Behind all the success of Singapore, there is one point of contention which foreign countries would point their finger at whenever the discussion of Singapore’s successful track record in attracting MNCs to this little island comes around. They refuse to acknowledge that Singapore is great for business, they frown and wag their finger at…

Yes, Singapore’s low tax rates, and yes, the country had been flagged by the OECD as a tax haven and gray listed[1]. Singapore is now on the whitelist. However, being a tax haven is something the government vehemently denies and provides evidence that Singapore is not a BVI or a Panama. If you always thought that Singapore was a paradise island without significant economic activities, a visit to the city state would immediately change your mind.

To start off, Singapore’s headline corporate income tax rate is 17%. Comparing the tax rate to countries like the HK, US and UK, you may be surprised that Singapore’s tax rate isn’t that low.

The US is a tax haven (gasp) [2],[3] and so is the UK [4](further gasp).

You might think this article is written to defend the island’s numerous tax incentives scheme like the tax exemption schemes, pioneer status…

No, there is no need to defend the country’s innovative approach to enabling REAL businesses to seek out Singapore’s tax incentives. It is never immoral for a business/company to seek out viable alternatives for it to grow its business.

A government cannot invest or dole out cash like venture capitalists to invest in businesses/companies in order to get returns for its country. There may well be a sovereign fund, but the sovereign fund is still a resource that belongs to the taxpayers.

Tax credits, tax incentives and tax benefits are investments made into companies in lieu of cash which exists ONLY IF you qualify for it. Tax incentives do NOT work if your business cannot generate a profit. Tax incentives are only realised when there is a tax liability.

In this way, a government is a better investor than a venture capitalist who invests in HOPE of getting a return.

Returns to the government from tax incentives given exceeds the returns that an investor invests in a company. They are:
a. GDP growth b. Employment of its people c. Income tax earned from employment of the people d. Indirect tax earned from the goods and services purchased by the people employed e. The purchase of goods and services from local suppliers f. The increase in capital investment g. The possibility of import of Intellectual property developed in the country h. The support of support services like banking, financial services, logistics…

The top line number any government would strive for is the…Unemployment number [5]. Your GDP growth rate may be great, but you want a healthy employment rate and a well paid citizen.
An example is Hong Kong where they enjoy good GDP growth and low unemployment rate but more than 1.3 million Hongkongers live in poverty according to the South China Morning Post report and the reports of the cage people and people waiting for proper and affordable housing is legendary [6].

When a country decides on a low tax rate and high tax incentive tax regime, it has given much thought to how much returns it would get for its investments into the developing the country into a place that is attractive to an MNC.
There is no use for a country to provide high tax incentives without the proper infrastructure (language, safety, currency, ease of transition…) and the necessary factors of production to be in place for a company particularly a MNC to locate its operations in that country.

Would you want to enjoy 0% tax rates and breathe in smog everyday?

Just like a venture capitalist or a bank pondering on doling out cash, it would consider the risks and returns. The cost of capital would be a number that reflect those considerations.

A more viable business opportunity would thus attract a higher venture fund and a lower borrowing interest rate. It will be no different than a country that will scrutinize and approve the companies that would enjoy the preferential tax rates. The more viable a business (large employment numbers and high capital investment), the lower the effective tax rate the company would enjoy!

Of course, the high tax countries would gesticulate its disapproval by attacking the transfer pricing policies which would shift profits to lower taxed countries.

As explained above, countries have to remember why they want companies to grow in their country, why do they want to encourage entrepreneurship? The corporate tax revenue numbers is not the most critical element in budgeting for its expenditure, it is the EMPLOYMENT numbers and GOOD employment remuneration that these countries should focus on!

What benefit does a country like Singapore have if S$1B of NON TAXABLE income is transferred to the island? Does the country get richer? The economy does but the budget does not stand to gain from income received in Singapore that are not taxed!

Take China for example, its fight for more revenues to be trapped in China and subjected to higher tax rate is well known. An MNC that pays a higher tax in China would only enable the Chinese government to accumulate a higher budget surplus. Would the government pass on these tax surpluses to the people that earned them for the government?

Those tax dollars were earned by the blood and sweat of the Chinese people. Rather than fighting for more taxable income, a government that can negotiate a higher salary for the workers in lieu of higher taxes would do its economy MORE good than harm.

It would have better workers and a better economy by having free market capitalism at work with more dollars earned and spent by its workers.

An enlightened government would return tax dollars to its people and that’s what the Singapore government did with the wage credit scheme, special employment credit scheme and the workfare income supplement scheme.

A higher tax regime would lead to a fat government and a wasteful government. If high tax rates were the way to go, Bangladesh with 35% corporate tax rate would be the best economy in the world and enjoy the highest living standards.[7], but they aren’t.

It is time to look at why governments impose corporate taxes and how it utilises the taxes to improve the country. Rather than looking at corporate tax as income to the country, governments should view corporate tax revenues as a PART OF an overall returns to the investment made in corporations by giving out tax incentives and preferential tax rates.