Implications for Singapore of G7 Agreement on Global Minimum Corporate Tax Rate

Ms Jessica Tan Soon Neo asked 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.

Ms Mariam Jaafar asked 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.

Sir, since 2016, there have been concerted efforts to strengthen international cooperation 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 Organisation for Economic Co-operation and Development (OECD) to deal with the issue of Base Erosion and Profit Shifting (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 on BEPS.

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

The first proposal concerns the reallocation 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 One. The current proposal is that Pillar One 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 Two. 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 briefly explain how Pillars One and Two will likely impact Singapore.

Pillar One 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 One, some part of the profits and hence, the taxes payable of large companies with overseas operations will be reallocated to where their customers are.

To illustrate, assume a Pillar One MNE group in Singapore has a profitability of 15%. Pillar One will then reallocate 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 Two 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 an 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 Two 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, under Pillar Two, is to apply this minimum effective tax rate to MNEs that meet a certain revenue threshold, currently set at 750 million euros, as I highlighted just now. There are about 1,800 such MNE groups in Singapore that would meet this revenue criterion.

We expect that a majority of these MNE groups will have group effective tax rates below 15% in Singapore. That is 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. And 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 still 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 multilateral instrument, there will be a need for international consensus to be fully reached before the changes can be implemented.

So, 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. First, we will abide by internationally agreed standards. Second, we will safeguard our taxing rights. Third, we will seek to minimise the compliance burden for businesses.

Ultimately, the best response to these tax changes is to continue to strengthen 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 hub. The Monetary Authority of Singapore 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.

Mr Speaker, the latest proposals to change international corporate tax rules will not be the first or last challenge we 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 can ensure Singapore's continued economic success and ultimately a good future for our people.

Thank you, Speaker. I thank the Minister for his response. I understand a lot of details are not out yet but, I guess, with the announcement, there has been a lot of interest in the industry. Whilst we expect the tax system to evolve, I would like to hear the Minister's thoughts on, for the Minister to speak a little bit more about what specific non-tax benefit could Singapore provide or enhance, in order to compensate for the loss of tax benefits, previously enjoyed by companies, so that there is some level of certainty when companies are planning.

Question two is about the carve-outs. I understand that financial services have been a carve-out from this global tax reform. Could the Minister comment on how the financial sector is being impacted including family offices and variable capital companies (VCCs)?

And last but not least, on jurisdictions that have been tax havens, without the other non-tax benefits. I would like to ask the Minister, how is Singapore positioning itself to attract companies that are expected to exit tax havens and how Singapore will attract them with other non-tax related benefits.

Mr Speaker, with regard to the question of carve-outs, as I mentioned earlier, the current proposal on the table is for regulated financial services to be carved out from Pillar One. As for Pillar Two, as I have mentioned, it applies to the larger MNEs. So, whether or not family offices and VCCs will qualify, will really depend on the facts of the case, and ultimately, what are the final criteria that are used for the definition of large MNEs. So, we will continue to monitor this closely. And as I said earlier, we will respond accordingly once the international rules are worked out and finalised.

We will respond in two ways.

Number one, we will protect our sovereign rights on taxes. And we will make sure we adjust our corporate tax system accordingly, in line with the international standards and in close consultation with businesses in Singapore, ensuring that as far as possible, we keep a low compliance burden on businesses.

Number two, we will continue to work hard at improving and enhancing our competitiveness in other areas, especially in terms of the non-tax factors that Ms Foo highlighted.

So, to Ms Foo's question, yes, this is work in progress. We have always been looking at how we can restructure, transform our economy, invest in enterprise capabilities, as well as the capabilities of our workforce. And we will work even harder at that.

Our objective is to continue to remain attractive and competitive; attractive to substantial investments and substantial economic activities to be based here. We are not trying to get companies to register in Singapore without a physical presence. That is not our intent. We want to anchor substantial activities here, with the aim of creating good jobs for Singaporeans. That must be the objective of our economic policy. It has always been so and we will continue to work hard on this front.

