholding tax cases, or a person asked to provide

information on another person (the taxpayer) for EOI cases). In these latter cases, the procedure is by way of judicial review.

A few older cases focused on enforcing payment of tax through legal action by the tax authority (A Co Ltd, 1966; Goodearth Realty Pte Ltd, 1988), including obtaining summary

judgment (Beaver Singapore Pte Ltd, 1979).

What can be gleaned from this snapshot of the tax litigation history? In view of the importance of the income/capital dichotomy, we can expect that cases focusing on this aspect would

continue to come before the courts. We can perhaps also expect more litigation relating to international taxation and the GAAR. However, given the low level of litigation over the past

70 years, it is unlikely that taxpayers will become overly litigious in regard to their disputes

with the tax authority and this means the jurisprudence for taxation law will have to evolve

somewhat slowly over the course of time.

Tan Kay Kheng*

Head of Tax Practice, WongPartnership LLP

*I acknowledge with thanks the assistance provided by Goh Ziluo in carrying out the

research needed for this article.

21

Exchange of Information: Evolution and Changes in the Law and Obligations Under Singapore’s Exchange of Information Regime

Gurbachan Singh

Assisted by Zhu Lin

The Exchange of Information (“EOI”) regime has undergone considerable upheavals both at home and abroad since the 2008–09 global financial crisis. Hitherto, it is a long-standing principle that a sovereign state would not enforce or help to enforce a foreign state’s revenue laws. Opinions vary on the doctrinal basis of this approach, but the common thread appears to be that a sovereign state’s tax regime should be regarded as the state’s exclusive prerogative and domain. It is therefore unsurprising that early versions of EOI provisions in bilateral tax treaties are marked by significant restraint over the extent of obligations to exchange information that are mutually accepted by treaty partners. Article 26 of the 2003 OECD Model Tax Convention (“OECD Convention”) is a good example of a conservative EOI provision. According to Article 26, contracting states can exchange information that is necessary to their tax administration, provided that the information sought is within the scope of the OECD Convention – that is, the information relates to residents of either state and to taxes levied by either state on income or capital (see also Articles 1 and 2 of the OECD Convention). However, Article 26 includes the restriction that information cannot be exchanged if it is not obtainable under domestic law, if the information is a trade or business secret, or if disclosure of the information would be against public policy or at variance with domestic laws. Prior to the 2009 overhaul of Singapore’s EOI regime (“2009 Amendment”), Singapore had generally adopted Article 26 of the OECD Convention as a model for its double tax agreements. Given the restricted scope of the typical EOI clause, the EOI regime received scant attention in the context of domestic revenue law. In any event, the Inland Revenue Authority of Singapore (“IRAS”) preferred a more balanced view and would refuse compliance with EOI requests on the ground that the information requested was beyond the scope of the relevant double tax agreement. The 2009 Amendment resulted from a series of initiatives undertaken by European countries and the United States at the height of the global financial crisis, which highlighted the detrimental effects on public coffers of cross-border tax evasion carried out under the guise of banking secrecy. Taking advantage of the heightened public sentiment, all major economies supported the campaign to build a robust international standard for tax administration. In October 2008, the United Nations Committee of Experts on International Cooperation in Tax Matters endorsed the new Article 26 of the 2008 OECD Convention (“New Article 26”) as the internationally agreed standard for the exchange of information (“Standard”). The New Article 26 incorporates three major modifications to its predecessor. First, it broadens the scope of information subject to exchange obligations by replacing the test of necessity with the test of foreseeable relevance. Second, it expressly removes the domestic interest requirement (that is, the state from which information is requested must supply the information even if that information is not required for domestic tax purposes). Third, it ensures requests cannot be declined on the grounds that the information is held by a bank,

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other financial institution, nominee or person acting in an agency or fiduciary capacity, or because the information relates to ownership interests. In an exceptional moment of camaraderie in April 2009, the G20 – in conjunction with the OECD – threatened sanctions against jurisdictions that had yet to comply fully with the Standard. Singapore was placed on the OECD’s “grey list” for not fully cooperating in the exercise. To safeguard its reputation as an international banking and wealth-management centre, and a proponent of international standards, the Singapore Government acted swiftly to renegotiate a number of bilateral tax treaties and brought its EOI provision in line with the Standard. Singapore was moved to the OECD’s “white list” in late 2009. To give effect to the Standard, Parts XXA and XXB were introduced into the Income Tax Act (“ITA”) in 2009. Part XXA provides the Comptroller of Income Tax (“Comptroller”) with powers to comply with a valid request for information made under an EOI provision of a bilateral tax treaty (“EOI Request”) and to invoke the information-gathering machinery of the ITA to obtain the requested information. For an EOI Request to be valid, it must satisfy the information requirements prescribed in the Eighth Schedule to the ITA. These requirements include, inter alia, the grounds for believing that the information is held by a person in Singapore and a statement that the requesting country has pursued all available means in its territory to obtain the information. Part XXB sets out the judicial procedure under which the Comptroller may obtain an order of court for disclosing information protected from unauthorised disclosure under the Banking Act or the Trust Companies Act (“Court Order Procedure”), provided that the High Court is satisfied that the making of the order is justified in the circumstances pursuant to section 105J(3)(a), and is not contrary to public interest pursuant to section 105J(3)(b). The bifurcated decision-making process applied to protected information represents a clear attempt by the Singapore Government to strike a balance between acceding to the international code of conduct and preserving one of the bedrocks of Singapore’s renowned banking and financial services. A string of case law quickly developed over the correct application of the section 105J(3) conditions. While it was apparent from the outset that the public interest condition (that is, section 105J(3)(b)) exclusively covers information pertaining to the vital interests of the requested state 34 , there was substantive judicial discourse regarding the justification of circumstances condition under section 105J(3)(a). The dust largely settled on the position that an order for disclosure would be justified so long as the EOI Request, taken at face value, satisfied all information requirements prescribed in the Eighth Schedule to the ITA. In other words, the courts were not required to engage in a substantive enquiry into the veracity of the information set out in an EOI Request.35 There were also initial doubts over whether the test of foreseeable relevance found in the applicable treaty was separate from the two conditions embodied in sections 105J(3)(a) and 105J(3)(b). Judicial consensus eventually settled on the position that the issue of foreseeable relevance was subsumed under the justification of circumstances enquiry under section 105J(3)(a).36

