Jamus debated a bill.
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Last week in Parliament, there was a debate over a bill that would roll out Pillar 2 of the OECD’s so-called BEPS 2.0 framework. That’s a lot of jargon, so it’s worth explaining a little.
For decades, large multinational corporations (MNCs) have tried to reduce their tax burden, via accounting maneuvers. One strategy is to sell goods at inflated prices to subsidiaries in low-tax jurisdictions, which reduces the base of taxable profits in high-tax ones. Another is to transfer high-value assets, especially intellectual property, to subsidiaries located in low-tax jurisdictions, which allows them to book higher profits that would be taxed less. Such examples of base erosion and profit shifting are what inspired BEPS (which is an acronym of these two terms). The goal of the treaty is to discourage MNCs from pursuing such accounting tricks.
BEPS has two pillars. The first reallocates firms’ taxable income to where the money was made (which is fair, since governments should be able to tax economic transactions that occur within their borders). The second then stipulates a minimum effective tax rate of 15 percent, given the base set in the first pillar. This pillar further allows an aggrieved jurisdiction to impose a top-up tax on the MNC, if it thinks that it’s circumventing the minimum rate. That’s what the bill I spoke on does: it puts into law our ability to apply this top-up tax on MNCs based in Singapore, but operating subsidiaries in places that fail to apply the 15 percent, while also simultaneously raising the minimum tax on MNCs based here.
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#workersparty had previously argued in favor of raising the effective corporate tax rate on multinationals before, as a possible lever for raising more tax revenue. So we were obviously in favor of the steps taken by the bill.
But will Singapore remain competitive without low taxes? Of course! Tax competition is an old-fashioned way to attract investment. While it worked for us in our developing years, we should have evolved away from this strategy by now. There’s plenty of evidence that other factors—like our educational and technological infrastructure and our efficient workforce—matter much, much more for making a place attractive for investment. That’s what we should focus on.
Given the importance of human capital in giving us a competitive edge, we should naturally reinvest revenues raised from BEPS in our people (in education, or health), perhaps by earmarking these revenues for such needs. There seems to be room to keep expanding money in pursuit of education. The share of educational spending in the budget has slipped over the past decade, from 2nd (after defense) to 4th.
While some of this is expected, given an aging population and declining fertility (more elderly to care for, less kids to educate), we also don’t generally need to build new school buildings, either. Rather, we can spend more on paying our teachers more, and hiring more of them so that we can shrink the size of our classrooms. At the upper end, we can devote more money to support reskilling programs and R&D.
In the end, spending on human capital can become a self-sustaining process. By elevating our people, they become more productive, which raises their incomes and hence their tax contributions. It is truly time to evolve away from a foreign capital-reliant, low-tax model of accumulating yet more physical capital, toward one based on human capital, knowledge accumulation, and innovation.