Tax incentives have historically been an integral part of Singapore’s fiscal toolkit in attracting foreign direct investments (FDI). There has been much interest in how Singapore’s tax system (and specifically its incentive regime) will be affected ever since the OECD Inclusive Framework published its two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This is because Pillar Two of the Global Anti-Base Erosion (GloBE) model rules would ensure that large multinational enterprises (MNEs) - those with consolidated annual revenues of EUR 750 million or more - pay tax at an effective rate of at least 15% on profits earned in the jurisdictions in which they operate. Such a global minimum tax would therefore negate the benefits of concessionary tax rates which large MNEs enjoy in Singapore.
As Pillar Two implementation gained momentum globally in December 2022 with the EU agreeing to adopt the draft Pillar Two Directive, Japan including the regime in its 2023 Tax Reform proposals and South Korea approving draft legislation for such a tax, the attention has turned to Singapore. This is particularly so since Singapore has indicated that it will adjust its tax system in response to international tax developments, including exploring the introduction of a domestic minimum top-up tax (DTT).
With the announcement that Singapore plans to implement the GloBE rules and DTT for in-scope businesses from financial year beginning on or after 1 January 2025, the Finance Minister has provided much needed certainty to the business community. It is also reassuring that the Finance Minister reiterated the intent to continue to engage businesses and provide them with sufficient advance notice before the rules become effective.
In deciding on a 2025 start date, some MNEs with operations in Singapore could be subject to a top-up tax in their ultimate parent entity’s (UPE) location if that location implements GloBE rules in 2024. Without a corresponding DTT, the tax not collected in Singapore, say because of a tax incentive, could be picked up and paid at the UPE location. In other words, the tax incentive offered to the business in Singapore will not benefit the MNE as a group because it will have to pay a top-up tax elsewhere.
That said, not all of Singapore’s key trading partners have adopted the GloBE rules, the most notable of which is the US. The 2025 start date could mean some MNEs may continue to enjoy the benefits of their tax concessions – this would preserve Singapore’s competitiveness in attracting FDI in the meantime. Singapore-headquartered MNEs may also benefit during this time if their effective tax rate (computed under these rules) is less than 15% in any jurisdiction in which they operate. However, with potentially different effective dates between jurisdictions and given the broad ambit of the GloBE rules, MNEs should review their holding structures and where each of their entities is located to assess if any part of their operations is caught by the global minimum tax regime introduced in another jurisdiction.
It should also be noted that in-scope MNEs should start preparing for the new regime early notwithstanding the 2025 start date and the recently announced transitional safe harbour provisions. The GloBE rules are extremely complex, and not identical to current tax laws nor do they follow accounting standards in all respects. The compliance with these rules requires a vast amount of data, not all of which are readily available in current financial systems. MNEs should take full advantage of the two-year lead time to prepare for this new tax regime.
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