I think we should also be mindful and clear that with these tax changes, going forward, as a small city-state with no natural resources, with limited land, it will be that much harder for Singapore to attract investments. And that means we will have to work even harder to attract and retain investments based on these non-tax competitive factors.

Up to now EDB and our economic agencies have been very effective in bringing investments into Singapore and creating jobs for Singaporeans, but we should never take that for granted. We should never assume that these investments will just fall on our laps and they will automatically happen year after year. It will get harder, so we will need all Singaporeans to support this critical mission; and that includes everyone in this House.

And I am saying that with a reference to the upcoming debates on FTAs, because what we say, the tone of the debate does matter. If investors start to feel that Singapore is starting to become less hospitable to foreign investments and talent, they will surely look for other options and there are many compelling options everywhere in the world. And we will end up worse off.

Thank you, Mr Speaker. Sir, my question is firstly on Pillar Two. I understand that the G7 countries had initially sought a minimum corporate tax rate of 21%, but have since agreed to lower it to 15%. I would like ask the Minister whether he sees this 15% effective tax rate as a number that Singapore can agree to. And if not, is there room for further negotiations or seeking further carve-outs? Or is it the case that Singapore, being a small country, will just be the price-taker?

The second question is, the Minister mentioned about Pillar One, where the location of the taxing right will be given to countries where the customers are, I want to ask how significant is this reduction in the tax base and whether that will have any fiscal impact on our Budget. For example, whether the 15% tax effective rate would be enough offset for them in the short term?

Mr Speaker, there has been already extensive discussions at the Inclusive Forum on many of these matters. And recently, 130 jurisdictions in the Inclusive Forum, including Singapore, have reached a consensus on the key parameters of the corporate tax changes. That includes the global effective minimum tax rate of 15%. But there are still many design elements and implementation details that need to be worked out, as I mentioned earlier. For example, how would the effective tax rate be determined? There are some technical details there to be resolved. Or whether there will be sectoral carve-outs, as I have mentioned.

For now, under Pillar Two, the one carve-out that is being proposed is for shipping. Why? Because really, shipping operates under a very special tax regime. Shipping has no, by definition, physical presence. It moves everywhere and to many different countries. And so, you have different kinds of taxes for shipping, like tonnage tax, that falls outside of the scope of corporate taxes. Therefore, the intent or at least the proposal on the table now is to carve out shipping from Pillar Two. But these things are fluid. They continue to be discussed at the Inclusive Forum. Singapore is an active participant in the forum and we will do our part to shape the consensus in line with our national interest and also to ensure a level playing field for everyone.

On the second question on Pillar One, yes, there will be a negative impact, because Pillar One means reallocating tax revenues for some of these large firms to where the markets are located. So, this will have certainly a direct impact on our revenues. Exactly how much, like I said, it is difficult to give any detailed estimates now when the detailed rules are still being finalised. And whether or not we will be able to make up with sufficient revenues elsewhere, that is something that we will have to work out.

I should explain why we even ended up with Pillar One. And the reason is that many jurisdictions feel that in this new digital world, digitalisation has enabled large MNEs, especially the digital companies to do well, to grow dramatically and to be able to acquire more customers in jurisdictions outside of where they operate. They can acquire customers remotely. And therefore, many of these market jurisdictions have started to unilaterally impose, what they call, digital services tax on these companies.

It is not in our interest to have a taxation system that is fragmented and to have other jurisdictions impose unilateral taxes. That is not helpful for Singapore as a small and open economy. And that is why we feel it is better that we participate actively in the Inclusive Forum and be part of the multilateral discussion to shape a set of international tax rules that can be adapted to this new business model of the digital world.

So, indeed, that is what Pillar One is about. As and when there is an agreement on Pillar One, the agreement will provide for the coordination of this new international proposal together with the removal of all digital services tax and other similar measures that have been unilaterally imposed by certain market jurisdictions. That is why we have decided we could go along with this Pillar One consensus view, so that businesses can work with one set of rules rather than have to deal with a patchwork of fragmented rules. But as I mentioned, there are still details to be worked out even under Pillar One and these are issues which we will continue to actively discuss at the Inclusive Forum.