34 Comptroller of Income Tax v BJY [2013] 4 SLR 801 at [43] – [44]. 35 ABU v Comptroller of Income Tax [2015] 2 SLR 420 at [40] and [42]; AXY and others v Comptroller of Income Tax (Attorney-General, intervener) [2017] SGHC 42 at [29]. 36 ABU v Comptroller of Income Tax [2015] 2 SLR 420 at [36].

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In 2013, Singapore’s EOI regime came into the international spotlight once again when the country was named as one of the major jurisdictions harbouring illicit funds in the course of a joint investigation by the American, British and Australian tax authorities. In response, the Singapore Government signed onto the Convention on Mutual Administrative Assistance in Tax Matters, an OECD initiative that immediately expanded Singapore’s EOI network by 11 jurisdictions. The Singapore Government also concluded a Model 1 Intergovernmental Agreement with the United States to facilitate compliance with the Foreign Account Tax Compliance Act (“FATCA”) by Singapore-based financial institutions holding financial accounts belonging to United States persons. It also automatically extended the internationally agreed standard of EOI assistance to all treaty partners, and empowered the Comptroller to exchange protected information without first seeking an order of court. Corresponding legislative changes were made to the ITA in late 2013 to give effect to the four policy initiatives mentioned above (“2013 Amendment”). The most significant change was the removal of Part XXB, as inserted in the 2009 Amendment, which provides for the court order procedure. It was replaced with a new Part XXB that facilitates compliance with the FATCA by Singapore-based financial institutions. The 2013 Amendment represents a large step in expanding executive and administrative powers to help foreign states enforce foreign revenue laws, as well as in the concomitant curtailment of a number of legal concepts, such as taxpayer privacy, fiduciary obligations and banking secrecy. These concepts were hitherto thought to be fundamental to the functioning of a successful banking and wealth management industry. It is noted that, with these changes and deviations from established legal doctrines, the role of the domestic courts and the rights of the taxpayer are consistently under siege from expanding administrative prerogatives exercised at the behest of international political norms. Since the 2013 Amendment, the EOI process has been administered internally by the IRAS, with the taxpayer’s only legal recourse reduced to that of judicial review. It would first be observed that judicial review as a redress for wrongful disclosure of protected information is fraught with the usual challenges and difficulties attendant to judicial review. One notable challenge is that the applicant is constrained to, before all else, satisfy the court that there is a prima facie case of reasonable suspicion that the Comptroller’s determination of an EOI Request’s validity satisfies one or more grounds for judicial review. The task is compounded by the court’s continued application of the non-substantive tests previously formulated for the justification of circumstances enquiry under section 105J(3)(a). It is also compounded by the shift in the perspective of the court from making the substantive decision to reviewing the decision-making process. As such, the 2013 Amendment gave rise to an enormous augmentation of the Comptroller’s discretion in determining the course of action relating to an EOI Request. It is no doubt an uphill task for an aggrieved applicant to succeed in a judicial review process concerning an EOI Request. A recent pioneering attempt to do so was frustrated at a preliminary stage for failure to establish a prima facie case of reasonable suspicion37 Furthermore, the efficacy of the safeguards or remedies available to the taxpayer, whether in the form of making representations to the IRAS or judicial review, is frequently compromised by the fact that requests for information are often imposed on financial institutions, and the Comptroller is under no obligation to provide details of those requests to the relevant taxpayer.

37 AXY v Comptroller of Income Tax (Attorney-General, Intervener) [2017] SGHC 42.

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In the light of the 2013 Amendment, it is clear that Singapore’s domestic EOI regime has set the legislative framework for accommodating further and more comprehensive EOI arrangements and obligations. As of mid-2017, in addition to automatic information exchange in compliance with FATCA, Singapore has also concluded bilateral Competent Authority Agreements with 22 jurisdictions, as well as the Multilateral Competent Authority Agreement. Under these agreements, from 2018, Singapore will automatically exchange information of tax residents of the relevant partner jurisdiction in accordance with the Common Reporting Standard (also an OECD initiative). There is little doubt that a growing volume and scope of taxpayer information will be exchanged, with diminishing scope for taxpayer intervention, and that disruptive developments in the EOI regime will continue to unravel existing legal norms and practice. While the move towards tax transparency and international standards reflects the contemporary tide of history, it is equally important to ensure that commensurate regard is accorded to domestic legal processes and safeguards to protect taxpayer rights.

