Debate on Annual Budget Statement 2022

MP Louis Chua

Mr Chua Kheng Wee Louis (Sengkang): It was the best of times, it was the worst of times. Mr Speaker, those were the opening lines from the novel by Charles Dickens, A Tale of Two Cities. Lines which I find to be quite apt to describe the situation we find ourselves in today. Two years into the pandemic, we are still battling the latest wave of infections brought about by the Omicron variant, with many of our healthcare workers struggling to cope with the stressful working conditions today. COVID-19 fatigue has also meant that many of us cannot help but feel overwhelmed at times even as we try so valiantly to live with endemic COVID-19.

On the economic front, it seems that economic growth is starting to pick up again. Singapore’s GDP grew by 7.6% in 2021, with the Government projecting an above-trend 3% to 5% growth for 2022, with total employment seeing the highest quarterly growth since 2014 of 47,400 workers in the fourth quarter. Yet, the rosy headline numbers belied the risk to the fragile global and local economic recovery, not least because of geopolitical tensions and rising concerns over inflation, among others, and one cannot rule out the tail risk of a recession in the near future. Inflation and the rising cost of living, in particular, have been of grave concern to policymakers globally and the man-on-the-street alike. As shared in one of my speeches in November last year, it was unclear if the current inflationary pressures in the market are transitory or permanent, though the US Federal Reserve has since then dropped the term “transitory” in its description of inflation and with concerns about stagflation now appearing in the market lexicon instead. 

Locally, the MAS has been concerned enough about inflation to surprise the market with a tightening of monetary policy in October, given that external and domestic cost pressures are accumulating. And soon after its first tightening in three years, MAS acted again in its second tightening in three months, given upside risk of inflation. Now, even if what Minister of State Low Yen Ling shared in this House ensues and that inflation is expected to ease in the later part of this year, it does not mean prices are going to come down. It just means that prices will still rise but not jump and still continue to eat into the real incomes of Singaporeans. Who can forget the slew of price increase signs being put up at coffeeshops since the start of the year and the more than 30% increase in fuel prices or the 23% increase in electricity prices since a year ago?

In the context of rising inflation and an uncertain global economic recovery, a GST hike, while delayed, would still be counterproductive, given the potential drag on private incomes, consumption and, ultimately, our GDP. As my fellow Workers’ Party colleagues have shared earlier, there are alternative revenue sources that can and should be considered beyond the regressive tax that is GST, with options to use more of Singapore’s existing physical headroom, for example, having the added benefit of minimising the impact to our local households and economy alike.

My speech will thus focus on three main areas which warrant urgent consideration.

Minister Wong made adjustments to residential property taxes and additional registration fees (ARF) for cars as part of Singapore’s answer to wealth taxes. I welcome these changes. When viewed from a glass half-full perspective, it is a step in the right direction when it comes to tackling wealth inequality and strengthening our social fabric – albeit a small step. However, when viewed from a glass half-empty perspective, the measures are a tokenism rather than a meaningful attempt at wealth taxes in Singapore.

Higher property taxes and ARF are expected to result in a $430 million increase in annual revenues and, even if we include higher personal income tax rates, the total annual increase is just about $600 million. This is significantly below what some academics have put forth as possibilities in our conservative estimates of what the net wealth tax could bring at about $1.2 billion annually. For example, in a November 2021 CNA article, Assoc Prof Walter Theseira from SUSS noted that a wealth tax might conceivably pull in a similar amount to raising the GST by a few percentage points, while a Bloomberg article on 16 February quoted Mr Christopher Gee, Senior Research Fellow at the IPS, as sharing that a similar wealth tax rate in Singapore, as that of Switzerland presumably, would generate $2.7 billion in Government revenues.

Consider the case of property taxes which, as the Minister said, is currently Singapore’s principal means of taxing wealth. As what a Business Times correspondent Ben Paul shared in his article, “As an owner/occupier of a modest apartment in the core central region, property tax is not a particularly big expense for me. In fact, it is nothing, compared to the maintenance fees and costs of general upkeep for my unit.”

