SINGAPORE: As a major milestone for the global economy, over 130 jurisdictions, including Singapore, agreed in July on the key elements of a two-pillar solution to address today’s international corporate tax challenges.
It was a breakthrough, according to estimates by the Organization for Economic Co-operation and Development (OECD), if fully implemented, up to 240 billion US dollars in lost government revenue can be generated annually from tax avoidance.
The efforts within the framework of the OECD / G20 Base Erosion and Profit-Sharing Project (BEPS 2.0) to cope with the tax challenges of the digitization of the economy have been bearing fruit for years.
But it is too early to assess the exact impact on Singapore, Treasury Secretary Lawrence Wong said in early July.
Approximately 1,800 multinational companies (MNEs) in Singapore meet the global revenue criteria of € 750 million.
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With Pillar One, Singapore profits generated by overseas MNEs with global sales in excess of 20 billion euros (US $ 24 billion) and profit margins in excess of 10 percent can be reallocated to larger jurisdictions where their customers are based are leading to a loss of revenue for the country.
The second pillar can limit the effectiveness of Singapore’s tax incentives in attracting investment by proposing a global corporate tax of at least 15 percent.
Treasury Secretary Lawrence Wong speaks in Parliament on July 5.
This could potentially increase our tax revenues depending on how it affects firm decisions and investment decisions.
BALANCING INTERNATIONAL TAX RULES
Singapore has found it necessary to register with BEPS 2.0. As a member of the OECD Inclusive Framework, she believes that a rules-based approach can close cross-border tax loopholes and create a level playing field around the world.
A world without global tax consensus risks countries taking unilateral measures that impose greater tax burdens and distort incentives, especially on technology companies with a global presence.
This race to tax the digital economy is becoming increasingly important with the emergence of internet companies and digital platforms.
However, the result was an increase in taxes on digital services with different rules and requirements for deduction. In addition, new regulations are being enacted to combat base erosion. For example, Australia’s constraint denies some tax deductions for Australian borrowers.
As part of the 2020 Mexico tax reform, some related party payments that are subject to an effective tax of less than 22.5 percent are also non-deductible.
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In such a dynamic tax environment, with countries regularly introducing uncoordinated individual tax rules, multinational corporations will struggle to keep up with ever-changing tax rules.
The OECD has understood this and has therefore formulated BEPS 2.0 as a way of avoiding the spread of unilateral tax measures and tax uncertainties. They want to minimize the global cost of tax compliance and tackle double taxation that the existing rules do not eliminate.
The use of tax incentives was key to Singapore’s strategy of attracting large investments to fuel economic growth and job creation. With tax incentives, multinational corporations could pay an effective tax rate that is lower than the total corporate tax rate.
However, Singapore has made various adjustments to its tax incentive programs over the years to ensure that they set high qualification standards that take substance and transparency into account.
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Tax incentives such as the Pioneer Certificate Incentive and the Development and Expansion Incentive, which encourage companies to expand their skills and undertake new or expanded activities, require significant business commitments in terms of headcount and local business spending needs.
The good news for Singapore is that the proposed 15 percent global minimum tax will facilitate competition based solely on tax rates. Currently, multinational corporations can achieve similar tax results by locating in jurisdictions such as Ireland (12.5 percent), Hungary (9 percent) and Dubai (0 percent).
In addition, under the second pillar, a formulaic spin-off of substances is being considered, excluding an amount of at least 5 percent of the book value of property, plant and equipment and wages from the low-taxed profit.
Office workers with protective face masks in the central business district of Singapore. (File Photo: Calvin Oh)
This is a compromise for countries and economic zones that have long used tax incentives to attract investment and will help cushion the impact of the global minimum tax proposal. Singapore should benefit as the country’s tax incentives are substance-based.
Overall, this restriction of tax competition through BEPS 2.0 will result in a greater focus on economic fundamentals for smaller nations like Singapore.
Singapore’s longstanding service to its institutions, infrastructure, labor market, and financial and legal systems – traits it has conscientiously nurtured for decades – are likely to be an even greater specialty.
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NO EXODUS EXPECTED
It is unlikely that these new tax rules will lead to an exodus of foreign MNEs in Singapore.
For a multinational headquartered in a G7 country with an aggregate tax rate of 30 percent or more, Singapore’s aggregate tax rate of 17 percent remains attractive to do business there.
In addition, Singapore remains attractive as a hub in Asia, a region that continues to enjoy a promising history of growth.
In fact, in a COVID-19 world, the bigger forces working against Singapore are not so much these evolving tax rules as the shift in businesses towards decentralized decision-making and working practices driven by advances in technology and the need for agility.
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Office workers wearing face masks using an underpass in Singapore’s CBD on April 29, 2021. (File Photo: Calvin Oh)
Singapore needs to train and complement its local workforce with foreign talent to support the growth of various technology-driven industries challenged by the current workforce shortage as tech giants expand their operations there.
With land scarcity, Singapore needs to think beyond its borders to include its closest neighboring locations such as Johor, Batam and Bintan as potential deployment areas for MNEs choosing a Singapore hub.
MNEs can anchor their regional headquarters and R&D activities in Singapore to act as a control tower in Southeast Asia while also developing more cost-effective manufacturing solutions regionally.
Facilitating the flow of goods, services, workers and technology through collaboration between governments and governments will be critical to the success of such multi-hub operating models.
RESPONSIBILITY OF BODY TAX
Even if these global tax regulations were not widely adopted, developments in the US would have effects similar to BEPS 2.0 for US MNEs with a presence in Singapore and Singapore MNEs with US operations.
The tax plan proposed by the Biden administration, entitled Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD), which seeks to deny the deduction for a variety of payments (including the cost of goods sold), directly or indirectly to If a low tax area is entered that does not have a strict minimum tax regime, Singapore may be forced to introduce an Alternative Minimum Tax (AMT) or equivalent.
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An AMT requires that corporate profits be subject to a minimum tax rate. Such a move can help Singapore avoid inadvertently foregoing tax rights once BEPS 2.0 is in place.
The potential loss of tax revenue for Singapore from the first pillar can be offset by the additional tax collection through the implementation of the second pillar and the AMT.
The additional tax revenue can then be channeled to support businesses in the form of grants, subsidies and financing as alternative instruments without tax incentives to attract targeted investments in Singapore.
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However, reforming the country’s longstanding corporate tax system is not an easy task to rush into. Singapore should continue to monitor the global roll out of BEPS 2.0 and US tax developments as it redesigns its corporate tax system.
Chester Wee is the head of international corporate tax advice at EY Asean.
The views in this comment are those of the author and do not necessarily reflect the views of the EY global organization or its member firms.