SINGAPORE: While the recent proposal for new global tax rules for multinational corporations (MNCs) could hurt Singapore’s corporate tax revenues and reduce the effectiveness of its tax incentives, it is “too early to assess the exact impact,” Treasury Secretary Lawrence Wong said on Monday, Jan. . July).
Singapore will change its corporate tax system after reaching global consensus on the matter and doing so in consultation with the industry. It will also work “even harder on non-tax factors” to ensure it remains competitive and attractive for investment, the minister added in response to several questions from MPs.
The Group of Seven (G7) countries reached a groundbreaking agreement in June to support the creation of a minimum global corporate tax rate of at least 15 percent and to take steps to ensure companies pay taxes regardless of where they are Make a profit whether they have a physical presence.
READ: What Is A Global Minimum Tax And What Will It Mean?
Last week, 130 countries supported the proposed reform plan in talks held by the Organization for Economic Co-operation and Development. Singapore is one of them, Mr Wong told the house on Monday.
This is far from over, however, as global discussions about how to design specific rules and how to implement them are ongoing.
The broader agreement will next go to the Group of Twenty (G20) economies for political approval at a meeting in Venice this week.
WHAT IT MEANS FOR SINGAPORE
In his speech in Parliament, Mr Wong first tried to explain how the two proposed changes could possibly affect Singapore.
The first concerns the reallocation of taxation rights to countries in which the customers of MNCs are located and applies to companies with worldwide sales of over 20 billion euros and a profitability of over 10 percent.
As an example, he cited a multinational company based in Singapore with a profitability of 15 percent. According to the proposed new regulation, the excess profit, which in this case amounts to 5 percent, will be reallocated from Singapore for taxation in other markets.
“This means that hub economies with smaller markets like Singapore will lose corporate tax revenues,” said Wong.
READ: What the G7 Global Tax Reform Plan could mean for Singapore
The second is the proposal of a new minimum tax rate of at least 15 percent for companies with a turnover of over 750 million euros.
“By and large, this means that if a MNE group (multinational corporation) is taxed in Singapore at an effective rate of, say, 10 percent, their home jurisdiction will impose additional rules that require the group to add an additional 5 percent in tax pay tax there, ”said Mr Wong.
This therefore limits the effectiveness of tax incentives as a tool to encourage larger companies to invest in Singapore, he added.
Singapore’s corporate tax rate is currently 17 percent, but the effective tax rate for many companies may be conducive to the country’s economic development due to tax breaks and tax incentives for those with skilled jobs.
Mr Wong said that around 1,800 multinational companies in Singapore would qualify for the new global rule and “a majority” of them would currently pay taxes below 15 percent.
“At this point, however, it is too early to assess the exact impact of the tax proposals,” he added.
“The final number of MNEs affected and the extent of the effects depend on the design of the specific rules that are still being actively discussed in the IF (the OECD / G20 Inclusive Framework).”
“As some of the tax proposals can only be implemented through a multilateral instrument, full international consensus must be reached before the changes can be implemented,” said Wong.
Similarly, once the detailed design elements of the two proposed tax changes have been worked through and agreed upon, Singapore will “only have a high level of confidence in determining the impact this would have on its financial condition”.
The ultimate impact will also depend on how companies and other governments react to these international developments, added the minister.
WHAT WILL SINGAPORE DO
Once global consensus is reached, Mr Wong said Singapore will adjust its corporate tax system as needed, in consultation with the industry.
All adjustments to the tax system are guided by three principles – compliance with internationally agreed standards, safeguarding the taxation rights of the country and minimizing compliance costs for companies.
However, the best response to tax changes is to further strengthen Singapore’s overall competitiveness, the minister reiterated, adding that an enabling tax environment is “not the deciding factor” in the country’s ability to attract investment.
READ: Singapore will ensure its tax system is compliant with international standards while managing the burden on businesses: Lawrence Wong
The “far more important factors” include a high-quality infrastructure, good connections, a qualified workforce, an open and business-friendly regime based on the rule of law – all competitive strengths that Singapore has to “double up” on.
“The result of these tax changes … is that it is becoming more difficult for Singapore to attract investment – there should be no doubt so let’s be realistic about what the impact will be,” said Wong.
“So we will have to work much harder on our part, be it on upgrading our employees, our infrastructure, our connectivity, our entire business environment. All of these factors would therefore become even more important to our ability to attract and retain investment and ultimately to create good jobs for Singaporeans, ”he added.
On a similar parliamentary question, Trade and Industry Minister Gan Kim Yong said Singapore will also improve its competitiveness and business environment through efforts such as Industry Transformation Maps.
He added that Singapore will continue to invest in its infrastructure so that companies can operate “very cheaply” and expand its connectivity through more free trade agreements. With the latter, authorities are looking for new opportunities, such as trade agreements with renewable energies and the digital economy.
“For the past few weeks since I took up the position, I’ve spoken to our colleagues in other countries almost every day to make new connections so that our companies can expand beyond the limits and limits of our physical size,” he said.
“We will also want to encourage companies to invest in productivity and modernization so that they can continue to operate cost-effectively,” he added, referring to the various funding programs available.