Enhanced tax incentives could secure Singapore's fiscal sustainability: EY

EY says that the revenue could be used to enhance Singapore's growth as a fintech hub.

Accounting and professional services firm Ernst & Young (EY) called on the government to work on enhancing its tax incentives and building corporate growth and innovation capabilities in order to shape a fiscally sustainable and secure future for Singapore.

Whilst local companies can offset a portion of the costs of acquiring shares in another company under the Mergers & Acquisitions (M&A) scheme, the benefits to Singapore groups can be curtailed due to restriction conditions and the fact that the M&A allowance cannot be transferred to companies within the Singapore group as part of a relief system, EY noted in its Wishlist for Singapore Budget 2019.

“Allowing the M&A allowance to be transferred… would allow these taxpayers to better benefit from the scheme and thereby encourage growth through M&A,” the firm stated. “This is because in many cases, the acquiring company is the ultimate Singapore holding company or an intermediate holding company which has no or limited taxable income.”

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Meanwhile, it also urged the government to enhance Singapore’s growth as a fintech hub by supporting the development of fintech strategy, on top of introducing a fintech tax incentive. EY noted that provisions to allow tax losses to be carried forward in one entity to be transferred within a qualifying group for deduction could be introduced as substantial losses and time consuming processes translate to a timing mismatch of trade losses incurred and income generated.

“The Monetary Authority of Singapore (MAS) may wish to consider introducing and administering a targeted tax incentive, offering a preferential rate of say 5% or 10% to promote financial innovation-related activities by financial services companies,” Desmond Teo, EY Solutions LLP’s partner for financial services tax highlighted. 

In addition, EY added that focus could also be placed on encouraging private funding for targeted innovative companies through a tax relief for large corporates looking to invest in start-ups that could be offered on interest received on convertible debt securities and on gains on this disposal of preference or ordinary shares that do not qualify for exemption of the Singapore Income Tax Act.

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“Currently there are no tax measures to encourage private funding in companies that focus on innovation,” Mriganko Mukherjee, EY Solutions LLP’s partner for financial services tax, explained in the report. “As such, measures designed to help smaller, high-risk innovative companies to raise funds will be particularly important to unlock the potential of equity crowdfunding for private investment.”

Moreover, extended tax exemption regimes for funds and family office investment vehicles could be something that may be considered to enhance the country’s appeal as an asset management hub. It pointed out how in 2017, Singapore’s asset management industry reached a record asset under management (AUM) of almost $3.3t which is double 2012’s AUM of $1.6t.

By extending the section 13CA/R/X tax exemption regime which is due for renewal by March 2019, EY highlighted that it would encourage investors to tap into the region’s growth opportunities and therefore enhance Singapore’s continued investment attractiveness.

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Continued support for the growth and innovation of small and medium-sized enterprise (SMEs) may also prove to be beneficial for Singapore’s economy, according to EY’s wishlist which called for new research and development (R&D) incentives for smaller companies.

“Local SMEs in a non-tax paying position have been slow to take up the current R&D incentive scheme as they are primarily focused on cash savings rather than tax savings,” EY Solutions LLP’s partner for business incentives advisory explained. “Experience from other jurisdictions show that R&D cash incentives are more effective in incentivising R&D amongst SMEs.”

To specifically help SMEs drive growth, the government could offer R&D cash payout as an alternate option to enhanced tax deduction, EY noted. “Where necessary, to minimise abuse, such cash conversions could be approved on an application basis.”