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The Digital Economy and the Challenges and Opportunities for Taxation

Richard Mackender Liew Li Mei Swati Gupta

The digital economy is significantly changing the way goods and services are bought and

sold. The implications of the changing marketplace – when considered from a taxation perspective – are serious, and are the focus of investigation by many revenue authorities.

Singapore is no exception. In this review, we explore the issues and present ideas on how tax authorities can respond to ensure that they are able to collect sufficient revenue and

allowing the government to continue to meet its current service levels.

The digital economy is difficult to define. Broadly, it refers to the economic activity of buying

and selling goods and services online; for example, buying clothes from an online store or downloading games onto a smart-phone. Singaporeans are enthusiastic participants in the

digital economy, spurred on by increasing download speeds, the wide take-up and use of smart-phones, and the global outlook of citizens and businesses. Because transactions in

the digital economy take place online and often involve one or more parties located outside Singapore, it is difficult for tax authorities to have visibility of such transactions and tax them

appropriately. In addition, tax laws such as the goods and services tax (GST) were designed well before online transactions were envisaged, so the rules and structure of the tax do not

lend themselves easily to online businesses. For example, many of the largest online

businesses are located outside Singapore, so the services that they supply to local purchasers are not subject to Singapore’s GST. Additionally, the goods that online

businesses sell can be brought into the country without any import GST because of the relief applied for postal imports of goods below a specific value.

As economic activity moves online and away from traditional ‘bricks and mortar’ businesses

– and even to large offshore providers – tax collections may well decline. For example, based on the Inland Revenue Authority of Singapore’s (IRAS) financial reports for the financial year

ended 31 March 2016, the GST collected in Singapore was S$10.3 billion. This represents a

modest increase of S$0.1 billion from the financial year ended 31 March 2015. This could be explained in part by weak domestic and tourist spending, but it is also likely that the modest

increase could in part be due to the growth in cross-border online transactions.

Under the current tax regime, GST is only imposed on domestic taxable supplies of goods and services made by someone who is registered for the tax. If a local business or consumer

purchases digital services (for example, downloadable software) from an overseas provider, no GST will be charged unless that provider is registered for GST. Singapore also offers

import GST relief for the import of goods subject to a cap on the value at importation of S$400.

This means that if someone purchases low-value goods (that is, less than S$400) via the internet and arranges for the goods to be shipped to Singapore via courier, no import GST

would be payable. The above stands in contrast to a situation where the digital services or

low-value goods are purchased from a provider in Singapore, where GST would be charged

if the provider was registered for the tax.

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However, this is not only an issue for Singapore. The Organisation for Economic Co-

operation and Development (OECD) has been studying how to standardise the taxation of

cross-border supplies as part of Action 1 – Digital Economy of the Base Erosion and Profit Shifting (BEPS) project.

Launched in 2013, the BEPS project is now being progressed by a coalition of more than 100

countries including Singapore – the so-called ‘Inclusive Framework’. It is also worth mentioning that Action 1 of the BEPS project is not a ‘minimum standard’, requiring members

of the Inclusive Framework to commit to implementation of the recommended changes, but only a ‘common approach’, which aims to facilitate convergence of national practices.

Nevertheless, given the significant importance of the digital economy in today’s world, many

countries have introduced changes to their direct and indirect tax laws to deal with the challenges of taxation in the digital economy.

In the Asia-Pacific, countries such as Japan, South Korea and New Zealand have already

implemented new rules to apply GST on digital supplies. Jurisdictions such as Australia,

Taiwan and India all recently announced an intention to change their rules so they can tax

such supplies. To ensure changes to indirect tax regimes are effective, a number of factors must be considered. The main factor is to ensure that whatever tax collection approach is

adopted, it is efficient.

A good example, in a GST context, is whether the tax should apply only to business-to-

consumer (B2C) digital services and exclude business-to-business (B2B) digital services. From a theoretical tax collection perspective, this is efficient. Businesses that are registered

for GST would usually be able to recover the GST they incur as an input tax credit, so taxing these transactions would not result in any significant additional tax revenue. On the other

hand, taxing B2C services is not easy because the payment a consumer makes is usually

small and is made by credit card, so is hard to identify. Plus, suppliers are often located

offshore, and bringing them into the tax net is more a matter of voluntary compliance than

compulsion.

It may be determined that the most efficient approach is to require overseas suppliers to register for GST in Singapore and for them to charge, collect and account for tax by filing a

local GST return. However, this means tax authorities would also need to determine the GST registration threshold and registration process. More importantly, the new requirements

would need to be communicated to the overseas suppliers, and the suppliers encouraged to comply voluntarily with the new requirements.

In respect to imports of goods ordered online then sent via post to the customer, it is

straightforward to apply GST to the declared import value of the goods. However, the

collection process presents the challenge of who is responsible for physically collecting the tax and what happens if they are not able to? Many countries have investigated this: some

have taken the route that the overseas supplier needs to register online and account via the GST registration process outlined above; other countries require the customer to pay the

delivery agent on receipt of the goods, so the delivery agent becomes a tax collector. There are pros and cons for these approaches, but what is important is that the approach is clearly

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set out so that all participants understand their roles and responsibilities and that the process

is as simple and straightforward as possible.

From a direct tax perspective – given that an extensive physical presence in a country is not

required to carry out a digital business – identifying the nexus between income and a tax jurisdiction is a key challenge for tax authorities. The development and increasing

sophistication of information technologies moves at a tremendous pace. This enables companies in the digital economy to gather and use information to an unprecedented degree,

and this raises questions about how value should be attributed to this data and the characterisation of income derived. Tax authorities must keep pace with new digital products

and means of delivering services to determine how payments are made in rapidly emerging

business models.