Thank you, Mr Speaker. I thank the Minister for the clarifications. I have got two further clarifications. The first is, basically, in terms of the effective corporate income tax rates here in Singapore, what are they and whether the Government has conducted any scenario analysis to assess the net impact to our income tax revenues as a result of Pillars One and Two. I understand that it is still preliminary days but we already have the key parameters. OECD, for example, has already given some sense of what it expects the global overall tax revenue impact is going to be.

The second question is in terms of the foreign MNCs who are currently paying effective tax rates of below 15%, whether the Government would consider raising the effective tax rates to be in line with this minimum of 15%. And if I look at the US IRS data, for example, based on what has been disclosed, I think the effective tax rates for these US companies do appear to be much lower than our statutory income tax rates at just about 4%, and especially given that, as the Minister said, Singapore's attractiveness is not solely based on tax incentives alone.

Mr Speaker, Mr Chua has, in fact, asked quite a detailed series of questions on our effective tax rates, not just for MNCs but for local enterprises, and quite a range of different breakdowns in a separate Parliamentary Question (PQ). So, we will provide the full answer there. Those are data that we will share.

Yes, effectively, our effective corporate tax rate is low, not just for MNCs, but for all companies, especially for SMEs in Singapore. They are low. And they are low for a reason because we want to encourage business innovation, business investments and we want to make sure that businesses can create good jobs for Singaporeans. So, with Pillar Two being in place and with the consensus around Pillar Two forming at an effective rate of 15%, we will, of course, have to start thinking about what changes and adjustments are needed with regard to our corporate tax system to be in line with international standards, as I have said earlier.

At this stage, I would just say it is premature to speculate or to talk about what these tax adjustments will be. But as I mentioned earlier, the key principle is we will preserve our sovereign tax rights, our rights to taxation, even within the international agreement, and we will work out together with businesses what adjustments and changes might be needed in our corporate tax system. Secondly, we will also, at the same time as we adjust our corporate tax system, make sure that we work even harder on non-tax factors to make sure that Singapore remains competitive and attractive to investments. That is not something we should take lightly for the reasons I have explained earlier.

I thank the Minister for elaborating on the impact of Pillar One and Pillar Two. I specifically have a follow-on question with regard to tech companies in relation to what the Minister said about the digital economy.

Given both Pillars One and Two, and the impact of that – although I know that there are still a lot of uncertainties – how can Singapore, specifically, for the tech hub status, how can we continue to be attractive because both Pillars One and Two, could have significant impact on Singapore's tech hub status.

I would ask the Minister if he could elaborate on some of the key levers we would need to strengthen. I know he talked about the whole breadth of it but what would be some of the key pillars for the tech sectors specifically, given the impact of digitalisation?

Mr Speaker, it is a very important question and I do not want to belabour the broad points because, at this stage, I think it is a little early to dive into details. The upshot of these tax changes, as I said just now, is that it will make it harder for Singapore to attract investments; there should be no doubt. So, let us be realistic about what the impact will be. It will make it harder for us to attract investments and we have to work harder, particularly, given our size, the fact that Singapore is such a small city-state, compared to so many other locations around the world which offer equally, if not more, attractive and compelling attributes.

So, whether it is for technology, whether it is for finance, whether, it is any other major investment that will now be impacted, we just have to work that much harder. Basically, in a post-Pillar One and post-Pillar Two world, the large MNCs of the world will bear a larger tax burden. That is what it comes down to, anywhere they go. Assuming Pillars One and Two are applied evenly, uniformly, around the world, they will have to bear a larger tax burden.

So, we, on our part, will therefore have to work that much harder, whether it is on upgrading of our workforce, our infrastructure, our connectivity, our overall business environment; all of these factors will, therefore, become more salient in our ability to attract and retain investments and, ultimately, with the objective of creating good jobs for Singaporeans.