Global tax overhaul
A community of 130 countries are close to seeking an end to the race to the bottom for international corporate tax. How will this affect Singapore?
For the past four decades, the international community has been in a “race to the bottom”. Different jurisdictions compete to cut corporate taxes in a bid to attract capital and foreign direct investment (FDI), given how globalisation makes it easier for multinational enterprises (MNE) to locate from one country to another.
In the early 1980s, the worldwide average statutory corporate income tax rate was slightly above 40%; today it is slightly less than 25%. In the US, corporate tax revenue as a share of GDP has fallen from approximately 7% in 1944 to just 1.1% as of 2019.
But governments have had enough. On June 5, Group of Seven (G7) finance ministers agreed to commit towards implementing a global minimum tax of 15%. Group of 20 (G20) finance ministers and central bank governors — who preside over 90% of global GDP and 80% of international trade — are expected to sign off on the proposal in Venice from July 9–10. So far, 130 countries — including Singapore — have endorsed the proposal in principle, with implementation possibly as early as 2030.
The Base Erosion and Profit Shifting (BEPS) 2.0 proposal comprises two major pillars. Pillar One grants jurisdictions where a firm’s customer base is located greater taxing rights than those where its underlying economic activity is conducted. This rule applies to only a small group of very large multinationals. Pillar One’s threshold applies to MNEs with more than EUR20 billion ($31.9 billion) of global turnover potentially reducing to EUR10 billion after seven years.
Pillar Two requires MNEs to pay a minimum tax rate in their home jurisdiction. Regardless of how they manage their tax affairs and operational model, governments are allowed to charge “top-up taxes” if firms are paying an effective tax rate below the proposed 15%. The revenue threshold for Pillar Two is EUR750 million ($1.2 billion) and will affect 1,800 MNE groups in Singapore.
“Our collaboration will create a stronger level playing field and it will help raise more tax revenue to support investment and it will crack down on tax avoidance,” declared the G7 summit communique issued on June 13.
Singapore, ever eager to maintain a business-friendly environment, will ensure that the country’s tax system remains compatible with international norms. However, “the new rules should not inadvertently weaken the incentives for businesses to invest and innovate, otherwise, countries will all be worse off, fighting over our share of a shrinking revenue pie”, said Finance Minister Lawrence Wong on June 8.
In parliament on July 5, the finance minister committed to minimising the compliance burden for affected companies in Singapore. Wong also vowed to safeguard Singapore’s “sovereign rights on taxes” even as Singapore actively participates in BEPS 2.0 discussions to shape international consensus in line with its national interests and create a level playing field for all.
Payback time
Now, having implemented unprecedented fiscal stimulus to counter the economic fallout of the pandemic, governments see BEPS 2.0 as a way to replenish their coffers. “There’s now an expectation that companies pay back for those kinds of benefits and there’s been a mood that companies should pay more tax for a long time,” says Simon Baptist, global chief economist at the Economist Intelligence Unit (EIU).
Some coffers, if left empty, could trigger a downward spiral. “With a vigorous post-Covid-19 rebound and higher interest rates, the most heavily indebted countries could find themselves in difficulties,” warns John Driffill, Yale-NUS economics professor, in a CNA op-ed, arguing that rates should be at least 25% in order to be meaningful.
Still, Jamus Lim, associate professor of economics at ESSEC Business School, is sceptical that higher corporate taxes would straightaway translate into lower financial burden for states. The sheer size of debt incurred following the pandemic stimulus is on top of the spending incurred just over a decade ago countering the 2008–2009 Global Financial Crisis. As such, the effect of higher corporate taxes on this significant debt will likely be marginal, especially for advanced economies.
But the original 2012 aim of BEPS 2.0 was to combat elaborate tax avoidance strategies by MNEs. Typically, they engage in “profit shifting” where they allocate profits from hightax jurisdictions to low-tax jurisdictions such as the Cayman Islands, Ireland or Bermuda. The result is “base erosion” since the migration of these profits sees other states having a lower tax base from which to raise revenues.
Tech companies, with their ability to generate earnings from delivering services online across borders, have been singled out as those practising “aggressive tax avoidance”. Advocacy group Fair Tax Mark, for example, claims the “big six” — Amazon, Apple, Facebook, Alphabet, Microsoft and Netflix have avoided