Rise in Effective Corporate Income Tax Rate that would be Equivalent to Two-percentage Point Hike in GST

Ms Hazel Poa asked the Minister for Finance how much will the effective corporate tax rate have to be raised in order to raise the same revenue as a two-percent hike in GST.

The effective tax rate is most useful when looking at the tax burden of a company, after taking into account the design of the corporate tax system, such as further tax deductions, capital allowance and schemes, such as the Partial Tax Exemption (PTE) and Start-Up Tax Exemption (SUTE) schemes. Different companies have different effective tax rates. For the purpose of Ms Hazel Poa’s question relating to overall revenue yield, we have done simulations based on the headline corporate income tax (CIT) rates.

To simulate how much the headline CIT rate has to increase to generate $3.5 billion each year, that is, the revenue generated from the GST increase, we used the data for Years of Assessment (YA) 2019 and 2020, so that the data would not be distorted by the effects of COVID-19, and we applied the current parameters of the corporate tax system, such as the recently revised parameters of the SUTE and PTE schemes. We also removed the effect of temporary measures, such as the CIT rebate in YA 2019 and YA 2020.

If we assume that the tax base remains unchanged, in other words, that firms do not respond to the change in CIT rates, our simulation shows that to generate an additional $3.5 billion every year, we will need to raise the CIT headline rate by at least five percentage points to 22%.

In reality, the above assumption is unlikely to hold. Firms will likely respond to this CIT increase and will move some of their operations out of Singapore, especially since many competitor jurisdictions have lower CIT rates. For example, Thailand’s CIT rate is 20%, Hong Kong’s is 16.5%, Switzerland’s is 14.9% and Ireland’s is 12.5%. A reduction in our tax base means that to raise an additional $3.5 billion from CIT, we will need a headline CIT rate in excess of 22%.

Such an increase in CIT rate will have a major impact on Singapore’s competitiveness. We will find it harder to attract new investments. Ultimately, Singapore and Singaporeans will be the ones who lose out.

MOF will continue to review all revenue sources. When we need to raise more revenue, we will ensure that any increase in taxes is implemented in such a way that is fair and inclusive and does not hurt Singapore’s overall competitiveness.