The OECD’s view is that the digital economy should not be separately defined or ring-fenced from the rest of the economy, as the digital economy is increasingly becoming the economy

itself. In its Final Report on Action 1, the OECD concluded (or hoped) that the BEPS concerns

of the digital economy would effectively be addressed under other parts of the BEPS project.

For example, this could be done through modifications to the list of exceptions to the definition of permanent establishment (PE) regarding preparatory and auxiliary activities, and the

introduction of anti-fragmentation rules to deny benefits from these exceptions through the

fragmentation of certain activities. Nevertheless, work is ongoing on these issues, and new developments – in terms of technologies and the tax policies governments introduce to

address them – will continue to be monitored. The OECD has proposed that countries also consider implementing unilateral measures through their domestic laws, having regard to

their treaty obligations. India, as an example, has introduced a six per cent equalisation levy under its income tax law on gross service fees from inbound, online advertising services.

In the Singaporean context, there are no separate provisions in the Singapore Income Tax

Act (SITA) to deal with taxation of transactions in the digital economy, and current tax laws

and principles are applied. In its e-tax guide on e-commerce38, published on 18 August 2015, IRAS indicated that the ‘operations test’ remains relevant to determine whether the income

is sourced in Singapore, and therefore liable to tax in Singapore. Whether the operations test is met is a question of fact and degree. Certain principles will be considered in determining

whether the business has a tax liability in Singapore, such as the presence of a business’s manufacturing or service activities in Singapore; the hosting location of the website that

enables customers to obtain information about the business’s products, place orders and make payments; the function of the website; the location where the e-commerce activities,

for example, delivery of goods, provision of after-sale services and so on are performed; and the presence of a branch in Singapore. The above principles also apply in the case of an e-

commerce intermediary that provides market-making services or intermediary services such

as hosting, technical assistance and internet connectivity. The Singapore government has not announced any specific measures to tackle direct tax challenges of the digital economy.

38 https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/e-

Tax_Guides/etaxguides_IIT_income%20tax%20guide%20on%20e%20commerce_2001-02-23.pdf

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In recent years the global economy has been restructured due to digital disruption.

Technology is fundamentally changing patterns of consumption – and even entire cityscapes

– as traditional shopping norms are challenged by the ease and variety of online shopping. Just as we stand at the dawn of a new era of the digital economy, we are also seeing the first

stirrings of the dawn of a new era in how taxes are designed, focused and implemented.

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Making the Tax System Easier for Small and Medium Enterprises

Lee Tiong Heng Chua Kong Ping

Introduction

From an income tax perspective, the total tax cost to companies operating in Singapore

broadly comprises two parts. The first is the actual tax liability costs incurred by companies

– or the amount of money they pay to the government tax authority to meet their tax liabilities.

The second is associated tax compliance costs, or the costs of employing administrative resources to determine tax liabilities under the Singapore Income Tax Act – such as retaining

documents and maintaining accounts.

Anecdotally, small and medium enterprises (SMEs) generally have a less sophisticated

understanding of tax laws, or may not devote sufficient resources to tax matters to fully comply with the laws. In addition, SMEs generally face a disproportionately higher tax

compliance cost than bigger companies, when considered as a percentage of sales.

This shows that SMEs stand to gain the most out of a simple and efficient tax system that

seeks to maximise the collection of taxes while reducing the compliance costs associated

with collection.

In recent years, the Singapore Government has made continuous, consistent efforts to

provide both targeted and broad-based support to encourage SMEs to internationalise, scale up, deepen their capabilities, increase productivity and transform their business models

through innovation. By making the tax system easier and more efficient, the government can help SMEs cope better with the regulatory environment, in turn reducing the overall

compliance costs for businesses in Singapore.

Simplifying the tax system for SMEs

Over the years, the Inland Revenue Authority of Singapore (IRAS) has implemented various

measures to ease the tax compliance burden for SMEs. Some notable initiatives are

described below.

• Simplified income tax return (Form C-S)

Form C-S was introduced in the Year of Assessment 2012 to simplify the filing procedure for

small companies.39 This form more than halves the number of data fields companies must fill

out compared to the previous Form C. In addition, companies that qualify for Form C-S submission are not required to submit financial statements and tax computations because

essential tax information and financial information would have to be declared in the Form C-S.

39 In Year of Assessment 2012, a ‘small’ company was defined as one incorporated in Singapore with an

annual revenue of less than $1 million. As of Year of Assessment 2016, a company with annual revenue

less than $5 million is classified as ‘small’.

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• Exemption from filing estimated chargeable income

Generally, companies are required to provide IRAS with an estimate of their chargeable

income within three months of the end of the accounting period relating to that year of

assessment.

To help reduce compliance costs, IRAS has waived the requirement for small companies to

file an estimated chargeable income (ECI), if the company’s annual revenue is not more than $5 million for the financial year ending in or after July 2017 (otherwise, the revenue threshold

is $1 million) and the ECI for that year of assessment will be nil.

• Allowing companies to write off low-value assets in one year

For capital allowance purposes, companies may choose to write off plant or machinery costing not more than $5,000 in one year, provided certain conditions are satisfied.

A tax system based on proxies?

