Last week in the UK, the Group of Seven (G7) rich nations struck a landmark and historic deal after lengthy negotiations, which aims to close cross-border tax loopholes and impose a global minimum tax rate on big multinational companies.
Reforming the Global Tax System
Ever since the financial crisis of 2008, there has been the greater impetus to address tax avoidance and to reform the global tax system. The issue has been discussed and proposals have been made in some form or other at various levels. In 2013, the OECD (Organisation for Economic Cooperation and Development) and G20 launched the Base Erosion Profit Shifting (BEPS) project and this culminated in the release of 15 action points to standardize international tax rules and tackle aggressive tax planning.
In 2019, motivated primarily by the tax challenges created by the digitization of the economy, the BEPS 2.0 initiative was introduced with the final blueprints under the two pillars released in 2020.
Following rounds of discussions, the G7 has reached a consensus on the key parameters of the two pillars:
- Pillar one: Countries would get a new right of taxation over a share of profits generated in their jurisdiction by an overseas-headquartered multinational. This means taxing a company’s revenue source, regardless of its physical location. The G7 agreed to put this new right of taxation on at least 20% of profit exceeding a 10% margin for the largest and most profitable firms.
- Pillar two: Countries would impose a minimum corporation tax rate on the overseas profits of large companies headquartered in their jurisdiction. The G7 agreed to put this global minimum tax rate at least 15%, which is lower than the 21% proposed by the US President Joe Biden earlier this year. The global minimum tax rate is part of the OECD’s BEPS 2.0 initiative to curb tax base erosion.
Other details are currently being worked out. A G20 meeting is scheduled in July 2021, where the world’s largest economies will attempt to reach a consensus on the specific parameters of the proposals. As things stand, the OECD is working towards reaching a final agreement by the end of October this year.
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How will this impact Singapore and Singapore headquartered companies
Singapore joined the Inclusive Framework for the global implementation of the OECD’s BEPS initiative in 2016 and announced its commitment to work with other participating jurisdictions to ensure consistent implementation of measures under the BEPS project, and a level playing field across jurisdictions.
Now with the G7 announcing its landmark deal, it’s pertinent to look at the impact it may have on Singapore’s economy and Singapore headquartered companies, even while the details are being worked out.
- Pillar one: Given Singapore’s small market size and consumer base, this could potentially mean that the revenue base could shrink as the new rules seek to link the taxing rights to the customer and user markets. However, depending on the final details, and how Singapore reacts and changes its tax policies to align with the new international tax rules, multinational companies who wish to establish a presence in Singapore will inevitably consider how these developments impact them before making their decision.
- Pillar two: This is expected to have more significant implications for Singapore considering how the country has granted tax incentives to attract investments by multinational corporations. Multinational companies enjoying tax incentives may review their position and in the longer term, Singapore’s position as a regional hub for multinational groups will have to depend on non-tax factors.
What Singapore needs to do next
Whether the global minimum tax rate is set at 15% or at some other level, one thing is certain, there will be changes in the global tax regime very soon.
It is important for Singapore to continuously monitor and adapt as and when required to the global tax developments. It must continue to align itself with the new standards, and at the same time adjust its policies to maintain its position as a choice location for multinational groups seeking to expand into Asia.
It is heartening to note that Finance Minister Lawrence Wong has indicated that any change to Singapore’s corporate tax system after a global consensus is reached on the new international rules would be in close consultation with businesses and tax professionals. He also reiterated that Singapore’s overall competitiveness should not be based on taxation alone. Rather, it should be about ensuring a conducive environment for businesses and entrepreneurs to thrive.
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FAQs
- The G7 agreed to put this global minimum tax rate at least 15%, which is lower than the 21% proposed by US President Joe Biden earlier this year. The global minimum corporate tax will be imposed upon multinational companies such as Google, Amazon, Apple, Facebook, and Microsoft.Other details are currently being worked out. A G20 meeting is scheduled in July 2021, where the world’s largest economies will attempt to reach a consensus on the specific parameters of the proposals. As things stand, the OECD is working towards reaching a final agreement by the end of October this year.
- The global minimum tax rate is part of the OECD’s BEPS 2.0 initiative to curb tax base erosion. Ever since the financial crisis in 2008, there has been the greater impetus to address tax avoidance and to reform the global tax system.
- The following 2 pillars discuss the potential situations that MNCs in Singapore could face:
- Pillar one: Given Singapore’s small market size and consumer base, this could potentially mean that the revenue base could shrink as the new rules seek to link the taxing rights to the customer and user markets. However, depending on the final details, and how Singapore reacts and changes its tax policies to align with the new international tax rules, multinational companies who wish to establish a presence in Singapore will inevitably consider how these developments impact them before making their decision.
- Pillar two: This is expected to have more significant implications for Singapore considering how the country has granted tax incentives to attract investments by multinational corporations. Multinational companies enjoying tax incentives may review their position and in the longer term, Singapore’s position as a regional hub for multinational groups will have to depend on non-tax factors.
- The Group of Seven (G7) is an international forum comprising the seven most advanced economies in the world. The seven economies are:
- the United Kingdom,
- the United States,
- Canada,
- France,
- Germany,
- Italy, and
- Japan.
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