The corporate tax contribution in sustaining Singapore’s social compact

When Budget 2024 was announced as the first instalment of plans for the Forward SG initiative, the instinct was that the new policies or policy shifts would aim at benefiting Singaporeans – workers, students, families, businesses, and more.

A closer look at the announcements shows that a lot more parties are impacted.

The Overseas Humanitarian Assistance Tax Deduction Scheme, for example, will be piloted for four years from 2025. This scheme provides individual and corporate donors with a 100 per cent tax deduction for qualifying cash donations to charities located around the world.

On the business end, the Refundable Investment Credit awards refundable cash to companies on qualifying expenditures that “support high-value and substantive economic activities”.

The companies that will benefit are not limited to local businesses, but include foreign multinational companies operating here.

What these imply is that the interaction Singapore has with the world and the foreigners living here are integral to formulating the social compact, which we are refreshing through the Forward SG initiative and the Budget.
 

Taxes from foreign corporations are important

Since FY2022, the largest source of revenue to Singapore’s yearly Budget has been Corporate Income Taxes (CIT). In 2023, S$28.38 billion came from taxes levied on the profits generated by local and foreign companies, making up 27.2 per cent of government operating revenue.

When the 15 per cent Global Minimum Tax (GMT) rate comes into force next year, the first-order effects would likely further increase the revenues collected from the companies, even though there are uncertainties as to how big the revenue gains are.

As the government reviews the Budget every year, it is essentially tabling the cost of Singapore’s needs and how they are funded.

While costs and needs are ever-increasing with Singapore’s ageing population and heightened geopolitical risks around the world, funding options are also increasingly limited. Further raising our goods and services tax for the next Budget year, for example, is unviable.

This year in particular, the needs that we recognise and are paying for are those of fellow Singaporeans that were agreed upon over the Forward SG initiative.

Our fiscal policies are therefore a tangible presentation of our social compact with each other. This social compact is between the government and its people, which should include those local and foreign companies that have been called upon to contribute the largest share of our yearly Budget.

What are the roles, responsibilities, and expectations that we ought to have with businesses operating in Singapore? The GMT is one important way to define and show our commitment to each other.
 

The GMT: What it is and is not

In Budget 2024, it was announced that Singapore would implement Pillar Two of the Base Erosion and Profit Shifting (BEPS) initiative from 2025, through the Income Inclusion Rule and Domestic Top-Up Tax.

This means increasing the effective tax rate of in-scope multinational enterprises (MNEs) – those with global revenues exceeding €750 million (S$1.09 billion) – to a minimum of 15 per cent.
 

Although Singapore’s CIT rate sits at 17 per cent, tax incentives bring the effective rate to a lower figure. Pillar Two would neutralise the effects of these incentives by requiring a top-up tax of at least 15 per cent.

One response to this tax reform is to celebrate the prospect that increasing the corporate tax rate will generate significant revenues and thus create more fiscal space for Singapore.

This view, however, promotes the interpretation of BEPS as a money-grabbing exercise for jurisdictions. Not only would this be untrue for many countries, but it is also unhelpful as it pits businesses against the government – the former existing only to contribute to the latter’s coffers.

Such a mentality also fails to recognise that upholding our commitments in Forward SG – to empower Singaporeans in their diverse aspirations; provide assurance for Singaporeans on basic needs, and so on – requires investments.

The contributions of foreign multinationals enables the government to make these large financial investments.
 

Response to BEPS reflects how value is defined

The GMT also provides opportunities to strengthen Singapore’s social compact when the responses articulate to foreign businesses and Singaporeans the things that the country values.

A large concern about BEPS is the possible reduction in our tax base, should MNEs shift some of the activities to other jurisdictions in response to the new business environment.

This is a legitimate concern for policymakers, as well as multinationals, which must seriously consider the pros and cons of locating their businesses in different locations.

How we continue to convince MNEs that they should locate their business in Singapore must increasingly go beyond the tangible benefits such as tax incentives.

