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In this Explainer, find out...
What global developments are driving a change in Singapore's tax policy?
How is Singapore adapting to these changes?
What are the strengths and potential drawbacks of these responses?
Introduction
The guiding principles and general makeup of Singapore’s tax structure were explored in Part 1 of this series on Singapore’s tax system. In this piece, we explore how global changes in the geopolitical and economic landscape are influencing taxation. In turn, we aim to answer a few questions: How is Singapore developing its tax structure for the age of tomorrow? Are these changes meritorious for the local economy at large?
A Changing Tax Environment
Recent shifts in Singapore’s tax system include (i) the adoption of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 framework, (ii) carbon taxes stipulated by the 2015 Paris Convention, and (iii) the rise of the digital economy. We will now examine each tax policy according to its drivers, formulation, merits, and potential shortcomings.
Adoption of the BEPS 2.0 Framework
The Driver
The OECD’s BEPS 2.0 framework is a landmark global project to address tax loopholes exploited by multinational enterprises (MNEs). It targets a costly international problem: profit-shifting by MNEs to low-tax jurisdictions despite a disproportionately low economic activity, such as manufacturing processes and consumer sales. The sweeping scale of this costly international problem demands urgent action: US$100-240 billion (~ S$130-320 billion), or upwards of 10 per cent in global corporate income tax revenue, is lost annually due to profit-shifting tax structuring. This deprives nations worldwide of tax revenue that could be allocated to public services.
The BEPS 2.0 framework pioneers a more stringent global corporate tax regime through the “Two-Pillar Solution”. Crucially, the main targets under these reforms are MNEs, key culprits of corporate tax avoidance. Under Pillar 1, some taxable profits will be shifted to markets where customers are located. Notably, Pillar 1 only affects MNEs with global revenues above €20 billion (~S$28 billion). Meanwhile, Pillar 2 introduces a Global Minimum Tax Rate of 15 per cent which will be levied on MNEs with revenues exceeding €750 million (~S$1 billion).
Considered together, Pillar 1 and 2 disincentivise profit-shifting by tackling the problem of global “tax havens”, which refer to jurisdictions that attract MNEs primarily via low corporate tax rates.
The Response
Singapore is among 142 signatories to the BEPS 2.0 framework. Our compliance with the Two-Pillar Solution is contained in the draft Multinational Enterprise (Minimum Tax) Bill, released by the Ministry of Finance (MOF) on 10 June 2024. In line with Pillar 2, the Bill proposes an effective tax rate of at least 15 per cent on MNEs with annual revenues upwards of €750 million (~S$1 billion), effective 1 January 2025. This raises the effective tax rate for in-scope MNEs from the concessionary tax rate of less than 10 per cent. Provisions to relinquish tax rights over some profits, as stipulated in Pillar 1, are currently being considered in IRAS consultation papers.
Given these radical shifts in corporate tax policy under the BEPS 2.0 framework, why has Singapore adopted these standards?
First and foremost, Singapore adopts a consensus-based approach towards alignment with international tax standards. We can trace this policy stance to the fundamental nature of Singapore’s open economy, which heavily relies on cross-border trade and investment. Adopting domestic tax standards that are internationally consistent improves the coherence of the international tax landscape, of which Singapore, as a regional financial hub, is a critical member.
Next, Singapore aims to leverage the new corporate tax rules to strengthen our economic fundamentals. A tax policy shift that reduces Singapore’s ability to attract MNEs via tax competition simultaneously serves as motivation to enhance Singapore’s competitiveness through non-tax mechanisms. Above all, adopting the BEPS 2.0 framework aligns Singapore’s tax policy with our economic policy position at large: to develop a fundamentals-based, pro-innovation and pro-growth economy.
A Critical Evaluation
To some, adopting the BEPS 2.0 framework heralds an uncertain future for Singapore’s globally competitive tax structure. If enacted, the Multinational Enterprise (Minimum Tax) Bill may reduce Singapore’s tax competitiveness and trigger a relocation of MNEs. Nonetheless, we can temper bleak expectations of declining foreign direct investment (FDI) with MOF’s reassurance that tax incentives will remain in a post-BEPS 2.0 tax landscape. Additionally, Singapore’s headline corporate tax rate, at 17 per cent, remains internationally competitive compared to corporate tax rates upwards of 30 per cent in the G7 countries.
