G-7 tax deal ripples through Singapore and beyond: what you need to know

SINGAPORE – Last week, the Group of Seven Advanced Economies pledged to set a global corporate tax rate of “at least 15%” – a major step in promoting fairer taxation in the world. era of globalization and digitization.

While the G-7’s proposal will be discussed further in the coming weeks in broader international frameworks, such as the Group of 20, Asian countries and multinationals are already assessing the impact if a minimum tax materializes.

Some may benefit from a level playing field. Others could lose their luster as investment destinations, especially given the lingering pressure to impose corporate taxes above the proposed minimum of 15%. Either way, policymakers and business leaders are likely to have strategic adjustments to make.

Here are some of the implications for Asia.

Will Singapore and Hong Kong become less attractive to investors?

Some countries and territories in Asia have encouraged multinational companies to set up operations with low tax rates. Singapore’s corporate tax is set at 17%, while Hong Kong’s is 16.5%, lower than most other Asian economies. They also offer benefits that can further reduce the effective tax rate. It is still unclear how the proposed minimum rate rule would deal with such incentives.

Chester Wee, who heads EY’s international corporate tax advisory business for ASEAN, told Nikkei Asia that the two cities “should review their corporate tax regimes to ensure their relevance in the new tax world.” . Still, he added that they would likely continue to attract investment even if the tax floor was set at 15%.

The authorities have clearly taken note.

Singaporean Finance Minister Lawrence Wong said “it was too early to say” what the impact would be, in a Facebook post on Tuesday. But he said that once a global consensus is reached, Singapore “will make all necessary changes to our corporate tax system, in close consultation with businesses and tax professionals.”

Wong stressed that “the new rules should not inadvertently weaken the incentives for companies to invest and innovate. Otherwise, countries will all be worse off, fighting for our share of a shrinking pie.”

Hong Kong Finance Secretary Paul Chan told the legislature on Monday that the proposed tax regime could affect some of the city’s tax benefits for various industries, according to a Bloomberg report. “We would like to use low tax rates to promote the development of certain sectors,” Chan said, “so we could be limited [from] using a low tax rate regime as a competitive method.

Other Asian jurisdictions that have relatively low corporate tax rates include Macau, at 12 percent, and Brunei, at 18.5 percent, according to data from the Organization for Economic Co-operation and Development.

How have Asian multinationals reacted?

So far, few Asian business leaders have revealed their views on the G-7 proposal. The scheme could be a bigger problem for Western multinationals like Google and Facebook, whose tax avoidance strategies have drawn strong criticism. But Asian businesses could also be affected.

Global Times, a Chinese state-owned media outlet, reported on Sunday an expert’s opinion that the minimum tax rule would discourage the country’s tech giants from avoiding taxes by setting up accounts in other country, giving Beijing more control. “Like their US and European counterparts, many large tech companies in China also have divisions in tax havens such as the Cayman Islands, including Tencent and Alibaba,” the report said.

Masakazu Tokura, head of Japan’s largest trade lobby Keidanren, as well as chairman of Sumitomo Chemical, told reporters that the minimum tax would help prevent a “race to the bottom” in global tax rates and help prevent domestic industries to contract. He added that the new regime should not complicate administrative procedures.

Many in Japan, however, are still scratching their heads. Finance Minister Taro Aso said on Tuesday he had no idea of ​​the impact of the new tax regime on Japanese businesses.

What are the Asian members of the G-20 saying about the proposal?

Apart from Japan – the only Asian member of the G-7 – Australia, China, India, Indonesia and South Korea are all part of the G-20. A key question is whether countries outside the G-7 will adopt the new tax regime.

“We support the search for a consensus on a solution by mid-2021 in the multilateral framework, in accordance with the mandate of the G-20,” Chinese Foreign Ministry spokesman Wang Wenbin said on Tuesday. “China believes that all countries, including the G-20 [members], should contribute pragmatically and constructively, properly handle the main concerns of all parties and be inclusive in the design of the solution, ”he said.

Chinese Foreign Ministry spokesman Wang Wenbin said Beijing supports seeking consensus on a tax solution by mid-2021. © Reuters

Australian Treasurer Josh Frydenberg said: “Australia welcomes the commitment of the G-7 countries to agree on a globally coherent approach to the fiscal challenges posed by the digitization of the economy”, according to the local media.

South Korea’s finance ministry said tax rules could have a mixed impact on the country as businesses face a financial blow, but the government could see more tax revenue. “Companies with subsidiaries in tax havens will face heavier tax burdens,” said a ministry director who asked not to be named. “For the government, it is a plus for collecting tax revenue.”

Indonesian Finance Minister Sri Mulyani Indrawati supported the minimum tax proposal in a Washington Post opinion piece, which she co-wrote with four counterparts. Indian officials have yet to publicly react to the G-7 deal.

The Economist Intelligence Unit noted on Wednesday that members of the G-20 outside the G-7 are “seen as broadly in favor of reform, although outside of China their governments and businesses are unlikely to are significant beneficiaries or payers of net taxes “.

How did other emerging Asian economies react?

Thai Prime Minister Prayuth Chan-ocha has tasked his economic departments to study the impact of the G-7 deal, according to a local report. Prayuth said the move could be both a boost and a bane to Thailand’s efforts to attract foreign investment, including into the Eastern Economic Corridor, according to The Nation. “Thailand needs to monitor, adjust and improve regulations to increase skills in the face of upcoming changes,” a government spokesperson said in the report.

Like Thailand, many jurisdictions in emerging Asia offer tax incentives that result in lower effective rates to attract investors.

Where does the discussion go from here?

The G-7 communiqué only briefly mentioned that the group would “commit to an overall minimum tax of at least 15% country by country”, leaving details for future discussions in broader forums such as the G-20 and the OECD.

“At least 15%” implies that some countries can still push for a higher threshold. The US Treasury Department, which proposed the minimum rate of 15%, said last month that “15% is a floor and discussions should continue to be ambitious and push this rate up.”

Some low-tax economies like Ireland, which has a corporate interest rate of only 12.5%, should resist.

Fair tax groups say 15% is too low. “This deal should be the starting point for a future deal that includes a higher minimum tax rate, and which also works for low-income countries,” said Tax Justice UK executive director Robert Palmer, in a press release.

Gabriela Bucher, executive director of Oxfam International, a charity, said the 15% minimum “will do little to end the race to level corporate taxes to the bottom and limit the ‘widespread use of tax havens “.

For now, the lack of certainty poses a risk. EY’s Wee warned that in the short term, “the investment climate may be slowed due to the uncertainty created by these global tax changes.”

Additional reporting by Kim Jaewon in Seoul.


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