Global tax changes are a chance for Singapore to rethink investor incentives

THE upcoming shake-up to global tax rules offers Singapore a chance to creatively update policies to stay top-of-mind as a prime destination for investors.

Governments worldwide are under pressure to find non-tax incentives to continue attracting investments, as efforts to combat base erosion and profit shifting (BEPS) take direct aim at low corporate tax rates.

The main responses in Singapore’s policy tool kit may resemble existing incentives: grants, loans and co-funding schemes. But with or without BEPS changes, perhaps the Republic should consider fresh ways to structure business benefits – and what practices to reward.

For instance, speaking to The Business Times last week, Hsien-Hsien Lei, chief executive of the American Chamber of Commerce, suggested that post-BEPS incentives could be pegged to multinational corporations’ plans to invest regionally.

At first blush, it sounds scandalous for Singapore to reward businesses for spending their money elsewhere.

But in an era of greater regional economic integration, such a scheme would make sense if investments are set up to be win-win, instead of being seen as a zero-sum game.

Singapore has a long-running track record of cross-border industry collaboration, including nearly 20 Vietnam-Singapore Industrial Parks, as well as the Nongsa Digital Park in Batam.

Such arrangements can successfully leverage individual partners’ strengths: Singapore’s advanced technical know-how, and the availability of land and labour in regional countries with experience in manpower-intensive manufacturing.

Foreign investors are certainly not strangers to the concept. Take household electronics giant Dyson, which carries out the advanced manufacturing of motors at a plant in Tuas, while finished goods are mostly assembled across the Causeway in Malaysia.

Dyson’s regional production footprint is no detriment to Singapore’s prospects. On the contrary, the Republic benefits – by housing Dyson’s research and engineering, commercial, advanced manufacturing, and supply chain operations, as well as the company’s global headquarters.

Finance Minister Lawrence Wong warned in his Budget round-up speech that multinationals are weighing the lower cost of doing business elsewhere in the region – which poses a worry for Singapore’s status as a preferred investment site.

But Singapore has long banked on its strategic location as a gateway to Asean and the rest of Asia, along with advantages – such as infrastructure and strong rule of law – that are difficult for regional rivals to replicate in the near to medium term.

The next generation of business incentives could thus bring these domestic and regional strengths together and offer investors the best of both worlds – all from a base in Singapore.

While drawing up blueprints, Singapore should also pay close attention to how similar jurisdictions plan to attract investments post-BEPS 2.0.

Wong, who is also Deputy Prime Minister, noted in the Budget that the European Union, Britain and Switzerland intend to start implementing BEPS-related measures from 2024, in phases.

Singapore is set to align tax rates from 2025, but “will continue to monitor international developments” and adjust its timeline if there are delays elsewhere, he said.

Any roll-out of complex new tax rules is at risk of teething issues, and Wong’s timeline is “a strong signal that, as an important and responsible hub location, Singapore will not simply jump on the bandwagon”, said Loh Eng Kiat, tax partner at Deloitte.

“Many multinationals remain concerned that the full and hasty implementation... will result in tax and non-tax responses from other countries that would further destabilise the global economy.

“Such feedback strengthens our belief that it is in the best interests of Singapore not to be the first mover in enacting the Pillar Two rules domestically,” said Loh.

In that regard, policymakers here may want to keep their cards close to their chests.

After all, as DBS economist Chua Han Teng told BT: “Developments on BEPS remain fluid, and it remains to be seen how other jurisdictions will tackle the upcoming implementation.”

Jaclyn Ho, tax adviser at Baker McKenzie Wong and Leow, expects “more signalling” from business hub rivals such as Hong Kong in the coming months.

Stiffer competition for investments should prompt Singapore’s economic planners to keep thinking out of the box when it comes to what incentives they can offer multinationals.

The global BEPS rules aim to put all countries on a level playing field when using taxes to compete for investments – which means the test will be how well each captain leads their team.

Singapore’s Ministry of Finance has cautioned that “the net fiscal impact of BEPS is unlikely to be favourable”. However, given the Republic’s hard-won advantages and the opportunity to refresh its economic policy, the impact does not have to be unfavourable, either.