Global minimum corporate tax rate will hurt the West and help S’pore

While 136 countries – including Singapore – have signed a landmark agreement establishing an overall minimum corporate tax rate of 15%, there is no doubt how this will affect the city-state.

After all, small business havens like Singapore are the primary target of this global deal, as part of an effort by governments around the world to force businesses to pay more taxes and limit their ability to avoid it through to complex foreign and offshore mechanisms.

Earlier in July, Finance Minister Lawrence Wong responded to questions from Parliament that the agreement make it more difficult for Singapore to attract investment.

But is it really?

In his responses, he mentioned the need for the city to be qualitatively competitive, offering better business conditions, better workforce, infrastructure, etc.

The point is, Singapore is already doing this and has been doing it since time immemorial.

Perhaps then, Minister Wong’s statements were just a public manifestation of concern before the deal is finalized which, in reality, will benefit Singapore more than it can harm it.

Make multinationals pay their “fair share”

Will Singapore not lose tax revenue to other countries?

Let’s start with the first of the two pillars of the agreement, which targets the world’s largest companies like Google, Amazon or Apple.

Critics may point to specific provisions in the document, which are supposed to force large multinationals to pay taxes from which their income is derived.

At first glance, then, it seems that Singapore – and other small countries – would stand to lose a lot of money. After all, the local market is tiny, and all of the big companies based here do most of their sales overseas.

If they are forced to pay taxes where they sell, shouldn’t the city-state be preparing for hard times?

No. When you read the fine print, it becomes clear that this rule is practically dead on arrival, as it applies to strictly defined businesses, including:

  • Global sales exceed 20 billion euros
  • Profit margins are above 10 percent

And once they meet those criteria, only 25 percent of their profits above the 10 percent margins would be reallocated to domestic markets outside of their primary place of residence.

Indeed, it will end up being paltry, coming only from a handful of companies that qualify. Amazon, for example, wouldn’t, as its profit margins have never exceeded 10% and typically fall between low and mid-range numbers.

Amazon’s net profit margins were typically less than 4% before the pandemic / Image Credit: CNBC

In fact, intensive reinvestment or other means of minimizing profit margins could easily be used by the world’s largest companies to break out of the deal and avoid new tax obligations altogether.

And the second pillar? The global tax floor of 15%? Won’t that hurt Singapore?

The end of corporate tax competition

The main consequence of the second pillar is the limitation of corporate tax competition, in particular the “race to the bottom” of certain countries which hope to attract foreign companies to operate their operations through their tax jurisdiction, helping them to collect some of the money that would otherwise be paid elsewhere.

However, again, this does not necessarily apply to Singapore because, contrary to what many seem to believe, it has never been a tax haven.

The local corporate tax rate is not at all low. At 17 percent, it’s on par with many European countries and just below the US federal rate of 21 percent in effect since 2018, after President Donald Trump slashed it by 35 percent.

It is also considerably higher than the 12.5% ​​collected in Ireland, 10% in Bulgaria or only 9% in Hungary – all EU countries no less.

Corporate Tax Rates and Classifications in Europe |  Tax foundation
Corporate tax rates in the EU / Image credit: Tax Foundation

The effective tax rate in the city-state is certainly below 17%, due to various incentives – and is likely below the new global low of 15% – but it’s not that far off that the new rules make a difference. significant difference.

Singapore is not the Cayman Islands. It is not a tax haven as such, it is a normal country, with a fairly standard tax system and rates barely more attractive than elsewhere.

It has other benefits – and far more important – that collectively make it so attractive to businesses:

  1. Low bureaucracy – doing business in Singapore is easy, compared to almost any other jurisdiction in the world.
  2. Low corruption – there is no need to worry about the need to pay bribes to corrupt officials to do anything.
  3. Political stability – with a single business-friendly party in charge of the country, Singapore is secure and predictable in the long term.
  4. Excellent infrastructure – a world-class port and airport facilitate trade with the rest of the world.
  5. A skilled workforce and fairly attractive immigration policies – no business can function without the right people.
  6. Site – finally, all of the above is gathered in this small place in the middle of Asia, at the crossroads between the Far East and the West. No other country comes close.

It is only after taking all of these elements into account that taxation kicks in – and the authorities have ensured that Singapore’s taxes are as low as they need to be and as high as they can be. be so, so that the city-state remains attractive but can also attract and benefit from hosting as many foreign companies.

Will international companies suddenly turn their backs on Singapore even if, due to the new global tax rate, they will indeed be forced to pay a few percentage points more on their income? It’s unlikely.

Ironically, however, establishing such a minimum floor is in Singapore’s best interest and it may even lead to increased tax revenue, if it is forced to raise more money under the terms of the deal. . Businesses are more likely to pay and enjoy other benefits than researching any other jurisdiction.

More importantly, however, it effectively removes the risk of future competition on corporate tax rates – something to which the city-state would be more vulnerable than most developed countries.

You see, the economies of the West are not very dependent on corporate tax revenues. In the United States, United Kingdom, Germany or France, corporate tax revenues represent between four and six percent of their annual budgets – and even less as a proportion of GDP (between one and two percent). hundred).

How does corporation tax work?  |  Center for Tax Policy
Corporate tax revenue in the United States, as a share of GDP / Image credit: Tax Policy Center

In Singapore, however, the share of corporate taxes accounts for 23% of operating income and over 18% if NIRC is factored in – and between 3-4% of GDP.

If the city-state were pushed to compete with tax rates, it could lose billions of dollars each year and sink into a persistent and large deficit.

corporate tax revenue
Corporate tax receipts (Singapore vs other countries) / Image credit:

Paradoxically, Western countries are much better placed to lower corporate tax rates, or even eliminate them altogether.

Coping with an estimated annual deficit of one to two percent of GDP (if one of them simply removed income tax) would not be a problem with somewhat more responsible budget management, as they have already recorded even larger deficits, even before the pandemic.

For example, annual federal CIT revenues in the United States in recent years have been around US $ 200-350 billion, while the country has continued to run deficits of between US $ 500 billion and US $ 900 billion. . Removing the federal corporate tax would hardly make a major difference.

In reality, the gap would likely be smaller because some of the money would always come back in other forms (for example, through personal income taxes from higher compensation to workers or company managers). , higher employment, tax on capital gains through more investment, greater use of financial services, etc.).

Additionally, companies that have moved billions of dollars overseas (as part of a tax optimization) would now repatriate funds and use them freely domestically, likely producing additional economic benefits and contributing to revenue. tax through other channels.

As a result, the net impact of a significant reduction or outright abolition of corporate taxation in the West would be relatively small and could even end up creating huge economic benefits.

In other words, the countries loudest demanding global corporate tax rules could easily become tax havens themselves – and at a fairly low cost.

The reason they won’t is not that freezing or raising taxes is in their best interest, but that it is in the best interest of their politicians, scrambling to find and cement new sources of “revenue.” That they can continue to ‘bribe’ their constituents with.

Ironically, if they ever did decide to cut corporate tax rates, places like Singapore would really feel the effects, as they simply wouldn’t be able to compete due to the much greater dependence on income than they did. generate for their national budgets.

The biggest threat to Singapore has always been the return of common sense and responsibility to Western governance, which could easily make these great economies much more competitive – and attractive. Fortunately for the city-state, however, they decided to continue to cripple themselves. And now they’ve even enshrined it in a binding international agreement.

With the new floor set at an effective rate of 15 per cent, Singapore need not fear tax competition. And because its primary benefits have always been legal, political, and institutional, it is bound to be even more – not less – attractive than it is today.

Featured Image Credit: The Conversation

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