Commentary: Global minimum corporate tax rate is approaching and will change the way Singapore attracts multinationals
SINGAPORE: Less than two months after first proposing a minimum global corporate tax rate of 21%, on May 20, US Treasury Secretary Janet Yellen launched the idea of ââa lower rate of 15% %.
However, she stressed that this was a floor rate and that a higher rate was still being considered and negotiated.
This more realistic rate is likely to gain increased support from other countries and build on the momentum of a growing consensus for an overall minimum corporate tax rate.
This announcement follows on-going discussions under the OECD’s Digital Economy Taxation Project, colloquially known as Base Erosion and Profit Shifting (BEPS) 2.0, aimed at tackling planning strategies. tax used by some multinational corporations (MNEs) to avoid taxes.
France and Germany, already the first supporters of the 21 percent rate initially proposed, were quick to approve the latest US initiative, hailing it as a “good compromise” and “great progress.”
The move comes ahead of a meeting of the G7 countries in London next month, where the new 15% rate could get more support.
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However, not everyone warmed to the idea. The initial rate of 21% had met strong resistance from low-tax European countries like Ireland since the idea was floated.
At home, Republicans are expected to oppose the Biden administration’s tax proposals, whether it’s the watered-down 15% global minimum rate or the proposed increase in the U.S. corporate tax rate to 28%.
Admittedly, it was a smart policy on the part of the United States to try first to gain the support of the international community on the world minimum rate in order to increase its chances of success on its national tax plan.
However, to be accepted, its proposed national corporate tax rate of 28% may also need to be reduced, for example, to 25% to match the rate proposed by the UK from 2023.
In a previous comment, I argued that while the initially proposed global US minimum tax of 21% would likely meet strong opposition from other countries, these talks would ignite new momentum towards a deal on the global minimum tax based on the consensus proposed by the OECD under Pillar 2 of BEPS 2.0 concerning the taxation of large multinationals.
With the compromised position of the United States, a deal by the end of 2021 now looks highly possible, given the small gap between 15% and the 10-12.5% ââthat the OECD talks are hovering over.
ABOLISH THE COMPETITIVE TAX REGIME OF SINGAPORE
In Singapore, as I explained before, regardless of this overall minimum rate, Singapore’s corporate tax base will be affected.
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If this significantly reduced minimum rate of 15 per cent is adopted, the impact on Singapore will be somewhat reduced, but it will remain substantial.
Even though the overall corporate tax rate in Singapore is 17 percent, the effective tax rate for many companies in Singapore could be lower than that rate and possibly even lower than 15 percent.
In addition to certain privileged sectors such as global finance, shipping and trading companies which benefit from preferential tax rates when eligibility conditions are met, the gains to companies from the disposal of certain assets such as stocks are generally not not taxable in Singapore if held for a long time. term investment.
The net result could be that what is not taxable in Singapore can trigger an âadditional taxâ as the profits of the group companies are taxed in Singapore at an effective tax rate below the global minimum rate of, say 15 percent.
Indeed, Singapore, like other countries, could waive its rights to tax a foreign parent jurisdiction as part of the comprehensive minimum tax proposal.
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This in turn undermines Singapore’s competitive tax regime by neutralizing some of its most important tax factors that have attracted global investors for many years – the availability of tax incentives and the lack of a tax regime on the over- values.
SINGAPORE STILL HAS A LOT TO OFFER
There may still be a silver lining to the overall minimum tax rate proposal, assuming the eventual rate is between 10 and 15 percent.
Singapore may well benefit from the exodus of companies from tax havens such as the British Virgin Islands, Cayman Islands, Bermuda and Vanuatu, which do not levy taxes at all, assuming other comparative advantages they can. offer as an attractive place to be valued as being less than Singapore.
With corporate tax rates of 15% and 12% respectively, the Maldives and Macao are the other two low-tax economies likely to experience a business exodus.
In the worst-case scenario, some US multinational companies may move some functions currently performed in Singapore to their homes or elsewhere.
Yet this view is too pessimistic.
Many global companies have, over the years, chosen Singapore as an investment location due to many optimal non-tax policies, including its strategic geographic location, global connectivity, political stability, business-friendly environment and pool of diverse talent – to name a few.
In addition, Singapore could continue to explore other strategies to attract more multinationals to its shores.
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For example, the government can provide assistance to multinationals in the form of capital grants and other incentives, which are not taxable.
Such programs may be more effective than low taxes in incentivizing multinationals to commit to Singapore’s other economic goals, including forming a Singaporean core or working with SMEs.
The government could also increase the attractiveness of programs linked to the employment of local workers or to R&D spending.
Depending on how the US or BEPS 2.0 global minimum tax proposals come to fruition, Singapore, in consultation with various stakeholders, needs to react decisively after considering the details of the implementation.
If preferential tax rates by themselves are no longer effective in attracting foreign direct investment to Singapore, then the time of 0 percent tax rates, such as those enjoyed by pioneer incentive companies, is over. maybe gone.
Sacred cows – for example in the absence of a capital gains tax regime, may also need to be slaughtered – to avoid tax leakage to other jurisdictions and to preserve the revenue base for the tax on capital gains. companies in Singapore.
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The pandemic has already wreaked havoc on corporate and public balance sheets in 2020, but 2021 may well end as the year of countries’ corporate tax regimes disrupted.
But the government still has time to react.
Even though the global consensus on BEPS 2.0 clauses on the taxation of large multinationals 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 globally.
In the meantime, the government should continue its unremitting efforts to promote Singapore as an attractive investment hub with a focus on its non-tax factors.
Simon Poh is Associate Professor (Practical) in the Accounting Department at NUS Business School. The opinions expressed are those of the author and do not represent the views and opinions of NUS.