Taxing e-commerce players such as Amazon one way to raise Govt revenue: Experts
SINGAPORE — With the Government needing to impose new taxes or raise existing ones to fund growing healthcare and infrastructure expenditure, tax experts have suggested several ways for the country to boost its coffers: Taxing e-commerce operators such as Amazon and Taobao as well as those providing business-to-business (B2B) services, creating a new tax bracket for the ultra-rich, and increasing the goods and services tax (GST) rate.
While Singapore has one of the lowest corporate tax rates globally, the experts noted that raising these rates was not a viable option if the Republic wants to maintain a competitive tax regime at a time when countries around the world are seeking to reduce corporate taxes. Nevertheless, they singled out the burgeoning digital economy as one potential revenue source.
The rise of e-commerce has resulted in a loss of tax revenue, as overseas online retailers are generally not taxed in Singapore on their income generated from consumers here.
Analysts had previously estimated that more than half of the total revenue generated in Singapore from e-commerce involve cross-border transactions. In May last year, Temasek and Google released a report stating that Singapore’s e-commerce market could grow to US$5.4 billion (S$7.68 billion) by 2025. Citing the report, Mr Koh Soo How, PwC Singapore’s Asia-Pacific Indirect Taxes Leader, said a tax on online transactions could translate to a “significant windfall” for the Government.
However, the Republic’s current tax regime is “finding it difficult to keep pace with technology developments and business disruptions”, KPMG Singapore’s tax head Chiu Wu Hong noted.
Deloitte Singapore and South-east Asia indirect tax leader Richard Mackender said the main challenge with taxing e-commerce is identifying when a transaction has occurred. “Because of the nature of the Internet, transactions take place in cyber space via a Wi-Fi connection and a credit card,” he added.
Nevertheless, he noted that countries such as Japan, South Korea, New Zealand and Australia have come up with a way to tax online transactions between businesses and consumers: Foreign e-commerce companies are required to charge local GST for transactions with private customers. These businesses have to account for the local taxes that they collect from customers via a GST registration and reporting portal.
However, Mr Mackender cautioned that if the tax requirements are onerous, foreign businesses could pull out of the Singapore market, given its relatively small size.
On the B2B front, the Government could enforce a reverse charge mechanism, where the service recipient pays the tax, the experts said.
Nanyang Business School Associate Professor of Accounting Kevin Koh suggested encouraging foreign businesses to set up a brick-and-mortar presence here. “This would ultimately benefit Singapore as a whole with new jobs created … I think such a strategy is a better long-term strategy than just reaching for the low-hanging fruit of taxing these (online) purchases,” he said.
The tax regime could also be tweaked to introduce new personal income tax bands and higher tax rates for the top income earners, said Ernst & Young solutions tax services partner Tan Ching Khee.
National University of Singapore (NUS) Business School Associate Professor of Accounting Simon Poh suggested introducing a higher tax bracket of up to 25 per cent for taxable income in excess of, say, S$2 million. “In line with a progressive tax system advocated by the Government, there is scope to increase the income tax payable by the very rich taxpayers without disincentivising work and enterprise,” he said.
Changes to the personal income tax regime were last announced during the 2015 Budget by then-Finance Minister Tharman Shanmugaratnam: The tax rate for the top 5 per cent of income earners, who draw at least S$160,000 in annual income, was increased, with the top marginal tax rate for those making over S$320,000 a year raised by two percentage points to 22 per cent. This would apply to income earned in 2016 onwards. Overall, the change is expected to bring the Government an additional S$400 million in revenue annually.
To boost the Government’s revenue, Mr Tharman, who is now Deputy Prime Minister, had also announced that Temasek Holdings will be included in the Net Investment Returns framework — joining GIC and the Monetary Authority of Singapore — so part of its projected long-term returns can be spent. These revenue measures would provide sufficiently for the Government’s increased spending planned for the rest of the decade, he said.
In his Budget speech on Monday, Finance Minister Heng Swee Keat said the Government is studying its options carefully. “We must make these decisions in good time, to ensure that our future generations remain on a sustainable fiscal footing,” he said. Government spending is expected to outstrip revenue for the third straight year, although the overall fiscal position for FY2017 is expected to be a S$1.9 billion surplus.
Analysts had previously noted that there is scope to consider increasing the GST rate, which stands at 7 per cent.
Mr Mackender proposed levying GST on smaller businesses, by lowering the GST registration threshold for businesses from S$1 million to a level “more aligned” with other countries, such as S$100,000. This would widen the pool of taxpayers, and result in more goods and services being subjected to tax and borne by consumers eventually.
Assoc Prof Poh reiterated that a GST rate hike was inevitable “but it will not happen in the next three years”. “When it happens, it will only be a nominal 1 or 2 per cent increase,” he said.
PwC’s Mr Koh said there was room for the GST rate to climb to 10 per cent, “whether in stages or in one step when the time calls for it”, in line with the average rate around the region.
“The likely scenario is that Singapore will continually look to rebalance the tax system to shift its reliance to consumption taxes, which are less prone to economic cycles, if it is looking for more stable sources of revenue,” he said.