Apart from allowing companies to write off low-value plant or machinery in one year, the

measures mentioned above seek largely to reduce the administrative burden of tax compliance for SMEs by simplifying and reducing the frequency of tax filings.

One further measure that the government can consider is to calibrate the income tax regime to reduce the amount of work an SME must do to determine its tax liability and hence reduce

its compliance burden.

Presently, the provisions of the Singapore Income Tax Act apply with equal force to

companies regardless of their size or turnover. In arriving at their chargeable income, companies would, among other things, need to determine:

• their taxable income • which expenses are deductible and how much can be claimed • if expenditure on fixed assets or business equipment is depreciable for tax purposes.

Making the tax system easier for SMEs could mean replacing the tax law provisions or the tax rules with a proxy that correlates with income, and applying a suitable tax rate on the

proxy. Such proxies could include indicators of economic activities – for example, number of employees, floor area occupied and utilities consumed. These proxies are usually easy for

SMEs to report and may offer significant savings in tax compliance and administration costs. However, this change has one significant disadvantage. Because taxes are no longer levied

on income but on the proxy, it could result in unintended and adverse implications, such as

discouraging the hiring of employees. Alternatively, a tax could be levied on turnover. There is usually a positive correlation between

turnover and firm size, and a tax could be levied on companies with turnover falling below a certain threshold. Similarly, using turnover as a proxy for income would significantly reduce

tax compliance costs, as little to no adjustments are required on the part of the taxpayer.

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A downside of a tax on turnover is that it may effectively impose a higher tax burden on

companies that engage in business activities with a large turnover, but with relatively thin

profit margins. This can be ameliorated to a certain extent by basing the turnover tax rate on the business sector or industry type. Another side effect of a ‘turnover tax’ is that there will

no longer be tax losses to be carried forward or backward.

A tax on accounting profits can also be a proxy to implementing a tax based on tax rules. Because this tax follows accounting principles, compliance costs would be reduced. It would

also be simpler to understand. There would be no need for SMEs to navigate the tax rules to adjust from providing accounting profits to taxable profits. The challenge for IRAS will be in

determining how much reliance can be placed on the accounting profits, particularly in cases

where audit exemption apply and the numbers are not required to be audited.

All the above measures involve a radical reformation of the tax system and are a significant deviation from the Singapore taxation principles and rules in existence since Independence.

How about simplifying the tax law provisions for SMEs?

To determine their tax liability for each assessment year, SMEs need to review their business expenditure on non-deductible items, as well as ensure that expenses are deducted in the

correct period (for example, in the case where provisions for expenses are made). SMEs also

need to determine whether expenditure on fixed assets qualify for capital allowances. These tax adjustments take up considerable time and effort, and require a good understanding of

the tax rules. To help ease the stress of tax adjustments for SMEs, the government should

consider simplifying certain tax laws.

Rather than undertaking a radical reform of the existing tax rules, the quantification of deductible business expenses could be simplified by deeming a certain proportion of

business expenses as deductible.40 The proportion of expenses deemed deductible could be

set after a statistical data analysis of an SME’s tax returns, and set at an appropriate ‘discount’

to the total business expenses (excluding depreciation) reflected in the profit and loss

accounts of the company. SMEs can be given a one-time choice to opt in to this scheme or remain on the existing tax regime.

In relation to claiming capital allowances, rather than writing-off small assets over one year, SMEs may be allowed deductions based on the accounting allocation of expenditure incurred

on fixed assets 41 (that is, depreciation), except for expenditure incurred on immovable property.

Another area of complexity and compliance cost for SMEs is determining the taxability of foreign income and computing foreign tax credits. A complete tax exemption for foreign

income could also help ease the burden of compliance.

40 This is similar to the way that claiming of rental expenses for individuals was simplified from the Year of

Assessment 2016 41 Provisions in the Singapore Income Tax Act allow a special deduction on renovation and refurbishment

expenses, subject to conditions.

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How can technology be used to help?

Increasing the use of technology to automate the tax compliance process can go a long way

to making the tax system more efficient for SMEs.

A company’s accounting net profit before tax forms the starting point in computing its tax

liabilities. Currently, such information already exists in digital form within a central repository, since it is mandatory for companies to file their financial statements electronically with the

Accounting and Corporate Regulatory Authority (ACRA) of Singapore. A logical step would be to develop software and algorithms for computing the tax liabilities of companies based

on the accounting information submitted to ACRA. Where necessary, companies would submit additional, granular financial accounting data to allow their tax liabilities to be

calculated with a high degree of accuracy.

The development of such software may need to be funded by the government as it is generally not cost-effective for SMEs to invest in commercial off-the-shelf software or fund

the development of such software.

Imagine this – a software developed by IRAS that can take financial data from ACRA and

convert it into taxable income, to calculate the tax amount. SMEs would no longer need to file tax returns. They need only to access an e-Portal system to validate the financial data

filed with IRAS – a process similar to that of filing personal income tax returns. Things would definitely be a lot easier. However, some of the more complex tax rules may need to be

adjusted to allow the algorithms to work optimally and determine tax liabilities with utmost

precision.

Conclusion

Making the tax system easier for SMEs will be a win-win for the government and business. It

could help reduce the burden of administrative processes, and establish a lighter-touch tax regime. A less complicated tax system encourages better compliance with tax laws and fewer

tax disputes. It also frees up precious resources for SMEs to focus on running their businesses.

