Debated in Parliament on 3 Nov 2014.
Order for Second Reading read.
Mdm Speaker, I beg to move, "That the Bill be now read a Second time."
The Income Tax (Amendment) Bill 2014, or "the Bill" for short, covers income tax changes announced in the 2014 Budget Statement as well as other changes arising from the periodic review of our income tax regime.
The draft Bill was released for a public consultation exercise from 4 to 24 July this year. MOF has evaluated all the feedback received and, where relevant, accepted the suggestions.
Madam, the tax changes announced in the 2014 Budget Statement have already been debated in this House. Let me highlight the key changes.
First, the Productivity and Innovation Credit, or PIC Scheme, has been extended for three years till Year of Assessment (YA) 2018 to provide more time for businesses to put in place productivity improvements. We have also introduced a PIC+ Scheme to provide additional support to small and medium enterprises (SMEs) which are making more substantial investments to transform their businesses. Under the PIC+ Scheme, qualifying SMEs can enjoy a higher expenditure cap of $600,000 for each PIC qualifying activity per YA. This is 50% or $200,000 more than the existing PIC cap of $400,000. Other enhancements have also been made to the PIC Scheme.
From YA 2014, businesses can claim PIC benefits for training of seconded staff from other organisations or persons working for them under centralised hiring arrangements. Such arrangements are quite common in the hotel and food & beverages industries and occur when the hiring function of a group of companies is centralised in a single entity and employees are subsequently deployed to related entities within the group. The cost of training such staff is borne by the respective entities to which the employees are deployed or seconded and should rightly be supported by PIC since they also improve business productivity. This change was made in response to industry feedback.
Second, the additional 50% tax deduction for R&D activities has been extended for 10 years till YA 2025 and the scheme to allow writing down allowance for acquisition of
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Intellectual Property Rights has also been extended for five years till YA 2020.
In line with the definition used by the World Intellectual Property Organization, intellectual property rights must be creations out of intellectual activities and we have, therefore, added a negative list to exclude items which do not meet the definition. We will be excluding customer information and documentation on work processes, such as Standard Operating Procedure manuals, that do not contain any industrial know-how. However, documentation on work processes containing industrial information or techniques that will assist in the manufacturing or processing of goods or materials will continue to qualify for the writing down allowance under section 19B in the proposed legislation, provided that they relate to industrial know-how that can be legally protected. These are provided for in clauses 20 to 22 and 30 to 32.
Third, we will make clear that Additional Tier 1 hybrid instruments issued by Singapore-incorporated banks will be treated as debt for tax purposes. This means that distributions on such instruments will be deductible for issuers and taxable in the hands of investors, unless specifically exempted from tax. The change will help maintain a level-playing field for these banks as their distributions will be deductible, similar to the tax treatment accorded to banks incorporated in countries like the United Kingdom. These are provided for in clauses 6, 8 and 48.
Fourth, the quantum of parent relief, handicapped parent relief and other handicapped dependant-related reliefs will be increased from YA 2015 to provide greater recognition to individuals supporting their dependants. We will also allow sharing of the parent relief and handicapped parent relief among claimants according to a proportion agreed between the claimants. This is provided for in clause 45.
Madam, MOF regularly reviews and refines the income tax regime. I shall now outline other key changes arising from MOF's periodic review of the tax regime.
First, we will introduce anti-abuse measures for the PIC Scheme. IRAS has come across abusive arrangements aimed at artificially creating or inflating PIC claims, especially where cash payouts are involved. While such cases constitute a minority of PIC claims, additional measures are necessary and have been included in the Bill to tighten the qualifying conditions for PIC cash payouts, as well as to target abusive arrangements and the intermediaries who promote or facilitate such arrangements. These measures include: requiring a PIC automation equipment to be in use before an application for PIC cash payout on the equipment can be made; strengthening the Comptroller’s powers to deny PIC benefits arising from PIC abusive arrangements; and imposing penalties on intermediaries who promote or facilitate PIC claims for such abusive arrangements. These changes are elaborated in clauses 40 and 42. These changes are not expected to affect businesses making
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bona fide PIC claims, but seek to deter the small minority of businesses which attempt to make artificial or inflated PIC claims. IRAS will also continue to ensure timely disbursements to businesses for their legitimate claims.
