Income Tax (Amendment) Bill

Mr Louis Ng Kok Kwang (Nee Soon): Madam, this Bill introduces a wide array of reforms meant to update our income tax policies and provide necessary financial support to our economy. 

 I thank the Ministry for doing a public consultation for this Bill in June 2021 and for publishing in September 2021 its response to feedback received. Indeed, several pieces of feedback were accepted and we see their imprint in today’s Bill. I hope MOF will continue this good practice of holding public consultations and accepting productive feedback.

Madam, I have three points of clarification to make.

My first point is about tax deductions for donations. Singaporeans should donate to social and community causes. To encourage this, the Government is providing tax deductions for qualifying donations up until the end of 2021. This Bill extends the end date of that scheme by two years. I thank the Ministry for it.

However, I would like to raise questions about one kind of recipient: donor-advised funds (DAFs). To my understanding, donations to DAFs are eligible for income tax deductions if the DAF is designated to offer grants to Institutions of Public Characters (IPCs).

DAFs have become more popular around the world. From 2015 to 2019, donations to DAFs have risen by 110% in the UK and 80% in the US. With this growth, lawmakers and experts have criticised the rise of DAF-related “zombie philanthropy”.

This is the trend where DAFs hold on to donations indefinitely and fail to disburse them to charities. The government loses tax income immediately due to tax deductions, while society benefits only belatedly as donations sit untouched for a long time.

On this point, I would like to raise three questions.

First, can the Minister share what is the yearly dollar amount of income tax deductions linked with donations to DAFs for each of the past five years?

Second, can the Minister share what information is typically requested under section 37(3)(b) of the Income Tax Act? In particular, what information has it previously requested when an individual attempts to claim tax deductions using donations to a DAF?

Third, can the Ministry share how does the Government proactively guard against the problem where donors claim tax exemptions, tax deductions for donations to DAFs while the DAFs fail to disburse funds to the IPCs in a timely manner?

I know DAFs are meant to encourage charitable giving and I have no broad concerns with their existence. However, there may be room for stronger tax rules on DAFs that tie the incidence of tax deductions with the distribution of the funds.

Such rules would promote stronger governance of intermediary charity groups and promise more timely benefits for society.

My second point today is about data secrecy. This Bill empowers IRAS to offer people access to highly confidential government data for the purpose of auditing the administration of public schemes, such as of IRAS’ IT systems. Such people can copy government records for conducting their audits.

While this amendment may help IRAS undertake vital audits, I am concerned that it may not promise sufficient safeguards for data secrecy. 

On this, I have two questions on the topic of excess, for the Minister’s clarification.

First, excessive scope. What scenarios fall within and outside the purpose of the audit? Would it be reasonable for a data audit firm to create extensive digital backups stored on their own systems? How does the Government determine whether the backups are excessive in scope?

Second, excessive time. Why do the amendments not penalise permitted people from holding on to copies of government records for excessive amounts of time? Surely, we agree that even IT auditors should not be holding on to confidential government records for longer than necessary.

Copies of government records held in excessive scope for excessive time increase the likelihood and severity of data leaks and data misuse. I hope the Government will take strong action to ensure vital government records are used and copied in a responsible way.

My third point today is about tax deductions for landlords. In this COVID-19 crisis, more than before, Singaporeans have learned the immense powers landlords have over commercial tenants.

Commercial tenants have gone out of business as they struggle to pay their rent. Many groups, such as the Restaurant Association of Singapore and Singapore Tenants United for Fairness, have spoken in chorus about the lack of flexibility from landlords.

The Government has tried our best to urge landlords to do the right thing. But the pleas have often fallen on deaf ears. As a result, in the past year and a half, this House has to pass laws compelling landlords to provide rental waivers, to allow penalty-free termination of rentals and most recently to match rental support provided by the Government.

In this context, the purpose of the new section 14ZH is unclear. It seems to encourage a somehow perverse situation where a landlord can evict a failed tenant and then pay reduced taxes on their rental income.

Why should landlords receive financial incentives when they evict a tenant and keep the property vacant? The outcome is a net loss for society as productive land is left unused.