This means that Singapore must continue to shore up the non-tax incentives – benefits that are non-monetary in value, such as knowledge-based leadership and training opportunities – that make the Republic an attractive place to do business.

When we show to the MNEs that their only stakes in Singapore are not just the tangibles (monetary benefits from low tax rates), we are also demonstrating to Singaporeans that there is value in the things that are less visible or quantifiable.

These are things such as a stable sociopolitical environment, skilled workforce, high trust in systems, which Singapore has always invested in, enabling the country to punch above its weight.
 

In the current world of heightened insecurity and rising costs across the world, these underlying factors are even more important. However, it is also in such environments that it becomes more difficult to see the long-term benefits of these strengths.

One of the key aspirations of Forward SG is to move from the narrow focus on academic performance and paper qualifications “to embracing wider competencies, life skills, and other personal attributes”.

Although this mainly applies to the education system in Singapore, the underlying principle and spirit also apply to how we shape our business environment.

In the refreshed social compact, Singaporeans support and recognise contributions that come in different forms. As an investment hub, Singapore’s value proposition to the world is also multifaceted, with some being more tangible than others.
 

Long-term partnership with foreign multinationals

Lastly, Singaporeans and foreign multinationals must see each other as long-term partners in order to sustain and reap the benefits of a stable social compact.

For individual Singaporeans or our small and medium-sized enterprises, it goes back to the point of not seeing BEPS as an opportunity to extract more money from MNEs.

For policymakers and MNEs operating here, it means avoiding reactionary responses that forfeit longer-term growth. For example, in a recently published policy brief, a working group convened by the Institute of Policy Studies outlined the negative implications that might arise when MNEs place too much emphasis on carve-out provisions.

Such provisions include the Substance-based Income Exclusion (SBIE), a provision designed by the Organisation for Economic Co-operation and Development (OECD) and G20. The SBIE allows firms to exclude a percentage of expenses on tangible assets and payroll to be excluded from the Global Anti-Base Erosion Model Rules tax base.

A short-term view taken by MNEs is to see this carve-out as an opportunity to pay less tax and invest more on tangible assets, even though they might not be suitable or necessary for the firm’s needs.

Tangible assets and employee compensation are not necessarily top value drivers in a modern knowledge-based economy like Singapore. In fact, for Asia as a whole, industrialisation has been predicated upon improving skills and technology to move up the value chain.

Policymakers should be able to understand that Singapore is naturally limited to possessing relatively fewer tangible assets and workers due to its small land size. It is therefore unproductive to expect much from a policy that runs contrary to the overall direction of the country’s economy.

Instead, the expectations that firms and policymakers should have of each other is the focus on pro-growth goals that might even mean investing in intangibles such as social capital.

Thus, the new Refundable Investment Credit can be an effective tool to make clear to businesses those activities that are of value to the local economy and incentivise growth in those areas, such as investing in research and development, innovation, and solutions with decarbonisation objectives.

Unlike tax incentives, the returns of these investments in the ecosystem are not immediately visible.

However, Singapore’s short history is enough to remind us of how intangible factors such as good governance and sociopolitical stability have allowed us to become the investment hub that we are today. Grounding our multinationals on these factors also brings about those multiplier effects where innovative and value-adding companies contribute jobs, ideas and activities to Singapore’s economy.

All of these sustain Singapore’s social compact by providing the diverse pathways of success and resources to overcome major challenges, such as climate change and food security.

Efforts to continue building up these underlying strengths of our nation must persist, and our businesses should have the patience to stay and contribute to the fruition of these investments. After all, members of a social compact – whether citizens or not – are in it for the long run.
 

Christopher Gee is deputy director and senior research fellow at the Institute of Policy Studies, National University of Singapore. Yap Jia Hui is research assistant at the same institute.

This article was first published in The Business Times on 28 February 2024, and is reproduced with the writers’ permission.