The G7 Tax Deal Should Be a Motivation for Singapore to Leverage Its Real-World AdvantagesBy Benjamin Lim
The Group of Seven (G7) has recently agreed on a basic framework for overhauling the modern global tax system, in an effort to stop the world’s largest corporations from avoiding tax, as well as keeping up to pace with a rapidly changing digital economy.
Before we delve into how exactly these new proposals will affect Singapore, let’s take a look at the basics of the proposed framework.
In 2013, The Group of 20 (G20) and the OECD (Organisation for Economic Cooperation and Development) initiated the Base Erosion and Profit Shifting (BEPS) initiative, which resulted in the publication of 15 action points to standardise global tax standards and mitigate tax avoidance by multinational enterprises (MNEs).
In an effort to address the issues which remain unresolved by the 15 action points, as well as the tax challenges posed by the digital economy, the BEPS 2.0 initiative is a continuation of the OECD’s BEPS project where blueprints on the two pillar approach were released in October 2020. The two pillars are as follows:
- Pillar One — Introduces proposals for new profit allocation and nexus rules and addresses the taxing rights between jurisdictions. Broadly, market countries would be allocated taxing rights over a portion of profits derived by MNEs in their jurisdiction, irrespective of whether the MNEs have a physical presence in the country. The G7 have reached a consensus that those market countries should be awarded at least 20% of earnings over a 10% margin for the largest and most profitable enterprises.
- Pillar Two — The proposed global anti-base erosion (GloBE) rules under Pillar Two are intended to ensure that large MNEs pay at least a minimum level of tax, regardless of where the profits are earned or booked. It is hoped that this stops harmful tax competition by setting a floor rate and protects developing countries from undue pressure to offer tax incentives. The G7 has agreed that the global minimum tax rate should be at least 15%.
There are many parameters of the Pillar One and Pillar Two proposals which have to be agreed and the OECD has set an ambitious target of reaching a final consensus on the proposals after the Group of 20 (G20) meetings that will take place in July and October of this year. It is hoped that a consensus amongst the 139 member countries of the OECD/ G20 Inclusive Framework (IF) can be attained by October 2021.
Singapore joined the IF in 2016 as part of its commitment to working with the international community to help create a global level playing field through the consistent implementation of the BEPS standards.
How Will the G7 Minimum Tax Proposal Affect Singapore?
While nuanced and dependent on the final agreed framework, the G7 minimum tax deal is likely to affect Singapore in a few ways.
On the outset, the Pillar One proposals may have some impact on Singapore. Given its relatively small market size and consumer base, it is expected that Singapore could lose tax revenue if and when the new rules take effect. Depending on how the new framework is adopted by different countries, this could lead to MNEs adopting a more cautious approach by examining how the new rules work in each country, and how they inter-play with different jurisdictions, before they decide on entry into the Singapore market.
As for Pillar Two, it may well be that there will be more far reaching implications for Singapore’s economy. Singapore has long relied on a business friendly and stable tax system where tax concessions have been used to attract MNEs. The introduction of a global minimum tax rate could lead to unnecessary complexities and uncertainty for taxpayers, and even adversely impact the sectors in Singapore that currently benefit from tax incentives. In a more extreme scenario, it could blunt Singapore’s attractiveness as a choice location for regional expansion.
The new global tax framework will impact many countries, and each country has their own political interest and agenda; how the mechanics and finer details of the new international tax rules will pan out is currently unknown. The longer developments take to unfold on this front, it could lead to uncertainty and apprehension among MNEs around the globe who choose to adopt a wait-and-see approach before embarking on firm expansion and investment plans. To a certain extent, SIngapore may experience some impact if such a business climate materialises.
No matter how the final global tax rules present themselves ultimately, change is inevitable, and Singapore will need to adapt. While Singapore has traditionally used tax incentives to attract global investment, it is an established economy and a leading financial centre. To adapt successfully, Singapore's allure to MNEs looking to establish a presence here (or in the wider Southeast Asia or Asian region by utilising Singapore as a base), must go beyond tax considerations.
Singapore must learn to leverage its inherent advantages, such as its strategic geographical position, global connections, political stability, strong rule of law, pro-business climate, and vast talent pool.
Whatever the G20 and OECD consensus is, Singapore will continue to monitor and react to global tax changes in order to remain aligned with the new norms. Singapore’s continued global reputation as a premier investment centre will hinge on adjusting its policies to leverage its real-world advantages that lie outside of a tax domain.