SINGAPORE - There is "no doubt" that a landmark deal by the world's richest nations to back a global minimum corporate tax rate of at least 15 per cent will make it harder for Singapore to attract investments, said Finance Minister Lawrence Wong.
But it is too early to work out the exact impact, as implementation details are still being negotiated.
"The large MNCs (multinational corporations) of the world will bear a larger tax burden anywhere they go. So on (Singapore's) part, we will have to work much harder, whether it's on upgrading of our workforce, our infrastructure, our connectivity, or our overall business environment.
"All of these factors will therefore become more salient in our ability to attract and retain investments, and ultimately with the objective of creating good jobs for Singaporeans," he said in Parliament on Monday (July 5), adding that many locations around the world offer equally, if not more attractive and compelling attributes as Singapore.
He was responding to MPs' questions on how Singapore will be affected by the Group of Seven's (G-7) agreement on June 5 to back the creation of a global minimum corporate tax rate of at least 15 per cent.
The G-7 also agreed on allowing countries, where a multinational's customers are based, to be "awarded taxing rights of at least 20 per cent profit exceeding a 10 per cent margin", regardless of whether the MNC has physical presence in these markets.
It remains to be seen if the proposals can garner support from the world's top developed and developing countries at the Group of 20 (G-20) meeting in Venice later this week, and the more than 130 countries in the Organisation for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS).
The IF collaborates on the implementation of measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
Mr Wong said the current proposal is to apply this minimum effective tax rate to multinational enterprises (MNEs) groups that meet a certain revenue threshold, currently set at €750 million ($1.2 billion), based on the group’s effective tax rate in every jurisdiction that it operates in.
Around 1,800 MNEs in Singapore would meet this criteria, he said. It is expected that a majority of them will have group effective tax rates below 15 per cent in Singapore.
Even though Singapore's headline corporate tax rate is 17 per cent, the effective tax rate of many companies here could be lower than this after taking into account various reliefs.
The net result could be that what is not taxed in Singapore may trigger a "top-up tax" to the extent that profits of group companies are taxed in Singapore at an effective tax rate below the global minimum rate of 15 per cent.
But it is too early to work out the exact impact of the proposals, he said, as the final number of affected MNEs, as well as the extent of the impact, depends on the design of specific rules which are still being actively discussed at the IF.
"As some of the tax proposals can only be effected through a multilateral instrument, there will be a need for international consensus to be fully reached before the changes can be implemented."
This also means that while there will be negative impact on Singapore's fiscal position, exactly how much this will be is uncertain, he said in response to a question from Mr Liang Eng Hwa (Bukit Panjang).
"It is difficult to give detailed estimates now because those details are still being finalised, and whether we will be able to make up sufficient revenues elsewhere - that's still something we will have to work out."
He pointed out that while consensus has been reached on the key parameters of the global tax, many design elements and implementation details have not been ironed out.
For example, one sector carve-out is shipping, whose taxation has largely been based on tonnage taxes which fall outside the scope of corporate taxes.
"These things are fluid, they continue to be discussed at the IF. Singapore is an active participant in the forum, and we will do our part to shape the consensus in line with our national interests, and also to ensure a level playing field for everyone," said Mr Wong.
He added that it is not in Singapore's interest to have an international system which is fragmented, and where other jurisdictions can impose taxes unilaterally.
"That's not helpful for Singapore as a small and open economy, and that's why we feel it's better that we participate actively in the IF and be part of the multilateral discussion to shape a set of international tax rules that can be adapted."
When a consensus is fully reached, Singapore will adjust its corporate tax system as needed in consultation with the industry, he said.
Any adjustments to its tax system will be guided by three principles: Singapore will abide by internationally agreed standards; safeguard its taxing rights; and seek to minimise the compliance burden for businesses.
But ultimately, the best response to these changes is to strengthen non-tax factors that contribute to the Republic's overall competitiveness, noted Mr Wong and Trade and Industry Minister Gan Kim Yong.
Mr Gan said that Singapore's competitiveness goes beyond taxation rates to include "key fundamentals" such as its strategic location, international connectivity, excellent infrastructure, rule of law and skilled workforce.
"However, we must not be complacent. We are therefore redoubling our efforts to enhance competitiveness and improve our business environment," he said, citing the many schemes available to support upgrading industry transformation and research and development.
The global corporate tax proposal, added Mr Gan, is just one of many threats that could affect Singapore's competitiveness.
"We have to constantly be on the move... continue to restructure, reorganise and reposition themselves for new opportunities to come."