July 23 2021

Asean nations left ‘exposed’ by global minimum corporate tax seen forging closer ties with China

Source: South China Morning Post

The global minimum corporate tax – agreed upon by Group of 20 finance ministers this month – is set to re-chart the course of international investment flows, creating new uncertainties for Southeast Asian nations that have been striving to lure foreign capital and financial expertise.

Final agreement on the 15 per cent minimum-tax plan, originally agreed to by Group of 7 (G7) developed economies in early June, is not expected until October. It could also be years before it takes effect.

But its adoption may force nations in the fast-developing Southeast Asian region, still struggling to overcome the impact of coronavirus pandemic lockdowns, to rely more on their domestic consumer markets and their supply of cheap labour for future economic growth, according to analysts.

Additionally, some say the plan may push certain members to forge closer economic ties with China to consolidate their positions in the global economic landscape.

The minimum tax has been hailed as a way to improve the fiscal positions of countries ravaged by the pandemic. But it will also hit tax havens in Asia and throughout the world, as well as big multinational companies that have shifted profits to low-tax countries still operating in many high-tax jurisdictions.

When the G7 proposed the minimum global corporate tax, the 15 per cent rate was a compromise between the United States’ pitch for a 21 per cent rate and the 12.5 per cent plan put forth by a working group of the Organisation for Economic Cooperation and Development (OECD).

The efforts to end multinational companies’ “race to the bottom” have been endorsed by international agencies such as the International Monetary Fund and some developing countries hit hard by the pandemic.

“Developing and emerging economies are particularly exposed, as tax measures are an important part of the industrial policy and investment promotion toolkit,” the United Nations Conference on Trade and Development said in its recent annual report.

The organisation’s world investment report painted a bleak picture for the Southeast Asian region, as the former investment hotspot reported a 25 per cent fall in net capital inflows, to US$136 billion, last year. However, this performance was better than the average 35 per cent decline worldwide.

The largest destinations for foreign capital inflows – such as Singapore, Indonesia and Vietnam – all recorded declines last year, given supply-chain disruptions and delayed investment plans caused by the pandemic.

The foreign investment in Singapore fell 21 per cent to US$91 billion, led by a more than 80 per cent drop in manufacturing investment, according to the UN report. Malaysia’s FDI fell by 55 per cent to US$3 billion, while that of Myanmar dropped 34 per cent to US$1.8 billion.

Most of the Southeast Asian countries are on the safe side of the Western push for a minimum corporate tax. For instance, the Philippines levies the region’s highest corporate tax rate of 30 per cent, followed by 25 per cent in Myanmar, 24 per cent in Malaysia, 22 per cent in Indonesia and 20 per cent in Laos and Vietnam.

Singapore, however, may lose some of the tax advantages that helped its economy prosper in recent years.

With a nominal 17 per cent corporate income tax, but a much lower effective rate after including incentives and tax breaks, Singapore was ranked as the 9th largest tax haven in the world in the Corporate Tax Haven Index 2021 compiled by Tax Justice Network, an advocacy group based in the United Kingdom. In Asia, only Hong Kong was considered a bigger tax haven, ranking 7th on the list.

Singapore, as a financial and shipping centre in Southeast Asia, is home to the regional headquarters of several multinationals, including American giants such as Microsoft, Apple, Actavis, Pfizer, Google, General Electric, Proctor & Gamble and General Motors. It is also increasingly a destination for Chinese companies, such as ByteDance.

Around 1,800 multinational enterprises in Singapore would meet the revenue criteria, while most of them will have effective tax rates below 15 per cent, according to Singapore’s finance minister, Lawrence Wong.

“All of these factors will, therefore, become more salient in our ability to attract and retain investments,” he was quoted by The Straits Times as saying at a July 5 parliamentary meeting.

Jonathan Culver, a tax partner at accountancy Deloitte in Hong Kong, said: “These global tax changes may weaken [Singapore’s] competitive position, but it is likely to remain one of the most attractive hub locations globally.”

Singapore could also create non-tax incentives to further enhance its attractiveness to foreign investment, and these could be funded by the taxes collected under a domestic minimum tax.

Many analysts differentiated the country from other tax havens such as the Cayman Islands, Bermuda and the British Virgin Islands, given Singapore’s thriving financing and shipping businesses and its role in bridging businesses between the East and the West.

Simon Poh, an associate professor (practice track) with the National University of Singapore’s business school, said the downside of a global minimum tax is so far limited for Singapore, because only a few large companies will be targeted, and the government can offset higher taxes with non-tax incentives.

“Many global companies have, over the years, chosen to base their operations in Singapore not entirely due to tax reasons,” he said, citing the city state’s strategic geographical location, global connectivity, political stability, pro-business environment and diverse talent pool.

Meanwhile, the G20 meeting may encounter some resistance within the European Union, where some countries have tax rates below the G7 minimum, including Ireland at 12.5 per cent and Hungary at 9 per cent, Poh said.

Singapore was ranked fifth in the 2021 world competitiveness ranking released by the Institute for Management Development. Other Asean countries also performed well: Malaysia placed 25th, Thailand placed 28th, and Indonesia placed 37th.

Meanwhile, the Doing Business project at the World Bank, which ranks the business environment of 190 economies, put Singapore in second place last year, followed by Malaysia at No 12, Thailand at No 21 and China at No 31.

G20 member Indonesia is among those having expressed support for the G7 proposal, with finance minister Sri Mulyani Indrawati joining US Treasury Secretary Janet Yellen in hailing the “historic opportunity to end the race to the bottom in corporate taxation”.

Indonesia saw foreign investment fall 22 per cent to US$19 billion last year. Investment from Japan plunged 75 per cent to US$2.1 billion, while that from Singapore shrank nearly 30 per cent to US$4.6 billion.

Suan Teck Kin, head of research at United Overseas Bank in Singapore, said Asean countries actually have many non-tax advantages, including political stability, cheap labour forces, huge markets and supply-chain resilience.

“For example, as they are part of RCEP [the Regional Comprehensive Economic Partnership], there will be huge supply chains for the entire region,” he said. “So, companies want to participate … for other considerations such as access to suppliers in this particular location between China and Asean, and access to labour and land.

“Also, it is a huge consumer market. They are young and have a high tendency to spend.”

The region, which is already China’s top trading partner, is set to benefit by attracting global value chain-related investments due to the China-US trade tensions and the associated global supply-chain restructuring, according to a report released in May by the Asean+3 Macroeconomic Research Office, a regional macroeconomic surveillance unit.

Chinese investment in Asean countries rose 52.1 per cent, year on year, to US$143.6 billion in 2020, with the top destinations being Singapore, Indonesia and Vietnam, government data showed.

Source: South China Morning Post