Corporate Tax in Singapore: Will the New Global Minimum Tax Rate Affect Us?

Corporate Tax in Singapore: Will the New Global Minimum Tax Rate Affect Us?

Singapore is often considered a tax haven because of our low income tax and corporate tax rates. We even get mentioned on the Wikipedia page for “Tax haven”, yay! (However, that isn’t to say that we aren’t taxed heavily in other areas, like GST or COE.)

From the point of view of a tax haven, it isn’t exactly good news that the major global powers are currently pushing for a new global minimum corporate tax rate.

After all, making it attractive for MNCs to set up shop here has long been one of the pillars of Singapore’s economic strategy. Our selling points have always been our stability, ease of setting up a business… and our low corporate taxes.

What is Singapore’s corporate tax rate?

Singapore’s corporate tax rate is currently 17%. 

If that sounds high to you, it’s really not. Compared to the rest of the world, it is low. Australia, China and Malaysia’s corporate tax rates all hover at around 25%.

What’s more, some businesses in Singapore manage to lower the corporate tax rate even further. Certain government schemes offer a tax discount in order to entice MNCs to operate in Singapore.

For instance, the Regional Headquarters Award (RHA) lets companies pay 15% corporate tax for up to five years on qualifying incremental income, while the IHA lowers their tax rate on qualifying incremental income to 5% to 10%.

So, while 17% is the headline corporate tax rate in Singapore, savvy companies may actually pay less thanks to government schemes.

What’s the new global minimum corporate tax?

The G7 countries have announced that they want to put in place a minimum global corporate tax rate of at least 15%. Companies would also be required to pay taxes on profits earned overseas.

The G7 nations are composed of some of the world’s richest and most powerful countries, namely the US, Canada, the UK, France, Italy, Germany and Japan.

The reason they are so eager for a minimum corporate tax rate to be imposed is because many developed countries are eager to extract more tax dollars from big tech companies. Because such companies deal with intellectual property rather than physical goods and services, they can easily base themselves in a tax haven to avoid paying taxes in the countries in which they actually operate.

At the moment, businesses in the UK and many European countries impose Digital Services Tax (DST) in order to get their share of the pie. But the US is complaining that this scheme unfairly targets their big tech companies — many of which are domiciled in tax havens.

The proposed 15% corporate tax is the global superpowers’ attempt to work out a standardised international tax framework for the digital economy.

Note that the global minimum tax rate is not approved yet. Although the G7 countries are extremely powerful, what they want isn’t always a given. To push through the 15% minimum, they will next need to gain approval at the July 2021 G20 meeting in Venice, which will be attended by the EU bloc and 19 nations, including Australia, China, India, Korea and the UK.

How will tax havens be affected?

If implemented, the global minimum tax rate will be bad news for tax havens as they will be forced to raise their corporate tax rates, making them less attractive to businesses.

Some of the top tax havens in the world include:

  • Cayman Islands – a big fat 0% corporate tax
  • Bermuda – 7% corporate tax
  • Ireland – 12.5% corporate tax
  • Switzerland – 14.93% corporate tax
  • Hong Kong – 16.5% corporate tax
  • Jersey – 10% to 20% corporate tax
  • Netherlands – 20% to 25% corporate tax
  • Singapore – 17% corporate tax
  • British Virgin Islands – 15% corporate tax

Some of these tax rates look pretty high. But headline corporate tax rates aren’t the only thing that makes a tax haven.

For instance, the Netherlands’ corporate tax rate of 20% to 25% isn’t particularly low compared to other European countries, but their government offers many incentives that lower the overall tax rate for companies and also allows big MNCs to avoid paying taxes on some portions of their profits.

If the minimum corporate tax is implemented, what will happen to Singapore?

Although Singapore is a bit of a tax haven itself, our current corporate tax rate of 17% is above the minimum of 15% that is being proposed by the G7 nations.

However, the actual minimum tax rate to be implemented has not been confirmed yet and could well end up being higher than 15%.

It is probable that the new minimum tax rate will only apply to companies earning above a certain annual revenue threshold — the OECD has advised that this be about $1.2 billion. This means it won’t affect the smaller startups and SMEs, but it will affect many of the big MNCs operating here.

For the global companies paying concessionary tax rates here, thanks to government schemes, Singapore might no longer be such a cost-effective destination.

Also, Singapore’s future ability to wield concessionary tax rates as a weapon to attract MNCs will also be hampered.

Should MNCs start leaving Singapore for greener pastures, that could mean we have fewer MNCs to choose from when looking for a job, and thus fiercer competition for the MNC job openings.

Surely there are other reasons for MNCs to stay in Singapore?

Singapore has spent a lot of effort positioning ourselves as an attractive place to do business. So, while we’ll be affected one way or another by the global minimum tax rate, it is hard to say how MNCs will respond.

To some businesses, there might be other advantages to remaining in Singapore than low taxes — or so we’d like to think.

Some companies come here because we are a convenient bridge to the rest of Asia thanks to our geographic position, political stability and ease of doing business. Having English as the lingua franca is also a big plus.

On the other hand, we do have some shortcomings, such as the high cost of real estate and the fact that we are not as cheap as the developing countries that make up most of Asia.

If the global minimum tax rate is implemented, the Economic Development Board will have to scramble to come up with a new game plan to make us more attractive to foreign businesses. It is also likely the government will step in to help affected local businesses absorb some of the shock in the first few years with the new corporate tax rate.

A global minimum corporate tax rate might actually be a good thing, but…

Don’t get me wrong — establishing a global minimum corporate tax rate might actually be a good thing for the world in general.

After all, it’s not exactly right that huge companies like Facebook and Google evade taxes by establishing offices in tax havens. (Though your view on this would depend on your political leanings.)

If these tech giants started paying decent taxes, the money that they pay to governments could be used to help ordinary citizens and improve infrastructure. In theory, anyway.

However, what’s good for the world may not be good for Singapore as a country. As our economy relies quite a bit on MNCs and foreign investments, this proposed tax rate might affect our global position.

In the long run, we average Singaporeans might have to brace ourselves for a weaker MNC presence in the country. For employees who want to climb the career ladder, seeking career opportunities abroad might become more important than ever.

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