This could potentially increase our tax revenues depending on how it shapes firm decisions and investment choices.
BRINGING BALANCE TO INTERNATIONAL TAX RULES
Singapore has deemed it necessary to sign up to BEPS 2.0. As a member of the OECD Inclusive Framework, it believes a rules-based approach can close cross-border tax loopholes and create a global level playing field.
A world without global tax consensus risks countries taking unilateral actions, imposing greater tax burdens, especially on tech companies with a worldwide presence, and distorting incentives.
This race to tax the digital economy is coming into sharper focus with the rise of Internet companies and digital platforms.
But the result has been a rise in digital services taxes, with varying rules and qualifying conditions for deductions. New anti-base erosion rules are also being enacted. For example, Australia’s integrity rule denies some tax deductions for Australian borrowers.
Under the 2020 Mexico tax reform, some payments made to related parties subject to effective tax of less than 22.5 per cent do not qualify for deductions either.
In such a dynamic tax environment where unique tax rules are being introduced by countries in an uncoordinated fashion on a regular basis, MNEs will struggle to keep up with ever-changing tax rules.
The OECD understands this and therefore has couched BEPS 2.0 as a way to avoid the proliferation of unilateral tax actions and tax uncertainty. They want to minimise global tax compliance costs and tackle double taxation that existing rules do not eliminate.
SUPPORTING INVESTMENTS
The use of tax incentives has been key to Singapore’s strategy in attracting large investments to drive economic growth and job creation. With tax incentives, MNEs could pay an effective tax rate below the headline corporate tax rate.
Yet, Singapore has made various adjustments to its tax incentive schemes over the years to ensure these set high qualifying standards that consider substance and transparency.
Tax incentives such as the Pioneer Certificate Incentive and the Development and Expansion Incentive, which encourage companies to grow capabilities and conduct new or expanded activities, demand significant business commitments in terms of headcount and local business spending requirements.
The good news for Singapore is the proposed global minimum tax of 15 per cent eases competition based solely on tax rates. Currently, MNEs can achieve similar tax outcome should they locate themselves in jurisdictions like Ireland (12.5 per cent), Hungary (9 per cent) and Dubai (0 per cent).
Moreover under Pillar Two, a formulaic substance carve-out will be considered, excluding from the low-taxed profit an amount at least 5 per cent of the carrying value of tangible assets and payroll.