Will the Loss of Tax Competitiveness Threaten Investments into Singapore?
The Multilateral Enterprise (Minimum Tax) Bill will put into legislative force the terms associated with the second pillar of the OECD’s BEPS Treaty.[1] Given that Singapore has been a signatory of the original convention since mid-2017[2]—and, four years thence, having signed on to the second phase—this is essentially a ratification of our preexisting international commitments.
Moreover, the stipulations give effect to a corporate minimum tax that, absent action on our part, would simply afford other jurisdictions the opportunity to apply a top-up tax, if our effective rates were to fall below the minimum threshold of 15 percent. This will allow others to capture tax revenue that we otherwise would. Given our well-telegraphed future expenditure needs, this would be foolhardy.
For these reasons, the Workers’ Party supports the Bill. Even so, some may caution that subscribing to a corporate minimum tax will erode one of the cornerstones of Singapore’s global competitiveness: our attractiveness to foreign capital. In my speech, I will begin by explaining why such fears are probably misplaced.
We should not be competing in race-to-the-bottom tax competition
Sir, there is a standard refrain for those who believe that BEPS 2.0 will herald an unrecoverable erosion of our nation’s competitive advantage: absent low taxes, we will be unable to attract the necessary investments from abroad, which in turn will leave us adrift.
If there were any truth to this claim, it would, perhaps, have been applicable half a century ago. It is no secret that Singapore, in our formative years as a nation, relied heavily on attracting foreign direct investment via multinationals.[3] This, in turn, hinged on factors such as attractive corporate incentives, including tax holidays for multinationals,[4] which kept the effective company tax rate as low as 10 percent.[5]
Still, even a casual examination of statutory corporate tax rates would reveal that statutory rates were as high as 40 percent until the late 1980s.[6] This was only later that they were progressively reduced: to 32 percent through the early 90s, then 26 percent, to the 17 percent that prevails today.[7] Whether this was a belated effort to chase the tail of low costs to sustain our competitive edge, or if it was driven by pressure from foreign businesses to keep rates attractive, I do not know.
What I do know is my belief that we should already have evolved away from such unvarnished tax competition. The determinants of foreign direct investment are, after all, rich and varied, but there is only some mild indication that the corporate tax rate—whether statutory or effective—matters. Indeed, one study that summarized the extant evidence indicates that factors like market size, trade openness, and infrastructure quality are between 4 and 7 times as important.[8] Another concluded that “the effect that tax policy had on FDI was small compared to other factors” and that “[t]ax policy cannot compensate for a negative investment climate”.[9]
One important reason for this relatively muted effect of taxes on FDI is that sufficiently large multinational corporations will ultimately face foreign taxes on their earnings when profits are repatriated back to their home country.[10] This could even lead, paradoxically, to a situation where—depending on the tax regime in the home country—raising taxes even stimulates more investment![11] Of course, tax treaties designed to mitigate the effects of double taxation may blunt this effect, somewhat. However, such treaties have often been found to have little effect on actual FDI flows.[12]
Such conditions are precisely what is being addressed by BEPS 2.0. The new regime targets large MNCs,[13] many of which are already domiciled in higher-taxed regimes. While these home countries can now officially apply a top-up tax, many firms would have faced such higher taxes anyway, when profits were eventually booked at home for redistribution to shareholders. Furthermore, even compared to our ASEAN neighbors, a corporate tax rate at the 15 percent minimum remains below the regional average of a little more than 20 percent.[14] Hence, my sense is that, while BEPS 2.0 may hurt at the margin, it is not game-changing.
The bottom line is simple. As a high-income economy, Singapore’s attractiveness as an investment destination is not, and should not be, fundamentally reliant on low corporate taxes, but on all the other things that set us apart. Lest one takes this as an idiosyncratic opinion, I should stress that this isn’t just my own conclusion. According to the World Competitiveness Report, Singapore’s owes its competitiveness landscape more to its efficient labor market, openness to international trade and investment, and educational and technological infrastructure—all of which it ranks in the top 3 globally—than its tax policy, where it places 10th.[15] Similarly, our score in the Global Competitiveness Report is due more to our country’s transport and utility infrastructure, sophisticated and stable financial system, and quality of institutions, as opposed to low taxes.[16]
The reality that our competitiveness is not anchored in low taxes has also affected real-world investment advisory. PwC lists, in a 2022 report, 10 factors that make Singapore the best in class in the region, and none of these ten are about taxes, per se.[17] To the extent that taxes were featured at all, it was in the context of double taxation agreements, which I agree should continue to be a priority for IRAS.
