The article is published in TODAY online on 24 February 2015.
The late Steve Jobs of Apple once said that "innovation distinguishes between a leader and a follower". If Singapore is to lead against its competition, then surely greater innovation must be the key to Singapore’s economic growth over the next decade.
In this year’s Budget speech, the word "innovation" appeared a grand total of 27 times while ‘productivity’ was used 20 times. It seems that the tide of focus has finally shifted from promoting productivity to encouraging more innovation.
Even more encouraging is that much of the focus on productivity and innovation is now in relation to growing local enterprise, with multinational companies receiving little mention in this year’s Budget.
As Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam noted, the next phase of Singapore’s restructuring will see increased support for all efforts to innovate and internationalise – whether from upgrading basic solutions or in achieving breakthroughs.
The Budget proposal therefore outlines plans to support everything from technology research to product development and the creation of new brands as well as their related marketing.
UNDERSTANDING THE DIFFERENT FACES OF PRODUCTIVITY
New this year is an analysis to understand the seemingly lacklustre results from the productivity drive of the last five years.
The Minister noted a stark difference between productivity growth in industries which competed internationally, as opposed to those such as construction, retail and F&B which only operated domestically.
Clearly, there seems to be a two-speed economy where it came to productivity. Growth rates averaged 5 per cent per year for the former, as opposed to under 1 per cent for the latter.
This year’s Budget thus attempts to kill several birds with one stone – promoting productivity by encouraging quantum growth through innovation and adding internationalisation as part of the recipe for this economic growth.
Mr Tharman also noted that Singapore’s tight labour market with its 2.9 per cent rate of unemployment in 2014, must surely be a motivator in itself for companies to seek alternative sources of human resources.
Local businesses are therefore free to manage their costs by achieving greater productivity, or for some sectors where more cost effective, seek lower labour costs through investments in regional ASEAN markets.
How timely this is, given the advent of the ASEAN Economic Community later this year which also promises greater cross-border labour mobility.
Other measures announced this year reinforce this theme. Examples include the enhancement of the Double Tax Deduction for Internationalisation scheme to cover salaries for Singaporeans posted overseas as well as the new International Growth Scheme tax incentive to help Singapore businesses venture abroad.
While not specifically targeted at internationalisation, enhancements to tax allowances from 5 to 25 per cent for companies making acquisitions and the extension of this Mergers and Acquisitions scheme introduced in 2010 for another five years is as Mr Tharman noted, a ‘useful strategy for many companies to acquire scale, attract talent and compete effectively overseas’.
Nevertheless, it is somewhat disappointing that while incentives to promote innovation is the right step forward as Singapore matures from a value-adding to a value-creation economy, the Budget contained no specific measures to recognise home grown brands that have the potential to inspire newer brands.
Building strong Singapore brands is a key factor in internationalisation. It would have been a much more complete package if there were a new tax incentive to recognise and promote strong Singapore internally generated brands.
IMPACT OF HIGHER INCOME TAXES
Rather unexpectedly after some years of declining personal tax rates worldwide, Singapore joins a rare club of countries which has seemingly gone into reverse gear.
Come Year of Assessment 2017, the highest rate of personal income tax will be 22 per cent. In comparison to Singapore’s oft-compared competitor Hong Kong – which has a highest personal income tax rate of 17 per cent - a 3 per cent gap now widens to 5 per cent.
While at first sight baffling as it makes Singapore less tax competitive relative to Hong Kong in attracting top talent, the reality is that these changes will only affect local and international talent with taxable incomes above S$160,000 per year.
This means that for taxable incomes of about S$250,000 per annum, the additional tax payable is S$400. For an income earner of $800,000 per annum, the changes mean an additional S$10,400 in taxes.
Representing an effective tax rate of about 19.5 per cent, this is still very attractive when compared to individual tax rates of other developed nations.
The reality therefore, is that most taxpayers in this tax bracket are likely to consider these marginal increases in view of other considerations. These include air quality levels, availability of childcare, traffic and other quality-of-life considerations.
Any impact on attracting and retaining these taxpayers to live and work in Singapore may only be known over the longer term.
The article is contributed by Tay Hong Beng , Head of Tax at KPMG in Singapore. The views expressed are his own.