The Situation

Met with disruptive technologies, changing consumer expectations, and increasingly complex regulatory requirements, enterprises need to move beyond traditional business models and find a more effective way to navigate the uncharted waters of the digital world to ensure survival. Beginning a digital transformation journey will be the first step enterprises must take in order to stay relevant in this dynamic market environment.

For a start, with digital transformation, manual processes can be replaced with faster, more efficient technologies, resulting in higher productivity, better customer experiences and improved engagement. There are many opportunities to use digital solutions to address business challenges. For instance, with the use of AI and Internet of Things (IoT) machines backed by data-driven strategies, enterprises can predict occurrences, track new consumer behavior patterns and anticipate emerging market trends. The introduction of the 5G technology will also open up new revenue sources and business opportunities for further enterprise growth.

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Challenge # 1 : Are we making the most of data-driven digital technology to enable our enterprises to transform?

Many enterprises currently outsource their business processes to low-cost markets. However, such outsourcing practices are considered only an initial step in digital transformation. To help enterprises become fully digitally-enabled, the next stage in business transformation will require onshoring such activities through technology and ‘digital labor’.

To achieve this, Singapore should deploy wide-scale digital transformation initiatives in both the public and private sectors, in order to meet the new demands of the digital economy. Digital disruption is already forcing many enterprises across all industries to re-examine the way they conduct their businesses, in view of the following trends:

  • Customer expectations are ever-changing.
  • Products are being enhanced by data, resulting in improved labor productivity.
  • New partnerships are being formed as companies learn new ways to collaborate.
  • Existing operating models are being transformed into new digital models.

There is a strong need to invest in technology enablers for companies, supported by data-driven systems and new ways of collaboration. Enterprises can start by deploying intelligent automation capabilities in areas such as finance, human resources and procurement.

From Singapore’s perspective, it makes sense to incentivize such large-scale transformation efforts.

Singapore loses tax revenue when enterprises offshore their operating activities, as their profits are reduced due to outsourcing costs. However, when these activities are resumed in Singapore with technology-backed solutions, it will help to preserve revenue since the costs of undertaking these onshore activities will be made cheaper with technology or digital labor. Hence, while short-term government spending/funding may be necessary to incentivize transformation, it will eventually lead to a rise in Singapore tax revenues as sustainable business profitability improves in the medium to long term.

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Challenge # 1 - Our Recommendation :

Introduce a Digital Transformation Package, consisting of broad-based tax incentives to catalyze business transformation by supporting significant capital outlay and resources.

i. Enhanced capital allowance for digital adoption

To help enterprises invest in new capital assets (including software development) for digital adoption.

ii. Enhanced deduction for digital skills training

Applicable to expenses incurred for digital skills training, so that employees can acquire technology-based skills.

iii. Enhanced tax deduction for consultancy and professional fees

To help enterprises offset the costs of consultants.

In view of the substantial costs involved and importance of digitalization, the enhanced deduction/enhanced capital allowance on digital initiatives should be structured as follows: 400% for the first $1,000,000 of expenditure + 200% beyond the first $1,000,000 of expenditure.

Challenge # 2 : How can we get enterprises to develop and adopt 5G applications more quickly?

The progressive roll-out of the 5G network by telcos in Singapore within the next two years is expected to fuel greater demand for data centres. A 5G network can be 20 times faster than a 4G network, and promises to fuel greater data consumption and create demand for innovations while pushing other technological platforms to develop more quickly.

This can create new revenue sources across the supply chain as we use analytics and software intelligence to unlock insights and deploy new technologies for more efficient use of material flows to reduce costs.

According to property consultancy Cushman and Wakefield, Singapore has emerged as the third most robust data centre market in a global ranking of 38 countries, and is the only mature data centre market in Southeast Asia. At the same time, technology giants have expanded their cloud infrastructure footprint to facilitate expansion plans over the last few years, making rapid deployment in 5G more pervasive.

A KPMG study on 5G also showed that, in addition to powering consumer mobile devices, 5G can be deployed by enterprises as a private network providing key benefits such as significantly-improved capability, reliability, latency, bandwidth and efficiency. The study also found that three-quarters of industrial companies in the US believe that 5G is going to be a catalyst for their digital transformation in the next five years. Examples of notable private 5G use cases include manufacturing plants, military bases, hospitals and university campuses.

With increasing deployment of 5G technologies, the need for highly-skilled employees with learning agility in this area will continue to grow. Enterprises will need to retain and recruit the right human capital in order to stay relevant in a 5G environment.

More government support is needed to enable faster 5G development and adoption on a larger scale, and to prevent 5G development costs from being passed down to consumers at a later stage. With this support in place, enterprises will be more willing to invest in 5G technology, especially when they realize the significant value it can bring to solving existing challenges and enabling new business models.

