SINGAPORE: While the recent proposal of new global tax rules for multinational corporations (MNCs) may have an impact on Singapore’s corporate income tax revenues and the effectiveness of its tax incentives, Finance Minister Lawrence Wong said on Monday (July 5) that it is “too early to determine the exact impact.” Singapore’s corporate tax structure will be changed after a worldwide agreement is reached, and it will do so in conjunction with the industry. In answer to multiple inquiries from Members of Parliament, the minister stated that it will work “even harder on non-tax factors” to ensure that it remains competitive and appealing to investors (MPs).
In June, the Group of Seven (G7) countries agreed to support the adoption of a worldwide minimum corporation tax rate of at least 15% and put in place measures to ensure that businesses pay taxes in the countries where they earn profits, regardless of whether they have a physical presence.
READ MORE: What is a global minimum tax and how will it affect you?
At the Organisation for Economic Cooperation and Development’s (OECD) meeting last week, 130 countries backed the suggested reform proposal. Mr Wong told the House on Monday that Singapore was one of them. However, since worldwide negotiations on the design of particular rules and implementation details, as well as the prospect of sectoral carve-outs, continue, this is far from a done deal.
Following that, the broader deal will be presented to the Group of Twenty (G20) major economies for political approval at a conference this week in Venice.
WHAT DOES IT IMPLY FOR SINGAPORE?
Mr Wong began his speech in Parliament by attempting to explain how the two sets of proposed reforms may affect Singapore.
The first is a reallocation of taxing rights to countries where MNCs’ consumers are located, which will apply to corporations with global revenues of more than 20 billion euros and a profit margin of more than 10%.
He used the example of a Singapore-based multinational corporation with a 15% profit margin. 5% of profits will be moved from Singapore to be taxed in foreign markets under the proposed new law. Mr Wong explained, “This means that hub economies with smaller markets, like as Singapore, will lose corporate income tax revenues.” READ MORE: What Does the G7’s Global Tax Reform Plan Mean for Singapore? The second is a proposal for a new minimum tax rate of at least 15% for businesses with revenues above 750 million euros. “Broadly speaking, if an MNE (multinational enterprise) group is taxed at an effective rate of, say, 10% in Singapore, its home jurisdiction will apply additional laws requiring the business to pay an additional 5% in tax there,” Mr Wong explained. As a result, tax incentives’ efficacy as a tool to persuade larger enterprises to invest in Singapore is limited, he added. Singapore’s headline corporation tax rate is now 17%, although due to tax advantages given to companies viewed as advantageous to the country’s economic development, many enterprises’ effective tax rate may be lower than that, or even the proposed worldwide minimum. Mr Wong stated that roughly 1,800 multinational corporations (MNCs) in Singapore will be subject to the new worldwide regulation, and that “the majority” of them already pay taxes of less than 15%. “However, it is still too early to determine the specific impact of the tax measures at this time,” he added. “The final number of MNEs affected, as well as the magnitude of the impact, will be determined by the design of the precise rules, which are still being debated at the IF (OECD/G20 Inclusive Framework).” ” “Because some of the tax suggestions can only be implemented through a multilateral instrument,” Mr Wong explained, “international consensus would be required before the reforms can be enacted.” Similarly, after the precise design components of both proposed tax adjustments are worked out and agreed upon, Singapore will be able to “predict with a good degree of confidence what the eventual impact on (its) fiscal position would be.” The impact will also be determined by how firms and other countries react to these worldwide events, according to the minister. WHAT WILL SINGAPORE DO IN THE FUTURE? Mr Wong stated that whenever a worldwide agreement is reached, Singapore will change its corporate tax system as needed, in cooperation with the industry. Any changes to the tax system will be driven by three principles: adhering to globally established norms, protecting the country’s taxation rights, and reducing the burden of compliance for enterprises. However, the ideal reaction to tax reforms, according to the minister, is to continue to improve Singapore’s overall competitiveness, noting that a favorable tax climate “is not the deciding factor” in the country’s capacity to attract investments. READ: Singapore’s tax system will be compliant with international standards while reducing the burden on businesses: Lawrence Wong is a writer who lives in Hong Kong. Quality infrastructure, good connectivity, a competent workforce, and an open and business-friendly environment based on the rule of law are all competitive characteristics that Singapore must “double down” on. “The result of these tax reforms… will make it more difficult for Singapore to attract investments – there should be no mistake about that, so let’s be realistic about the impact,” Mr Wong added. “As a result, we will have to work significantly harder on our end, whether it is in terms of updating our people, infrastructure, connection, or our general business environment. All of these characteristics will become increasingly important in our ability to attract and maintain investments, with the ultimate goal of providing good jobs for Singaporeans,” he added. In response to a similar parliamentary question, Trade and Industry Minister Gan Kim Yong highlighted that initiatives like the Industry Transformation Maps are helping Singapore strengthen its competitiveness and business environment. Singapore will continue to invest in its infrastructure to allow businesses to operate in a “very cost-effective” manner, as well as expand its connections through new free trade agreements, he added. Authorities are looking for new prospects in the digital economy, such as trade deals involving green energy. “I’ve been talking to our counterparts in other nations practically every day since I started the position,” he stated, “to build new relationships that will help our companies to expand beyond the boundaries and limitations of our physical size.” “We’ll also want to encourage companies to invest in productivity and upgrades so that they can remain cost effective,” he continued, pointing to the many support schemes available./n
