G-7 tax deal - not quite the perfect storm for Singapore just yet

DURING her press conference on June 5 following the close of the G-7 Finance Ministers Meetings, US Secretary of the Treasury Janet Yellen remarked that "by collaborating with one another on the global minimum tax, governments protect their national sovereignty to set tax policy, because . . . the race to the bottom on corporate tax rates are alleviated".

Secretary Yellen's reference to tax sovereignty in this context is hardly a circumspect one, even if one were to make allowances for the excitement of a first in-person G-7 meeting in a long while.

In broad terms and to set the scene, the "G-7 tax deal" backing a global minimum tax rate of at least 15 per cent also commits to "market countries" being awarded taxing rights on at least 20 per cent of profit exceeding a 10 per cent margin for the largest and most profitable multinational enterprises.

HUB ECONOMIES: TONES OF DEFIANCE AND DEFLATION

In late April this year, Ireland's Minister for Finance Paschal Donohoe expressed reservations about the possibility of a global minimum corporate tax rate, and reportedly insisted any new deal must "accommodate" Ireland's 12.5 per cent rate. His belief that small countries "need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries" could well resonate strongly with Singapore's policymakers, even if our government's messaging had been possibly less upbeat, with (then) Finance Minister Heng Swee Keat pointing out in his Budget 2021 statement that some of the proposed international tax rules "will adversely impact our corporate income tax revenues".

Indeed, Second Minister for Finance Indranee Rajah may have provided a prescient warning (in her address at a digital tax conference on Oct 4, 2019) in saying: "if (the international tax reform proposals) focus excessively on allocating profits towards where the market is . . . governments that have previously invested in building a conducive business environment might find less motivation to continue doing so".

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Be that as it may, the current situation merely reaffirms the understanding that Singapore will be increasingly constrained in pursuing its own tax policy mix; and while dilution of tax sovereignty can be demotivating for our policymakers, there is still much to work towards in maintaining our cherished reputation of being a trusted investment hub.

LOOKING AHEAD AND SIEVING OUT THE POSITIVES

Some longstanding tax incentives here could well face existential challenges; yet many are set to operate "business as usual" especially with the ongoing discussions that certain industries (eg international shipping, financial services, commodities trading, etc) ought to be excluded from some of the new rules.

Some of the reasons for exclusions can be highly technical (eg existence of alternative or supplementary taxation regimes like tonnage taxes for the shipping industry) and are better dealt with separately; suffice to note for now that the industries mentioned above are fairly key to our economy, and it behoves the relevant authorities to engage some of the key players in these industries to articulate expected stability in the fiscal support they can continue to enjoy from Singapore.

Furthermore, while acknowledging that Singapore is also actively involved in the ongoing discussions around these landmark revisions to international tax rules and her stance that the country could make suitable adjustments to our corporate tax system if and when these international tax rules are changed, it may be reassuring for our business community and prospective investors if our officials release certain precise positioning statements way upfront.

For example, with the revisions being meant to apply to large MNC groups, it is reasonable to emphasise way in advance (as what Hong Kong appears to have done recently) that Singapore's eventual corporate tax response measures will aim to minimise the impact on local small and medium-sized enterprises, and are intended to remain simple and to accord certainty to most businesses and the majority of investors. Such simple and clear communique complements and refreshes the oft-stated narrative that investors are attracted to Singapore for many non-tax reasons such as its stability, geographical and other "soft" factors.

Beyond the messaging aspects discussed above, some of the proposed tax reform measures can potentially justify the broadening of Singapore's tax base. The concept of applying the global minimum tax generally requires calculation of companies' effective tax rate (ETR) to determine if say, Singapore's ETR is below the threshold. If so, mechanisms can be invoked to require Singapore to effectively forgo the differential tax, to be picked up by other jurisdiction(s) involved. An example of where this scenario can manifest for Singapore, is in the context of portfolio holdings of shares if the gains from disposal of such shares are treated as non-taxable capital gains, thus lowering the ETR.

NO LONGER STRAIGHTFORWARD

With the global minimum tax/ETR parameters, the discussion around whether Singapore should increase its tax base with some form of capital gains tax can become more nuanced and compelling. It is no longer as straightforward as simply equating capital gains tax to being a deterrent to foreign investors and the corresponding trade-offs, but the debate should also consider the fact that if Singapore gives up such a tax, the relevant investors are no better off and may just have to pay the equivalent taxes elsewhere.

On balance, while the prevailing view may be that large economies and market jurisdictions stand to gain the most from the proposed rules, hub jurisdictions like Singapore may well still thrive and prosper if their cards are played right.

• The writer is tax practice leader at Baker Tilly Singapore