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Singapore's Budget To Raise Productivity With Tax Incentives

Tuesday, February 23, 2010

Singapore’s 2010 budget, presented by the Finance Minister, Tharman Shanmugaratnam, looked to increase productivity in the economy by tax incentives to both companies and individuals, while providing additional protection for lower and middle income groups.

Firstly, he pointed to the action taken by the government which had successfully reduced the effect on Singapore of the global recession – including the Jobs Credit; tax reductions to help companies with their cash flow and encourage them to begin investing for recovery; and significant direct assistance helped Singaporean households to see through the crisis.

Because the economy contracted by less than expected last year, Singapore’s budget position also turned out better than projected. The basic deficit in 2009 is now estimated at SGD8.5bn (USD6bn), or 3.3% of gross domestic product (GDP), compared to the SGD14.9bn that was expected.

Shanmugaratnam emphasized that the 2010 budget focuses on building up the capabilities for economic growth based on productivity growth of 2%-3% per year over the next decade, raising skills rather than relying on an ever-expanding use of manpower and other resources.

To that end, he said that the government will give significant tax benefits to businesses that invest in skills and innovation, thereby lowering their effective tax rates. The government will commit SGD1.1bn a year over the next five years in the form of tax benefits, grants and training subsidies to support this combined, national effort to raise productivity.

To complement investments in productivity, he continued, the supply of foreign workers (that are almost a third of the workforce) must also be managed. “The best way to do this is through the price mechanism, that is, by raising foreign worker levies rather than through imposing numerical limits,” he said. “We will phase in higher levies gradually over the next 3 years, so that companies know well in advance what will happen and have time to adjust.”

The changes will start with a modest increase in levies in 2010, and will involve further increases over the next two years. As a first step, levy rates will be raised by between SGD10 and SGD30 for most work permit holders on July 1, 2010. There will be further adjustments in levy rates and tiers in 2011 and 2012. Taking the three years together, there will be a total increase of about SGD100 in average levies per worker in manufacturing and services.

“The increase in levies will be complemented by the strong financial support from the government,” he added, “through tax benefits and grants to help businesses that invest to raise their employees’ skills, to improve efficiency or to create more value. In fact, over the next five years, the government financial support that the business sector will receive for productivity upgrading will be significantly larger than the additional payment they have to make in foreign worker levies.”

The government will also place additional emphasis on older, low-wage workers, by providing them the needed support to enhance their skills. Currently, for example, there is the Workfare Income Supplement (WIS) to encourage older low-wage workers to stay in the workforce. There will be two additional enhancements to help this group.

There will be a 3-year Workfare Training Scheme that will provide their employers with 90% to 95% of funding for absentee payroll and course fee outlays, and will provide the workers with cash grants when they complete their training. The grants will be capped at SGD400 per year.

The WIS will also be enhanced. Starting from 2010, maximum payouts for the WIS will be increased by between SGD150 and SGD400, with more going to older workers to encourage them to remain in the workforce. For example, a 60-year-old worker will get an annual WIS payment of up to SGD2,800, an increase of SGD400. The government has also decided to extend WIS to workers earning up to SGD1,700 a month – up from the current limit of SGD1,500. The enhanced WIS will cost an additional SGD100m annually and will benefit about 400,000 low-wage workers.

In addition a Productivity and Innovation Credit (PIC) will be introduced. The PIC will provide significant tax deductions, for investments in a broad range of innovative activities. It would cover spending on, such as, research & development; the registration and/or acquisition of intellectual property, including patents, trademarks, and designs; design activities; automation through technology or software; and the training of employees.

All businesses will be eligible for the PIC, based on the amount they invest in any of the activities covered by it. They will be able to deduct 250% of their expenditures on each of these activities from their taxable income. The enhanced tax deductions are capped at SGD300,000 of expenditures for each activity, so as to focus the benefits on small to medium-sized enterprises. The PIC will be available for five years and will cost SGD480m a year.

To support small but growing businesses which are cash-constrained, the government will also allow businesses the option to convert up to SGD300,000 of their PIC a year into a cash grant of up to SGD21,000. This is aimed at helping businesses that are starting off with low taxable income, but want to grow by investing in technology or upgrading their operations.

The government is to promote corporate restructuring further by encouraging mergers and acquisitions (M&A). For five years, a one-off tax allowance scheme will be introduced to help defray a portion of acquisition costs. The allowance will be equal to 5% of the value of the acquisition, and will be capped SGD5m in a single year. Stamp duty will also be waived on the transfer of unlisted shares for such deals. This will apply to such deals worth up to SGD100m in any year.

In addition, the government is introducing additional incentives to encourage the expansion of specific economic activities with high growth potential. For example the development and expansion incentive scheme to law practices providing international legal services will be extended, so as to enhance Singapore's position as an arbitration hub. Under this incentive, approved law practices will enjoy a 10% concessionary tax rate on incremental income derived from performing international legal services.

The government will continue to update Singapore’s tax incentives for the financial services sector to encourage institutions to build up high value activities and expand their professional teams in Singapore, and will also introduce a tax incentive to grow shipbroking and extend that for maritime financing activities. Furthermore, the scope of GST zero-rating for the marine industry will be extended. The maintenance, repair and overhaul business is also a growing opportunity for Singapore, and the government will renew the investment allowance scheme which grants an additional 50% allowance for aircraft rotables for another five years.

In addition to the recently-introduced seller’s stamp duty of 1% for the first SGD180,000 of the consideration, 2% for the next SGD180,000, and 3% for the balance on the conveyance, assignment or transfer of property, the government will replace the 1994 GST rebates with a simple but progressive tax schedule for owner-occupied residential property.

It will introduce three tiers of tax rates under a new schedule for owner-occupied residences. The first SGD6,000 of annual values (AV) will be exempted from property tax. The next tier will be taxed at 4%, and the balance of AV in excess of SGD65,000 will be taxed at 6%. This new schedule will apply for property tax payable from January 2011.

There is no change to the property tax structure of non-owner occupied residential properties and other properties, which will remain at a flat rate of 10% of AV.

Finally, changes are being made to individual income tax reliefs, particularly to benefit middle-income groups, and especially families providing support for their elderly and their handicapped members. Taking all the measures together, the government will be spending SGD1.4bn this year in direct transfers for households. While most Singaporeans will receive some benefits, more will go to those with lower and middle incomes.

Overall, the government expects a basic deficit of SGD7.2bn in 2010. At 2.6% of GDP, this is slightly smaller than last year.