Implications on Singapore from G7 Agreement on Global Minimum Corporate Tax Rate

Parliamentary Question by Ms Foo Mee Har:

To ask the Minister for Finance (a) how will Singapore be impacted by the landmark agreement amongst G7 nations to reform the global tax system and impose a minimum global corporate tax rate of 15%; and (b) what are the plans to mitigate adverse impact to Singapore's corporate income tax revenue.

Parliamentary Question by Ms Jessica Tan Soon Neo:

To ask the Minister for Finance (a) what are the implications of the G7 agreement on a global minimum corporate tax for Singapore; (b) whether Singapore’s status as a tech hub will be affected; and (c) how will the tax affect multinational corporations that currently operate in Singapore.

Parliamentary Question by Ms Mariam Jaafar:

To ask the Minister for Finance (a) what is the number of MNCs that currently pay less than the global minimum corporate tax rate of 15% proposed by G7; and (b) given that MNCs receive tax incentives for undertaking activities that benefit Singapore in the long run such as developing new sectors or building capabilities, whether such special tax schemes will be permissible under the proposed changes; and (c) what other levers must the Government strengthen.

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Parliamentary Reply by Minister for Finance, Mr Lawrence Wong:

Since 2016, there have been concerted efforts to strengthen international co-operation in taxation matters, to stamp out harmful practices and to increase the taxes paid by multinational enterprises (MNEs).  These efforts were first initiated by the OECD to deal with the issue of Base Erosion and Profit Shifting (or BEPS) by MNEs. To ensure a wider international consensus, the discussions were subsequently broadened to include more than 130 jurisdictions through a platform called the Inclusive Framework (IF) on BEPS. 

Singapore has been actively involved in these international discussions as part of the IF. The IF has been discussing two major tax changes. 

The first proposal concerns the re-allocation of taxing rights of the largest and most profitable MNEs from where they conduct their substantial activities to where their customers are. This is known as Pillar 1. The current proposal is that Pillar 1 will apply to MNE groups with global revenues above 20 billion euros and profitability above 10%.

The second proposal is the introduction of an internationally-agreed minimum corporate tax rate for large MNEs, wherever they operate. This is known as Pillar 2. The G7 and IF have proposed a minimum effective tax rate of at least 15% for MNE groups with global revenues above 750 million euros. 

Let me explain how Pillars 1 and 2 will likely impact Singapore.

Pillar 1 was intended to adapt the international tax system to new business models where large businesses sell remotely to consumers in other jurisdictions, without physical presence. Under Pillar 1, some part of the profits and hence the taxes payable of large companies with overseas operations will be re-allocated to where their customers are. To illustrate, assume a Pillar 1 MNE group in Singapore has a profitability of 15%. Pillar 1 will then re-allocate a portion of the profits in excess of 10%, 5% in this case, from Singapore to be taxed in the market jurisdictions. This means that hub economies with smaller markets like Singapore will stand to lose corporate income tax revenues.

Pillar 2 aims to put a floor on international corporate tax competition.  Essentially, under this proposal, MNEs will be subject to the minimum effective tax rate of 15% at the MNE group level, in every jurisdiction they operate.  Broadly speaking, this means that if a MNE group in Singapore is taxed at an effective rate of, say 10%, then its home jurisdiction will impose additional rules to require the group to pay an additional 5% in tax there.  Pillar 2 will therefore limit the effectiveness of tax incentives as a tool to encourage larger MNEs to invest in Singapore. 

Ms Mariam Jaafar asked how many MNEs in Singapore currently pay less than the global minimum corporate tax rate of 15%. The current proposal is to apply this minimum effective tax rate to MNEs that meet a certain revenue threshold, currently set at 750 million euros. There are about 1,800 such MNE groups in Singapore that would meet this criteria.  

We expect that a majority of these MNE groups will have group effective tax rates below 15% in Singapore. That’s because our headline corporate tax rate is 17%, close to the proposed minimum effective tax rate of 15%. Furthermore, our tax system, like most others, provides for tax reliefs to encourage various meritorious activities like capital investment, R&D or charitable donations. For a small number of companies, there are also tax incentives for their qualifying activities subject to economic commitments.

However, at this stage, it is too early to work out the exact impact of the tax proposals. The final number of affected MNEs, as well as the extent of the impact, depends on the design of the specific rules which are still being actively discussed at the IF. As some of the tax proposals can only be effected through a multi-lateral instrument, there will be a need for international consensus to be fully reached before the changes can be implemented. 

Hence, in response to the query from Ms Foo, we will only be able to determine with a high degree of confidence what the eventual impact on Singapore’s fiscal position would be, once the IF has worked through and agreed on the detailed design elements of both Pillars. The eventual impact will also depend on how companies and other governments respond to these international developments.   

What we can say for certain is that when a consensus is fully reached, Singapore will adjust our corporate tax system as needed, in consultation with the industry. Any adjustments to our tax system will be guided by three principles:

a. First, we will abide by internationally agreed standards.

b. Second, we will safeguard our taxing rights.

c. Third, we will seek to minimise the compliance burden for businesses. 

Ultimately, the best response to these tax changes is to continue strengthening our overall competitiveness.
  
Over the decades, Singapore has built a solid reputation and track record as an attractive place for business and substantial economic activity.  While a conducive tax environment has been helpful in attracting investments, it is not the decisive factor.  Having quality infrastructure, good connectivity, a skilled workforce, an open and business-friendly regime founded on the rule of law, are all far more important factors.  We must therefore double down on these competitive strengths.  In particular, the Government has been investing and will continue to invest in enterprise capabilities, including innovation and digitalisation, and in the skills of our workforce.  

The Minister for Trade and Industry will be elaborating further on how Singapore can continue to strengthen its position as a technology hub.  MAS has also separately provided a written answer to Ms Mariam Jaafar’s question on Singapore’s position as an international financial centre.  In short we will continue to provide a conducive regulatory environment for businesses, especially for new and innovative activities, as well as a good ecosystem and infrastructure for such activities to scale up across the region.  We will also work closely with the industry to build up capabilities and skills that will enable us to stay relevant in the face of key structural trends like digitalisation and sustainability that are transforming the financial landscape.

The latest proposals to change international corporate tax rules will not be the first or last challenge we will face.  The key is for us to stay agile and nimble, and respond innovatively to the key global trends affecting our economy.  We must continually work hard to strengthen our value proposition, build new advantages and seek new opportunities. This way, we ensure Singapore’s continued economic success and ultimately a good future for our people.