Reduced Tax Exemptions to Have Minimal Impact on Singapore Start-Ups

by Team Homage

Source: CNA

SINGAPORE: Despite the announcement of lower tax exemptions in Budget 2018, start-up founders here are not worried, with some noting that the adjustment will likely have “minimal” impact.

This is because the tax change, which is due to take effect in two years’ time, will be affecting start-ups that have turned profitable in their initial years and these remain a minority in Singapore, according to experts and local entrepreneurs.

Besides, there are other Government initiatives and grants to tap on for support, they told Channel NewsAsia.

In his Budget statement delivered on Monday (Feb 19), Finance Minister Heng Swee Keat said the Start-up Exemption Tax (SUTE), which was introduced in Year of Assessment 2005 to support entrepreneurship, will be revised and restricted to the first S$200,000 of a start-up’s chargeable income. The current cap is S$300,000.

Other changes include a reduced exemption on the first S$100,000 taxable income from 100 per cent to 75 per cent. The next S$100,000 chargeable income will enjoy 50 per cent exemption.

The broad-based Partial Tax Exemption will also be adjusted to restrict the tax break to the first S$200,000 taxable income. These changes will take effect on or after Year of Assessment 2020.

Start-ups that Channel NewsAsia spoke to echoed the same sentiment.

Majority of the start-ups in Singapore are in the early stages and the strong emphasis on growth means that start-ups tend to put any profit back into the business during the early years, said MatchMove CEO Shailesh Naik.

Using his fintech start-up as an example, Mr Naik said Matchmove is unprofitable and will be “for a while more” as it continues to re-direct all of its funds into product development and market expansion. The homegrown start-up, founded in 2014, has since established presence in seven countries.

Most do not focus on profits at least for the first five to seven years. Any surplus will be reinvested so that there can be quick growth without borrowing, and that’s a standard operating model for high-growth start-ups.

Hence, Mr Naik reckoned that reduced tax exemptions will likely affect young start-ups that are making profits, given that the SUTE exemption applies to a start-up’s first three Years of Assessment. Those “getting close to an initial public offering (IPO)” and will have to maintain themselves in the black may also feel some pain, he added.

Mr Khoo Kar Kiat, who founded food delivery start-up about two years ago, agreed.

Most start-ups in the tech space are not profitable in the early stages as our initial objectives are typically to build a good product and focus on growing customer base. As such, the impact should be minimal.

But Mr Khoo added that the signal from the Government is “slightly confusing” as the cutback on tax exemptions appear to contradict with its support schemes for the start-up space.

Still, most felt that the overall environment in Singapore remains supportive. Ms Val Yap, founder of insurance technology start-up PolicyPal, pointed to the variety of measures that entrepreneurs like her can tap on for funding or expertise help. For one, the start-up applied for the ACE Start-ups Grant and received S$50,000 to kickstart operations in 2016.

Announced in Budget 2018, the doubling of tax deduction for intellectual property (IP) registrations fees and the set-up of the Open Innovation Platform (OIP) are also “fantastic” moves, said Ms Yap.

Due to be piloted this year, the OIP is a virtual crowd-sourcing platform aimed to “matchmake” businesses with relevant ICT partners to co-create digital solutions.

“Most of the tech start-ups will want to protect their own assets even if IP and trademark can add up to be significant costs of four to five figures, or even more if you are in deep tech,” she said. “For the OIP, it is all about community building which is important.”

Ms Gillian Tee, the founder of healthcare start-up Homage, also singled out the OIP as a scheme that she is looking forward to, alongside the “material” changes in the double tax deduction for internationalisation (DTDi).

As we redirect quite a bit of our resources into technology developments so the OIP is relevant. Outsourcing of product development could help us to launch new products quickly and keep costs low.

Meanwhile, the low effective corporate tax rate for start-ups at 4.3 per cent constitutes another “big incentive”, said Ms Tee referring to figures from Mr Heng’s Budget statement.

“For a taxable income of S$100,000, the effective corporate tax rate is 4.3 per cent for start-ups and 8.1 per cent for older firms, as compared to the headline rate of 17 per cent,” according to the finance minister.

After taking into account the various tax exemption schemes, the effective corporate tax rate is calculated by dividing a company’s tax by total income.

“For any early-stage start-up, any form of cost reduction does move the needle but tax breaks aren’t silver bullets,” said Ms Tee. “I personally feel that the tax adjustments are about providing a more holistic and consolidated support to help us become value-generating companies that look beyond Singapore.”

Despite having some impact on young start-ups that are cash-strapped, Mr Chai Wai Fook, partner of tax services at Ernst & Young Solutions, noted that the reduction in tax exemptions are unlikely to dent Singapore’s allure.

“While the tax change may take some shine off Singapore’s attractiveness for start-ups, it is unlikely to dent our attractiveness as there are other non-tax factors, such as Singapore’s strong legal framework of IP protection and government support schemes, which would be taken into consideration by start-ups in picking a location to base in,” he said.

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