The writers are a tax partner and a senior manager of Deloitte Singapore, respectively. The

views in the article are their own.

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Tax Challenges for Singapore and the Global Economy

Tan Tay Lek

As we mark 70 years of taxation in Singapore, it is apt to consider the exciting times ahead in the world of taxation as we move to a more globalised and increasingly digitalised economy. But let us first ground ourselves in some realities. Sovereign governments levy taxes to fund the provision of public goods and services. As Franklin D. Roosevelt said: “Taxes, after all, are dues that we pay for the privileges of membership in an organised society.” This task seems to get harder even as rapid technological advances create new economic opportunities for businesses and individuals. Few would dispute that Singapore’s economic growth has slowed, yet our country faces increasing demands to cater for an ageing population and ensure social safety nets are in place for the disadvantaged. To meet these spending requirements and maintain the fiscal prudence that has been its hallmark since independence, the government must creatively expand its revenue base and look beyond traditional sources of tax revenue. On this basis, I humbly set out some thoughts on the challenges Singapore is likely to face in creating a tax system that is fit for the future. In offering these musings, I should caution readers not to rely on them to any degree in planning or managing their personal or company’s tax affairs. Macroeconomic trends While China and the United States (US) will remain the world’s top two economies for the next 10–30 years, other economies such as those in Africa, the Middle East and Latin America will emerge as serious competitors. Maintaining open economic ties with these economic blocs will allow Singapore to benefit from these macroeconomic changes. It is important to maintain strong tax links with other countries, primarily through tax treaties and trade agreements. We need to build links where none exist, and improve existing relationships. One immediate task is to correct what is broadly considered an anomaly – the lack of a comprehensive tax treaty with the US. This will likely be quite challenging under the current US administration given its protectionist inclinations. Tax competition and broadening the revenue base Singapore has positioned itself as the premier business hub in Southeast Asia. It is the home base of many entrepreneurs, multinational corporations (MNCs) and skilled workers seeking opportunities in this high-growth regional market of more than 600 million people. But competition looms. Other regional players are dishing out a plethora of tax incentives to attract the same MNCs and even Singapore’s own home-grown businesses. The general trend is towards declining headline tax rates, not only in this region but also globally. A case in point is the United Kingdom, where the corporate tax rate has decreased to 19% in the last

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few years, and will eventually settle at 17% according to government plans. While Singapore has the means to compete, this is a race to the bottom where there is no winner. Demands on government spending will only grow by the day due to the ageing population and the need to safeguard our security in a time where terrorist incidences continue unabated beyond our shores. To broaden its revenue base, Singapore took the plunge in implementing the Goods and Services Tax (GST) in 1994. Since then, increasing the GST rate to offset falling income tax receipts has been the government’s favoured approach, in line with the policy objective of expanding the tax base. The inevitability of further GST rate increases should not come as a surprise. The key to securing public buy-in is to offer assistance to low-income earners, who are disproportionately affected by such increases. While providing this help is a given for the Singapore government with a well-established system of rebates and other assistance schemes, a key consideration should be streamlining and simplifying the schemes to make them more accessible. After all, assistance schemes are less effective than they could be if people don’t know how to access them. Climate change Change of another, more insidious, nature is disrupting the way societies and governments operate globally. It’s projected that the effects of climate change – including sea level rise and increasingly turbulent weather patterns – will wreak havoc on coastal cities, threaten the world’s food supplies and even lead to wars. All nations, including Singapore, face a long, drawn-out battle to combat the effects of climate change. We have already increased water prices and will soon introduce a carbon tax to encourage resource conservation and improve Singapore’s energy efficiency. Taxes on the purchase of vehicles are also tied to their emission levels. To further drive conservation efforts, it is not a long stretch to imagine that taxes on vehicle use could be introduced in the future – calculated on the distance travelled, for example. The tax collection mechanism will be enabled by technological advances. The government should offer new and/or more generous tax incentives for the purchase of electric cars, hybrid vehicles, personal mobility vehicles and even the humble bicycle to encourage their use, as they contribute less to global warming. Other possible measures to increase energy efficiency could involve incentives for research and development relating to green energy, recycling and sustainable farming or fishing. Additionally, big businesses should not be the only ones that benefit from these measures. Small and medium enterprises, and even private individuals who originate clever initiatives, should be given greater benefits, proportionately. Personal taxes Many recent media reports have derided tax systems that create the seemingly illogical outcomes of employees paying more taxes proportionately than their employers, and labour providers being in higher tax brackets than capital owners.