Reinvesting in our people as a source of competitive strength
In addition to not bluntly competing for foreign capital inflows along the corporate tax margin, we should also be mindful that, given our status as a high-income country, we shouldn’t be blindly courting capital, for its own sake, either. This isn’t to say that foreign investment isn’t important; rather, it is that we should pursue FDI more for its secondary benefits, rather than for the financing itself.
Singapore is already a capital-rich economy. Where we have fallen short, rather, has been in bringing our levels of productivity and innovative capacity to the global frontier.[18] What should, instead, become ever-more important is a focus on elevating the efficiency of our capital deployment, and an upgrading of our technological capabilities. If that comes along with FDI, wonderful.[19] But FDI shouldn’t be the goal.
The government has, for its part, made it clear that it plans to reinvest any excess revenue garnered from participation in BEPS 2.0 back into the economy to ensure competitiveness.[20] I could not agree more.
If we are not to expend our efforts on courting global capital, then, what should we do instead? We should reinvest as much as possible in the human capital of our people, of course, as this is what would give far more bang for the buck, when it comes to productivity and innovation. Notwithstanding how money is fungible, this implies that we should seriously consider earmarking the funds for R&D, education, or—as my Sengkang colleague has suggested—healthcare.
In prior interventions in this House, I had repeatedly emphasized the importance of placing the investment in human capital on at least the same footing as that of physical capital.[21] I had suggested, for example, that funds targeted toward infrastructure development can and should be broadened to accommodate expenditure on training and education, [22] or warned that those deigned for productivity improvements do not somehow get diverted toward yet more physical capital accumulation.[23] Even in the most recent context of PM Wong’s budget statement this year, I cautioned against the Refundable Investment Credits scheme morphing into a loophole for simply increasing production, rather than R&D or Green transition efforts.[24]
I will reiterate the appeal here: that as we reinvest the proceeds from the top-up taxes accruing from BEPS 2.0, we once again consciously channel these toward bolstering intangible capital: the education and skills of our workers, to generate knowledge and ideas that would keep us at the forefront of the global competitiveness frontier.
Conclusion
At risk of oversimplification, Mr Speaker, let me offer an analogy to the points I am making. We can think of tax rates as the parking fees one pays to access a mall. Sure, all else equal, one would probably choose a mall that charges less for parking (or offers free parking for the first hour or two). But ultimately, we choose the mall we do because of the range of shops, the price of the goods sold there, the quality of service of the restaurants, and how pleasant the overall shopping experience is. Such thrusts should be the focus of our investment regime, going forward.
In future, we are likely to see more, not less, of such multilateral economic agreements, led by the major economies. As frustrating as the lack of progress in carbon pricing worldwide has been—especially for those of us that are advocates of the approach—the go-it-first approach of the EU in implementing its Carbon Border Adjustment Mechanism (CBAM)[25]—it is heartening to see how unilateral approaches have nevertheless sparked complementary legislation in other jurisdictions.[26] Similar progress has been made, within the G20, on the rollout of a global wealth tax.[27] The reality is, international agreements that used to sting—as a result of difficulties associated with free-riding—are now finding renewed life, via unilateral mechanisms by major players that better align the incentives of those that would previously have rankled at the prospect of such coordination. It behooves us to play to our nation’s inherent advantages—as they exist today, and not as they used to be—as we navigate this changing global geoeconomic and political landscape. For this reason, we should—nay, we must—not only embrace the spirit of BEPS 2.0 for our economy, but proactively channel our energies to refreshing our growth model toward the genuine drivers in the 21st century: our people
[1] The formal name is the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which is commonly referred to as BEPS. The 2.0 phase, launched in 2019, is a refinement of the original 1.0 phase that was concerned more with action plans to limit race-to-the-bottom tax practices internationally.
[2] MOF (2017), “Singapore to Sign The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,” Press Release, Jun 7, Singapore: Ministry of Finance.
[3] Song, T.K. & M. Bhaskaran (2015), ”The Role of the State in Singapore: Pragmatism in Pursuit of Growth,” Singapore Economic Review 60(3): 1550030.
[4] The formal legislation was the Economic Expansion Incentives (Relief from Income Tax) Act (1967), which was subsequently amended in 2010.
[5] Choy, C.L. (1986), “Singapore’s Development: Harnessing the Multinationals,” Contemporary Southeast Asia 8(1): 56–69.
[6] This was then reduced to 33 percent in 1987.
