Both sides have agreed to remove almost all tariffs within five years after the agreement enters into force. Singapore will remove all tariffs on EU imports, while the EU will immediately eliminate tariffs on 75% of goods imported from Singapore, with the rest to be phased out over three to five years.
More than 10,000 European companies have branches in Singapore. A statement from the EU trade commissioner said growth into ASEAN [Association of South-East Asian Nations] was ‘absolutely vital for the EU.’
“If I have to export a service or export a good to the rest of Asia, then sometimes there’s a lot of red tape to getting that done. If Singapore takes that red tape out of the equations, that makes it easier for EU suppliers to come into ASEAN,” explained Gordon Lawson, tax partner at KPMG in Singapore. “Singapore is really the first step the EU is making into ASEAN.”
Singapore used the Korea-EU FTA as a sample treaty, says Lawson, though Singapore worked to secure additional deals. “In negotiating the EUSFTA, Singapore was keen to obtain at least the same level of commitment from the EU, as that obtained by Korea in its EU-Korea FTA. In certain respects, Singapore’s strategic home grown service sectors have been able to secure more preferential access to the EU marketplace.”
Investment Protection
To protect the foreign investments, the agreement included a provision on investor’s state dispute settlement (ISDS), which allows companies to pursue international legal action against governments if a significant legal change affects their operations in that country. The provision has been contentious when included in previous EU trade agreements, including those with the US and Canada.
Singapore was hesitant to include the investment clause in the agreement, which delayed negotiations for more than a year. Singapore suggested that goods and services provisions in the FTA be discussed separately from the investment arrangements, though this was unsuccessful. The ISDS was included in the final agreement.
Dan Ikenson, director of trade studies atUSindependent public policy group Cato Institute explained that domestic taxpayers bear the brunt of the costs under ISDS. The clause allows more risk averse companies to access the Singaporean market, creating more competition for more risk tolerant companies that would take a chance on the market regardless of ISDS.
“Singaporean companies are also taxed in the sense that they can seek amends for losses due to policy changes only through the Singaporean courts. ISDS is available only to the foreign investors, who can avail themselves of both venues, giving them two bites at the apple.”
“Claims based on changes in tax rates that apply equally to domestic- and foreign-owned entities would probably not withstand scrutiny in an ISDS tribunal,” said Ikenson. However, tax changes perceived as unfair or inequitable might be challenged under the provision.
In Mexico, US corporation Corn Products International challenged a tax on high fructose corn syrup under the ISDS provisions of the North American Free Trade Agreement (NAFTA). The tax, they argued, was discriminatory as it taxed only corn syrup, which is nearly always imported from the US, and not pure cane sugar typically produced in Mexcio.
The court ruled in favour of Corn Products International, and two other companies in similar suits, based on the argument that the tax discriminated against foreign investors.
Fostering trade into ASEAN
Singapore is the EU’s fifth largest external investor and its largest trading partner in Southeast Asia. Daniel Rosario, the new European Commission spokesperson for trade, highlighted the trade benefits and emphasised the EU’s intentions to expand its trade network in the region.
“Taxation is a question of great importance in our relation to Singapore, and it has been addressed within the framework of the Partnership and Cooperation Agreement (PCA), negotiated in parallel to the free trade agreement, and that contains provisions on good governance in the tax area.”
The EU is negotiating similar agreements with Vietnam, Thailand and Malaysia.
The deal must be approved by EU member states and parliament before coming into effect, which will take time as the document must be translated into all of the EU languages before being ratified.
Singapore has expanded its network of tax treaties significantly, with 76 double taxation agreements now in place including with all the major ASEAN countries.
“In my opinion, there are a lot of intangible benefits derived from the FTA given that Singapore wants to be seen to be as a front runner,” says Lawson. “Singapore is leading the pack.”