The second amendment arising out of our regular and periodic review is to allow expenses incurred by a person for the purpose of complying with statutory and regulatory requirements of his business, to be tax-deductible with effect from YA 2014. This promotes good corporate governance and voluntary compliance with statutory and regulatory requirements. The change is provided for in clauses 27 and 28 of the Bill.
Third, we will allow Supplementary Retirement Scheme (SRS) members who have reached the retirement age to withdraw investments from their SRS accounts without the need to liquidate the investments. Currently, such SRS members can only make withdrawals in the form of cash. This necessitates the liquidation of SRS investments. To reduce transaction costs for SRS members, they will be allowed to withdraw their SRS investments by transferring them into another investment account, such as their personal Central Depository accounts, without the need for prior liquidation. Similar to cash withdrawn from the SRS accounts, the value of such SRS investments withdrawn will be brought to tax. Clauses 5, 53 and 57 provide for these.
Fourth, we will amend the Act to enable Singapore to ratify the Convention on Mutual Administrative Assistance in Tax Matters. This is a multilateral exchange of information treaty that Singapore signed in May 2013 to enhance Singapore’s international tax cooperation framework.
The changes will allow Singapore to be in a position to engage in spontaneous exchange of information (EOI), as well as administer group EOI requests, both of which are requirements under the Convention. Spontaneous EOI refers to an instance where IRAS, in the course of tax assessment, comes across information which it thinks is relevant to a foreign tax administration and transmits the information to that tax administration spontaneously on its own accord. Group EOI requests are requests for information on a group of persons where the persons are not individually identified, but can be identified as a group using certain unique characteristics. For example, a country may ask for information on its nationals who bought a certain product from a certain bank over a specified period. Such international cooperation measures are increasingly adopted by countries working together to combat cross-border tax evasion and our moves are in line with that of a responsible tax jurisdiction in the international community.
To harmonise our tax cooperation framework across all EOI instruments, we will also incorporate these two changes in other relevant arrangements such as Avoidance of Double
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Taxation Agreements. The changes are provided for in clauses 2 and 61 to 63.
The remaining legislative changes are mostly technical in nature or relate to improvements in tax administration. Mdm Speaker, I beg to move.
Question proposed.
Mdm Speaker, I wish to declare that I own and operate businesses that are subjected to the corporate components of the Income Tax (Amendment) Bill.
This Bill covers a large number of changes. I will focus on some aspects related to the PIC scheme and to also propose an item for the Government to consider in future amendments to the Income Tax (Amendment) Bill.
First, on PIC. A survey of local companies released by PWC Singapore last month reported that only 6.3% of those surveyed intended to tap on the R&D tax benefits offered in the PIC scheme. The report suggested a mismatch in defining R&D for business and tax purposes. The report concluded that "what is clear from the results is that respondents are seeking more engagement via a two-way dialogue with IRAS in the R&D claim progress".
Madam, I have spoken previously in this House about the extremely low utilisation of R&D support under the PIC scheme. The report is consistent with my own observations about the experiences of technology companies, especially the smaller ones that have found difficulties in claiming cash payouts under the PIC scheme for R&D. It seems that IRAS applies a very strict definition of what would qualify as R&D activities which makes it difficult for smaller companies to tap on PIC to help them in what they may consider as necessary R&D activities for their own development.
It would be unfortunate if companies hold back on investing in R&D because of the difficulties in securing Government support as I believe that such expenditures are needed to make quantum leaps in productivity as new technologies, systems and methods can drastically change business models to great advantages. This is especially essential if Singapore is to move into the next lap of having innovative companies that are competitive on the global stage.