More broadly, Singapore’s forward-thinking policy agenda makes changes to our corporate tax rate more palatable. The MOF has announced a two-pronged approach to strengthen Singapore’s non-tax appeal, specifically our robust infrastructure and skilled workforce. The first tenet is to reinvest corporate tax revenue into industry development schemes. The second tenet involves expanding the scope of existing initiatives such as the National Productivity Fund and introducing new ones like the Enterprise Innovation Scheme.
Altogether, while Singapore’s tax advantage may be eroded by its adoption of the BEPS 2.0 framework, the economic impacts may in fact be minimal, given how Singapore is adapting its economic strategy to these changes.
Taxing Carbon
The Driver
Economists have long regarded climate change as a market failure. When producing goods and services, firms generate negative externalities, since the greenhouse gases (GHGs) they emit contribute to rising global temperatures that negatively affect third parties, e.g., future generations. However, firms do not bear the costs of their actions and thus have no incentive to decrease their GHG emissions.
To correct this market failure, governments around the world have intervened by compelling firms to internalise the costs of their emissions. One way of achieving this is through taxing GHG emissions, for instance, using a carbon tax. This way, the third-party costs of GHG emissions are priced and borne by firms, meaning they face higher costs and are incentivised to generate less GHGs than before.
The Response
Singapore’s carbon tax is a linchpin of her efforts to combat climate change. As of 2024, it covers 80 per cent of our total GHG emissions by levying taxes on facilities that directly emit more than 25,000 tonnes of carbon dioxide equivalent (tCO2e) annually.
In 2019, Singapore established the first carbon pricing scheme in Southeast Asia. To allow companies to ease into paying carbon taxes, the carbon tax was fixed at S$5/tCO2e from 2019 to 2023. In 2024, however, it was raised to $25/tCO2e, and will continue to rise to S$45/tCO2e by 2026. The target is to reach S$50-80/tCO2e by 2030. This trajectory (see Figure 1) sends a firm price signal to companies, forming a strong impetus for emitters to reduce their carbon footprint.
Figure 1. Trajectory of Singapore’s Carbon Tax
A Critical Evaluation
A key concern is that of inflation, both upstream (affecting emitters) and downstream (affecting consumers).
Upstream, taxing carbon increases business costs and decreases profits. As an export-oriented economy, not only does this increase the prices of domestic goods and services, but we also run the risk of losing our competitive advantage to countries without a carbon tax. For instance, beyond Singapore and Indonesia, no ASEAN country has a carbon tax implemented.
On the bright side, the carbon tax increments are staggered and thus this gives businesses ample time to adjust. The revenue arising from the carbon tax is also allocated to decarbonisation efforts. For instance, the Economic Development Board (EDB) runs the Energy Efficient Grant which co-funds business investments in energy-efficient capital. Since its launch in 2022, approximately 2,000 companies have tapped into the grant. International carbon credits (ICCs) may also be used to offset no more than 5 per cent of companies’ taxable emissions. ICCs are certificates that can be bought from other emitters who have successfully reduced emissions to offset an emitter’s carbon emissions.
Downstream, even though consumers may not be paying carbon taxes directly, higher business costs can be transmitted to consumers through higher prices, such as higher utility bills. In the Budget 2022 speech, Finance Minister Lawrence Wong articulated that an increase in carbon tax to S$25 will increase utility bills by S$4 for an average household.
In response, additional U-Save rebates have been distributed under the 2024 Assurance Package. This means that Housing & Development Board (HDB) households will receive over twice the amount of U-Save rebates in 2024 relative to past years.
That said, the increased cost might not necessarily be bad. It serves as a financial disincentive, motivating individuals to switch to more energy-efficient electrical appliances. Essentially, this is the price mechanism in effect, as the social and private costs of energy consumption are now better aligned. In turn, this encourages more Singaporeans to adjust their behaviour in line with Singapore’s green transition plans.
Tech and Tax
The Driver
Singapore’s digital economy has grown significantly over the past decade, particularly under Singapore’s Smart Nation drive. The value-add derived from Singapore’s Information and Communications (I&C) sector and digitalisation in the rest of the economy contributed 17.3 per cent of Singapore’s GDP in 2022 (see Figure 2), double the share of Singapore’s GDP five years ago. Furthermore, given the roll-out of Singapore’s National Artificial Intelligence Strategy 2.0, the proliferation of Singapore’s digital economy is unlikely to slow down.
