In budget 2023 Finance Minister Lawrence Wong announced that Singapore would implement a 15% tax rate for some of the world's largest corporations on or after the first of january 2025 it's to fall in line with a global minimum corporate tax rate, part of pillar two of the base erosion and profit shifting initiative, Orb eps for less of a mouthful, it's a global framework for the reform of international tax rules.
So why does this matter for Singapore and Singaporeans? And could it impact the city states attractiveness to foreign investment from the money mine team? To break this all down for us here, Tax head at close, Singapore Silva set the scene for us. What is babs and how did it come to be? So
babs basically refers to tax strategies employed by multinational enterprises to basically shift profits from high tax jurisdiction To a low tax jurisdiction or to a no tax jurisdiction. The focus on baps started in 2008 after the global financial crisis, when countries felt that they need to increase their tax revenue. The G-20 countries at that point in time, I felt that the way to increase tax revenue is to focus on tax avoidance.
There was a slew of measures from 2008 to combat profit shifting, and the most recent manifestation is what the Finance Minister spoke about in the budget this year of the global minimum tax. So global minimum tax is an initiative to get the consensus of countries to tax the profits of multinational enterprises. So
Key to this is a domestic top up tax, which Singapore plans to implement from January 1, 2025. Could you explain to us why that's needed?
The global minimum tax only applies to a multinational enterprises that have a global turnover of €750 million so it's not across the board. The global minimum tax, in terms of the mechanism is a bit complex, but I can give a very simple example. So let's say a multinational enterprise that is based in a foreign country and they set up a subsidiary in Singapore. Let's say we give tax incentive to the subsidiary in Singapore in order for it to do further investment in Singapore.
And due to the tax incentive, let's say the subsidiary has effective tax rate of about 5%. So the 5% effective tax rate is well below the 15% minimum tax. If Singapore does not take steps to impose the minimum tax of 15% on this subsidiary. What it means is that the country where the parent company is located can actually do a top up tax. So when we say a top up tax, what it means is that It's a difference between 15%, which is the minimum tax
and the effective tax rate in Singapore 5%. So in this case the top will be 10%. So if Singapore does not take steps to impose the minimum tax, what it means is that we are giving up our taxing rights to a foreign country, which is why the finance minister mentioned that the global minimum tax would be implemented in Singapore in 2025.
Singapore is planning to implement Pillar two in 2025, that's a year behind some other jurisdictions. Why is that? So
why wait and see approach is because while the implementation plan for the global minimum tax has been released, but there's still a little bit of uncertainty, like for example, will the U. S. Adopt global minimum tax? They're also developing countries, there are feeling that maybe the global minimum tax might not benefit them as much, There's
a little bit of uncertainty as well. So while european countries have kind of said, yeah, they'll go ahead with the implementation but there's a bit of uncertainty respect to other countries. So, I think from a Singapore perspective, taking a wait and see approach is also good.
Here's what we've been speaking about so far, Beeps refers to a global movement to crack down on tax avoidance by some of the world's largest corporations. A major component of that is a global corporate minimum tax rate of 15%. This only affects companies which have an annual turnover of
more than €750 million. So we are talking corporate Giants, Singapore will implement the global minimum tax rate from 2025 Civil Singapore is known for tax incentives for multinationals to invest here, could this affect how they view Singapore as a place to invest,
when you look at the global minimum tax, the concern is that tax incentives will no longer be effective, No longer attractive because there is a minimum tax of 15%. Now, I would like to see in a more positive light because even with tax incentive, we're already competing with a lot of countries because other countries are also providing tax incentive and sometimes it's like a race to the bottom, where am I pro
riding a better tax incentive than another country. So with global minimum tax, basically taking tax out of the equation and we are competing on non tax factors, which is actually I think is favorable to Singapore because we have the strong fundamentals, very good infrastructure, the talent pool, we have stability and on top of that safety, I think
it's a very, very big consideration. The pandemic has demonstrated to the world, not only the government, but the people as well have worked together and Singapore is really a very, very safe place to be, not only to live to work, but also to invest, to locate the companies and use Singapore as a launchpad to the region. So these are really good factors that are working in our favor.
Now, what is important is that Singapore continue this path, continue to be competitive, We need to continue to upscale, the skills of the employees because at the end of the day, when foreign investors come into Singapore, they are looking for certain skill sets, they need the talent. So as long as we continue to invest in those areas, I'm pretty optimistic that we will continue to attract foreign investments to
That end. What have you seen in budget 2023? That would help Singapore in the form of these non-tax incentives
it's again tied to the global minimum tax, right? Because we will not be able to use tax incentives as a tool before you go into that. Maybe, you know, just a qualifier, It doesn't mean tax incentives are useless because the global minimum tax impacts companies that has a global turnover of €750 million. There a lot of companies that fall outside that school and Singapore is well positioned to attract those companies. Growing companies startups, we can still give tax incentive to
these companies to be based in Singapore. It is kind of a recalibration. Who do we want to give tax incentives? What kind of tax incentives we want to give. It's not like the death of tax incentive. Tax incentives will continue but it will just be refocused recalibrated. Now when we look at the budget, it is really creating that conducive environment. So if you're saying we want to attract investments and we don't want to use tax incentives
to attract the investment. Now we need to have the right environment and in this case we need companies that are investing in there are people, we need companies that are innovating because if you look at the ecosystem as a whole, when a foreign companies setting up operations here, they are not working in silo, they are part of the ecosystem. They need support from smes as well. Smes could be like their subcontractors, they could be their vendors and so on.
When you have smes with the right capabilities with the right talent, innovating, productive that is going to really help in kind of telling the foreign companies we have the right ecosystem when you come in, it's plug and play. So I think that's what the budget is trying to achieve.
We've been speaking about beeps the international framework that's trying to get big companies to pay their fair share of tax in the places where they operate as part of this. Singapore will introduce a domestic top up tax. This could result in higher tax revenue for Singapore though, we don't know for sure yet if that's actually going to happen.
What it does mean though is that the competition for foreign investments won't just be about tax incentives, non-tax factors will become more important and that's likely to work in Singapore's favor. Also, the framework only applies to companies that have an annual turnover of more than €750 million. There's lots of companies out there that fall under this threshold. So tax incentives could still come into the picture for such enterprises.
So there'll be quite a bit of recalibration ahead. And this also means that innovation becomes even more important because it will sharpen that competitive edge. And that's the five things you need to know about how new rules on corporate tax will affect Singapore. I've been speaking to Siva Kumar, head of tax at Crow. Singapore Money. Mind is every saturday at 10:30 p.m. on Mediacorp c n a. You can also catch us at sienna dot asia on youtube.