Compared to other categories of allowable claims in PIC, R&D expenditure does appear more difficult to claim under the cash payout. Companies may be tempted to take a more
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convoluted method if they really want to try very hard to claim PIC support, say, for original software development. For example, a company could place out their staff with another software company and get the software company to build the application and then sell back the completed system, with all intellectual properties (IP) to it, and then hire back the staff involved in the development. Or, perhaps, have the system charged as website development by a friendly third-party developer if the product is a web-based system. This may allow it to qualify for claims under IP or website capital expenditure. I do not think this is a scenario IRAS wants to encourage. Nevertheless, with the seemingly difficult experiences that some companies may have with qualifying under R&D support for PIC cash payout, some may, indeed, try creative methods to claim R&D work through another aspect of PIC that is more lax.
While I appreciate that the Government wants to tighten abusive PIC claims, I hope that when it conducts its regular reviews of the PIC scheme, the Ministry can look into how R&D activities can be broadened in the PIC definition so that companies that genuinely wish to commit their staff towards building essential systems to support innovative new business processes can benefit from this scheme.
Next, under the changes proposed to tighten PIC claims to prevent abuse in section 371, I wish to seek clarification on what the Ministry would consider as PIC automation equipment to be "in use" so that it qualifies for cash payout. This is because, sometimes, businesses may invest in spare capacity, say, for disaster recovery use or for future anticipated use. Perhaps, it would be useful to clarify if situations such as these can qualify for PIC cash payouts.
Lastly, for future amendments to the Income Tax (Amendment) Bill, I would like to suggest that the Ministry look into more relevant packages to encourage more merger and acquisition (M&A) activities amongst our local companies, especially the smaller ones. I have spoken about this before in this House as well. Even as we try to encourage productivity amongst our companies, my concern is that we have many companies that are very small in size. Even with Government support for automation and productivity measures, it is often very difficult to extract significant increases in productivity if the scale of business is small. Hence, M&A is a way to encourage the amalgamation of businesses to provide the scale for automation and changes to business processes that could see our companies becoming more competitive on the global scale.
The current M&A tax incentives are due to expire in March next year. My reservations over the existing M&A tax incentives are that they are structured in a manner that makes it unattractive or not very meaningful for smaller companies to tap on the schemes for M&A. Hence, utilisation of this scheme appears to be very low. Since I have already given suggestions previously in this House on my proposed changes to the M&A scheme, I shall not elaborate on this today. I hope that these suggestions can be incorporated in the design
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of new M&A tax schemes in the future. Mdm Speaker, I support the Bill.
Senior Minister of State Josephine Teo.
Mdm Speaker, first, let me thank the Member, Mr Yee, for his suggestions on the M&A scheme. Indeed, I think one of the issues that he highlighted is that some companies are so small that it is quite difficult for them to have the capacity – the bandwidth – to undertake not only R&D activities, it is even difficult for them to get started on productivity improvements. But what I am glad to share with Members is that, notwithstanding the difficulties, actually, our SMEs have done quite well in terms of embarking on the productivity journey.
If Members recall, we started PIC about three, four years ago and, in the first year of its implementation, at the time, just about one in three of the SMEs were able to file claims and enjoy the benefits of PIC. So, it was 34%. If we fast forward three years down the road, that number has gone up to 42%. So, we have seen an improvement in terms of the take-up of PIC amongst businesses. Some of it can be attributed mainly to just greater awareness. Others can be attributed to enhancements in the schemes so that they provide more timely support to the SMEs in their pursuit of productivity improvements and we would like to see this continue and that is why the scheme is being extended for a further three years. We hope that that gives businesses that sense of urgency to embark on their productivity journey.
Forty-two percent may not seem like a big enough number but I just want to remind Members that it is 42% in a particular year. Cumulatively, if we add it up, in fact, the number could be larger. In other words, if we add up all the businesses – SMEs that have taken advantage of PIC to embark on productivity improvements – I believe that the number is bigger than 42%, because 42% is the number of SMEs that applied in the most recent year. So, that is part of our challenge and it is an ongoing one. It is going to be a multi-year effort, it is not going to happen overnight and it is going to require sustained effort.