In addition, how will IRAS ascertain whether a landlord has made “reasonable efforts” to find a new tenant during the vacancy period? This loosely defined clause appears to be the only check in these amendments against the scenario I have just described. It would be important to clarify how IRAS intends to implement it and guard against bad-faith actors. 

Madam, notwithstanding my clarifications, I stand in support of the Bill.

Mr Lawrence Wong (The Minister for Finance): Mdm Deputy Speaker, I thank Members Mr Louis Chua, Mr Louis Ng, Mr Yip Hon Weng and Mr Don Wee for their support for the Bill and their comments and suggestions.

While this Bill is mainly to effect the extension of measures announced at the Budget this year and the various COVID-19 support measures that we have also announced earlier this year, Members have raised other suggestions and broader concerns, so, I will respond to these in turn.

Let me start by responding to the comments on the Budget and COVID-19 support measures.

I should clarify that the Bill gives effect to the implementation of measures that have been announced in the Budget and in the various COVID-19 support packages. These are not new measures. They really detail the implementation of measures that have been announced. 

So, I think Mr Yip had questioned if these exemptions were too generous. But to clarify, these are not new measures, they were announced earlier either in the Budget or in earlier statements and we are implementing them, and you would see that in the implementation of these measures, we have been quite careful in scoping them.

For example, the Renovation and Refurbishment (R&R) measure, mentioned by Mr Yip, allows taxpayers the option to claim tax deductions on qualifying expenditure over one year, instead of the three years which is already allowed under the Income Tax Act today. But we are just allowing now one year instead of three years. There is also no change to the overall cap of $300,000, which applies for every relevant period of three consecutive Years of Assessments. So, basically we are allowing the option to claim tax deductions on an accelerated schedule which provides cash flow support to businesses during this period, but we have not changed the overall caps. 

Mr Yip also asked about tax deductions on provisions on doubtful debts and the diminution of value of investments under section 14I of the Income Tax Act. This is only available for banks and qualifying finance companies, and is subjected to caps to safeguard against excessive provisions. These existing tax deductions aim to promote the overall soundness and stability of our financial system by catering for the building up of adequate provisions to cushion against potential losses in the financial institutions’ loan and investment portfolios. The change, which is to be incorporated into this Bill, expands the scope to include specified loans and securities in line with financial reporting standards. Again, there is no change of the prevailing caps in the Bill.  

Mr Yip was also concerned about tax exemption for packaging costs. I wish to clarify that packaging costs, like any business expense incurred in the production of income, can only enjoy 100% tax deduction. There is no further tax break. 

There were also some questions on the Double Tax Deduction for Internationalisation, or DTDi scheme. That covers, amongst others, specified expenses incurred in the design of packaging for overseas markets. These expenses are design costs, not packaging costs. Such design costs include, for example, cost of third-party consultancy fees to design packaging for overseas markets. As part of the Budget 2021 measure, we have announced that design costs would be added to the existing list of automatic qualifying expenses under the DTDi scheme. Again, the overall cap remains unchanged at $150,000 per year for the list of qualifying expenses which taxpayers can claim in their tax return without the prior approval of Enterprise Singapore under the DTDi scheme. 

Mr Don Wee had asked about qualifying expenses in relation to virtual trade fair that qualify for this scheme. Expenses incurred by firms on overseas advertisement and promotional campaigns on social media, including the engagement of influencers, are covered under the DTDi scheme. In this Bill, we will enhance the scope of the DTDi scheme to cover specified expenses incurred to participate in approved virtual trade fairs. These specified expenses include third-party costs for the design and production of digital collaterals and promotion materials for the approved virtual trade fair, and logistics costs incurred to send samples overseas to potential clients met at the approved virtual trade fair, subject to conditions. So, as you can see, we are talking about expanding the scope of qualifying expenses but we have continued to keep a cap on the overall amount at $150,000.

Mr Wee asked if the double tax deduction, or DTD scheme for qualifying upfront cost attributable to retail bonds issued under MAS’ Bond Seasoning and Exempt Bond Issuer Frameworks can be extended to green bonds. The answer is yes. Green bonds which meet the qualifying criteria for the DTD scheme can qualify under the scheme.

