THE ECONOMIC REVIEW COMMITTEE (2002), Singapore

GLOBAL TREND TOWARDS LOWER DIRECT TAX RATES
The external environment has changed dramatically since the 1986 Economic Committee review. Globalisation and rapid technological advances have paved the way for an increased international flow of good and services. Since 1985, world exports have been growing well in excess of world GDP, while global FDI inflows have increased over twice as fast as world exports. New players in the global economy are strengthening their capabilities to compete with countries ahead of them, including Singapore. The most important new player is China. With its low costs and huge domestic market. China has been pulling away investments that could otherwise have located in Singapore or the region.

In today's integrated world, capital and skilled labour are more and more mobile and therefore less and less likely to stay put and pay taxes that are higher than those levied elsewhere. Investors and entrepreneurs can easily shift jobs, goods and capital to lower-tax environments. Studies have found that the average effective tax rates of countries have a significant influence over a MNC's choice of investment location, and the amount of capital invested there. As a result, many countries have been trying to make their tax systems more competitive by removing tax barriers and reducing tax rates to attract mobile capital and talent.

In recent years, the OECD and EU countries have been leading the drive for lower tax rates, as they seek to narrow the tax rate 'gap' between themselves and the less developed countries. Between 1997~2002, for example, the average corporate tax rate for OECD and EU countries was reduced by about 5 percentage points.

At least 15 countries lowered their corporate tax rates in the last two years, including Australia, Canada, France, Germany, India, Ireland, Korea and Switzerland. Germany implemented a comprehensive tax reform programme in Jan 2001 to simplify the tax system and reduce the corporate tax from 40 percent to 25 percent, a massive 15 percentage point cut. Ireland will be moving to a standardised rate of 12.5 percent by Jan 2003. In the region, Hong Kong is maintaining its low corporate tax rate of 16 percent.

Many of these countries offer generous tax breaks for both corporates and individuals on top of these basic rates to attract investments. Further cuts in tax rates are also likely. French President Jacques Chirac has recently proposed a package of tax cuts, including reductions in income taxes by a third . The Japanese government is considering tax rate cuts to stimulate the economy. The Keidanren has recommended a cut in the corporate tax rate from 40 percent to 20 percent .


Competition for human capital is intensifying. Companies scour the world and are willing to pay a premium for top-quality people. Hence, countries around the world are also lowering their personal tax rates to attract and retain talent, and encourage hard work and enterprise. Germany, Ireland, Malaysia and the US are among the countries that have cut their personal tax rates in recent years. Hong Kong's personal tax rate of 15 percent is one of the lowest in the world. Because there is no tax on earnings outside Hong Kong, a large number of expatriates in Hong Kong end up paying income taxes at well below the 15 percent tax rate.

Increasingly, many companies are locating their high value-added activities in places where top management and the highly skilled are willing to live and work. Although our personal tax rates are low compared to many of the industrialised countries, they may not be competitive enough to retain and attract the top tier of global talent, especially since many of these countries are also offering generous tax concessions, thus mitigating our advantage in terms of lower tax rates.

We are, therefore, facing increasing competition, not only from developing countries such as China with their low labour and land costs, but also from developed ones such as the US and Europe.

1986 Economic Committee , Singapore & The Direction of the 'Then' Tax Reforms in Singapore

1986 ECONOMIC COMMITTEE
The 1986 Economic Committee recommended the following key changes in the tax system to create a more conducive business environment to support hard work and enterprise, and nurture both MNCs and local companies:

a) Tax reductions totalling about $1.2 billion. This included a cut in the corporate tax rate from 40 percent to 30 percent (with further reduction to 25 percent as soon as the revenue position permits), a cut in the top marginal tax rate to 30 percent, and a 30 percent across-the-board investment allowance for expenditures on capital equipment and machinery.
b) Shift from direct to indirect taxes as the main source of Government revenue. Specifically, the Report stated that:

"Government should shift from direct to indirect taxes as its main source of revenue. Consumption taxes such as retail sales taxes may be administratively more difficult to collect but are economically preferable to income taxes. They do not penalize companies which are making profits or persons who are putting away savings. Tax is paid only when money is spent on consumption items, not when the money is invested in productive capacity"

c) Remove the existing bias that favours manufacturing activities in our tax incentive schemes. Tax incentives should be broadened, to be enjoyed by both services and manufacturing firms.
d) Move towards a uniform, low corporate and personal income tax regime with minimal selective tax incentives as a long-term goal.