The Group of Seven (G7) advanced economies announced last week that they had reached an initial agreement to establish a global minimum corporate tax rate of 15%.
The proposal will then be discussed further with the OCED (Organisation for Economic Co-operation and Development) and G20 countries.
The major economies have been attempting for some time to prevent multinational corporations from shifting profits to low-tax jurisdictions regardless of where their sales are made.
Recently, companies have shifted income from intangible assets such as intellectual property, software, and drug patents to these jurisdictions, allowing them to avoid paying higher taxes in their traditional home countries.
Although a global corporate tax pact is unlikely to be reached anytime soon, experts generally agree that low-tax jurisdictions such as Singapore may see their attractiveness to global MNCs (multinational corporations) eroded if such a global rate is implemented.
While Singapore’s headline corporate tax rate is 17%, the effective rate is significantly lower. After taking into account the various incentives and concessionary rates available to certain industries, the rate for some sectors is significantly lower than 15%. As details are still being worked out, it is unclear how the new proposed global tax rule will affect such indirect tax benefits.
Singapore has attracted investments from targeted businesses in the technology, finance, biomedical, and maritime sectors, all of which qualify for preferential tax rates if certain criteria are met. Apple, Google, Facebook, Bytedance, and Microsoft have established regional headquarters in the city state.
Since 2000, it is estimated that over 7,000 Indian companies have established a presence in Singapore. Indian conglomerates such as Mahindra, Tata, and Reliance have a long history in the country. Adani Group announced the establishment of a regional headquarters in Singapore earlier this month.
Singapore’s appeal to foreign companies is not solely based on financial incentives such as favourable tax rates and benefits; it also has other advantages. Singapore is ranked second in the World Bank’s ease of doing business index, having previously held the top spot for ten years prior to 2017, when it was surpassed by New Zealand.
Indeed, establishing a business in Singapore is quite simple. Apart from a sound infrastructure and an efficient bureaucracy, it benefits from a robust legal system and robust intellectual property protection. Additionally, there are no restrictions on foreign ownership and no currency controls for the majority of businesses.
Singapore has an extensive network of tax treaties with other countries (including one with India), which enables Singapore companies conducting international business to avoid double taxation.
Additionally, Singapore benefits from superior connectivity to the rest of Asia and a thriving business and technology ecosystem. Singapore serves as a gateway for Indian businesses seeking to expand their trade and investment into the Association of Southeast Asian Nations (ASEAN), as it is both an international financial centre and an Asia-Pacific shipping and aviation hub.
It has recently attracted a large number of Indian technology entrepreneurs to its shores as a result of its pro-growth and pro-innovation policies. There are numerous grants, tax incentives, and in-kind assistance programmes available to start-ups.
Additionally, the government can subsidise a new business’s labour costs in certain preferred sectors. These benefits are available to both domestic and international businesses. Singapore has nurtured and grown the venture funding community to become one of the top venues in Asia for start-up funding, leveraging its status as a financial hub. If the world’s major economies do agree on a minimum global corporate tax rate, Singapore’s corporate tax structure will need to be adjusted.
Singapore’s Finance Minister, Lawrence Wong, stated on Facebook that “it is premature to speculate” on the impact. Additionally, he stated that the Singapore government would make any necessary adjustments to the corporate tax system “once a global consensus is reached.” “The new rules must avoid inadvertently undermining businesses’ incentives to invest and innovate,” Wong continued. “Otherwise, all countries will suffer as we fight for a smaller share of a shrinking revenue pie.”
“Whatever the final global minimum tax rate is, Singapore’s corporate tax revenue base will be impacted,” said Simon Poh, an accounting professor at the National University of Singapore Business School. “Should this significantly reduced minimum rate of 15% become law, the impact on Singapore will be mitigated somewhat, but will remain significant.”
The professor added, “However, there may be a silver lining to the proposal for a global minimum tax rate.” This is because “Singapore may well benefit from the exodus of businesses from tax havens such as the British Virgin Islands, the Cayman Islands, Bermuda, and Vanuatu, which do not levy taxes at all, assuming that the other comparative advantages they may offer as an attractive location are deemed to be less than those offered by Singapore.”
“Numerous multinational corporations have chosen Singapore as their investment location over the years due to a variety of favourable non-tax policies, including its strategic geographical location, global connectivity, political stability, pro-business environment, and diverse talent pool. Additionally, Singapore may pursue additional strategies to attract multinational corporations to its shores.”
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