Two decisions by the Group of Seven (G7) nations (U.S., Japan, Germany, Britain, France, Italy and Canada) on tax reform will "no doubt" make it harder for Singapore to attract investments, Minister for Finance Lawrence Wong said in Parliament on July 5.

However, Singapore does not rely on tax incentives alone to attract investment into the country.

These are the G7's agreement to to back a minimum global corporate tax rate of at least 15 per cent, and to implement a proposal to reallocate taxing rights of the largest and most profitable MNEs from where they conduct their substantial activities, to countries where their customers are located, regardless of whether the firms have a physical presence.

However, it is still currently still too early to work out the exact impact of such measures, he added.

The number of multinational enterprises (MNEs) as well as the extent of the impact depends on the design of the specific rules which are still being discussed at the the OECD/G20 Inclusive Framework (IF), the minister noted.

What are the two proposals about and how do they affect Singapore?

The 15 per cent global corporate tax

On June 5, the Group of Seven (G7) nations (U.S., Japan, Germany, Britain, France, Italy and Canada) said that they had agreed to back a minimum global corporate tax rate of at least 15 per cent, Reuters reported.

This agreement subsequently received the support of 130 countries, representing more 90 per cent of global GDP, including Singapore, according to Wong.

Under the new measure, countries are not required to set their rate at the agreed figure. However, it grants other countries the right to apply a top-up levy to the minimum on an MNE's income which comes from another country that has a lower tax rate.

The measure will apply to MNEs that have global revenues of more than 750 million euros (S$1.2 billion), with only the shipping industry exempted.

As such, within Singapore, this means that if an MNE is taxed at a rate of 10 per cent, its home jurisdiction will impose additional rules, requiring the entity to pay an additional five per cent in tax back there.

This essentially limits the effectiveness of tax incentives as a tool to encourage investment in Singapore, Wong said.

Reallocation of taxing rights

As for the reallocation of taxing rights, these apply to MNE groups with global revenues of more than 20 billion euros (S$32 billion) and a profitability of more than 10 per cent.

Here, Wong gave a hypothetical scenario of such a MNE in Singapore which had a profitability of 15 per cent.

Under the new measure, five per cent of the profits will be reallocated from Singapore to be taxed in other markets.

"This means that hub economies with smaller markets like Singapore will stand to lose corporate income tax revenues," Wong elaborated.

Around 1,800 MNEs in Singapore are expected to hit the revenue criteria for the new rules

Wong then pointed out that there are around 1,800 MNEs in Singapore are expected to meet the revenue criteria for the new rules.

He highlighted that while Singapore's corporate tax rate was 17 per cent, many of the MNEs likely paid taxes below 15 per cent due to the provision of tax relief to encourage economic development in Singapore such as capital investment, research and development and charitable donations.

Singapore will only be able to assess the impact once more details on the tax changes are agreed upon

However, as some of the tax changes can only be implemented through a "multilateral instrument", an international consensus is required before the changes can take place, the minister said.

As such, Singapore will only be able to determine the impact with a high degree of confidence once more details are agreed upon by the IF regarding both measures.

"The eventual impact will also depend on how companies and other governments respond to these international developments," he added.

Once a consensus has been reached, Singapore's changes to its tax systems will be done according to the following three principles:

• Abiding by internationally agreed standards,
• Safeguarding the country's taxing rights, and
• Minimising the compliance burden for business.

A conducive tax environment has not been the decisive factor in attracting investment to Singapore

This brought up Wong's following point: "Ultimately, the best response to these tax changes is to continue to strengthen our overall competitiveness."

Amidst Singapore's past efforts to develop its reputation as an attractive place for businesses and substantial economic activity, Wong highlighted that a conducive tax environment, while helpful, had not been the decisive factor in attracting investments.

Rather, "having quality infrastructure, good connectivity, a skilled workforce and open and business friendly regime founded on the rule of law are all far more important factors," he noted.

"We must therefore double down on these competitive strengths," Wong stated.

In a follow-up question, Member of Parliament Jessica Tan asked if he could elaborate on key levers to strengthen in taxation, given the impact of digitalisation.

Wong said at this stage, it's a little early to "dive in details", but there is "no doubt" the move will make it harder to attract investments.

Singapore will therefore have to "work harder", perhaps by upgrading our workforce, infrastructure or connectivity to attract and retain investment.

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