So, these are to address all the comments about Budget measures, COVID-19 measures which had been announced, but we are talking about the implementation and we want to assure Members that in working out the implementation details as reflected in the amendments in this Bill, we have been careful to make sure that the schemes are carefully and properly designed. 

Mr Don Wee then also asked about the further extensions of some of the schemes, beyond what had been announced. For example, he asked if the option to accelerate the write-off of the cost of acquiring plant and machinery can be further extended for another year, in view of the current situation. I should say that each time we ask for additional requests for help for businesses or individuals, we should look at schemes in totality. It is not just one particular scheme but we have other schemes in place overall to encourage businesses to invest in new and emerging technologies to sharpen their competitiveness.

For example, in Budget this year, we had extended the enhanced support levels of up to 80% for existing enterprise schemes like the Productivity Solutions Grant and the Enterprise Development Grant, to end of March 2022. We continue to monitor the situation closely and review all our schemes, as needed. Should there be a need to extend any measure, any such extension will then be announced at Budget 2022 and then it will be effected in next year’s Income Tax (Amendment) Bill. So, it is an ongoing process. 

Next, let me address the specific comments raised on other amendments outside of Budget and COVID-19 support measures. 

First, Mr Louis Chua asked about the new section 10P. This is a scenario where trading stock is appropriated for capital purposes. I must clarify first that this is an existing treatment. IRAS already practices this. But this is to codify the existing treatment, which is also similar to what is done in Hong Kong and the UK.

Mr Chua asked about the disposal of property, plant and equipment. That is capital in nature. So, it is not considered as business trading stock in the first instance. So, there would be no appropriation of trading stock and section 10P does not apply under such a scenario.

Mr Louis Ng asked about the new section 14ZH in the concerns that it may inadvertently reward a landlord who evicts a failed tenant and keeps the property vacant. This section is in line, again, with the existing tax treatment that IRAS applies up to now. The legislative clarification provides tax certainty for the taxpayers, namely landlords who are taxable on their rental income. So, under this section, as long as the landlord demonstrates with supporting evidence that he has made reasonable efforts to secure a tenant during the vacancy period, IRAS will allow tax deduction for qualifying expenses such as property tax, repair, insurance and maintenance of the property incurred during the vacancy period.

So, what does the landlord have to demonstrate in order to show reasonable effort? For example, IRAS would request a taxpayer to provide supporting evidence such as documents showing that the repair was made to the property to keep it in lettable condition, or that a property agent was appointed to find a tenant or that the property had been advertised for rent. And if IRAS is satisfied that reasonable efforts have been made to seek a tenant during the vacancy period, then this section will apply. But if IRAS is not satisfied that reasonable efforts have been made to secure a tenant, then the tax deductions will not be allowed.

Next, let me address the points raised by Mr Ng with regard to Donor Advised Funds (DAFs). Mr Ng asked for data on the amount of income tax deductions linked with donations to DAFs. We do not track this data specifically because tax-deductible donations are currently tracked based on IPC and approved grant-maker status, and this is in line with requirements for the receipt of tax-deductible donations under the Charities Act and the Income Tax Act respectively.

I understand Mr Ng's concerns over ensuring the timely disbursement of funds by DAFs to IPCs. So, for DAFs which are themselves IPCs, they have flexibility to disburse the funds for the charitable programmes, no different from other IPCs. But I think Mr Ng is more concerned about DAFs which are approved grant-makers. For such DAFs, they are required to disburse the tax-deductible donations to IPCs within five years from receiving the donations.

The only exception is when an endowment fund is being set up by the approved grant-maker, in which case the approved grant-maker can disburse the tax-deductible donations to IPCs over a longer period, obviously because they are setting up an endowment fund.

To ensure accountability, all grant-makers are required to submit annual reports to IRAS on the tax-deductible donations received and disbursed. Thus far, all grant-makers have disbursed the donations received to IPCs according to the disbursement requirements within the specified number of years. So, Mr Ng can be assured that we do not have this scenario where donations are being made to grant-makers, but they hold back on disbursing grants to the charities.

