BEPS 2.0 unlikely to hurt competitiveness, may net Singapore gains in tax revenue

Singapore

THE attractiveness of Singapore as a business hub is unlikely to be eroded by a global move to introduce a standardised minimum corporate tax rate, and the Republic could potentially make a net gain from higher tax revenues, watchers told The Business Times.

Singapore is one of the 137 countries and jurisdictions that late last year signed a landmark tax deal led by the Organisation for Economic Co-operation and Development (OECD) to create a fairer system of paying tax.

The Base Erosion and Profit Shifting (BEPS 2.0) initiative covers 2 pillars and is likely to come into effect by 2023.

Pillar 1 targets multi-national enterprises (MNEs) with a global turnover of over 20 billion euros (S$30.5 billion), reallocating taxing rights from markets where activities are conducted to where consumers are located.

This is expected to apply to about 100 of the biggest and most profitable MNEs in the world, according to the OECD.

In his Budget speech on Feb 18, Finance Minister Lawrence Wong said that Singapore will lose tax revenue under Pillar 1 given its small domestic market and the extent of activities conducted.

But as to how much this loss would amount to, tax experts BT spoke to said it is difficult to estimate given that details have yet to be finalised.

Allen Tan, principal and head of the tax practice at Baker McKenzie Wong & Leow (BM), said that there's a chance the high threshold and exemption for regulated financial services, among others, could help limit the number of MNE groups in Singapore being affected, especially in the initial years.

The scope of impact widens with Pillar 2, although it's a worthy question whether this could eventually play to Singapore's benefit.

Pillar 2 introduces a global minimum effective tax rate of 15 per cent for MNE groups with annual global revenues of at least 750 million euros.

In July last year, Wong told Parliament that about 1,800 MNE groups in Singapore would meet this criteria, with a majority of them having group effective tax rates below 15 per cent.

Although Singapore has a headline corporate tax rate of 17 per cent, many companies pay a lower rate thanks to a slew of tax reliefs and incentives.

Those with turnover exceeding S$100 million have, from Year of Assessment 2010 to 2019, paid average effective tax rates of about 8-10 per cent, he told the House.

This is why Singapore is currently mulling over a top-up tax called the Minimum Effective Tax Rate (METR), which would top up an MNE group's effective tax rate in Singapore to 15 per cent.

"We may end up in a situation where Pillar 2 is implemented before Pillar 1, so if that happens, then Singapore will be collecting more tax revenue under Pillar 2 but not lose any tax revenue because Pillar 1 has not been implemented," said James Choo, partner for international tax and transaction services at Ernst & Young (EY).

Asked if the gains from Pillar 2 could also offset the losses from Pillar 1, he said it is "certainly possible" but caveats that this depends on the final rules of Pillar 1.

Noting that the number of MNE groups that fall under Pillar 1 is "a very small segment", Choo said: "Even if we assume that the top 100 companies are in Singapore, it's 100 versus 1,800."

BM's Tan agreed but said that the additional tax revenue may be temporary, since the turnover and profitability threshold for Pillar 1 is set for a review 7 years after the agreement comes into force.

"A lower threshold would bring a larger number of multinationals under Pillar 1, and the impact to Singapore's tax revenues will have to be reassessed at that stage," he said.

As to whether Singapore can continue benefiting from Pillar 2, this depends on whether it can convince MNE groups to stay, although tax experts believe the METR alone is unlikely dent Singapore's competitiveness as a business hub.

"The simple reason is that if Singapore does not tax corporate income at 15 per cent, another country will do so and therefore Singapore loses out. The METR is essentially just protecting Singapore's right to tax Singapore profits under the new global tax rules," said Harvey Koenig, partner for telecommunications, media and technology tax at KPMG Singapore.

BM's Tan added that the question for MNE groups is simply where such tax will have to be paid.

What it does mean though is that with the tax-related playing field levelled by Pillar 2, Singapore would need to double down on its non-tax strengths, watchers said.

This includes its stable political environment, a strong rule of law, a world class infrastructure, a hard-working and skilled labour force and a business-friendly environment, said Liew Li Mei, international tax leader at Deloitte Singapore.

"The key is also to look at arresting rising cost of business and addressing talent shortage. MNEs that are affected will be wondering next how this will impact them practically, and will be looking for other forms of support for their local operations given that the additional tax burden was not planned when they expanded their operations in Singapore," she added.

Chris Woo, tax leader at PwC Singapore, said the Republic has more than tax competitiveness in its economic toolbox and if it can offer viable alternative benefits, they would help to complement the various factors that already make Singapore attractive.

"Such alternative measures should also serve to nullify potential negative perceptions about Singapore such as the cost of land and labour," Woo said.

"However, this needs strong and almost immediate consideration as overseas investment planning for new capital expenditure in 3 to 5 years is likely happening now given the lead time needed to set up manufacturing operations or any significant investment."

What businesses will also have to contend with is the likely higher cost of compliance and paper work involved in filing for taxes; a system that involves both tax breaks as well as the METR could potentially be onerous and complicated.

David Sandison, head of tax and practice leader at Grant Thornton Singapore, said: "If you've got to go through all this calculation, recalculation, collation of information and reporting, you're doing this for nothing. It doesn't make the world a richer place. It just moves where the tax is picked up."

He added: "To me, that's the real cost. It's the cost to businesses having to deal with this stuff, another effective layer of taxation, another set of rules when we should be trying to simplify tax systems, and not make them illegible."

In the case of Pillar 2, where Singapore could potentially rake in more tax revenue, Sandison said: "Mathematically, yes, you end up profiting, and so the question is, if there is a level playing field, then yes, we win because these businesses are looking for a home in Asia... and therefore, Singapore is still an attractive place.

"We still benefit from it, but I don't know why someone else is forcing us to benefit from something that we might not have wanted to benefit from in the first place."

So would a system with some form of top-up tax and no tax breaks be easier on companies?

Not so fast, tax experts said, especially since smaller companies would not be covered under Pillar 2, which means tax incentives would still be effective in attracting new investments into Singapore.

PwC's Woo added that firms in industries with long gestation periods also typically pay little to no taxes in their early years and may not have negotiated for reduced tax rates.

EY's Choo said the question is one that boils down to tax policy choices.

Given that the Pillar 2 rules affect larger and smaller MNE groups differently, he said: "The Singapore government has made the choice that it doesn't want to get involved in the commercial decision making of a company... because it doesn't know actually whether that tax incentive is beneficial or not."

Even with the hassle of a more onerous tax system, Choo said this is a necessary endeavour for if not, smaller companies would be disadvantaged.

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