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However, it would take political courage to keep personal income taxes low or even reduce them, to continue to attract human talent to Singapore. Given the global mobility of talent and the great impact that clever decision makers, innovators, strategists and experts can have on our economy, attracting good talent is imperative. A competitive tax regime, complemented by opportunities for personal and professional development and an attractive living environment, can help position Singapore favourably compared with competing economies. Good talent can increase their employer’s revenue. This means that attracting the right workers to Singapore can lead to greater taxable corporate profits earned in our country. These individuals will also benefit the economy by paying indirect taxes on the consumables they purchase. Special taxes An easy way to increase government revenue is to introduce new taxes or charges, with revenue channelled towards specific spending needs. An example is the foreign worker levy, which mainly funds subsidies for worker training. The government could consider an education levy to subsidise childcare, or a national defence tax on those residents who are exempt from undertaking national service under current laws. These types of taxes may appeal to the altruistic aspirations of individual tax payers who may not mind contributing to specific causes that benefit society as a whole. However, the government must be mindful of introducing too many revenue-raising measures and complicating the tax system. Taking a wider view Taxation systems complement the economic policies of governments, which are influenced by economic, technological and social change. Rapid technological developments challenge traditional business models and create new ones. We are all witnesses to an age when the provision of products and services through digital means are becoming pervasive in our daily lives. Tax policies and systems designed for the bricks-and-mortar economy may not effectively and fairly tax value creation in this knowledge- and data-driven economy. Here’s one classic conundrum – should Airbnb pay property taxes? Governments are also grappling with the question of whether to tax profits where value is created versus where that value is consumed. This presents perhaps the greatest challenge to governments worldwide – that of designing taxation policies and systems to catch up and keep up with the speed of economic change. This demands more flexible rules but also more detailed guidelines to give greater certainty to taxpayers. These rules should be underpinned by more agile administration and collection mechanisms. Given the connectivity of the global economy, such policy thinking cannot happen in isolation. It must consider the policies and systems of our major trading partners. Looking back at the past 70 years, we can appreciate how Singapore’s taxation system has successfully supported our nation-building initiatives. When it comes to the next 30 years, we can expect more profound changes to our taxation system and also the need for more flexible policies to help Singapore make the most of opportunities in an ever-changing global economy.

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The Future of Income Tax in Singapore

Tang Siau Yan

I was asked to write this article to commemorate 70 years of income tax in Singapore. It is a commemoration, not a celebration – there is probably little to celebrate about any form of tax

(except perhaps in a petty “better you than me” way). I try to avoid using clichés, but I cannot help but think of the old adage that nothing in life is certain except death and taxes. Just as

with taxes, we don’t celebrate death, although we may commemorate someone’s passing.

Paying tax is an unavoidable price of living in a civilised society with social norms and

expectations that must be met. Civilised society also demands an acceptable allocation of wealth and resources, and respect for property rights, all of which also comes at a price.

Maybe the best way to commemorate 70 years of income tax is to remember what those

taxes have paid for. It seems there is little else to like about taxation.

Returning to the topic of this article, we can ask two questions: Is there a future for income

tax in Singapore? What might that future look like?

Is there a future for income tax in Singapore?

I’m sure some readers will object to the triteness of this question. To those of us working in tax policy, the question is a no-brainer – we must continue to have income taxes in Singapore.

But readers may be uncomfortable with the unexamined certainty of this answer.

Taxes are an unavoidable means to an end – they are an instrument of public policy, nothing more. But while some forms of tax can be used to achieve an objective, there is nothing

inevitable about income tax. Many jurisdictions have managed without significant levels of income tax (these are often denigrated as tax havens).

Unfortunately, in Singapore, we need the revenue from income tax to support our public programmes. And income tax is an ideal tax base. To illustrate why, I can hardly do better

than return to the four canons of taxation articulated by Adam Smith.42

The first canon refers to tax equality. This does not mean that every citizen should pay the

same amount of tax. On the contrary, Smith said: “The subjects of every state ought to

contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under

the protection of the state.” This is rooted in the notion of fairness – that taxes should be means-based. Since Smith’s time, this principle has been further refined into two separate

concepts: horizontal equity (that is, people of similar means should be subject to similar levels of taxation, which is about the same principle propounded by Smith); and vertical equity (that

is, people of greater means should pay more tax at a progressively higher rate). The concept of vertical equity is rooted in a view of social justice that redistributes wealth through taxes.

Smith lived in a time when almost all taxpayers were natural persons, and incorporated entities with limited liability had not emerged as vehicles for commerce and investment. A

discussion of equity in taxation would be incomplete without considering the taxing of entities.

42 The Wealth of Nations, Book V, Chapter 2.

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At its core, the conventional argument goes that in the absence of corporate taxes (that is, if

individuals were the only taxpayers in Singapore), corporate vehicles would essentially be

operating as tax shelters. This would offend horizontal equity (because a person earning income in their own name would be taxed differently to a person earning the same amount

through a company) and vertical equity (because, unlike owners of capital, wage earners cannot earn income through a corporate vehicle). The obvious conclusion is that it is only fair

that corporate vehicles must be taxed, either on income or on capital (that is, a wealth tax).

If choosing between taxing income, wealth or consumption, the first canon of taxation points

to a preference for taxing income or wealth rather than consumption. A tax on consumption

is regressive because the poor need to consume – at least at a basic level – whereas the

wealthy can choose whether to consume more, making the level of taxation disproportionate

to the means of the taxpayer.

The second canon refers to the certainty of taxation, which should be based on known rules.

Certainty aids compliance and administration, which in turn improves the efficiency of tax collection. Under the Constitution, all taxation must be stated in law43; however, this does not

mean it will necessarily be clear in application. There are many possible reasons why, despite clear rules, application can vary. For example, a rule may be general, and not sufficiently well

defined to apply to taxpayers in different business circumstances. In some cases, a rule may lead to an inflexible outcome, but the tax administrator may have the flexibility to ameliorate

this, depending on the merits of the taxpayer. In other cases, a rule simply states the

treatment of a value but leaves the value to be determined (for example, by a valuer). The reality is that all forms of taxation (other than perhaps levies based on usage) will be subject

to some interpretative issues. However, the longer a tax has been around, the clearer its

practical application ought to be, since both the tax administrator and taxpayers would have

settled on an “accommodative” interpretation over time. This canon of taxation does not favour a tax on income over, say, a tax on wealth, but it does favour building on existing and

familiar tax concepts. That said, the design of income tax is by no means simple compared to, for example, property tax or goods and services tax (GST).