While the increase in the headline marginal property tax rates appear high, the actual impact on the households involved are unlikely to be material. As noted in Annex C-2 of the Budget Statement, an owner-occupied condominium in a central location is only expected to see an increase of $200 a year while a very large landed property is expected to see a $15,400 increase. The corresponding numbers for non-owner occupied properties are $1,004 and $19,200 respectively. Based on my analysis, a centrally located condominium in Cairnhill that is being leased out as an investment property, only raised rents by 2% to offset the higher property tax rates while that of a luxury development located on Nassim Road commanding monthly rentals of almost $20,000 a month need only raise rents by 7% to offset the higher property taxes. To put into context, rents in 2021 for a private residential property already rose by 10%.

The other tax change is that of introducing a new ARF tier for cars. For a Bentley Flying Spur, which retails for almost $900,000 without COE, the new ARF tier is expected to increase ARF by about $59,000, a fairly large number in itself but represents just about 6%-7% of the cost of the car. For someone who is prepared to pay almost $1 million for an asset that depreciates rapidly over 10 years, is it even meaningful in the grand scheme of things for this person?

Thirdly, higher personal income tax rates are not wealth taxes per se. But I do agree with the principle that those who earn more should contribute more and it is a fine example of what progressive taxes look like. However, the increase appears to be very modest once again, once you work through the mathematics. For example, someone making $1 million in chargeable income would pay a grand total of $5,000 more in personal income taxes or 0.5% of chargeable income, while someone making $1.5 million would only pay $15,000 more or about 1% of chargeable income.

I would even argue that the last increase in personal income tax rates in Budget 2015, where the top marginal personal income tax rates were raised to 22% among others, was an even bolder move than what we have today, raising more revenues at $400 million a year back then, as compared to $117 million a year, with today’s change. Also bearing in mind that from 2015 to 2019, that is, the latest available year on SingStat, the number of individuals with assessed income of more than $300,000 has increased by 22% within this timespan as well.

I recognise that the Government will continue to study the experiences of other countries and explore options to tax wealth effectively. And I sincerely hope that more meaningful efforts to change our tax system and raise wealth taxes can be made sooner than later. Yes, I agree that taxing wealth has its challenges. But consider a hypothetical case of a multi-billionaire tech founder who made a windfall after his startup’s IPO and has retired from the firm. From time to time, he collects dividends as his income while continuing to hold shares in the listed company, which accounts for the vast majority of his wealth.

Meanwhile, he is renting multiple luxury apartments instead of owning just one place of residence. And does our tax system adequately capture the wealth of what could be one of Singapore’s richest? Would this person even be paying income or wealth taxes at all? If we think about the Forbes 50 richest list in Singapore, just how much of their wealth is in their residential address or the cars that they drive?

As highlighted by a 2018 OECD report on the role and design of net wealth taxes, which provide for certain tax design recommendations, in countries where capital gains are not taxed, there may be a stronger justification for levying a net-wealth tax. A similar argument can be made for countries that do not levy taxes on inheritances. Singapore will fit into both of these cases as a country with no capital gains tax, no tax on dividends, no inheritance tax, no estate duties and still has one of the lowest effective personal income tax rates globally. We must guard against only going through the motions when we move towards addressing wealth inequality, while still leaving the least fortunate among us still pleading, “Please, Sir, I want some more”.

Let me now speak about corporate income taxes amidst BEPS 2.0, of which Singapore is one of 141 members of the OECD G20 inclusive framework on BEPS.

Corporate income taxes have consistently been the largest contributor to the Government’s operating revenues and 2022 is no different, at an estimated $18 billion, or 22% of operating revenues. However, while part of the goals of this Budget is to build a fairer and more resilient tax system where those with greater means contribute a larger share, could there be more scope for certain corporates to pay their fairer share of taxes, especially against the context of a looming GST hike, which, ultimately, is borne by the end-consumer and not the corporates?

