G-7's global minimum tax deal may nullify any tax advantage Singapore offers

Singapore

THE historic tax agreement by the Group of Seven (G-7) could nullify any tax advantage Singapore offers to multinational corporations (MNCs), leaving a question mark over how this will affect their investment decisions to continue to operate here, tax experts say.

But countries with large domestic markets such as Indonesia may benefit from the global tax deal given that MNCs will have to pay a larger proportion of their taxes to countries where sales are generated, says Chua Hak Bin, senior economist at Maybank Kim Eng.

Over the weekend, finance leaders from the G-7 countries agreed to back a new global minimum tax rate of at least 15 per cent that companies would have to pay regardless of where they locate their headquarters. The agreement would also impose an additional tax on some of the largest MNCs, potentially forcing technology giants such as Amazon, Facebook and Google, as well as other big global businesses, to pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence in that jurisdiction.

Ajay Kumar Sanganeria, KPMG Singapore's partner and head of tax, says the G-7 agreement mostly benefits larger countries with high corporate tax rates.

"Developing economies may find their policy options to attract investments much more limited as they will be unable to offer tax incentives," he says.

While Singapore's corporate tax rate is 17 per cent, which is slightly higher than the 15 per cent global minimum rate, the effective tax rates of many businesses here may fall below 15 per cent due to tax incentives and factors such as not taxing unremitted overseas income and capital gains.

Many MNCS, which are based here and serve the region, book their revenues in their Singapore office in part because of the lower tax rates. These MNCs are incentivised and taxed at rates that are possibly as low as 10 per cent, Mr Chua says.

"It is unclear when the rules will be implemented but businesses in Singapore would need to consider the impending impact of these announcements starting now," Mr Sanganeria adds.

Chester Wee, EY Asean international corporate tax advisory leader, says: "Even if Singapore were to grant an incentive with preferential tax rates of 0 per cent, 5 per cent or 10 per cent, the tax differential will be picked up for tax collection elsewhere, nullifying any tax advantage offered.

"Multinational enterprises (MNEs) that choose to locate in Singapore for commercial reasons will continue to stay, but subject to the detailed regulations; the advantage of the tax incentives that Singapore offers to large MNEs will likely be eroded under the new proposal," Mr Wee says.

The question then is how this would affect the overall investment decisions of the large MNEs to continue to operate in Singapore.

"Understandably, the impact will vary from MNE to MNE," he adds.

Another proposal which involves the reallocation of at least 20 per cent of large MNEs' profits exceeding 10 per cent margin for taxation in market jurisdictions could also have implications.

Mr Wee says: "MNEs have used Singapore as a hub for distributing their products and services into Asia-Pacific. Part of large MNEs' profits from Singapore may be reallocated to market jurisdictions, meaning a possible erosion of tax base for Singapore."

US Treasury Secretary Janet Yellen, who attended the London meetings, said the agreement "provides tremendous momentum" towards reaching a global deal that "would end the race-to-the-bottom in corporate taxation".

Britain's Treasury chief Rishi Sunak, the meeting's host, said the deal would "reform the global tax system to make it fit for the global digital age and crucially to make sure that it's fair, so that the right companies pay the right tax in the right places".

The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 140 countries being held in Paris as well as a Group of 20 (G-20) finance ministers meeting in Venice in July.

However, tax experts say there is still much work to be done, and garnering wider support may be a challenge given that countries are at different stages of economic development and face varied challenges.

Dean Rolfe, KPMG's partner and head of international tax for Asia-Pacific, says the G-7 represents a small fraction of the 139 countries under the Organisation for Economic Co-operation and Development's (OECD) Inclusive Framework. It remains to be seen if the other members are aligned with what has been agreed on.

"A global agreement depends to a large extent on whether developing economies stand to gain anything under these rules. Given there is a lack of clarity on digital taxation in recent months, as well as increasing uncertainty on who is within the scope of these rules, there is still much work to be done to achieve a global consensus," Mr Rolfe says.

The G-7 communique provides for the "removal of all digital services taxes, and other relevant similar measures, on all companies".

"That is to say, the G-7 is suggesting that while these new rules only apply to the largest global companies, unilateral measures to tax the digital economy must be removed in all countries regardless of whom these rules are targeting," Mr Rolfe says. "This of course pushes in the opposite direction of the demands from a number of key developing countries - they are arguing that the roll back of unilateral tax measures that target the digital economy should only be done for taxpayers falling within the scope of these new global tax rules. In other words, many economies are currently arguing for a limited roll back only. It will be interesting to see how the 139 Inclusive Framework members and the G-20 negotiations land on this issue."

Crucial details are still missing. These include the size of the MNCs that will be affected, how to share the spoils, and the timing for rolling out these rules.

A key and critical unknown at this time is which sectors will be excluded from these rules. There has been much speculation on whether financial services, real estate, international transportation and infrastructure will be excluded. Extractive industries may also be excluded.

"That said, some member countries of the Inclusive Framework would prefer no exclusions. We will await the details of who is within and outside the scope of these proposed rules," Mr Rolfe says.

With additional reporting by Claudia Tan

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