The Small and Medium sized Enterprise (SME) sector plays an important role in Singapore’s economic progression. As per statistics provided by SPRING Singapore, the 180,000 local SMEs employ 70% of Singapore’s workforce and contribute to nearly half of Singapore’s GDP. The growth of Singapore SMEs is crucial for the overall economic growth – today’s SMEs will become tomorrow’s multinational enterprises (MNE)! However, the current global slowdown coupled with digital disruption is adversely affecting the Singapore SME’s ambition to grow beyond domestic borders. Needless to mention, Singapore SMEs need to reinvent, evolve and adapt themselves to face the current dynamic business environment. In addition, the following fiscal measures can be considered by the policy makers to support our SMEs to thrive and be successful under the current difficult circumstances.
1. Encourage collaboration and centralisation of resources
SMEs can achieve economies of scale by sharing resources such as centralised back-office functions, data centres or central kitchens. SMEs could be encouraged to invest in shared infrastructure by allowing them to claim enhanced capital allowances or deductions (depending on the nature of the expenditure) for the cost incurred to develop or purchase the equipment and technology, and to put such arrangements in place
2. Aid overseas growth
i) Currently, there is a DTDi scheme which provides tax deductions to companies in order to assist them in expanding business overseas. However, the DTDi scheme requires following refinements in order to make it effective for SMEs to avail the benefits:
Overseas postings are usually done by way of secondment to the overseas establishment, in order to void creating an overseas tax exposure (via a permanent establishment) for the Singapore employer. Instead of requiring that the salary expenditure must be incurred for the seconded employee, the condition should be revised, requiring the individual to be an employee of the Singapore employer prior to the secondment;
DTDi should be applicable to scenarios where the salary expenditure is recharged to the Singapore company with a mark-up to meet transfer pricing requirements, and where the overseas establishment does not charge a service fee, but is taxed on a deemed service fee (i.e. a mark-up on the salary expenditure) under domestic tax rules; and
The scope of DTDi deduction should include non-cash remuneration, e.g. tax equalisation bore by the Singapore employer.
ii) Some of the key challenges faced by SMEs is lack of familiarity with overseas markets and difficulty in identifying suitable local partners. SMEs often work with experienced business consultants and advisors who help them identify suitable partners and implement the right framework, governance structure and business plans to expand overseas. An enhanced tax deduction scheme to help local SMEs offset the cost of obtaining advice for business growth would encourage overseas expansion.
3. Liberalise tax deduction rules
i) Currently, expenses incurred by companies in respect of new business ventures are not deductible as they are considered capital in nature. Businesses should be allowed to deduct expenses in respect of new ventures against profits from their existing trade or business; and
ii) Businesses engaged in industries with long gestation period (such as technology, pharmaceutical and construction) should be allowed to carry forward business expenses as trade losses, notwithstanding that such expenses may be pre-commencement expenses, without any carry forward period restrictions.
4. Liberalise requirements for carry forward of losses
i) It is not uncommon for companies to bring in new investors at different stages of their development. This is particularly so for SMEs as they expand their operations. Given this, such SMEs may not be able to fulfil the continuity of shareholding test and hence unable to carry forward trade losses incurred in past years. The same business test and continuity of shareholdings tests, which were introduced as anti-abuse measures should be removed as the general anti-avoidance rules are sufficient to clamp down the trading of loss-making companies; and
ii) The current restrictions pertaining to the quantum and period of unutilised loss/items a company is allowed to carry back should be removed altogether and companies should be allowed to carry back losses to any year of assessment that has not been time-barred.
5. Liberalise deductions for borrowing costs
Businesses often resort to take standby credit and similar facilities to better manage financing costs and cash flow in order to ensure they can sustain their operations. Currently, it is possible that upfront cost of securing such credit facilities may be viewed as capital in nature and hence not tax deductible. Hence, the list of prescribed borrowing cost should be expanded to cover such borrowing costs regardless of whether the facilities are drawn down.
The Singapore government has set up a Committee on the Future Economy (“CFE”) with an aim to review current facts and circumstances and recommend solutions for the future to keep the Singapore economy competitive and identify areas of growth with regard to regional and global developments. The CFE is expected to unveil its recommendations for Singapore in the near future. It would be worthwhile to see if any of the above fiscal measures are covered by the CFE in its final list of recommendations to the government in order to accelerate the growth of the Singapore SME sector beyond domestic borders.
(Abhijit Ghosh is India Desk Leader and Tax Partner, PwC Singapore and Gaurav Tijoriwalla is Manager, PwC Singapore)