To be clear, I fully recognise that many local SMEs and small businesses, especially those in the retail and F&B scene, have been struggling to make ends meet amidst the pandemic and the changing safe management measures (SMM) rules over the past two years. And I applaud efforts by the Government to strengthen our local enterprises. However, it is interesting to note that while more than $29 billion of job support scheme funding was provided to corporates in the last two years, it appears that corporate profitability, as a whole, did not fare too badly.

In FY 2020, while the Government expected CIT revenues to fall by 18% year-on-year or around $3 billion to $13.7 billion in FY 2020, the actual CIT revenue turned out to be $16 billion, not too far from FY2019 levels. Revised FY2021 CIT revenues are expected to exceed FY2019 levels at $17.5 billion, growing by 9% year-on-year or $1.4 billion, and this is expected to continue into FY2022, reaching a new high of $18.2 billion.

This brings me to my key point on BEPS 2.0. I acknowledge the Minister’s comments that the Government needs more time to study these issues thoroughly and will announce changes in the corporate tax system when we are ready. However, if things go according to plan, BEPS 2.0 is already on the horizon, with the implementation of the two-pillar solution targeted to start in 2023, that is, next year.

I thank MOF and IRAS for patiently addressing my various Parliamentary Questions over the past year on this issue and I believe the various public officers involved have done plenty of detailed analysis and scenario planning on this issue by now. With less than a year to go before the implementation of the two-pillar solution and with OECD already having published in December last year the model rules for domestic implementation of the 15% global minimum tax, my question is, what is the Government’s current estimates or range of estimates of the net impact of pillar one and pillar two to our CIT revenues?

While Minister Lawrence Wong noted that pillar one will result in a negative revenue impact to Singapore, this is, firstly, limited in scope, as it is expected to apply only to global MNEs with a global turnover of more than €20 billion, with just around 100 of such companies globally. Secondly, it is only 25% of the profits in excess of 10% of revenues that will be allocated away. And, thirdly, I do not believe that profits are being artificially inflated here in Singapore, given rigorous transfer pricing rules.

On the other hand, for pillar two – this applies to a much larger group of MNEs. Any company with over €750 of annual revenue would now be subject to a global minimum corporate tax. In Singapore alone, the Government shared that there are over 1,800 such MNE groups operating here that are unlikely to be affected. As I have shared in this House last year, I hope that the Government will view the global minimum tax reforms as an opportunity rather than a threat, given Singapore’s strong non-tax advantages and attractiveness to MNEs, bearing in mind the current average effective corporate tax rate is closer to 3% in YA2019.

If we look at the subset of non-SMEs or those with revenues exceeding $100 million and making an accounting profit, then, in YA2019, the average effective corporate tax rate is even lower, at 2%. Now, profitable non-SMEs contributed $10.4 billion or 64% of total CIT paid by all companies. If we assume a 15% tax rate instead, this could hypothetically balloon seven times to $71.5 billion. Of course, this is purely hypothetical since, obviously, not all companies will be scoped into the rules and there could be some slippage from both pillar one and pillar two rules and the actual impact will be much lower. But the point remains that, technically, even a small shift towards the proposed global minimum rate of 15% could result in significantly higher corporate tax receipts for the Government.

Beyond the dollars and cents, the more important conceptual point to me is this. If a global MNE is already operating in Singapore, what incentive would it have to incur additional relocation costs, when the minimum corporate tax rate of 15% would be normalised globally? And with tax considerations out of the way, why would not a global MNE keen to tap on the attractive growth prospects in Asia, base their headquarters here in Singapore? The World Bank has consistently placed Singapore as among the best places in the world to do business and I am confident that our competitive strengths and strong non-tax advantages will continue to provide a competitive edge to companies seeking a place of business.

Lastly, let me touch on the other elephants in the room, the NIRC and our reserves. It is comforting to note that instead of a $54 billion draw on the reserves, as announced in Budget 21, the actual amount we utilised across three years was $43 billion, savings of about $11 billion. It was previously said that we have drawn on our reserves equivalent to over 20 years of past Budget surpluses. We have used a generation’s worth of savings to combat a crisis of a generation.

