Strategic Challenges to Singapore’s Corporate Tax System

In budget speeches in 2020 and 2021, Deputy Prime Minister, and then, Minister of Finance, Heng Swee Keat spoke about Base Erosion & Profit Shifting (BEPS).  BEPS refers to tax planning strategies used by multinational enterprises to exploit gaps and mismatches in tax rules for the purposes of tax avoidance.  Tax evasion is a crime; tax avoidance is a business strategy.  Since developing countries have a higher reliance on corporate income tax, they suffer from BEPS disproportionately.  It is estimated that BEPS practices cost countries US$100 billion to US$240 billion in lost revenue annually. 

The OECD/G20 Inclusive Framework on BEPS has over 135 countries and jurisdictions collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules, and ensure a more transparent tax environment.  On the surface, it looks like a wonderful initiative.  It is not in Singapore’s interest for several reasons.  Our Minister of Finance is correct is that the BEPS initiative will significantly impact how we structure our tax system, and erode our competitive advantage.  This is an impingement of our sovereignty. 

Tax avoidance is a legitimate means of generating revenue.  Most of my clients come from around the region, and there are legitimate reasons why they avoid paying taxes in these countries.  For one, there is corruption.  Taxes paid disappear into a blackhole of politician’s personal coffers, and not into running the government and infrastructure development.  These individuals have their own companies.  Corporations are, in effect, subsidising business rivals to their own detriment. 

We must also consider that the tax regime is discriminatory.  In certain countries of Southeast Asia, ethnic Chinese businessmen are liable to higher taxes, both legitimate and otherwise.  Funds in banks disappear, and even insurers do not pay up the full claims.  Naturally, they put their funds in Singapore. 

Any discussion on the sovereign right to fair taxes must also include measures to address corruption and discrimination in tax collection.  For Singapore to simply adopt these measures would mean we are being punished for our efficiency, our low corruption, and our better infrastructure.  It would make no sense for us to give up our competitive advantage. 

As part of the OECD/G20 Inclusive Framework on BEPS, there have been discussions on a global corporate minimum tax for corporations (GMTR).  OECD and G20 countries aim to reach consensus on both fronts by mid-2021, which is naively optimistic.  This minimum tax is expected to make up the bulk of the US$50 billion to US$80 billion in extra corporate tax that the OECD estimates companies will end up paying globally if deals on both efforts are enacted.  Should participating countries agree, governments could theoretically still set their own tax rates, but should those rates be lower than the GMTR, the home countries of these companies will top up the taxes. 

As it is, the Biden administration has said it wants to deny exemptions for taxes paid to countries that do not agree to a minimum rate.  While the governments involved in these discussions, including Singapore, broadly agree on the basic framework for the GMTR, they do not agree on the minimum tax rate itself.  Another thorny issue is whether investment funds and real estate trusts should be covered, so that they can be compatible with the 2017 US tax reforms.  The Biden administration wants to raise the US corporate tax rate to 28%; it has proposed a global minimum of 21%.  The Biden administration also wants the minimum to apply to US companies no matter where the taxable income is earned.  This proposed rate is more than twice the 12.5% minimum tax that had previously been discussed in OECD talks.  If this is implemented, it will affect many multinational corporations operating and benefiting from incentivised corporate tax rates in Singapore.  It will severely erode our economic advantage, and should be viewed as an existential threat to our standard of living. 

For the moment, we do not have an international consensus on the GMTR.  That gives us a small window to strategise, and consider the implications and options.  Due to the size of the economy, we are still a small boat dragged in the wake of giant ships.  Singapore does not have the size to simply go it alone, and disregard international developments. 

Singapore has doubled down on being a centre for wealth management, attracting family offices and funds from some of the wealthiest individuals in the world.  We have even implemented a new VCC structure for funds.  What is likely to happen is that the VCC framework will be relaxed so that SFOs can take advantage of it.  This allows UHNW families some choices, since funds and trusts are not part of the main discussion on GMTR, only corporations. 

Another concern is the OECD tax policy study of 2018.  One of the findings is that more countries have expressed a renewed interest in net wealth taxes as a way to raise revenue.  This is now a greater imperative due to the losses arising from economic closure, because of Covid19.  Revenue from income and consumption-based taxes have declined, and struggling economies need ways to raise more revenue.  A wealth tax is a low-hanging fruit.  A wealth tax disincentivises savings and long-term investments. 

While we have tweaks to our tax system, in a post-pandemic world, we need to be ahead of the curve of these international developments, because it will not be business as usual, especially in a corporate tax context.