Mr Yee sought clarification and this was in relation to the tightening of the disbursements of cash payouts. He wanted to know when IRAS required that the automation equipment be "in use" in a business before it would consider disbursing the cash payout. And he wanted to know when we say "in use", what is it referring to? I could outline briefly what we are looking for.
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At the minimal, for the equipment to be "in use", it ought to be on the premises or in the place of operation of the business. In other words, it is deployed for the purposes of the business. It is not sitting in the warehouse or, in some cases, not yet even delivered and only an order has been placed and it is, perhaps, not even being manufactured yet. So, "in use" has to be minimally within the premises or the place of business.
Another consideration would be that the business has an intention to use this automation equipment. The example that Mr Yee raised, supposing this was to be used as standby equipment for disaster recovery or some other purpose, the business is very well in a position to articulate its intended use and they can explain to IRAS what that equipment is being deployed to do. Even if it is as a standby equipment for disaster recovery, they can explain what that automation equipment is being used for. So, that is the intention when we require that the automation equipment be "in use".
But, Madam, the more important point that I wanted to highlight to Members is that in deciding to tighten and introduce some of these anti-abuse measures, we have been very careful in that they ought not be a very broad sweep and it has to be targeted at where the problem arises and we know from the task force that has been formed and the investigations into cases that have been brought to IRAS’ attention, that the abuses tend to occur for the cash payouts.
In other words, besides the cash payouts, where the claims of PIC benefits are to offset the taxes payable, there have been very few problems. It is really, where cash payouts are concerned, that it appears, to some unscrupulous intermediaries or businesses that are not bona fide, to be a very easy way to get hold of cash. So, the anti-abuse measures are not broad sweeping. They are targeted at mainly those that involve PIC cash payouts. That is still our intention to make sure that the anti-abuse measures are not in any way standing in the path of genuine businesses trying their best to make productivity improvements.
Mr Yee had also highlighted his concerns about R&D and whether there is a two-way engagement between IRAS and the potential applicants. We had started by talking about some businesses being of very small scale and Mr Yee has given suggestions for future amendments to consider whether the M&A scheme can be improved. Therein lies the difficulty that when we see that the level of R&D activity amongst SMEs is not as high as we would like it to be, one of the contributing reasons is that many of them remain very small. So, in terms of SMEs undertaking R&D activities, that has been one challenge.
MOF and IRAS have also reviewed feedback and found that there is an issue with R&D submissions by SMEs. Quite a number of them do not qualify due to insufficient information provided to support their R&D claims or lack of clarity in understanding the qualifying criteria. In this regard, I agree with Mr Yee that we have to make a greater effort to reach out and to
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help our SMEs understand what the scheme is about and also to take feedback from them on how we can continuously improve on the administration of the scheme.
One of the ways in which we have done so is to release a revised e-Tax Guide that provides more clarifications on the R&D qualifying criteria, explanations of its review process for R&D claims and the types of documentation that companies can use to substantiate their R&D claims.
To further help the SMEs, IRAS has also published a simplified set of guidelines on its website and will certainly work with the SMEs to identify alternative ways of supporting their R&D claims. IRAS is also willing to provide more examples of qualifying industry-specific R&D activities, starting with the Information Communications and Technology (ICT) sector and the F&B industry. In other words, what IRAS will do is to go sector-by-sector and say what kind of activities within each sector will qualify for R&D support. So, the revised guidance should help SMEs with their R&D claims. Mdm Speaker, I beg to move.
*Question put, and agreed to.*
*Bill accordingly read a Second time and committed to a Committee of the whole House.*
*The House immediately resolved itself into a Committee on the Bill. – [Mrs Josephine Teo].*
*Bill considered in Committee; reported without amendment; read a Third time and passed.*
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