Budget 2022: Singapore studying ‘top-up’ corporate tax in response to new global minimum tax rate

SINGAPORE: Singapore will explore a “top-up” tax as it adjusts its corporate tax system in response to a global deal that will ensure big companies pay a minimum effective tax rate of 15 per cent.

Called the Minimum Effective Tax Rate (METR), the new tax being studied will “top up” a multinational enterprise (MNE) group's effective tax rate in Singapore to 15 per cent, said Finance Minister Lawrence Wong in his Budget speech on Friday (Feb 18).

In his speech, Mr Wong had outlined a range of near-term aid and long-term measures for the Singapore economy and society. To bring these various initiatives into fruition, he said Singapore needs more revenue and he is therefore making "major enhancements to strengthen the tax structure”.

GLOBAL TAX CHANGES

Discussions to revise international tax rules and increase the taxes paid by large businesses have been under way since 2013, but gathered momentum last year.

As of November 2021, more than 130 countries and jurisdictions, including Singapore, have endorsed an agreement brokered by the Organisation for Economic Co-operation and Development to overhaul global corporate tax rules and fight what is known as base erosion and profit shifting (BEPS) issues.  

The new tax deal comprises two main pillars.

The first pillar looks to reallocate profit of the largest and most profitable MNEs from where activities are conducted to where their consumers are located.

“There are ongoing international discussions on how to determine the jurisdictions which will surrender profits for re-allocation to the markets under Pillar 1 and how much each will surrender,” said Mr Wong. 

“Given our small domestic market and the extent of activities conducted here by MNEs, Singapore will lose tax revenue under Pillar 1,” he added.

The second pillar aims, among others, to set a minimum effective corporate tax rate of 15 per cent for MNE groups with annual global revenues of 750 million euros or more, so as to curtail profit shifting to lower-tax jurisdictions.

“What this means is that if such an MNE were to have an effective tax rate of less than 15 per cent in Singapore at the group level, other jurisdictions such as its home jurisdiction can collect the difference up to 15 per cent,” Mr Wong explained.

Currently, Singapore’s headline corporate tax rate is at 17 per cent but the effective tax rate of many businesses may be lower than that, or even the proposed global minimum, due to tax incentives awarded to those seen as beneficial to the country’s economic development, experts have said.

Mr Wong noted that Singapore will adjust its tax system in response to proposed changes under the second pillar.

He added that the Inland Revenue Authority of Singapore will study the METR further and consult the industry on its design.

Singapore will also continue to closely monitor international developments before making any decisions on the METR, he said.

“PREMATURE AND DIFFICULT” TO DETERMINE FINAL IMPACT

Mr Wong said it is “premature and difficult” to determine the eventual fiscal impact of both pillars at this stage.

“There will be a negative revenue impact under Pillar 1. METR might yield some additional tax revenue in the short term, but the eventual impact of Pillar 2 on our revenue will depend on how governments and companies respond,” he said.

“The net impact of both pillars depends on the rules and details, which are still being developed by the Inclusive Framework on BEPS.”

While the latest proposals, also known as BEPS 2.0, may have reduced the scope for tax competition, it has not reduced global competition for investments. In fact, competition is “likely to intensify” as global governments seek to restore and rebuild their economies after the effects of the COVID-19 pandemic, the minister said.

“We will have to take this into consideration and ensure that Singapore remains one of the best places in the world for business,” Mr Wong told the House.

“We will therefore need more time to study these issues thoroughly and will announce changes in the corporate tax system when we are ready.”