Mr Speaker, the time has come for us to debate this long awaited but keenly anticipated Bill, for us to implement the Global Anti-Base Erosion Model Rules or Pillar 2 of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting or BEPS. It is a topic which I feel strongly about and have spoken on many occasions, including the last four Budget debates from 2021 to 2024.
As Singapore is one of the 147 countries who are members of the OECD/G20 Inclusive Framework, it is important that at the heart of it all, we adhere to the principles of BEPS and why a global tax consensus on this matter is so important. The rules are designed to ensure that large multinational enterprises pay a minimum level of tax on their income in each jurisdiction where they operate, thereby reducing the incentive for profit shifting and placing a floor under tax competition and bringing an end to the race to the bottom on corporate tax rates. This can only be beneficial to all countries, including Singapore.
In Singapore, corporate income tax is by far the single largest contributor to the Government’s budget, more so than the NIRC, personal income taxes or even the GST. Any changes to our corporate income tax policies are going to have the most significant impact to our country’s operating revenues, and by extension our long-term fiscal position and fiscal strategies; that is, if we allow it to be as such, as I will be elaborating further in my speech.
Assessment of the impact of Pillar Two
Beyond the technicalities of the tax legislation to be implemented, my first question is on the MOF’s assessment of the scope and impact of this new legislation.
Broadly speaking, the GloBE rules apply to a multinational enterprises (MNE) group that has a consolidated group revenue of at least 750 million Euros annually in at least two of the four preceding financial years. Just how many of such MNE groups are operating in Singapore, what it their total reported revenues, profits before taxes, corporate income taxes paid to Singapore and their effective tax rates?
Moreover, as with the past decades, many MNEs operating here in Singapore are given various tax incentive schemes, and these include the pioneer industries and service companies’ incentive, development and expansion incentive, investment allowances, concessionary tax rates for global trading companies, finance and treasure centres, maritime sector incentives just to name a few. How many of these incentive schemes will still be in force by the time this Bill is operationalised, and what would happen to the effective tax rates of the companies who are currently enjoying these preferential schemes? Would the top-up taxes prescribed by Pillar Two supersede these schemes?
I am reminded of an article on Bloomberg in 2021, which looked into the data collected by the US Internal Revenue Service (IRS) on US companies’ country-by-country filings on where they book their profits and pay taxes. According to the article, and I quote, “65% of US firms foreign profits are in low-tax jurisdictions, such as Ireland and Singapore, tax-havens like Bermuda, or in stateless entities.” What I find most interesting is the finding that the effective tax rate for US companies in Singapore based on the filings is a mere 4.0% instead of our statutory tax rate of 17.0%.
It is quite clear to everyone that our statutory corporate income tax rate of 17% in Singapore is low by global standards. But especially with the whole suite of tax incentives on offer, our effective corporate income tax rates are even lower, with companies under the pioneer tax incentive scheme effectively paying no taxes for a number of years, and companies under various other schemes effectively having tax rates as low as 5%. Mathematically speaking, it is thus not hard to imagine the potential increase in tax corporate income tax revenues from implementing a minimum tax rate of 15%, especially when many of these tax-incentivised companies are likely to be the ones who fall under the scope of the new Pillar Two rules. What then is the Government’s assessment of the potential increase in tax revenues when changes in this Act are implemented from January 2025?
In my Budget 2024 debate speech, I shared that the OECD has published a working paper earlier this year, which finds that the global minimum tax “can raise between USD 155-192 billion of additional CIT revenues per year, with revenue gains accruing to all jurisdiction groups”. Moreover, estimated participating countries categorised as “investment hubs,” which includes Singapore, would have the largest expected gains from the reforms, with corporate income tax revenues rising from 14% minimum to up to 34%.
Subsequently in his round up speech, then-DPM Lawrence Wong suggested that based on datapoints from the OECD, Hong Kong and Switzerland, the range for Singapore could be anywhere from around S$2 billion to S$11 billion per year, and that the Government will provide its own detailed revenue estimates in due course. Will the Minister now be able to provide an update given that most other countries would have enacted or are in the process of enacting these legislations, and MNEs would have to adhere to the same set of rules internationally from 2025?
Is a minimum tax going to raise revenues, or not?
My second question is really, is the Government’s plan to effectively return any additional corporate income tax revenues back to these in-scope MNEs, such that we will not have any additional net revenues going forward?
In Budget 2024, the Refundable Investment Credit (RIC) was introduced, which is to be awarded on qualifying expenditures incurred by a company in respect of a qualifying project, during the qualifying period. According to the IRAS website, the credits are to be offset against Corporate Income Tax payable. Any unutilised credits will be refunded to the company in cash within four years from when the company satisfies the conditions for receiving the credits. This is introduced in the new Section 93B under the Income Tax (Amendment) Bill.
The list of economic activities and qualifying expenditure categories specified by IRAS, however, appear to be notably broad-based in scope, and wider than the tax credit schemes in some other jurisdictions, which primarily focus on R&D activities. Qualifying expenditure for example covers a whole range of categories including capital expenditure; manpower costs; training costs; professional fees; intangible asset costs; fees for work outsourced in Singapore; materials and consumables; and freight and logistics costs.
