Can Singapore survive a global minimum tax?
Singapore has long enjoyed the reputation of being the “Switzerland of the East”. As a geopolitically nonaligned country with an advanced financial system and strong rule of law, the Lion City is a crossroad for global capital flows in Asia, making it smoother and easier for the thousands of multinational corporations to set up shop here. Of course, a relatively low corporate tax rate of 17%, versus the OECD average of 23.51%, helps.
But BEPS 2.0 might just cast a shadow on Singapore as a financial hub. Deputy Prime Minister Heng Swee Keat observed during his Budget 2020 round-up speech that as a small hub economy with a smaller consumer base, Singapore could face weaker corporate tax revenues. The OECD has estimated that investment hub countries like Singapore could face a 5% drop in taxable revenue.
But even though Singapore’s 17% corporate tax rate exceeds the proposed global minimum on paper, deductions and incentives mean that the effective tax paid by some MNEs may be less than 15%. The benefit of such incentives, Poh of NUS warns, could be nullified by BEPS 2.0 since MNEs will have to pay top-up tax in their home jurisdictions. Singapore would be just subsidising additional tax collection for other countries instead of attracting business.
Still, the consensus is that Singapore is unlikely to be too badly affected by a global minimum tax. While Singapore relies partly on its low tax rate to attract capital to its shores, Hennecke says it is not a “letterbox” tax haven since it does not rely purely on tax arbitrage.
It is Singapore’s non-tax advantages, says Hennecke, that will likely keep Singapore relatively competitive even if a global minimum tax is implemented. OCBC chief economist Selena Ling agrees, arguing that Singapore’s value proposition for FDI extends beyond just competitive tax rates.
“The overall clean government, strong legal and regulatory framework, efficient infrastructure, highly skilled labour, pro-business environment and strong eco-system etc are the key attractions. As a relatively high-cost manufacturing centre, the competition is a lot more sophisticated than just tax rates per se,” she says.
Lim of ESSEC agrees. “The Ministry of Finance maintains a fairly distributed revenue mix, for which corporate taxes contribute about a third,” he tells The Edge Singapore. “I believe that the economy is more diversified today than it was 20 years ago, and tax haven-diminishing policies (such as AML [anti-money laundering] and KYC [know your client] laws rolled out in the interim has meant that tax arbitrage reliance is less pernicious now.”
In any case, says Sanganeria of KPMG, not enjoying tax incentives here does not mean Singapore has lost out as a place to do business. He points out that Singapore’s tax incentives are never permanent, and that many foreign companies continue to stay put even when their rate goes back to 17%. The government, he says, will have to accelerate non-tax attractions to maintain Singapore’s economic attractiveness.
To that end, Minister of Trade and Industry Gan Kim Yong told parliament on July 5 that the government would be redoubling its efforts to improve Singapore’s business environment. It will continue to invest in infrastructure to allow companies to operate cost-effectively and provide support schemes to help firms improve productivity. It is improving connectivity through new free trade agreements in emerging sectors like the green economy and the digital economy.
Citing South Korea and Israel as benchmarks, Lim of ESSEC urges more public-private partnerships that could boost national R&D expenditure as a share of GDP so as to lift productivity not just for hightech firms in ICT or biotech, but also for the SMEs. Gan told parliament that Singapore offers significant incentives and support for technology firms to invest in R&D to anchor a knowledge-based and innovation-driven economy.
Exemptions could go Singapore’s way too, says SMU’s Ghosh. As a small trading nation and financial hub, moves by the UK to seek “carve-outs” of the financial services and marine sectors could benefit Singapore. Still, he says that the future of Singapore’s finance industry is to strengthen innovation and sustainability, deploy financial technology at lower cost and improve financial inclusivity.
“Singapore’s current tax regime seems to be substance-based and incentives are not provided unless there is a substantial amount of activity in the country,” says Ernst and Young tax partner Stephen Bruce. He says that substance-based carve-outs could allow Singapore to continue providing tax incentives.
And if the tax changes are implemented, traditional tax havens will lose their key attractiveness in facilitating tax arbitrage. Singapore would then find itself becoming more attractive to global finance due to its non-tax advantages, allowing it to further entrench its status as a premier financial centre, says Hennecke.
The same point was made by minister Wong: “Our overall competitiveness has never been based on taxation alone. It’s about ensuring a conducive environment for businesses and entrepreneurs to thrive.” But he warned that as a small city-state with no natural resources, a global minimum tax will still make it harder for Singapore to attract and retain investments.
Gan even described BEPS 2.0 as a “threat” that could affect Singapore’s competitiveness. “If we stop where we are and hope that we will continue to thrive and be vibrant, I think we will be in trouble,” he warned parliament. Singapore must keep moving and looking out for opportunities while restructuring and reorganising its economy to capitalise on them.
Yet if MNEs are persuaded to stay, BEPS 2.0 could see Singapore doubling down on its non-tax advantages. With more tax revenue due to the higher corporate tax rates, it could offset this higher tax burden by investing still more in non-tax advantages like infrastructure and talent development. Hennecke also sees Singapore using the additional corporate tax revenue to offset the drawdowns from the reserves it used to fight Covid-19.
Ultimately, says Ling of OCBC, Singapore’s economic fate will not be defined solely by its tax rate. In an increasingly complex global environment, factors like geopolitics and climate change will ultimately be equally if not more important in shaping Singapore’s role within the global economy. As the world emerges from a “once in a generation” pandemic, the world that Singapore will have to adapt to will likely look very different from that which came before. E