SINGAPORE: Less than two months after first proposing a global minimum tax rate of 21 percent, US Treasury Secretary Janet Yellen launched the idea of a lower tax rate of 15 percent on May 20.
However, she stressed that this was a minimum rate and that a higher rate was still being considered and negotiated.
This more realistic rate is likely to have increased support from other countries and build on the growing consensus on a global minimum corporate tax rate.
This announcement harks back to ongoing discussions within the OECD’s project on taxing the digital economy, known colloquially as Base Erosion and Profit Shifting (BEPS) 2.0, which aims to combat tax planning strategies by some multinational corporations (MNCs) to combat tax avoidance.
COURTING INTERNATIONAL SUPPORT
France and Germany, who backed the originally proposed 21 percent rate early on, also quickly supported the US’s latest move and welcomed it as a “good compromise” and “great progress”.
The move comes ahead of a G7 meeting in London next month, where the new rate of 15 percent could get more support.
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However, not everyone got warm with the idea. The initial rate of 21 percent had met strong opposition from European low-tax countries like Ireland since the idea was first introduced.
Domestically, Republicans are expected to oppose the Biden administration’s tax proposals, whether it be the watered down global minimum rate of 15 percent or the proposed increase in the US domestic corporate tax rate to 28 percent.
Granted, it was a wise US policy to win the international community over to the global minimum rate first in order to increase their chances of success with the national tax plan.
However, to be accepted, the proposed domestic corporate tax rate may also need to be reduced from 28 percent, for example to 25 percent to match the proposed UK tax rate from 2023.
US President Joe Biden’s proposal to introduce a worldwide minimum tax of 15 percent has met resistance in Ireland AFP / JIM WATSON
In a previous comment, I argued that while the originally proposed US global minimum tax of 21 percent is likely to meet strong opposition in other countries, these talks are igniting a new dynamic towards reaching agreement on the OECD’s proposed global minimum tax on a consensus basis would be the second pillar of BEPS 2.0 in relation to the taxation of large MNCs.
Given the US’s compromised stance, an agreement now seems very likely by the end of 2021, given the small gap between 15 percent and the 10-12.5 percent over which the OECD debates hover.
LOWERING THE COMPETITIVE TAX REGULATION OF SINGAPORE
Over in Singapore, as I explained earlier, no matter what that global minimum rate ultimately is, the Singapore corporate tax base will be affected.
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If this significantly reduced minimum rate of 15 percent is exceeded, the impact on Singapore will be somewhat less, but still considerable.
Although the corporate tax rate in Singapore is 17 percent, the effective tax rate for many companies in Singapore could be lower than this rate and possibly even below 15 percent.
In addition to some privileged sectors such as finance, maritime and global trading companies that enjoy preferential tax rates if the requirements are met, company profits from the disposal of certain assets such as stocks in Singapore are usually not taxable if held for long periods of time. Invest term.
Ocean-going vessels are seen moored in the waters south of Singapore. (File Photo: AFP / ROSLAN RAHMAN)
The net result could be that what is not taxable in Singapore can trigger a “top-up tax”, provided that profits of group companies are taxed in Singapore at an effective tax rate below the global minimum rate of, for example, 15 percent.
Indeed, like other countries, Singapore could surrender its taxation rights to a metropolitan country under the global minimum tax proposal.
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This, in turn, undermines Singapore’s competitive tax system by neutralizing some of its key tax factors that have drawn global investors for many years – the availability of tax incentives and the lack of a capital gains tax system.
SINGAPORE HAS A LOT TO OFFER
The proposal for a global minimum tax rate could still have a silver lining, provided the final tax rate is between 10 and 15 percent.
Singapore could well benefit from the exodus of companies from tax havens such as the British Virgin Islands, Cayman Islands, Bermuda and Vanuatu, which levy no taxes at all, provided the other comparative locational advantages are less than Singapore.
The Bahamas is a popular tax haven for US companies
With corporate tax rates of 15 percent and 12 percent respectively, the Maldives and Macau are the other two low-tax countries that could lead to corporate emigration.
In the worst case scenario, some US multinational corporations may move certain functions currently held in Singapore to their home or other location.
However, this view is too pessimistic.
Many global companies have chosen Singapore as their investment location over the years due to many optimal non-tax policies including strategic geographic location, global connectivity, political stability, business-friendly environment and diverse talent pool – to name a few.
Additionally, Singapore could continue to explore other strategies to attract more multinationals to its shores.
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For example, the government can support MNEs in the form of capital grants and other incentives that are not taxable.
Such programs can be more effective than low taxes in getting multinational corporations involved in other Singapore economic goals, including training a Singaporean core or working with SMEs.
The government could also enhance the attractiveness of programs tied to employing local workers or spending on R&D.
Depending on how the US or the global minimum tax proposals of BEPS 2.0 ultimately develop, Singapore must react decisively in consultation with various interest groups after reviewing the implementation details.
Chemical refineries in Singapore. (Photo: AFP)
If preferential tax rates alone are no longer sufficient to attract foreign direct investment to Singapore, then the days of 0 percent tax rates, such as those applied by pioneer incentive companies, could be over.
Sacred cows – for example, the lack of a capital gains tax regime – may also need to be slaughtered – to prevent tax outflows to other jurisdictions and to maintain the corporate tax base in Singapore.
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The pandemic took a toll on corporate and public balance sheets as early as 2020, but 2021 could well end as the year of disruption for countries’ corporate tax systems.
But the government still has time to respond.
Even if global consensus on the BEPS 2.0 clauses for taxing large MNCs and digital services can be reached by the end of this year, most tax experts estimate that it will take at least two years to implement the full agreement worldwide.
In the meantime, the government must continue its relentless efforts to promote Singapore as an attractive investment hub while focusing on its non-tax factors.
Simon Poh is Associate Professor (Practice) in the Department of Accounting at NUS Business School. The opinions expressed are those of the author and do not reflect the views and opinions of NUS.