- Ajay Kumar Sanganeria, Partner, Head of Tax, KPMG in Singapore
- Dean Rolfe, Partner, Head of International Tax, Asia Pacific, KPMG in Singapore
- Harvey Koenig, Partner, Telecommunications, Media & Technology, Tax, KPMG in Singapore
With the Group of Seven (G-7) advanced economies throwing their weight behind a minimum corporate tax rate of at least 15 per cent, hopes for a global consensus on new international tax rules have been rekindled.
Ultimately, a global deal will hinge on the outcome of long-running negotiations among the 139 countries in the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework. Singapore's Finance Minister Lawrence Wong said in response to the G-7 statement that it is too early to assess the impact on Singapore's economy, adding that the final details, if agreed on, will be closely monitored here.
The steering committee for OECD's base erosion and profit shifting (BEPS) project met on June 28 in Paris to finalise the proposals under consideration by the 139 member countries of the Inclusive Framework. It is understood that the steering committee called for indications of acceptance, or otherwise, by 5pm Paris time on June 28. Closely watched is when the final political consensus will take place. This will be attempted at the meeting of the Inclusive Framework, which was due to meet on June 30 and July 1. Otherwise, finalising of these proposals will move to the G-20 meeting of finance ministers and central banks in Venice on July 9 and 10.
While significant progress has been made on the broad policy approach, some key disagreements remain between participants.
The question of which sectors will be excluded from these rules remains open for discussion. It is understood that the United Kingdom would like to see a financial services sector exclusion, but not all countries agree with this. Some countries have also proposed excluding the shipping and mining industries.
At the moment, likely to be excluded from the global rules are investment funds, sovereign wealth funds and government-owned organisations. However, whether the exclusion for investment funds also extends to real estate investment trusts (Reits) and private equity funds remains to be seen.
Separately, some of the larger countries have suggested that it will be necessary to agree on a package of rules that includes all key details at the same time, rather than tackling individual rules separately (like the proposed global minimum tax rate) or deferring discussion on other sensitive matters. Specifically, they have suggested that a global minimum tax rate cannot be agreed on without also achieving consensus on which sectors are to be excluded from these rules. They argue that the question of tax rate is inextricably linked to sector exclusions.
There have also been discussions on whether pre-existing tax incentives should be retained for a transitional period beyond the introduction of these global rules. This matter is linked to the question of substance carve-outs for genuine economic activity that is currently subject to reduced rates of taxation.
On the question of who will be subject to these rules (that is, the threshold), it is widely anticipated that different revenue (and profit) thresholds will apply to Pillar One and Pillar Two of these proposed global tax rules. This is a deliberate policy choice to ensure that these rules only apply to the world's largest companies. They will therefore not apply to small and medium enterprises.
As it stands today, it looks increasingly likely that Pillar One will apply to the largest 100 companies with at least a US$20 billion revenue threshold and a minimum of 10 per cent profit margin. The Pillar One rule will allow market jurisdictions to tax 20 per cent of the profits of these largest 100 companies, irrespective of physical presence. The methodology by which this reallocation to market jurisdictions will occur has not yet been made public. It is currently understood that any reallocation of profits will be taxed at applicable domestic corporate tax rates applicable in the respective market jurisdictions, and not the so-called global minimum tax rate.
Implications of Pillar One and Two
The trade-off to Pillar One is that market jurisdictions will be required to give up their right to impose digital service taxes (DSTs) or other similar taxes, in exchange for greater taxing rights over the global profits of these largest companies. The OECD has requested the surrender of these taxing rights in relation to all companies and not just for the largest 100 companies. Naturally, affected countries want to limit the impact of this trade-off.
For Pillar Two (the global minimum tax rule), the threshold is anticipated to be set much lower at around US$1 billion. This means that between 2,000 to 3,000 (non-US) companies would be subject to the scope of this rule. This Pillar Two rule would result in the profits of these in-scope taxpayers being subject to a global minimum tax rate. It is widely anticipated that a 15 per cent global minimum tax rate will be proposed.
US companies are, of course, not subject to Pillar Two. They are instead subject to a different tax rule referred to as the Global Intangible Low-Taxed Income (GILTI) tax rule. This is a domestic US tax rule that applies to American companies. US President Joe Biden originally suggested that US corporate taxpayers would be subject to a 21 per cent global minimum tax rate, although US Treasury Secretary Janet Yellen has more recently indicated that a rate "of at least 15 per cent" would be acceptable.
With these implications in mind, what multinational corporations (MNCs) should not delay at is due diligence work. Detailed modelling tools, such as KPMG's BEPS assessment tool, can help MNCs undertake scenario planning and analyse the financial implications of the proposed tax changes.
Singapore is well placed to adapt to any changes to international tax rules. Part of the reason lies in its other strengths - its strategic geographic location, global connectivity, strong rule of law and overall business-friendly environment.
However, it is likely that MNCs will still weigh the impact of a global minimum tax against the efficiency and convenience of operating from here to manage their regional business. This is since they will need to pay a top-up tax in their home tax jurisdiction if they currently pay a tax rate in Singapore that is below the proposed global minimum tax, which effectively unwinds benefits of any incentives they may have received here. Another consideration is how shareholder returns might be impacted if taxes squeeze company profits and dividend payouts.
If agreed, Pillar One will have negative impact on tax revenue for Singapore because of tax base allocations to market jurisdictions, which is currently capped at 100 companies. However, Pillar Two may present broader opportunities for Singapore to refine its tax rules to offset these losses while introducing new non-tax incentives to attract foreign direct investment.
The world is watching closely to see the outcomes of the global discussions. Policy decisions will usually conclude with some trade-offs. However, businesses here can take heart that these global rules will be applied equally across all countries, so the outcome may not be all bad for Singapore.
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