Speech by Mr. Louis Ng Kok Kwang, MP for Nee Soon GRC at the Second Reading of the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill [Bill No. 1/2018]
Sir, I stand in support of this Bill. It is encouraging that the government continues to support companies through tax reliefs.
However, I would like to seek some clarifications and offer some suggestions.
Clarity on definition of Intellectual Property Income
First, Clause 2 of the Bill amends Section 3 of the Act by inserting a new definition of ‘Intellectual Property Income’. This is defined as “any intellectual property income prescribed by the Minister under section 102”. Section 102 of the Act, amongst other things, empowers the Minister to make regulations that may be necessary or expedient for purposes of carrying out provisions of the Act.
Can the Minister clarify why the meaning of Intellectual Property Income is not specifically defined within the Bill? What are the assessment criteria that will be considered by the Minister in prescribing a particular income as Intellectual Property Income? Will this be based on quantitative or qualitative criteria?
The reason I am asking is because greater transparency and less ambiguity in the legislation itself will only enable Pioneer Service Companies and Development and Expansion Companies to better understand what constitutes Intellectual Property Income, and correspondingly whether their activities will fall under the tax incentive scheme.
I understand that EDB does publish guidelines from time to time on its website, such as guidelines related to the Pioneer Certificate Incentive (PC) and Development and Expansion Incentive (DEI). However, if the principle behind the Act and this Bill, is to encourage companies to grow capabilities, develop high-value and substantive economic activities, through tax reliefs; then it is crucial for companies to have a clear understanding what the parameters are for them to qualify for tax reliefs. A clear understanding will allow companies to better plan their business and growth strategies.
I raised a related point in 2016 during the previous iteration of the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill on the need to have clearer qualifying criteria for PC and DEI. Then, Minister Lim Hng Kiang replied that it is a balance between clarity, transparency and ensuring we remain flexible and responsive to the increasingly complex economic environment.
I understand Minister’s point, but I have 2 follow-up queries.
One, I think responsiveness can be achieved through the mechanism of legislative amendments, which allows the government to continually review the incentives and schemes to maintain its relevance. This possibly explains why we are legislating amendments to the Act via this Bill within a relatively short period of time form the last amendment in March 2016.
Two, flexibility may also be achieved through the actual operative provisions in the Act, instead of relying on a broad definition of a key term. To my mind, it is a tenuous argument to rely on flexibility to justify why the definition of an important term, such as Intellectual Property Income, should be left to Minister to prescribe.
Hence, will the Minister consider including a specific clear definition of Intellectual Property Income within the Bill?
Legislation, EDB’s initiatives and impact to Singaporeans
Second, can the Minister clarify how the amendments relating to the exclusion of IP income as stated in Clause 5 of the Bill fit into the new IP regime administered by EDB, named the IP Development Incentive (IDI) announced during the 2017 Singapore Budget?
I note that IRAS published a table stating that IDI incorporates the OECD’s Base Erosion and Profit Shifting reports (BEPS)-compliant modified nexus approach and it is meant to encourage the exploitation of IP arising from research and development activities. Can the Minister clarify how the IDI works in practice with the legislative amendments in this Bill?
On the point of BEPS, I understand from a facebook feedback by Mr. Gregg Fong that as a result of the BEPS framework, tax authorities globally have put in place more stringent rules to ensure tax payers pay their fair share of taxes. Therefore, it is unwise to assume that tax incentives will remain attractive for MNCs in this post-BEPS era, and now more so than ever, tax incentives need to make business sense for MNCs and economic sense for Singapore.
In this context, the queries raised by Mr. Fong are how do these Bill amendments and the existing broader tax incentive schemes fit in with Singapore’s strategic goals?
Mr. Fong pointed out that historically, the initial intention of tax incentives was to attract top MNCs to invest in Singapore, and this worked very well. The tax incentives were then gradually tweaked as Singapore’s economy grew.
Can the Minister explain how the current amendments adjust the tax incentives such that they remain relevant and are aligned with Singapore’s current strategic goals? And can the Minister clarify what these amendments will mean for companies who did invest and are continually investing in Singapore?
Also, do the existing tax incentives schemes and these amendments ensure fair employment opportunities for Singaporeans in managerial positions? Can the Minister provide data over the past 3 years on the relationship between the number of foreign MNCs (with a regional office in Singapore who are enjoying such tax incentives) and the percentage of Singaporeans in managerial positions in these MNCs?
Mr. Fong clarified that this query is not coming from a place of an anti-foreigner sentiment, but it is taking a practical approach as logically MNCs would enjoy significant costs savings (from such tax incentive schemes and general manpower costs savings) if they are able to upskill Singaporeans over a period of time, and transfer these skills from expatriate foreigners to Singaporeans.
Practical applicability to SMEs
Third, on a broader practical level, how do these legislative amendments and various schemes and incentives from government agencies such as EDB and Spring all work together from the perspective of an SME who wishes to take advantage of these available tools?
From Minister’s reply in 2016, I understand that under the current PC Incentive scheme, between 2011 and 2015, only 2 out of 71 PCs were awarded to SMEs, of which only 1 was a local SME. The explanation then was that PC application requires companies to commit to economic contributions of substantive scale; hence it is natural that bigger companies qualify.
Keeping in mind that the principle behind this Bill and the Act is to put in place tax incentives to encourage innovation, I wish to ask whether there are ways in which our SMEs can benefit from these amendments? Smaller companies are able to respond and react to market conditions, and remain agile and flexible. Thus, it appears that SMEs by their very nature are better placed to embrace innovation and position their businesses to adapt to changes rapidly, in line with the principles of the Act.
If we are structuring the tax incentives to largely allow for bigger companies to meet the criteria, may the Minister clarify how this is in line with the principles of the Act?
Sir, notwithstanding my above clarifications and suggestions for Ministry’s consideration, I support the Bill.