Mr Ng also asked about the information requested by IRAS when an individual attempts to claim tax deductions on their donations to a DAF. Again, IRAS does not separately request for information on tax-deductible donations to a DAF. If the DAF is an IPC or an approved grant-maker, the same reporting requirements applicable to IPCs and approved grant-makers would then apply respectively. 

On the issue of tax deductions for donations, Mr Wee had proposed for the Government to tier the tax deduction rates based on the donation quantum. I understand the intent of such a suggestion but such a tiered system would then primarily benefit the higher-income as well as larger IPCs who have the resources to engage higher-income donors. Mr Wee's suggestion to provide 300% or 400% tax deductions will also result in more tax revenue forgone.

And Mr Louis Chua likewise had suggested to make permanent this tax deduction. Again, I appreciate the intent of Mr Louis Chua and Mr Don Wee to promote philanthropy and charitable giving. But we have to consider the merits and trade-offs carefully, bearing in mind that we currently have one of the highest tax deduction rates for donations in the world and we want to make sure that any scheme we have in place is fiscally sustainable.

In addition, besides tax deduction, the Government also adopts a multi-faceted approach to encourage charitable giving within the community. So, let us not just look at tax alone. Let us look at what we do with regard to non-tax measures as well. And we will continue to review both the tax and non-tax measures to do more for charitable giving.

Next, several Members asked about data confidentiality issues regarding audits on the administration of public schemes. In my speech, I mentioned that safeguards are provided for in the Bill to minimise the risk of unauthorised disclosures in the misuse of tax data. The audits provide independent checks to ensure IRAS disburses payouts correctly to their intended beneficiaries and the data provided to auditors will be limited to what is necessary for quality assurance of that specific scheme.

For example, annual revenue data would be provided to auditors to determine the eligibility of SMEs for the Rental Support Scheme. As revenue size is not part of the scheme designed for the Jobs Growth Incentive, such data will not be shared with auditors for the Jobs Growth Incentive. So, the Comptroller of Income Tax will have the discretion to decide on the extent of information that needs to be made available, subject to the safeguards that I have explained.

More importantly, as I mentioned earlier in my speech, the data made available will not be identifiable. Various methods like tokenisation would be used to prevent the disclosure of individual data. Authorised persons who are granted access to protected data will be prevented from retaining or making copies of the data provided in the first place. In other words, they can only access data on IRAS issued devices and only within IRAS' premises. So, there is no issue of external auditors storing data for excessive amounts of time.

Authorised persons who are granted access to protected data would be required to make and subscribe to the Declaration of Secrecy. It would be an offence under the ITA and the Official Secrets Act for authorised persons to disclose any protected information to other parties.

Appointed audit firms will also be required to adhere to contractual terms on data confidentiality and ensure that the use of confidential information is only for authorised purposes. In the event of a breach, the appointed firm will be liable to legal actions under the terms of the appointment contract and penalties under our Acts governing the data.

Let me assure Members that the Government takes this issue very seriously and safeguards would be put in place to protect the confidentiality of taxpayers' information and to minimise the risk of unauthorised disclosures and the misuse of tax data.

Next, Mr Yip asked about the methods of audits on the disbursement of schemes like the JSS. IRAS, as the administrator of the JSS, had instituted a robust anti-gaming framework, making use of data from multiple sources to identify and detect abuse. While we are unable to share the specifics of IRAS' anti-gaming operations for good reasons – if you tell people what we are doing, I think it will encourage more gaming behaviour – this framework has been in place since the first JSS payout in April 2020. For cases suspected of higher fraud risks, IRAS requires the firms to authenticate their CPF contributions before the payouts are released. Cases with strong corroborative evidence to suggest abuse are reported to the Commercial Affairs Department (CAD) for further investigation and prosecution.

I also thank Mr Yip for his support for the introduction of the Protection of Informers, or POI provision in the Income Tax and other tax Acts. Mr Yip asked about whistle-blower protection in other statutes. 

In fact, the proposed POI provision in this Bill is modelled after similar provisions in the Customs Act and the Cybersecurity Act 2018. The legislative amendment to better protect informers will also apply to other tax Acts, beside the ITA. 

