Broadcom’s Move Back To The US Spells Trouble For The PAP’s Economic Strategy
Today the WSJ reported that Broadcom, a major semiconductor company, announced that it was moving its headquarters back to the US. It had become a Singaporean company after it was acquired by Singapore-incorporated Avago Technologies in 2015 which adopted the Broadcom name after the merger went through.
A cornerstone of Singapore’s strategy for attracting foreign investment has been its low corporate tax rate which currently stands at 17%. This is not as low as Ireland’s corporate tax rate of 12.5% but Singapore’s government is open to doing special one-off deals or tax holidays for major investments which undoubtedly reduce the effective rate well below 17%.
Like Ireland, investments by multinationals in search of tax savings have driven a lot of Singapore’s GDP growth. In 2015 the Irish economy grew by 26%, prompting Paul Krugman, the Nobel Laureate, to dub it “leprechaun economics” and most international observers to regard the official statistics with a mixture of derision and incredulity. The main factors were a huge rise in net exports coupled with an enormous increase in the capital stock. It clearly did not reflect what was happening to the real economy and median incomes.
While Singapore’s GDP growth has not been as spectacular as Ireland’s, there is undoubtedly a lot of manipulation of the figures going on. Our growth rate has continued to be higher than expected despite the slowdown in the growth of world trade. It does not reflect the experience of most Singaporeans in the job market, where there have been increased layoffs, and the difficult conditions in the retail sector. The Department of Statistics, which is not independent and works under the direction of the Ministry of Trade and Industry, does not break down many of its figures. However one can point to big rises in net exports driven by a jump in the services surplus which suggests multinationals are choosing to book income in Singapore in order to take advantage of its lower taxes.
However, as I warned when Trump was elected, plans to cut the US corporate tax rate from 35% to 20% (the originally mooted cut was to 15%) would reduce the incentive for companies to re-incorporate or “invert” to Singapore and might actually start a movement in the opposite direction. This now seems to be happening with the Broadcom announcement which was timed to coincide with the rollout of the full details of the Republican tax reform plan today.
It remains to be seen whether the Finance Minister will respond to the US corporate tax cut, which still may not happen since the Republicans have a wafer-thin majority in Congress. However if it does retaliating by cutting corporate taxes further or even abolishing them altogether may not be an option since the Republicans also plan a minimum tax of 10% on businesses incorporated in tax havens.
If the US corporate tax cuts become a reality that would remove one of the main incentives for US investment in Singapore and also one of the biggest sources of growth. The PAP and the Lee dynasty will lose one of their favourite methods of justifying their authoritarian rule by pointing to the virility of GDP growth, no matter how meaningless those figures are to the average Singaporean.