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Business Times - 14 Feb 2007

Corporate tax cut: who really gains?

It is Singapore's international standing, rather than individual corporate earnings, that will really be boosted by a tax cut

By MICHELLE QUAH

WITH a corporate income tax cut considered all but a given in tomorrow's Budget, speculation has been on the 'unknowns' - the amount and timing of the cut and the effect it will have on different companies in different industries.

Indeed, economists, analysts, tax experts and observers have spent a lot of time and effort in recent weeks - since Minister Mentor Lee Kuan Yew first mentioned a likely corporate tax cut on Jan 20 - working out the possible scenarios.

So far the bets are on a one percentage point cut to the current rate of 20 per cent for income earned this year - that is, income assessed in 2008. Experts have estimated that such a cut could boost corporate earnings anywhere between one and 9 per cent, depending on the industry or business.

But in the midst of all the speculation, have the real questions been answered: Who is the corporate tax cut really meant for? And just who stands to benefit from it?

It's not the companies.

Tax experts have hinted at the answer previously. Asked which companies stand to gain from a cut, most tax professionals have said it depends on the sort of company.

For example, multinationals lured here by tax incentives will feel a cut much less than small and medium-size enterprises (SMEs) who pay the full rate of tax. Likewise, firms in the financial services sector, who already enjoy benefits under the Financial Sector Incentive scheme, will derive less benefit from a cut. And so will companies with operations overseas and receiving exempt dividend income.

The reality is: Many companies are already paying a lower rate of tax than the prevailing rate of 20 per cent because of the various incentives available to them. So a corporate tax cut will mean little.

Singapore - an incentive-rich regime - has not planned a corporate tax cut to benefit individual companies. This tax cut is really for Singapore itself. And here's why.

Singapore's greatest regional competitor for international business is Hong Kong. Both share many economically attractive traits - but Hong Kong's trump card is its lower tax rates. Hong Kong's corporate tax rate is 17.5 per cent - lower than Singapore's 20 per cent. Hong Kong also has lower personal income tax rates. And unlike Singapore, it does not have a Goods & Services Tax.

So on the face of it, Hong Kong would seem to be a more attractive place tax-wise for global companies to set up shop. In effect, however, the many incentives that Singapore offers foreign businesses reduce their effective rate to less than Hong Kong's 17.5 per cent.

The bad news is: This may not be immediately apparent to everyone.

What a corporate tax cut will do for Singapore is reduce an apparent discrepancy in tax rates between the island and Hong Kong - that is, Singapore's corporate tax rate will become comparable to Hong Kong's at first glance.

A tax cut is also a move Singapore can afford: As we said earlier, many companies already pay a lower rate of tax than the headline rate, so a tax cut won't significantly hurt Singapore's revenue.

But it will position the country better against arch rival Hong Kong.

In other words, a tax cut is going to be good publicity for Singapore - and will give it another bargaining chip when it bids for international business.

This view is shared by KPMG's global head of tax Loughlin Hickey. A corporate tax cut is a sign of Singapore's competitive instinct, he told BT. 'It would be in line with global trends and it shows that Singapore is alert to change and to competition. The modest quantum expected - about a one percentage point cut - also shows that Singapore isn't in panic mode.'

Still, there are other factors - and consequences - to consider regarding such a move. A low rate of tax can bring about its own set of problems in the global arena.

PricewaterhouseCoopers' (PwC) tax partner Paula Eastwood points out that while low taxes can make Singapore more attractive to foreign businesses, it can also result in the country being viewed with a degree of hostility by other governments.

'Some countries can be quite harsh on domestic companies going overseas - especially to jurisdictions they view as tax havens,' she said. 'To counteract such criticism, Singapore may want to consider - in the long term - having just one rate of tax that is equal to the incentivised rate of tax, if the headline corporate tax rate comes down far enough. That way, it couldn't be viewed as having a preferential regime for certain types of companies.'

This is something Singapore will need to bear in mind when it effects its corporate tax cut - to ensure it preserves the competitive edge such a tax cut will give it.

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