Budget debate: Potential changes to global tax rules could threaten Singapore's corporate tax revenue

Currently, the allocation of corporate taxing rights across jurisdictions is based on where the underlying economic activities are conducted.
Currently, the allocation of corporate taxing rights across jurisdictions is based on where the underlying economic activities are conducted.PHOTO: ST FILE

SINGAPORE - Proposed changes to global tax rules could threaten Singapore's corporate tax revenue, said Mr Cedric Foo (Pioneer) as he explained why a hike in the goods and services tax (GST) is necessary.

In particular, the proposal by the Organisation for Economic Cooperation and Development (OECD) to determine taxation based on where companies generate most of their sales could mean that a Singapore-based company selling its services in the United States would pay most of its taxes there, he added in Parliament on Thursday (Feb 27).

The OECD's base erosion and profit shifting (Beps) proposals are aimed at stopping large technology firms from shifting profits to low-tax locations.

Currently, the corporate tax system is based on the tax residency status of a company, which is typically tied to physical location or place of incorporation, among other things.

Mr Foo said: "Singapore is a small hub economy with a lower consumer base compared with the larger economies with higher consumption. Should the OECD's Beps proposal be adopted, we could end up with lower corporate tax revenues."

On top of this, the low interest rate environment worldwide would make it increasingly difficult to achieve high returns from the investment returns of Singapore's reserves, he added.

Given this double-whammy, he said, the planned GST hike appears inevitable.

The Beps issue was also raised by Mr Henry Kwek (Nee Soon GRC) on Wednesday when he referred to the proposal for a minimum global tax that will allow home countries to tax their multinational corporations more.

This means such companies may be paying most of their taxes in their home countries even if they get preferential tax rates elsewhere in the world to set up shop.

"If these developments take place, the impact on our revenue base could be swift and sizeable," Mr Kwek warned.

"Billions of dollars of lost corporate income tax; additional spending to keep and attract current and future investments; loss tax revenue and spending by a reduced international workforce; and less job opportunities for our people."

He urged the Government to keep a close eye on Beps developments, given that tax incentives are an important tool to anchor major investments in Singapore.

During Thursday's debate on the Budget statement, Ms Foo Mee Har (West Coast GRC) and Non-Constituency MP Leon Perera also raised questions on how the national reserves should be used.

Ms Foo said she was worried about Singapore's growing dependence on the net investment returns contribution (NIRC). In 2015, 13 per cent of Singapore's total expenditure was accounted for by NIRC funds. But this is projected to go up to 22 per cent in 2020, she said.

The NIRC, which refers to returns from Singapore's invested reserves, is the top contributor to government coffers.

Noting that the NIRC is subject to the volatility of the investment environment, she asked if it would be prudent to consider setting a threshold on NIRC dependency, and to ensure that recurrent spending should only be funded through recurrent revenue.

Meanwhile, Mr Perera suggested growing Singapore's reserves at a slower rate, so that more of it can be spent on boosting the competitiveness of Singaporeans and local companies.

He suggested that if these extra funds are used to help people and firms become more creative, resilient, innovative and entrepreneurial, the country might even end up saving money as the economy could grow more, leading to more tax revenue and possibly less need to spend on social welfare, he said.