Figure 2. Composition of Singapore’s Digital Economy (in % of GDP), 2022
Parts of Singapore’s tax system, however, can become irrelevant in this digital economy if no change is made. This is so for several reasons.
First, the proper allocation of taxing rights is fundamental in preventing double taxation, which occurs when a single source of income is taxed both where it is sourced and where it is received. This discourages cross-border economic activity and is especially detrimental to the growth of multinational enterprises (MNEs). Currently, the concept of Permanent Establishments (PE) is used to determine whether a country can tax the profits of a non-resident business. However, the PE concept heavily focuses on physical presence in the market jurisdiction. With digital technologies enabling businesses to expand into a new market without establishing the need for a local physical presence, the current concept of PE has become less relevant and needs further refinement.
A similar problem arises from Singapore’s territorial basis of taxation. This means that income accruing in or derived from Singapore, is subject to income tax. Notably, foreign-sourced income not received in Singapore is exempted. The digital economy has enabled many businesses to operate remotely whilst also spurring business models where it is difficult to determine or identify where economic activity occurs. This is especially the case where purely digital services are supplied, with no physical delivery of goods.
Another area of concern is the rising import of digital services. While both local goods and services as well as imported goods are subject to a Goods and Services Tax (GST) under the GST Act, this was not the case for imported services until amendments to the GST Act took effect in early 2020. This also resulted in overseas vendors supplying the same services to Singapore consumers having an unfair advantage as they would not have been charged GST on such services, while their Singapore-based counterparts would have been.
The Response
Singapore has introduced a range of measures in response to the growth of our digital economy.
Extensive policy reviews and tax treaties are being conducted and negotiated by IRAS to ensure that Singapore’s tax system remains robust so that Singapore retains its fair share of tax revenue generated from economic activities linked to the country.
Moreover, to mitigate the shortfalls in GST revenue, the Overseas Vendor Registration Regime (OVRR) was introduced for business-to-consumer (B2C) transactions while amendments were made to the reverse charge (RC) provisions of the GST Act for business-to-business (B2B) situations.
Over the past few years, the OVRR was introduced and expanded to tax imported goods and digital services, including low-value goods (of value less than S$400) sold by overseas vendors on e-commerce platforms, online educational services and telemedicine. As of November 2024, foreign vendors supplying digital services to Singapore consumers must collect GST from their customers in Singapore and hand it over to tax authorities. Separately, under the RC, Singapore businesses buying foreign services must account for the value of services imported and the GST payable to the tax authority.
A Critical Evaluation
The OVRR and RC are welcome changes in this new digital economy. However, the burden they place on businesses cannot be ignored. Notably, under both schemes, the onus of reporting falls on businesses rather than consumers. This is understandable since businesses are usually better positioned to bear the administrative burden of accounting for GST. However, while this may be true for large MNEs, smaller foreign vendors will likely face more compliance issues. This may discourage them from establishing a local presence. At the same time, these tax changes may also make digital services more costly for both businesses and consumers.
Whether or not this will slow the rate of expansion of the digital economy remains to be seen. What is apparent, however, is that taxation in this area is a tight balancing act. On the one hand, there is a need to maintain a coherent and effective tax strategy. On the other hand, implementing any tax strategy must also not hinder the development of an internationally competitive digital industry in Singapore.
Conclusion
As seen above, Singapore’s tax narrative is far from complete. Future challenges and opportunities constantly necessitate fitting changes to Singapore’s tax policies. In turn, as the Beatles’ Taxman lives on in our musical records, taxation moves on in a constant push and pull between citizen and state, the present and the future and, increasingly, one state and another, this generation and the next.
This Policy Explainer was written by members of MAJU. MAJU is an independent, youth-led organisation that focuses on engaging Singaporean youths in a long-term research process to guide them in jointly formulating policy ideas of their own.
By sharing our unique youth perspectives, MAJU hopes to contribute to the policymaking discourse and future of Singapore.
The citations to our Policy Explainers can be found in the PDF appended to this webpage.
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