Of the many tax announcements, we believe the two most impactful announcements were the announcement of the GST hike and adjustments to the corporate tax system in response to BEPS 2.0. This blog encompasses his views on the announced changes and how this will impact businesses in Singapore.
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A Staggered GST Hike
While many expected the GST increase to occur as soon as June 2022, particularly after Singapore’s economy grew 7.6% in 2021. Instead, The Finance Minister elected to slowly increase the GST over the next 2 years, to 8% in 2023, and 9% in 2024. This will give businesses and individuals time to transition to the new rate. This provides some relief for businesses, helping them cushion the likely impact on consumption related to rising costs and prevalent inflation. This is not without expense, as businesses will likely incur extra compliance costs from a two-stage GST rate increase.
While the decision to delay and stagger the GST increase is a pleasant surprise for many businesses, given the lead time required by many organizations to prepare for the GST hike, it will be beneficial for companies to start their preparations early. When the GST rate finally hits 9% in 2024, it could likely become the second-largest source of tax income for the Singapore Government, behind corporate income tax. Given the broad design of the GST system and upcoming laws on imported goods and services, GST compliance is likely to be scrutinized more heavily moving forward.
Singapore’s Proposed METR
Under Pillar 2 of the OECD’s Base Erosion Profit Shifting (BEPS) project, multinational Corporations (MNCs) with a global turnover over €750 million (S$1.15 Billion) operating in jurisdictions subject to an effective corporate tax rate below 15% will have to top up the taxes paid in their “home” jurisdiction.
To align Singapore’s corporate tax system with BEPS, The Finance Minister announced that the Singapore Government would be exploring a Minimum Effective Tax Rate (METR) to top-up the effective tax rate of multinational enterprise (MNE) groups in Singapore to 15 percent.
As Singapore has historically used tax incentives as part of an attractive package for foreign direct investment (FDI), the top-up tax presents a significant challenge, as it may affect Singapore’s image as a tax-friendly jurisdiction. However, aside from the tax system, MNCs place equal emphasis on non-tax factors when considering whether to invest in a location.
Related Read: Will the G7’s Global Minimum Tax Rate affect Singapore?
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The first increase will be on 1st January 2023, from 7% to 8%. It will then increase again on 1st January from 8% to 9%
The Minimum Effective Tax Rate (METR) that Singapore is exploring to top up the effective tax rate of Multinational Enterprises (MNEs) is 15%
It is unlikely these tax changes will impact Singapore’s attractiveness, as MNEs place equal emphasis on non-tax factors when considering whether to invest in a location.