Minimum tax for cross-border companies

Singapore has enacted the Multinational Enterprise Minimum Tax (MNE) Bill, which enshrines an income tax rate of 15% as the minimum applicable to all MNCs.

Back in 2023, the OECD developed the Global minimum tax (GMT) mechanism as part of its efforts to combat the erosion of the tax bases of multinational enterprises. The purpose of the mechanism is to ensure that large companies are subject to a minimum tax rate of at least 15% in each country where they operate. This should reduce the practice of profit shifting to jurisdictions with low tax rates.

GMT addresses the issue of lower corporate tax rates in a number of countries, which is done in order to attract MNEs to the tax jurisdiction. For example, in the US in 2017, the corporate income tax rate was reduced from 35% to 21% to increase the country's tax¹ attractiveness for MNEs. This leads to increased competition between jurisdictions for the tax revenues of large corporations and creates a risk of a “race to the bottom” in terms of tax rates, which is what the GMT should prevent.

Experience of Singapore

Singapore's new 15% minimum tax for MNEs Act applies to companies whose total consolidated revenues for at least 2 out of the last 4 financial years exceed €750 million. The calculation is based on the consolidated financial statements of their ultimate parent company, which includes the revenues of all² entities in the group operating in the country.

In addition to the minimum basic rate, the multinational enterprise top-up tax (MTT), Chapter 3 of the Act imposes a domestic top-up tax (DTT). DTT is the sum of the taxes payable by all subsidiaries and affiliates of an MNE at 15% and not actually paid in full due to the use of lower rates. This amount is calculated as the ratio of adjusted taxes to the income or loss of the group of companies. If the result of this calculation is below the minimum rate of 15%, DTT is applied to bring the rate to the minimum 15%.

Let us illustrate the functioning of the tax. For example, in Singapore the “default” corporate income tax rate is 17%, but all companies resident in Singapore may apply a rate of 8.5% on profits up to SGD300,000 per year. Imagine there are 10 subsidiaries of MNE operating in Singapore, each has annual income of €420,000 (€4.2 million in total), i.e. half of the income is taxed at 8.5% and half at 17%, on average each company will pay 12.75% income taxes. If MNE were to open one subsidiary with the same total income of €4.2 million, €209,000 would be taxed at 8.5% and the rest at 17%, i.e. in total the company would pay almost 17% income taxes. This means that from a tax perspective, it is more advantageous for MNEs in Singapore to split subsidiaries, thereby reducing income tax rates. However, the GMT mechanism obliges MNEs using such a scheme to pay the missing 2.25% income tax (12.75%+2.25%=15%) for each of the 10 subsidiaries, which makes splitting subsidiaries much less favorable.

To date, about 30 countries have already³ adopted legislation implementing GMT. For example, in the European Union, EU Directive 2022/2523 of December 14, 2022 was⁴ adopted.

Russia’s experience

In the Main Directions of the Budget, Tax, Customs and Tariff Policy of the Russian Federation for 2024 and for the Planning Period of 2025 and 2026, the Ministry of Finance of the Russian Federation provided for an assessment of the need to make changes to the Russian tax legislation. These changes are aimed at establishing a minimum level of taxation for Russian holdings that would correspond to the globally accepted GMT rate of 15%.

From the monitoring issue No. 10, October 2024. Download the full issue (PDF) · issue page at the Gaidar Institute