Mr Wee asked how we will prevent people with malicious intent from falsifying claims against their rivals or competitors. 

Let me assure Members that IRAS does not act on baseless or frivolous allegations. IRAS will carefully examine not only the information provided by an informer, but also other information available to IRAS and assess the validity of any allegations. IRAS will only commence an investigation when it assesses that a prima facie case exists for tax evasion and if the information provided by the informer proves to be reliable and accurate.

Apart from IRAS' internal process, the POI provision includes a legislated safeguard, similar to the POI provisions in other domestic legislation, which will mitigate against the risk of informers making false claims. In particular, the safeguard provides that the Court may require the production of the original complaint and full disclosure of the informer's identity only if the Court is satisfied that the informer wilfully made in his complaint a material statement which he knew or believed to be false or did not believe to be true; or justice cannot be fully done between the parties without the disclosure of the informer's identity. So, these safeguards are in place.

Let me now turn to some of the broader comments raised by Members.

Mr Louis Chua mentioned wealth taxes and more reliefs and help for SMEs. I would say, in terms of direction, what Mr Louis Chua has suggested is completely aligned with MOF's thinking. We want to address wealth inequalities and we want to do more to support our SMEs. So, in terms of policy intent, we are completely aligned.

But to address wealth inequalities, what exactly do we do? What sort of measures do we put in place? That is something that we will have to study carefully. In fact, we already have a form of wealth tax by way of the tax levied on private residential properties today which is tiered according to annual value (AV). So, we already have that structure in place in our property tax system.

I am unable to reveal what we are thinking about now. I think that will be premature and I do not want to pre-empt the Budget next year. But obviously, we are continuing to consider all options to address, as I have said, number one, income and wealth inequalities; and number two, what more we can do to support SMEs.

Where SMEs are concerned, I think the data is very clear. I think it is useful to bear in mind when you look at the data, it is not a homogenous group; it is very diverse. And therefore, if you look at averages or you look at effective tax rates, one can get a misleading picture. Because, in fact, the vast majority of SMEs, vast majority of them, pay very little tax. That is the reality.

We also need to be careful when we look at reliefs and exemptions for SMEs that we do not want to have inadvertent consequence. This discourages them from growing because if they stay small, they pay less tax. I think that will be unhelpful for our SMEs to scale up and grow and develop to become global champions in their own right.

So, we need to find the right incentives to support them but at the same time, encourage them to scale up and grow. So, that is something that MOF, together with our economic agencies, continue to study carefully. And we will look not only at tax measures but also at non-tax measures, in other words, the kinds of support schemes we can provide to them through grants, loans and equity. 

Next, Mr Yip also highlighted the caution that we need to ensure that we spend in a fiscally sustainable manner. And he is absolutely right because beyond our short-term fiscal response to COVID-19, we are mindful of our long-term fiscal responsibility to maintain a balanced and sustainable Budget position. Our prolonged fight against COVID-19 has been facilitated greatly by our ability to tap on Past Reserves for extraordinary measures to protect lives and to safeguard livelihoods.

But beyond these emergency conditions, where it comes to recurrent expenditure, ongoing expenditure, I think it is very important that we maintain the principle to fund them through recurrent revenues. As our recurrent expenditures continue to go up for a whole range of reasons, including rapidly ageing population, the need for more healthcare, to make growing demands for social spending, then we have to ensure that we look at raising our recurrent revenues to meet these recurrent expenditures. So, there is no avoiding this.

Of course, it is never easy to implement a tax increase, let alone a GST increase. The Government has announced that the GST rate increase will take place sometime during 2022 to 2025. This remains unchanged and we will continue to consider all factors, including our fiscal needs as well as the prevailing economic conditions in deciding on the timing of the GST rate increase.

At the end of the day, we must have the courage to make the difficult decisions that are necessary to uphold a culture of fiscal stewardship and fiscal responsibility. That is how we best serve the interests of Singaporeans both in the current as well as in the future generations.

Mdm Deputy Speaker, I believe I have addressed Members' concerns and questions. Mdm Deputy Speaker, I beg to move.

Source: Hansard