Two decisions by the Group of Seven (G7) States (USA, Japan, Germany, Great Britain, France, Italy and Canada) on tax reform will “undoubtedly” make it difficult for Singapore to attract investment, said Finance Minister Lawrence Wong in parliament on July 5.
However, Singapore does not rely solely on tax incentives to attract investment.
These are the G7 agreement to support a global minimum corporate tax rate of at least 15 percent and a proposal to redistribute the taxation rights of the largest and most profitable MNEs from which they carry out their essential activities to countries where their customers are located. regardless of whether the companies are physically present.
However, it is still too early to assess the exact impact of such measures, he added.
The minister stated that the number of multinational companies (MNEs) and the extent of the effects depend on the design of the specific rules that are still being discussed in the OECD / G20 Inclusive Framework (IF).
What are the two proposals about and how do they affect Singapore?
The worldwide corporation tax of 15 percent per
On June 5, the Group of Seven (G7) countries (US, Japan, Germany, UK, France, Italy and Canada) announced that they had agreed to support a minimum global tax rate of at least 15 percent, Reuters reported .
That deal subsequently received support from 130 countries, including Singapore, which Wong said accounts for more than 90 percent of global GDP.
Under the new measure, countries are not required to fix their rate at the agreed value. However, it grants other countries the right to levy an additional tax on the minimum amount on the income of an MNE that comes from another country with a lower tax rate.
The measure applies to multinational companies with a worldwide turnover of more than 750 million euros (1.2 billion SGD), with the exception of the shipping industry.
In Singapore, this means that if a multinational company is taxed at a rate of 10 percent, its home jurisdiction will impose additional rules requiring the company to pay an additional five percent tax there.
This essentially limits the effectiveness of tax incentives as a tool to encourage investment in Singapore, Wong said.
Redistribution of taxation rights
As for the redistribution of taxation rights, they apply to multinational corporations with worldwide sales of more than 20 billion euros (32 billion S $) and a profitability of more than 10 percent.
Here Wong presented a hypothetical scenario of such an MNE in Singapore that showed a profitability of 15 percent.
As part of the new measure, five percent of Singapore profits will be reallocated for taxation in other markets.
“This means that hub economies with smaller markets like Singapore will lose corporate tax revenues,” said Wong.
Approximately 1,800 multinational companies in Singapore are expected to meet the revenue criteria for the new rules
Wong then pointed out that around 1,800 multinational companies in Singapore are expected to meet the revenue criteria for the new rules.
He stressed that while the corporate tax rate in Singapore is 17 percent, many of the MNEs are likely paying taxes below 15 percent as tax breaks are provided to promote Singapore’s economic development, such as capital investments, research and development, and charitable donations.
Singapore will not be able to assess the impact until further details on the tax changes are agreed
However, as some of the tax changes can only be implemented through a “multilateral instrument”, international consensus is required before the changes can take effect, the minister said.
Therefore, Singapore will only be able to determine the effects with a high degree of certainty once the IF has agreed on further details on both measures.
“The ultimate impact will also depend on how companies and other governments respond to these international developments,” he added.
Once consensus has been reached, Singapore’s changes to its tax systems will be based on the following three principles:
- Compliance with internationally agreed standards,
- Respect for the taxation rights of the country and
- Minimizing compliance effort for companies.
A conducive tax environment was not a deciding factor in attracting investment to Singapore
This led to Wong’s point: “Ultimately, the best response to these tax changes is to further improve our overall competitiveness.”
Amid Singapore’s efforts to build its reputation as an attractive location for business and significant economic activity, Wong stressed that a favorable tax environment has been helpful, but not a key factor in attracting investment.
Rather, “a high-quality infrastructure, good connectivity, qualified workforce and an open and business-friendly regime based on the rule of law are far more important factors,” he stated.
“We have to double this competitive strength,” said Wong.
In a follow-up question, MEP Jessica Tan asked whether he could explain important levers for strengthening taxation in view of the effects of digitization.
Wong said at the time it was a bit early to “dive into the details” but there is “no doubt” that the move will make it harder to attract investment.
Singapore will therefore have to “work harder”, such as improving our workforce, infrastructure or connectivity, to attract and retain investment.
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