In early June 2021, finance ministers from the Group of Seven (G7) nations reached an "historic" accord in the United Kingdom, committing to implement a global minimum corporate tax of at least 15%.
Speaking after the deal was signed in London, British Chancellor of the Exchequer Rishi Sunak said the grouping had agreed to make the global tax system "fit for the global digital age and crucially to make sure that it's fair so that the right companies pay the right tax in the right places".
The deal is aimed at ending a so-called "race to the bottom" on global tax rates, whereby tax havens and low-tax jurisdictions stand accused of inducing governments to increasingly lower their taxes.
Such a scenario "disturbs the level playing field", meaning that important public goods may no longer be financed, said Ludger Schuknecht, Visiting Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.
The devil is in the details
Despite the agreement being reached in the UK this month, Professor Schuknecht argues it could be "years" before the new rules are fully implemented, and even then, they are likely to face challenges as companies will ask their lawyers to find loopholes and "creative solutions".
"This is likely to disadvantage emerging and developing countries," he said.
Yet, as the minimum corporate tax rate appears to be moving ahead, it's worth considering whether such a move can be effective in the battle to ensure a fair global environment when it comes to paying corporate taxes.
"Corporate tax rates have indeed come down in many countries, but corporate tax revenue as a share of GDP has mostly not, as countries have broadened their tax base," he said. "Other mechanisms like international information exchange have also been implemented to prevent tax evasion." In addition, corporate taxes are only part of the tax that company owners pay.
"Unlimited tax competition and very low tax rates are not helpful for political and societal support of the social market economy. While low tax rates may be justifiable, it is difficult to explain to tax-paying workers and the public why there are predatory zero taxes or near-zero taxes on corporate profits," he said.
As a result, establishing a minimum corporate tax rate would be effective in countering the argument that market economies are governed by greed and inherently self-destabilising.
However, some economists argue that the 15% rate is too high and would adversely impact small and often emerging or developing countries. There is also a suspicion that another motive behind the move is to establish a form of "taxation cartel" to prevent the loss of investment to more competitive, low-tax jurisdictions.
Possible effect on Singapore
It's also worth considering what impact a global minimum corporate tax rate would have on a country like Singapore, which has carved out a reputation as an attractive business destination due to factors such as its openness towards foreign investment, an attractive taxation regime, as well as its convenient location.
Professor Schuknecht believes Singapore is not likely to be too heavily affected by such a move because it already has many other advantages working in its favour, including its stability, well-functioning infrastructure and a strategic location. It may also benefit by attracting companies that want to leave tax havens.
"The minimum corporate tax rate is also likely to be accompanied by an agreement on shifting part of the tax base of very profitable, international corporations to the consumer country," he said. "Depending on the details of the agreement, this might affect Singapore positively (revenue from big tech companies) or negatively (revenue loss from companies taxed partially abroad). On the whole, the net effect is not likely to be huge," he said.
He added that the minimum corporate tax rate is also unlikely to impact Singapore's advantage as a "low tax and high quality of life" destination, which is important in attracting highly-qualified labour.
Most importantly, Singapore should underpin its good reputation as a reliable international partner with a reasonable implementation of an agreement and strong (other) framework conditions, he said.
Despite its relatively good position, Professor Schuknecht advises the city-state's authorities to maintain good framework conditions and Singapore's high attractiveness as an investment destination.
Maintaining strong framework conditions includes ensuring lean regulation, strong infrastructure and education, and high-quality services, which are considered Singapore's strong points.
"Keeping the orientation on strategic innovative sectors could be underpinned, for example by support to research and development, exploiting further the country's role as a regional hub and as an interface between the main power centres, building further on its reputation as a culturally open, stable and innovative country, and being a high-reputation country where companies do not have to fear political and regulatory risks or any damage to their own reputation as a result of doing business here," he said.
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