• Mya Chew

What the minimum global corporate tax will mean for smaller countries

Some of us may be familiar with corporate tax - it is the tax on the profits of a corporation. But have you heard of the minimum global corporate tax proposal?

President Joe Biden and the leaders of the G-7 group of nations will endorse a global minimum corporate tax of at least 15%[1](the initial 21% tax rate[2] had faced strong resistance from low tax European countries) This proposal was pushed by the Biden administration because they want to ensure that middle class working Americans can also enjoy the benefits brought about by globalisation and trade. So far, globalisation has benefited billionaires and multinational corporations (MNCs) the most, sparking great unhappiness amongst the working class. Over the past 35 years countries have exploited low corporate tax rates to attract MNCs, with the average corporate tax rate worldwide being more than halved, falling from 39% in 1985 to 23% in 2019, resulting in a “race-to-the-bottom” in corporate taxation. But with a global minimum corporate tax, MNCs will not be able to shift their profits to other countries that offer much lower tax rates as their profits will be taxed at the minimum global corporation tax rate either where they are booked or headquartered[3]. Even though not all countries are keen on a global corporate tax, the Biden administration wants to deny any exemptions for taxes paid to countries that do not follow the global corporate tax rate. With the global corporate tax having such heavy weight backing from the United States of America and other G7 economies, it will be difficult for small low tax countries to resist rising taxes.

Singapore, a small city state in SouthEast Asia, may struggle with this new tax in place. For decades, Singapore has used low corporate tax rates to attract MNCs to boost its small economy. Even though the headline corporate tax is 17%[4], the effective tax rate of many companies in Singapore could possibly be lower than 15%. By giving up its taxing rights to a global body under the minimum tax proposal, Singapore’s tax regime could be greatly undermined, resulting in it becoming less competitive on the global stage. However, not all is lost. Over the years, Singapore has developed a talented workforce, stable business environment and political stability that has attracted many MNCs. As long as these factors remain in place, Singapore will not be too adversely affected by the new minimum corporate tax.

Other countries may not be as fortunate. Third world developing countries that have greatly relied on low tax rates will suffer. These countries need to attract MNCs as their source of foreign direct investment (FDI). These MNCs are the key to uplifting these small economies as the benefits they bring are tremendous. From providing jobs for the locals to satisfying the demands of consumers, these MNCs could be seen as a silver bullet to many of these countries’ problems. Countries like Moldova and Paraguay that have corporate tax rates below 15%, have few other factors besides their competitive tax rates that could potentially attract MNCs. This would potentially increase the disparity between rich nations and poor nations.

Ultimately, the global minimum corporate tax rate removes the flexibility of nations to pursue their own tax rate policies that best suit their economies. Whether the minimum corporate tax rate proposal will be passed is yet to be seen.


[1] https://www.cnbc.com/2021/06/11/biden-and-g-7-leaders-will-endorse-a-global-minimum-corporate-tax.html [2] https://www.channelnewsasia.com/news/commentary/us-fed-global-minimum-corporate-tax-haven-singapore-g7-14903944 [3] https://www.theguardian.com/us-news/2021/jun/01/biden-corporate-tax-plan-could-earn-eu-and-uk-billions-study-shows [4] https://www.channelnewsasia.com/news/commentary/us-fed-global-minimum-corporate-tax-haven-singapore-g7-14903944