I asked Deputy Prime Minister Heng during last year’s Budget debate, after accounting from the draw, where would our reserves be, compared to five years ago and 10 years ago, though I do not think there was a direct answer to the question. Hence, I would like to ask Minister Lawrence Wong, after considering the $43 million drawn on our past reserves, are our reserves today higher or lower, compared to five years ago? I ask this because it is important to put into context the growth in our reserves as we debate the source of funding for our future expenditures, even if the Government continues to be guarded over disclosing the absolute size of the reserves itself. It is not that I disagree with the need to be prudent and I agree we should not take our reserves for granted. But just looking at the MAS Official Foreign Reserves (OFR), they stand at around $566 billion as of January 2022, an increase of $185 billion or close to 50%, compared to two years ago. Temasek’s net portfolio value as of March 2021 stands at $381 billion, up to $75 billion or 25%, compared to a year ago. And I believe GIC would have grown its portfolio as well, given generally supportive market conditions in the last two years.

Yes, I understand that the design of the NIRC framework is to provide a stable, sustainable source of income to our Budget, smoothed out over market cycles. But it is also helpful to remind Members of this House that our financial reserves grow not just from the balance 50% of NIRC not utilised, but also from inflows directly into the reserves, such as from land sales which averaged around $13 billion a year in the past 10 years and from MAS interventions in the foreign exchange market to dampen appreciation pressures, given Singapore’s excess of domestic savings, over investments and persistent capital inflow.

If the goal of this Budget is to ensure a fairer revenue structured, that means everyone chips in and contributes to a vibrant economy and strengthen the social compact, but those with great means contribute a larger share. If so, should we not revisit the contribution of our investment returns as opposed to the individual Singaporean who is grappling with the rising cost of living? Over the past five years, the NIRC provided an average revenue stream of around $17 billion or 3.5% of our GDP. If the assumption is that Government spending is at 18% of GDP today, but excepted to go to more than 20% of GDP by 2030, could we not raise the contributions from the NIRC to the Budget and raise its share of GDP too?

I hope that Minister Wong will agree with me that raising the NIRC contribution rate would result in a draw down of the reserves and would in fact still allow us to continue building up reserves.

So, to belabour with the point, this will not mean that we will not get a steady stream of income from the reserves to benefit today’s’ generation of Singaporeans and our children and our grandchildren. On the contrary, as Minister Wong has said, it is about being able to invest even more in our people and social infrastructure. It is to me about ensuring that we invest not only in financial assets overseas but in our people, Singaporeans, who to me are the most important resource of this country. It is simply about sustaining the value of our financial reserves and sustaining the lives and livelihoods of our fellow Singaporeans. Mr Speaker, allow me to conclude in Mandarin.

(in Mandarin): We are still amidst the COVID-19 pandemic. While economic growth seems to have started to pick up again, there are also some underlying concerns. Hence, we are very concerned about the risk of raising GST when the pandemic is still on-going and there are many uncertainties with the economic recovery. Instead of raising GST, Workers’ Party (WP) MPs suggest that alternative sources of government revenue be considered.      

In Budget 2022, the Finance Minister will adjust the Additional Registration Fee for luxury cars and the Property Tax as a way to collect wealth tax. While I welcome these changes, I also feel that there is much room for improvement.  

I talked about Corporate Tax and Net Investment Returns Contribution (NIRC). Our effective Corporate Tax rate is close to 3%, well below the global minimum tax rate of 15% announced by the OECD.

If Singapore imposes a global minimum tax of 15% on MNCs subject to the tax reform, it will not only raise our corporate tax revenue significantly, but also achieve the objective of this Budget, which is to build a fairer and more resilient tax regime where people wealthier will contribute more.

Singapore has strong non-tax advantages and appeals to MNCs. Therefore, the Government should view the tax reform on global minimum tax rate as an opportunity, not a threat.       

Finally, I suggest that we consider increasing NIRC to our Budget. This will not reduce our reserves; instead, we can continue to grow our reserves steadily while ensuring that we use our national resources more effectively to help sustain Singaporeans’ livelihood. Our people are Singapore’s most important asset.

28 February 2022

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