For hiring foreign workers, employers in Singapore have to pay foreign worker levy, ranging from $300 per month to $950 per month. There are many classifications. Even foreign domestic workers have to pay levy of $265 per month.
According to MOM website, the levy is a pricing mechanism to regulate the number of foreign workers in Singapore.
However, I see it as tax. Not tax on employers, but tax on employees. Technically, it’s employers who pay the levy. However, the “real” people paying the levy are the foreign workers. Or rather, both.
Let’s take foreign domestic worker for study. Their salary per month is $500 and the levy is $265 (before any subsidy).
To the maid, she gets $500. To employer, he pays $765. Now, as an employer, your total cost of hiring the maid is $765. Does it matter to you if part of it is paid to maid or government? If you can choose how much of the total $765 is paid to the maid, how much will you choose? I will choose 100% paid to the maid. Why? If the maid gets more pay for her work, she is generally happier.
Now, put yourself in foreign worker’s shoes. If your employer is willing to pay you $5,000, but you can get only $4,000 and government gets $1,000, how will you call that $1,000? Do you call it levy or tax?
For employing locals, employers pay $5,000 and employees get $5,000. At the end of the year, employees will pay tax according to their total income. For foreign maids, employers pay $765 and maids get $500. So, that levy of $265 is like tax that the maids pay in advance. For a full year, the maids are paying $3,180 levy/tax. For locals to pay that amount of tax per year, their income must be around $87,000. If they have employee CPF contribution (20%), which is exempted from tax, then with income of $87,000, they are paying even lower tax at $2,000.
Even though levy is not created as a tax on foreign workers, but the consequence is the same. They are getting less than what the employers are willing to pay. Singapore’s average income is far below $87,000. So, to me, many locals are paying lower taxes than foreign domestic workers are.
We can argue that if government removes the levy, then the maids will continue to get paid $500 only, not $765. That’s probably true and employers will save the levy in that case. Maids may not get the extra money because the supply of maid is more than the demand, and their salary has been controlled in the market all along. Also, they can’t really voice out to get more by applying to employers who are willing to pay more. If the government removes the foreign worker levy and increases the basic salary for maid to $765, will employers continue to hire maids? Absolutely. Their current cost is already $765, so what’s the difference to them? Since employers are paying $765 and maids get only $500, are the maids paying the tax of $265 per month?
For analogy, let’s compare it to employer CPF contribution. For basic salary of $5,000, employers have to contribute 17% to employee CPF. This is capped at $850 this year. So, to the employer, the total cost of hiring the employee is $5,850 per month. Again, to the employer, does it matter if part of it is paid to the employee in cash and part of it paid to the employee’s CPF account? It doesn’t matter to the employer. It’s the total cost that matters to them. Employee gets the full amount of $5,850, but part of it will be in CPF account and the rest as cash.
If one day, government reduces the employer CPF contribution from 17% to 0%, then what do you, as an employee, expect to receive as your total salary per month? Still $5,000? Apparently, some people think so. However, rationally, they should expect to receive the full $5,850 as salary in cash because that’s what the employers are willing to pay in the first place ($5,000 basic + $850 employer CPF) and has been paying all along. At 0% employer CPF contribution, some employers, usually those cheapskate ones, will omit that $850 from salary payment and save it for their own full benefit. Some better employers will pay that $850 to employees in cash, on top of their basic $5,000 salary. For those employees not getting the $850, they will apply to those companies that pay the 17% to employees in cash. It’s 17% difference. Those employers not willing to pay the 17% to employees in cash will see more staff turnover and have harder time to employ staff. Eventually, they will have to pay that 17% (or less) to the employee. After some time, the market salary rate will adjust to reach its equilibrium. My guess is, on average, the employees will receive slightly less than 17% in cash when employer CPF contribution is reduced to 0%.
So, both foreign worker levy and employer CPF contribution rate are controlled by the government. However, removing them have different impact to the employer and employee. In the former case, employers are likely to get the full benefit. In the latter case, employees are likely to get the full benefit.