CNA Explains: How a new tax scheme aims to retain the Singapore 'brand' and keep attracting foreign investment

 Base erosion, profit shifting, a global minimum corporate tax rate and Singapore's new Refundable Investment Credit - CNA's Tang See Kit tries to make sense of it all.

SINGAPORE: Singapore on Friday (Feb 16) announced a sprucing up of its economic policy toolkit, with a new Refundable Investment Credit aimed at ensuring the country retains its appeal as a top investment destination.

Deputy Prime Minister and Finance Minister Lawrence Wong in his annual Budget speech said this was necessary amid tougher competition for investments around the world, and as Singapore makes major changes to its corporate tax system to be in line with a global minimum tax rate of 15 per cent.

This new tax floor is part of what's called the BEPS 2.0 framework - Base Erosion and Profit Shifting - an overhaul of international rules aiming to tackle tax avoidance by multinational firms.

What exactly is BEPS?

Base erosion: When companies use deductible business expenses – costs of keeping a firm running, such as wages, rental and utilities – to reduce their taxable income.

Profit shifting: When firms move their profits from high-tax jurisdictions to low- or no-tax locations.

Together, BEPS refers to tax planning strategies deployed by multinational firms, to exploit gaps in tax systems and avoid paying a fairer share of tax.

To be sure, it is not just companies which are under pressure to reduce their taxes.

Jurisdictions themselves compete with one another to attract foreign investments, in turn creating a downward spiral in corporate tax rates globally.

These rates have fallen from an average of 40 per cent in 1980 to 23 per cent now – what United States Treasury Secretary Janet Yellen has called a race to the bottom.

Jurisdictions also sweeten the deal by doling out additional reliefs and subsidies, meaning that businesses end up paying even lower corporate taxes.

And what's BEPS 2.0?

Discussions to revise global tax rules and make large businesses pay more taxes have been underway since 2013.

But it was in 2021 when a decisive, significant step was finally taken.

Led by the Organisation for Economic Cooperation and Development (OECD), nearly 140 countries agreed to a two-pillar solution known as BEPS 2.0. 

The first pillar looks to reallocate certain taxing rights from the multinational enterprises' (MNEs) home countries, to the markets where their consumers are based and products sold.

The implementation date for this pillar remains unclear.

The second pillar prescribes a global minimum corporate tax rate of 15 per cent for MNE groups with annual global revenues of 750 million euros (S$1.09 billion) or more.

Under this second pillar, there are several interlocking measures such as an Income Inclusion Rule, Domestic Minimum Tax and Undertaxed Profits Rule - more on these later.

As the landmark BEPS 2.0 deal is still not mandatory, the hope is that once some nations introduce the global minimum corporate tax rate, the interlocking nature of these measures will give others an incentive to do so. Otherwise, participating nations can collect tax at their expense.

“Pillar two only needs a critical mass of countries to implement it,” the OECD’s former tax chief Pascal Saint-Amans told the Financial Times. “Nobody has found a silver bullet where you can avoid it.”

Adoption of this pillar has begun, with the United Kingdom, Switzerland, Australia and South Korea among the first wave of jurisdictions that have done so.