G-7 corporate tax plan could net Singapore more revenue in short run

Singapore

SINGAPORE could potentially collect more corporate tax revenues in the short term if a global minimum corporate tax rate of 15 per cent proposed by the Group of Seven (G-7) is implemented, but in the longer run, the city-state needs to find new ways to attract foreign investors.

Tax experts tell The Business Times that a global floor on corporate tax should not lead to a loss of corporate tax revenue for Singapore as businesses will still be subject to taxes in Singapore.

"Rather, the immediate impact of the global minimum tax rate is that companies currently paying effective tax rates below 15 per cent in Singapore will need to pay "top-up" taxes to foreign tax jurisdictions, typically where their global parent companies are located," says Harvey Koenig, Partner, Telecommunications, Media & Technology, Tax at KPMG in Singapore.

Over the weekend, the G-7, which comprises Canada, France, Germany, Italy, Japan, the UK and the US, agreed that businesses should pay a minimum tax rate of at least 15 per cent in each of the countries in which they operate. They also agreed to new rules that change which countries can tax which income in the increasingly digital economy.

The new rules will focus on large global businesses that have a profit margin of at least 10 per cent. The right to tax 20 per cent of profits above that threshold would be shared among governments.

Chris Woo, PwC Singapore's tax leader, says: "Singapore could potentially gain more corporate tax revenue given the impact of the global minimum corporate tax rate framework on our tax incentive regime."

Assuming Singapore does away with its tax incentives and applies the global floor rate of 15 per cent on MNCs, the city-state stands to gain from additional revenues derived from the removal of tax incentives. It would also benefit instead of losing the potential clawback amount to the parent jurisdiction of foreign investors.

Currently, Singapore's statutory corporate tax rate is 17 per cent, but most foreign firms pay a much lower effective rate due to various reasons such as a partial exemption on the first S$200,000 of chargeable income, non-taxation of capital gains, timing of taxing foreign income, enhanced tax deductions or tax incentive schemes to attract foreign investments here, says Chester Wee, EY Asean International Corporate Tax Advisory Leader.

While it is unclear how much taxes MNCs in Singapore pay, corporate income tax revenue accounted for 31 per cent, or S$16.7 billion, of all tax types for the fiscal year 2019/2020, according to the Inland Revenue Authority of Singapore. In contrast, the next biggest segment was personal income tax which accounted for 23 per cent, or S$12.4 billion, of the revenue collection.

Mr Wee says: "Assuming that large multinational enterprises (MNEs) are currently taxed at a low effective tax rate in hub locations and that there will not be any outflow of existing investments, investment hubs may see an increase in corporate income tax (CIT) revenue should they increase their CIT rates or reduce the tax concessions offered to MNEs."

It remains to be seen whether foreign investors will continue to invest in Singapore when there is a loss of tax benefits, and whether Singapore is able to attract new investments under the new regime governed by the global floor on corporate tax rate.

PwC's Mr Woo says: "This is a longer term issue that needs strong immediate consideration. Would Singapore be able to offer alternative benefits that can set off the potential areas that make Singapore less attractive such as the higher cost of doing business from land cost and salaries?

"Would Singapore's existing areas that currently make it attractive, such as economic and political stability, resilient and robust infrastructure, a relatively highly educated pool of talent/workforce, as well as an ideal geographical location to make it a gateway to Asia continue to be relevant and outweigh the loss of the benefit of existing tax incentives? It remains to be seen but we in Singapore cannot afford to assume it will."

This is why Singapore needs to continue to invest in infrastructure, productivity and workforce upskilling, as well as create a relevant Singapore ecosystem that is well connected to the region and the rest of the world. Sustainability will become even more crucial to maintaining Singapore's competitiveness in the medium to long term.

"In the longer term, whether Singapore will see reduced corporate tax revenues will depend on a number of factors, such as how businesses will react to these measures, what policy changes the Singapore government will make and details of the global minimum tax rules being implemented," KPMG's Mr Koenig says.

He believes that while the global minimum tax rate will nullify the benefit of tax incentives, Singapore's economy is unlikely to be hugely impacted as businesses are attracted to Singapore for reasons beyond tax incentives. These include political stability, strong protection of intellectual property, capable workforce, international connectivity and ease of doing business.

Many international businesses see Singapore as a safe gateway into Asia.

"MNCs will be weighing the impact of the global minimum tax against the efficiency and convenience of operating from Singapore to manage their regional business," Mr Koenig says.

He says there is also a very large pool of MNCs which are not affected by the global minimum rate since the G-7 proposed thresholds for companies that will be impacted has so far been set at between 750 million euros (S$1.2 billion) and 20 billion euros.

"Hence this pool of MNCs will continue to be attracted to Singapore due to various tax and non-tax benefits," Mr Koenig says.

The attractiveness of tax havens will be significantly eroded, even though it remains a country's sovereign right to decide if it should levy a corporate tax and at what rate.

"Singapore will benefit from the demise of tax havens as companies seek to move functions and activities, and income to jurisdictions such as Singapore," Mr Woo says.

In response to media queries, Jillian Lim, executive vice-president of Singapore Economic Development Board, says Singapore's fundamentals and reputation for being a trusted and open place to do business are more important than ever in the current environment.

"EDB will continue to work with companies and industry stakeholders to strengthen our economy, to create good business and job opportunities for Singapore and Singaporeans," Ms Lim says.

In May, Singapore's Deputy Prime Minister and Minister for Finance, Heng Swee Keat, said in a parliamentary reply that any adjustments to the country's tax system will be guided by three principles: Singapore would abide by internationally agreed standards; it would safeguard its taxing rights and it would minimise compliance burden for businesses, especially small and medium enterprises.

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