[7] The rate was 26 percent until 2000, then progressively reduced to between 18 and 25.5 percent through the 2000s, before settling at 17 percent from 2010 onward.
[8] Islam, M.S. & A. Beloucif (2024), “Determinants of Foreign Direct Investment: A Systematic Review of the Empirical Studies,” Foreign Trade Review 59(2): 309–37.
[9] Faeth (2009), p. 187. See Faeth, I. (2009), “Determinants of Foreign Direct Investment—A Tale of Nine Theoretical Models,” Journal of Economic Surveys 23(1): 165–96.
[10] Hartman, D. (1985), “Tx Policy and Foreign Direct Investment,” Journal of Public Economics 26(1): 107– 21.
[11] This would, of course, depend on the specific home country tax regime in each instance, but the more general point is that raising taxes may be associated with higher FDI could well hold, on average, in the data. See Swenson, D. (1994), “The Impact of U.S. Tax Reform on Foreign Direct Investment in the United States,” Journal of Public Economics 54(2): 243–66.
[12] Hallward-Driemeier, M. (2009), “Do Bilateral Investment Treaties Attract FDI? Only a Bit… and They Could Bite,” in K. Sauvant & L. Sachs (eds.), The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, New York: Oxford University Press, pp. 349 – 78.
[13] Specifically, those earning more than EUR 750 million in revenue.
[14] The ASEAN average, for available data, is around 23 percent, while that of Asia as a whole is about 21 percent. See KPMG Asia Pacific Tax Centre (2013), ASEAN Tax Guide, Singapore: KPMG.
[15] IMD (2024), “Singapore: Competitiveness Trends Overall,” World Competitiveness Yearbook,International Institute for Management Development.
[16] Corporate taxes don’t even feature in the indicators used to compile the index, and for taxes on labor, we rank 75 (out of 141). See Schwab, K. (2020), Global Competitiveness Report, Geneva: World Economic Forum.
[17] PwC (2022), Singapore: The Location of Choice for Asset and Wealth Management in the Asia Pacific, Singapore: Pricewaterhouse Coopers.
[18] This could be disputed, but it is undeniable that, despite the high rankings of Singapore’s universities in international league tables, we have yet to produce or even attract Nobel Prize winners to our shores. Our levels of productivity continue to lag those at comparable levels of per capita incomes; see, among others, Young, A. (1995), “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics 110(3): 641–80 and Mahadevan, R. & K. Kalirajan (2000), “Singapore’s Manufacturing TFP Growth: A Decomposition Analysis,” Journal of Comparative Economics 28(4): 828–39. An update that draws very similar conclusions is in Bhaskaran, M. & N. Chiang (2020), “Singapore’s Poor Productivity Performance,” Academia.sg, Nov 20.
[19] There is reasonable evidence that FDI is accompanied by a transfer of technology. See, for example, the survey piece by Keller, W. (2010), “International Trade, Foreign Direct Investment, and Technology Spillovers,” in B. Hall & N. Rosenberg (eds.), Handbook of the Economics of Innovation 2, Amsterdam: Elsevier North-Holland, pp. 793–829.
[20] MOF (2024), BEPS Explainer, Singapore: Ministry of Finance.
[21] Hansard (2021) 95(20): Feb 25.
[22] Hansard (2021) 95(29): Oct 5.
[23] Hansard (2023) 95(110): Aug 3.
[24] Hansard (2024) 95(125): Feb 27.
[25] Carbon tariffs by the EU are presently in a transitional phase, with the definitive regime expected from 2026. The CBAM will apply the markup on carbon-intensive production of covered goods for companies based in the EU, including aluminum, cement, and electricity. See Official Journal of the European Union (2023), Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 on Establishing a Carbon Border Adjustment Mechanism, Brussels: European Union.
[26] Jia,Z., R. Wu, Y. Liu, S. Wen & B. Lin (2024), “Can Carbon Tariffs Based on Domestic Embedded Carbon Emissions Reduce More Carbon Leakages?”, Ecological Economics 220: 108163.
[27] Sandbu, M. (2024), “We Are a Step Closer to Taxing the Super-Rich,” CNA, May 21. The full proposal advances a 2 percent minimum tax on those with wealth above $1 billion. See Zucman, G. (2024), A Blueprint for a Coordinated Minimum Effective Taxation Standard for Ultra-High-Net-Worth Individuals,” Report Commissioned by the Brazilian G20 Presidency, Brazilia: G20 Secretariat.