G7 Global Tax Reform and What It Means for Singapore
The Group of Seven (G7) rich nations have recently reached a landmark deal for creation of a global minimum of corporate tax rate of 15%.
The tax rate would be used to target mainly the largest and most profitable multinational companies (“MNCs”) such as Amazon, Google, Facebook, and discourage them from shifting profits and tax revenues to lower tax countries regardless of where their sales are made.
Over the years, we have seen income derived from intangible sources such as drug patents, software and royalties on intellectual property increasingly migrate to lower tax offshore jurisdictions, allowing companies to circumvent paying higher taxes in their home countries.
How would a tax rate work globally?
The global minimum tax rate would apply to overseas profits.
Governments are still able to set a local corporate tax rate and if a company pays a lower tax rate in another country, their home government is entitled to raise the rate to the minimum tax rate, thereby eliminating the advantage of shifting profit.
In May, governments had broadly agreed on the basic design of a minimum corporate tax.The G7 accord creates strong momentum around the 15 per cent and above level which has also been adopted by the OECD and G20.
The inclusion of items such as investment funds and real estate investment trusts is still being debated.
What it means for Singapore
Though it is still too early to predict overall outcomes, the global tax rules create uncertainty which may cause delays in investment decisions. There may not be a standard response across MNCs as certain investments may be categorised differently.
For example, large tech companies can move around more easily compared to those in manufacturing, but even so, is dependent on the availability of a skilled workforce. Companies that are seeking to apply strategies such as diversification of supply chains or require proximity to markets may be less inclined to move.
Nevertheless, the new tax rules aimed mainly at MNCs could see a reduction in the tax advantage that Singapore offers to these businesses. Tax experts say that it remains too early to tell how this will impact Singapore’s attractiveness as a regional and global business hub.
Singapore has a headline corporate tax of 17%, coupled with tax incentives, exemptions and rebate, the effective tax rate is usually lower, ranging from 4.25% to 17%.
Aside from the tax considerations, MNCs will also consider the non-tax benefits of operating in Singapore. Singapore's infrastructure, rule of law, stable political environment and reputation for integrity, as well as connectivity to regional and global economies are among the “intangibles” that companies consider beyond the dollar and cents.
Singapore will remain as a relevant regional hub with its availability of highly trained talents, strong protection of intellectual property and its reputation as a global financial hub.
The cost of doing business will remain a concern for companies, as such; Singapore will need to consider enhancing support for innovation, training and other value-added activities.
Finally and importantly, the tax reforms will not apply to small and medium sized enterprises (SMEs), as they fall below the expected threshold. According to a KPMG tax expert, the SMEs represent the majority of economic activity in many jurisdictions and their tax situation will remain unchanged under these proposed rules.
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