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Challenge #2 - Our Recommendations:

a. Provide test-bedding sites for prototyping and development

Explore 5G applications for bus stops, HDB flats, estates etc.

b. Enhance the R&D Tax Incentive Scheme to catalyze the development of new use cases that leverage high-speed 5G networks

i. Allow refundable tax credits

    Refundable tax credits (i.e. cash payout of R&D tax incentive deductions in lieu of enhanced tax deductions) of up to 42.5% of qualifying R&D and     innovation costs (pegged to current R&D Tax Incentive Schem benefits) to support enterprises, especially smaller technology players that have yet to     generate profits. They are critical players in the technology ecosystem as they are nimble and bring fresh ideas to the table. This is similar to schemes in     Canada and Australia.

ii. Extend the definition of R&D under the R&D Tax Incentive Scheme

    To include wider innovation activities, such as the development of data analytics models which have novel applications but may not necessarily involve     novel technologies or methodologies.

c. Set up a 5G technology and innovation fund in order to catalyze innovation and pilot projects in the 5G space

Grants of up to 50% for prototyping and innovation

Similar to the Monetary Authority of Singapore’s (MAS) Financial Sector Technology and Innovation (FSTI) scheme, this 5G fund should be used to provide grants of up to 50% of expenditure for prototyping and innovation.

d. Encourage Singapore enterprises to explore solutions in 5G-ready markets

Extend the Market Readiness Assistance Grant

Singapore will be progressively rolling out 5G networks from 2020. We propose that the Government extend the Market Readiness Assistance grant to provide funding for enterprises to explore solutions or work with partners in 5G-ready countries such as China.

e. Provide tax depreciation (or writing down allowances) for spectrum rights payments

Offset costs to telcos

Similar to other countries, this measure will address an otherwise significant cost to telcos if no tax deduction can be claimed on such payments, as is the case currently. Left unaddressed, such costs may potentially be priced into the products and services for consumers.

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Our point of view on digital tax

Singapore and the challenges of the digital economy

Technological advancements have dramatically changed the global trade of goods and services, as well as internationally-accepted principles governing taxation of cross-border business income.

Today, businesses can transact without being physically present in a market. As this happens, countries find it increasingly difficult to tax business income earned in their territory by foreign corporations under existing international tax frameworks.

We understand that certain countries have started adapting their tax laws to this new reality. As more businesses adopt digitalization strategies, new tax laws that are not limited to GAFA (Google, Amazon, Facebook, Apple) businesses are being put in place, becoming applicable to brick-and-mortar businesses that operate globally as well.

For example, in the field of income tax, different measures have been adopted to expand the taxing rights of source countries. This includes widening the definition of the permanent establishment concept, modification of the source rules, imposition of withholding taxes, and the introduction of new levies as seen with the digital tax introduced by France that is also being considered by other countries such as the UK.

As for indirect taxation, a growing number of countries have adopted the destination principle, requiring foreign residents that sell goods and services in their territories to register for GST purposes. The destination principle is now being considered for application even to taxes on income.

To maintain an international consensus on the rules governing the taxation of cross-border income, the OECD initiated a debate on the tax challenges of the digitalization of the economy as part of the Base Erosion and Profit Shifting (BEPS) initiative.

The initiatives that have already been implemented under the original round of BEPS proposals (BEPS 1.0 proposals) in the last five years have seen the greatest changes in the field of international taxation since World War II, but the new round of proposals to address the challenges of the digitalization of the economy (BEPS 2.0 proposals) looks set to introduce even more radical changes to the international tax framework, including a dramatic overhaul of transfer pricing principles.

Singapore has been the preferred springboard for investments into the Asia Pacific region for numerous reasons, including its business-friendly environment and our political stability. The BEPS 2.0 proposals, if implemented, have the capacity to undermine our position by neutralizing the effects of Singapore’s tax incentives. We believe that it will not serve Singapore’s interests to support direct tax measures that expand the taxing rights of source countries. Any such direct tax measures will inevitably erode our competitiveness as a business and technology hub.

Notwithstanding the outcome of the BEPS 2.0 review, we believe that tax rules and incentives would continue to be key considerations for attracting overseas investments to Singapore and making Singapore a more compelling location for commercial ventures, for both large and small enterprises. While it would be important to calibrate our tax regime and incentives in response to the BEPS 2.0 measures, this should be done when the measures are clearer and the implications to Singapore can be determined.

A holistic approach should be undertaken to review the attractiveness of Singapore as the Transformation Capital of Asia, revolving around our ability to drive transformation and digital capabilities and propelled by a supportive tax regime for such transformation.