THE ushering of the Year of the Monkey seems to have brought some calm to the financial markets which have otherwise had a turbulent start to 2016.
Many stock markets were at their 52-week lows. Oil prices touched US$26 a barrel, which is the lowest point since 2003.
Economic data coming out of many countries are not encouraging.
There is a lot of uncertainty around the emerging markets and in particular China.
Singapore is one of the leading financial centres in the world.
This coveted status has been achieved as a result of decades of planning by the government and the implementation of right policies. This is expected to continue.
The ups and downs in the global economy pose challenges for Singapore but at the same time show Singapore's strength to the world.
The strength is Singapore's ability to maintain its pro-business policies, strong tax and regulatory framework, even through hard times. But can more be done to ensure that Singapore remains resilient in these uncertain times while being ready to tap rising trends once the uncertainties show signs of being overcome?
Singapore's corporate tax rate currently stands at 17 per cent.
To spur growth in certain industries and to ensure that our tax regime is sufficiently competitive to attract businesses, various tax incentives were introduced to reduce rates to 12 per cent, 10 per cent and sometimes lower.
Many of the tax incentive rates have been maintained at this level for decades, from the time the corporate tax rate was well over 25 per cent about 15 years ago.
While Singapore's policy to provide tax incentives based on headcount, business spending and activities is admirable and should continue, there is some merit in reducing the tax incentive rates to half the current levels.
In today's age of information and technology as well as rising costs, the level of commitments (such as on headcount and business spending) required of taxpayers for a reduction of the tax rate from 17 per cent to, say, 12 per cent is not easy or justifiable to achieve from a cost-benefit perspective.
It could be counter- argued that the rate of 12 per cent or even 17 per cent is already competitive compared to many other countries.
However, many countries around the world have also steadily reduced their corporate tax rates and for us to continue to remain competitive, besides offering the many other good things about Singapore, we need to reflect whether the incentive rate of 12 per cent is a good enough lure for the financial services sector.
To help businesses better manage cash flow (especially during a downturn), a loss carry back system exists.
In a nutshell, where a business incurs a loss in one year but was profitable in the previous year, it is allowed to carry back the losses for one year for up to S$100,000.
This means that it may get refunds for tax paid in the previous year.
The rule is currently applied consistently across all industries. While such a provision may have an impact on small and medium-sized enterprises (SMEs), most large corporations will have little use for this, given the quantum cap.
In the context of insurance companies, the losses they incur can be in the millions, if not billions, of dollars. Estimates of the total cost of the recent Thai floods alone to insurers were in the billions.
There was also a string of catastrophes in 2011, such as the Japan earthquake, which increased the scale of losses - and Singapore-based insurance firms were not spared.
The insurance business in Asia is projected to grow at about 8 per cent per annum and by 2020, Asia is likely to account for almost 40 per cent of the global market.
As the leading insurance centre in Asia, it is expected that Singapore will share the pie of such growth by undertaking more of the insurance risks.
In light of the increasing stake, it is important to ensure that we support Singapore-based insurance companies in their pursuit of growth.
Our suggestion is that the loss carry back provisions be enhanced for insurance companies to allow an unlimited amount of tax losses to be carried back for a period of five years.
We believe that such an enhancement will go a long way in encouraging Singapore-based insurance firms to manage the cyclical nature of their business.
INCENTIVES FOR FUND MANAGERS
According to the annual survey done by the Monetary Authority of Singapore (MAS) on the asset management industry, Singapore has seen 30 per cent growth in the total assets managed by asset managers in Singapore (from S$1.8 trillion in 2013 to S$2.4 trillion in 2014).
There has also been an increase in the number of registered and licensed fund managers in Singapore (553 in 2013 and 591 in 2014).
Such growth not only creates jobs in Singapore but also boosts the talent pool here with asset and wealth management capabilities. It also contributes significantly to related and spin-off industries, and adds to the overall business ecosystem in Singapore.
One of the aspects that contributed to this growth is the availability of tax incentives to Singapore-based as well as foreign-based funds managed from Singapore.
Under the tax incentive schemes, funds are exempt from income tax on "specified income" derived from "designated investments".
The definition of "specified income" includes all income except for a finite list of excluded items. We think this exclusion list is the right approach and should be applied for "designated investments" too.
The list of "designated investments" shows all items that are meant to be exempt - whatever is not on the list is not exempt.
This inclusive list approach has several issues. One, each time there is a new investment product in the market which is not on the "designated investment" list, the list needs to be updated.
Two, the definition of "designated investment" may not squarely cover certain investments or at the minimum gives rise to interpretation issues.
As a result, the list needs an update or clarification.
While the authorities have been supportive and in most instances expanded the list of designated investments upon receiving industry feedback, this requires time and causes delay and uncertainty which can be done away with.
In many instances, the fund managers may simply not engage the authorities and decide not to use Singapore.
Our suggestion is that the "designated investments" list follows the exclusion list approach - all investments should be exempt except for a finite number of items which the government can identify in line with tax policy.
SMEs play a critical role in Singapore's economy and they contribute nearly 50 per cent of the GDP.
Despite widespread acknowledgement of SMEs' importance to our economy, they continue to face several challenges. Obtaining funding for their businesses is one such challenge.
To expand the sources of funding available to SMEs, the government may consider using tax tools to encourage banks and finance companies to extend loans to SMEs.
Banks and finance companies can be incentivised by allowing enhanced deduction for losses on loans extended to SMEs.
Further, an intellectual property (IP) hub masterplan has been issued to develop Singapore as a global IP hub.
As a start, the government launched a S$100 million financing scheme in 2014 targeting companies in the technology sector.
Companies can use their IP as collateral for bank loans and under the scheme, the risks for such loans are shared between the banks and the government.
To further encourage banks to do so, we suggest allowing enhanced deduction for losses on loans with IP as collateral. This would help to complement the initiatives to develop Singapore as an IP hub as well as encourage lending to SMEs with IP assets.
These are just some of the many ideas we have for the financial services sector.
The suggestions should cement Singapore's standing as the leading financial centre in Asia. Having lived through past economic cycles, one thing is sure - we will come out of this uncertain environment in due course.
We should be tax ready to tap the opportunities on the upturn.
The writers are respectively partner (financial services) and manager (financial services) at PwC, Singapore.
This article was first published on March 15, 2016.
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