While more information was said to be available on the EDB and EnterpriseSG websites by 3Q 2024, it is now mid-October and to date I have not been able to see any substantive information on RICs thus far. Are there expenditures that do not actually qualify, and how would the EDB or EnterpriseSG make such a determination as to what activities and expenditure would qualify under the RIC, and whether objective criteria on the assessment of the quantum of RIC to be awarded will be published in due course?
In my view, the effectiveness of the MNE Bill and the amount of net revenues we collect from in-scope MNEs will substantially depend on the extent of the generosity of the EDB and EnterpriseSG towards these MNEs.
What I am also concerned about is that under subsection 51 of the Income Tax (Amendment) Bill, “The Minister may make regulations to carry out the purposes and provisions of this section”. This gives the Minister a broad mandate to make regulations concerning RICs, and there are two particular areas which I hope the Minister can provide further clarifications on.
First, even though each RIC award will have a qualifying period of up to 10 years, and that the credits are supposed to be offset against Corporate Income Tax payable, subsections 30 to 32 effectively enables the company to choose to receive the RIC in cash ahead of the payout date specified, in lieu of being used to offset due taxes.
What is the rationale for this, how will this be applied and will the Government end up incurring out-of-pocket expenditure, as though it is a grant being given to the company?
Singapore is not a tax haven
My third question, which is arguably a rhetorical one, is does the Government see Singapore as just another a tax haven? For avoidance of doubt, I strongly believe that we are not a tax haven.
A few weeks ago, Singapore was ranked second in the IMD’s World Talent Ranking and fourth in the world financial centres ranking. In June this year, Singapore took the top spot in the IMD World Competitiveness Ranking, and in January, Singapore was ranked the most liveable city for Asian expatriates, among others.
To quote an International Tax and Transaction Services Leader in one of the Big Four Accounting firms, “overall, for the smaller nations like Singapore, the curtailing of tax competition from the global minimum tax proposal will drive a greater focus on economic fundamentals. Singapore’s long-standing merits in its institutions, infrastructure, labor market and financial and legal systems — qualities it has conscientiously nurtured for decades — would arguably be an even greater source of distinctiveness.”
Should the rollout of the global minimum tax be proceeding as scheduled, I would say yes let’s not be complacent, but we should take this window of opportunity to adapt and innovate when it comes to considering new economic development models that are more sustainable, and less reliant on short term tax incentives. And let’s also be a bit prouder of our non-tax advantages, including our most important asset, Singaporeans themselves, and not fall prey to the thinking that without aggressive tax incentives, we would not be competitive to international MNEs.
Subject-to-Tax Rule (STTR)
Lastly, in addition to the GloBE rules, Pillar Two also includes a Subject-to-Tax Rule (STTR). STTR allows a developing country to impose additional taxes of up to 9% on certain payments such as interest and royalties, that an entity makes to related entities in another jurisdiction, if that payment is taxed at less than 9% in the other jurisdiction.
In September last month, I note that nine jurisdictions signed a new multilateral treaty that will allow early adopters to swiftly implement the new Pillar Two Subject to Tax Rule, with 57 countries attending the first signing ceremony of the Multilateral Convention.
The OECD has stated that the STTR is an integral part of the consensus achieved on Pillar Two and is especially important for developing Inclusive Framework members. As such, may I ask the Minister what is the Government’s position on the STTR, given that this MNE Bill is as far as I observe, silent on the STTR? As the Government often reiterates that Singapore is a developing country, can I confirm with the Minister that Singapore whether considered a developing country under the STTR, and will be able to benefit from this rule?
Conclusion
Allow me to conclude Mr Speaker, by returning to the first principles of BEPS 2.0, which is that these reforms were introduced to stop the race to the bottom when it comes to sovereign tax policies, and to facilitate international collaboration to end tax avoidance.
Should we decide not to adhere to the principles of BEPS 2.0, we once again return to the vicious race to the bottom” where countries compete to offer the lowest tax rates in a bid to attract corporate profits, undermining fair competition, penalising smaller local SMEs that cannot engage in aggressive tax planning, and ultimately weakens national and international economies by depriving it of the resources necessary for sustainable development.
It is only fair that MNEs, which benefit from our skilled workforce, advanced infrastructure, and stable regulatory environment, pay their proportionate and fair share of taxes and contribute to our nation building. And by supporting BEPS 2.0, we not only promote a more equitable tax system but also signal our strong commitment to responsible global governance and economic fairness, thereby dissociating ourselves from the terms tax-havens or tax-favoured jurisdictions. Let me repeat once again that the OECD expects all economies to benefit from extra tax revenues as a result of the Two-Pillar Solution. All economies. It is perfectly reasonable for the Government to reinvest additional tax revenues such as through this landmark global tax reform into Singapore’s developmental needs. After all, this is the function of Government, to direct our operating revenues such as from income taxes into operating and development expenditures across a range of areas such as healthcare, education, and defence. But it is an entirely different thing to roundtrip additional income received from in-scope corporates, back to the same corporates. I hope the additional tax revenues from BEPS 2.0 will not simply be in substance returned to MNEs through other forms but invested in Singaporeans and our collective future instea