The third canon of taxation refers to convenience. Taxes should be levied at a time when the

taxpayer is able to pay. This makes tax collection more effective and reduces tax arrears; in other words, designing a tax system to make it easier for taxpayers to pay minimises tax

compliance risks and administration costs in enforcing payments. In the case of GST, taxpayers are co-opted into the functioning of the tax system by the self-reporting element.

This third canon would favour taxes on consumption and, to a lesser extent, on income over a tax on wealth. Such taxes are preferable for the simple reason that wealth may be illiquid

and not always realisable to pay the tax levied.

The fourth canon of taxation refers to efficiency. Taxation should not be excessive to the point

that it discourages individuals and businesses from being productive. Also, the level of taxes

should be based on what the government needs for its spending, and administration costs should be reasonable compared to the revenue raised. The level of taxation should not be

so high as to induce taxpayers to evade or avoid taxes. Conversely, a reasonable level of

taxation should induce taxpayers to comply, reducing risks and administration costs. To fulfil

43 Article 143 of the Constitution of the Republic of Singapore.

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this canon, it would be ideal for taxes to be scalable to meet the government’s budgetary

needs. All taxes are scalable to some extent through the adjustment of tax rates and the

scope of the tax base. However, among Singapore’s taxes, it is perhaps easier to adjust income tax, which has more elements – in addition to tax rates – that can be modified (for

example, income bands, exemption thresholds and specific exemptions can be removed). In contrast, GST has been designed with a single rate and minimal categories of exempted

supplies.

Finally, it is also possible to judge the economic efficiency of a tax; that is, whether a tax

might distort the economic decision-making of a taxpayer (assuming that taxpayers are

rational economic beings) and lead to a less than optimal economic outcome. It’s worth noting,

however, that in Singapore there have been times when the tax system has deliberately been

used to influence taxpayer behaviour as a way of driving public policy. In such cases, it would be true to say that the tax rules have had distortionary effects on taxpayer choices. Broadly

speaking, however, it is important to avoid unintended distortionary effects when making tax policy.

Looking over the four canons of taxation, it is clear to me that income taxes will remain an integral element of our general tax system because this tax broadly meets ideal taxation

principles.

What may the future of income tax in Singapore look like?

What I can say with confidence is that sound principles are unlikely to change and they will

continue to guide tax policy in Singapore.

Equality of taxation

The two main challenges would likely be social inequality and the corporate tax rate.

Singapore will always be an open economy that is subject to global economic forces. For

individuals, it means that people who are productive in a global market may earn more than those who operate only in a domestic market. Consequently, a certain level of income and

wealth inequality is to be expected – and this disparity may be more pronounced than in other

countries with less open economies. If taxation remains an important tool for mitigating social inequality, we can expect emphasis on the progressive aspects of our income tax system.

Obviously, the difference between the corporate and individual tax rates will have some impact on the equitableness of the income tax system. At the same time, the setting of the

corporate tax rate should take into account prevailing corporate tax rates internationally, so that Singapore remains attractive to foreign investors.

Certainty of taxation

Certainly, the Inland Revenue Authority of Singapore (IRAS) will continue publishing e-tax

guides, which contain administrative and interpretative guidance for taxpayers. There is also

room to simplify many of our income tax rules, which will no doubt be done over time. In addition, it is inevitable that new tax schemes will be introduced that may add to the

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complexity of the income tax system – every effort should be made to minimise any adverse

effects.

A trend that is growing internationally is to use principle-based approaches to taxation (as opposed to basing it on clear rules); for example, applying anti-avoidance rules or transfer pricing adjustments. This is supposedly in response to the perception of widespread tax avoidance by multinationals in some countries. There are obvious merits and disadvantages in such approaches. Convenience of taxation

IRAS will continue to use digital systems to make tax reporting, assessment and payment as convenient as possible.

Self-assessment systems (in which taxpayers assess how much tax they have to pay but

suffer financial penalties if they are wrong) are common in many countries, but fundamental

design issues must be considered in adopting such a system.

Arguably, it may be more convenient for some taxpayers to pay tax in the year income is earned, rather than paying for the previous year’s income (currently, tax assessments are for

income earned the previous year or basis period). But this may not always be true, and paying tax in the same year that income is earned may strain some taxpayers’ cash flow. Again,

there are fundamental design issues to consider in any such change.

Efficiency of taxation

Changes to efficiency depend on the public spending decisions of the government. The income tax system has the flexibility to raise more revenue if needed. This must be balanced

by considering the possible undesired behavioural effects and economic or financial

consequences that could follow from changing tax rates or the tax base. At the same time, unnecessary tax incentives and exemptions are routinely removed from the income tax

system. As a matter of fiscal discipline, broad-based tax incentives may not be as effective as targeted tax measures designed for specific outcomes. The efficiency of the tax system

will continue to be maintained through careful design of tax rules to minimise unintended effects on taxpayer behaviour.

Conclusion

I would like to return to where I started: the fundamental premise that taxation is inevitable and that there is little to like about it. Of all the known forms of taxation, income tax remains

closest to the ideal. Remaining close to the ideal also means that the future is more predictable if we remain true to our principles. Since income tax is necessary, the least we

can do is try to limit the inconvenience.