Singapore’s Budget 2016 is anticipated with amplified interest for two reasons, for one, it is the first budget of the new Finance Minister Mr. Heng Swee Keat and the other, for it being the budget that will launch Singapore in its next lap of economic growth and development. Some of the business federations and organizations serving the corporate community in Singapore have made their recommendations. Rikvin International, as a reputed corporate service provider forging strong relationship with startups as well as small and medium sized enterprises in Singapore, has unveiled its wish list as below.
Startup targeted tax incentives to evolve into a value creating economy
Singapore currently has a highly attractive tax regime for startups. Singapore incorporated startups enjoy 100% tax exemption on their first S$100,000 taxable income and 50% tax exemption on the remaining taxable income of up to S$300,000 in the first three years after incorporation. However it may not really be beneficial to some of the startups, which may actually be making losses. In order to transform from a value-adding economy to a value-creating economy Singapore needs to device schemes that are directly beneficial to the startups by aiding their cash flow.
This can be in the form of improving the startups’ access to finances or capital by providing significant tax benefits to investors serving the startup community. One possible way to achieve this is by extending the tax exemption on gains made from disposal of share in startups, which is presently available to corporate investors, to individual investors. It will be highly beneficial for startups because invariably their first source of capital is friends and family.
Enhanced Tax Deduction for SMEs to Support Internationalization
The Government could explore the possibility of enhanced tax deduction for the SMEs on the funding costs incurred for their internationalization efforts. Another potential way to promote SME internationalization is to extend tax deduction for their investment in overseas equities.
Enhanced risk sharing and funding from the government
Given the substantial downside risks anticipated in the global economy the SMEs are looking for more help from the government to wade through the headwinds. With the US Fed hiking the credit rates, the tightened credit market will challenge the SMEs.
SMEs will immensely benefit if the government is able to enhance its stake in risk sharing financing schemes that are currently in place. Enhancements to the government funding to small companies will also help them to overcome the double whammy of slow growth and high business costs.
A dedicated agency for SME
The government has been advocating internationalization and has indeed extended support for SMEs in their efforts to internationalize. The small size of the domestic market makes it imperative to internationalize, but many SMEs are challenged in their attempts by the maze of regulations and bureaucratic hurdles in the foreign markets. Therefore it is time to set up an agency dedicated for the internationalization efforts of the SMEs, focusing on promoting partnerships with larger or complementary enterprises both locally as well as in potential foreign markets. It is very vital to drive and support the growth of the local SMEs in order to enhance their economic value.
Besides helping in internationalization, such an agency could also identify the innovation needs of the SMEs. Productivity enhancement being the top priority, SMEs were incentivized through Productivity and Innovation Credit (PIC), however it has been observed that it has not translated into significant productivity leap. In order to bring true innovations and productivity, the dedicated agency can centralize the R&D efforts by identifying some of the common productivity issues of the SMEs in key sectors. Such as cooperative R&D agency will prevent duplication of efforts and wastage of resources.
Measures to address labor woes
There is a severe labor shortage in Singapore. Amidst the faltering economic growth small businesses are finding it extremely challenging to contain the business costs that is inflated by the restructuring measures. Their expense on labor levy is severely affecting their cash flow. Resorting to technology is not a comprehensive solution for companies operating in many of the key sectors.
Given the tight labor market situation and the vanishing liquidity in the market, SMEs wish that the government should defer any plans to hike the levy or tighten quota. As per Budget 2015, the announced levy increase for the Service, Marine and Process sector is set to kick-in from this year. The levy for Basic Skilled workers in the construction sector will also rise over this year and the next. This will severely impede the profitability of small companies operating in these sectors. So government should reconsider and defer the levy hikes in the light of the new economic situation that has precipitated a gridlock for SMEs.
Time to tweak the tax rate
Singapore has a very competitive tax rate. At 17% it is only 0.5% higher than its regional counterpart, Hong Kong. With partial tax exemption the effective tax rate is as low as 8.5% on a taxable income of up to S$300,000. Singapore boasts of a most business friendly tax regime.
However considering the significant downside risks that is threatening the global markets, it may be the right time to tweak the tax rate. The government could consider increasing the partial tax exemption, by increasing the taxable income qualifying for the 50% tax exemption. Alternatively, a tired tax rate for small companies can be introduced. With the new definition for ‘Small Company’ coming into effect, a small company tax rate may also be effective in weeding out tax avoiding practices of large companies to leverage the partial tax exemption scheme.
As a firefighting measure to address the concerns of small companies, government should substantially enhance the one-off income tax rebate. It may be recalled that in Budget 2015 a one-off income tax rebate of 30% capped at S$20,000, was announced for the YA 2016 and YA 2017.
Measures to enhance access to foreign capital and finance
Singapore is deemed as an attractive location to hold investments because of the safe harbor rule, which exempts gains made from disposal of investments in equities from tax. However this tax exemption is available only until May 2017. It will be highly beneficial to SMEs that seek the support of foreign equity investors if the safe harbor rule is made permanent.
Likewise the present withholding tax rate imposed on interest earnings of non-residents is 15%. If this rate is slashed down it will substantially improve the access to overseas funding.
Review the Entrepass Scheme
The Entrepass scheme, a special visa to attract foreign entrepreneurs to Singapore, was tightened in 2013. The tougher eligibility framework is a high wall to scale for many startups in their early stage. The prevailing scheme is aimed to attract high quality innovation driven entrepreneurs to Singapore, however the qualifying criteria is highly challenging for many early innovative startups, and only mid-market entrepreneurs may be able to fulfill the requirements.
The revised framework is efficient in preventing abuse of the scheme to merely immigrate into Singapore, but it is too stringent and has shooed away some startups with viable business plans. With Malaysia and South Korea launching their own versions of Startup Visa for foreigners, it is appropriate for Singapore to review the stringent requirements of its Entrepass Scheme.
A relaxed framework facilitating early stage innovators to setup their startups will attract more entrepreneurial talent and accelerate the innovation drive of the country. This is essential to add more vibrancy to the startup landscape that would translate to more economic spin-offs.
Rikvin is confident that Budget 2016 will have the essential features to take the country from a value adding economy to a value creating economy that will reinforce Singapore’s position as an unchallenged business hub in the region.
Related Article: Latest Amendments (as of Aug 2017) to the EntrePass Scheme