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Efforts to force multinational companies to pay a fairer share of tax have taken a decisive step forward after 130 countries finally agreed earlier this month to a global minimum corporate tax rate of 15%.
The principle of this agreement is that Multinational Corporations (MNCs) would be forced to pay a minimum of 15% tax in each country they operate in. It also includes plans to prevent the shifting of profits into tax havens by tech giants and other multinationals by enabling signatory countries to tax the world’s largest companies based on revenues generated within their borders.
Singapore and Hong Kong have long been known for its attractive corporate tax rates, but this tax advantage may be whisked away once this landmark tax agreement comes into effect. Although the corporate tax rate stands at 17% in Singapore and at 16,5% in Hong Kong, the effective tax rates of many businesses in Singapore and Hong Kong may fall below the 15% global minimum rate as a result of tax incentives and the non-taxation of capital gains and foreign sourced income.
Accordingly, this would place Singapore and Hong Kong in the category of low-tax jurisdictions which risk losing their tax advantages over high-tax jurisdictions. In a worst-case scenario, some US MNEs may move certain functions currently performed in Singapore or Hong Kong back home or to another jurisdiction.
Anyway, it is important to note that this Global Tax Deal might take a long time to come into effect. In the latest effort to ratify the reforms, finance ministers of the G20 nations endorsed a provisional deal and called for the agreement to be finalized by October. In the short term, Singapore and Hong Kong are likely to do away with some tax incentives, resulting in increased corporate income tax revenue.
In the long term however, Singapore and Hong Kong will need to shift away from its traditional reliance on low tax rates to continue to attract MNCs to its shores. The large MNCs of the world will bear a larger tax burden anywhere they go so Singapore and Hong Kong may maintain their competitive edge by exploring other strategies such as assisting MNCs in the form of capital grants and other incentives which are not taxable. Further, Singapore will need to capitalise on its non-tax strengths which include its economic and political stability, robust infrastructures, educated workforce and strong intellectual property (IP) laws. Likewise, Hong Kong has built a solid reputation and track record as an attractive place for business: a strong and well-regulated financial sector, a pool of managerial talent with international experience, ease of access, proximity to major markets, and a dense network of services firms are among the strengths and advantages of doing business in Hong Kong. Another natural advantage is Hong Kong’s convenient geographical location, leading to its being deemed a “gateway to Asia ».
The good news is some jurisdictions with tax rates lower than Singapore’s or Hong Kong’s will also lose their tax advantages over Singapore and Hong Kong, allowing these two Asian financial hubs to potentially benefit from the exodus of companies from tax havens such as the British Virgin Islands, Cayman Islands and Bermuda. Thus, small and medium-sized enterprises (SMEs) will not be affected by the new rules, noting that SMEs represent the majority of economic activity in Singapore and Hong Kong.
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