Pillar Two top-up taxes

Following the 2023 Budget when Singapore first stated its intention to introduce Pillar Two top-up taxes, the Finance Minister has announced that Singapore will proceed to implement two components of Pillar Two – the Income Inclusion Rule (IIR) and Domestic Top-up Tax (DTT) - for in-scope businesses from their financial years (FYs) starting on or after 1 January 2025. However, the last component, the undertaxed profits rule (UTPR), will be considered only at a later stage, as the present focus will be to ensure a smooth roll-out of IIR and DTT for affected businesses.

To recap, Pillar Two is part of an initiative of the OECD/G20 Inclusive Framework, comprising about 140 jurisdictions, to curb base erosion and profit shifting arrangements arising from a diverse international tax landscape. It does so by calling for the introduction of a top-up tax that 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 (as defined) earned in the jurisdictions in which they operate.

The implementation of the Pillar Two top-up taxes around the world has already gathered pace. Countries such as Germany and the United Kingdom as well as Australia, Japan and Korea have implemented their respective versions of Pillar Two as of 1 January 2024. Similar to Singapore, other Asian countries such as Hong Kong and Malaysia have announced the implementation of the Pillar Two top-up taxes by 1 January 2025. As such, it is no surprise that Singapore will be proceeding with the IIR and the DTT as originally planned.

The IIR applies to Singapore-parented in-scope MNE groups in respect of the profits of their low-taxed constituent entities outside Singapore, whereas the DTT applies to foreign-headquartered in-scope MNE groups in respect of the profits of their low-taxed constituent entities in Singapore.

The UTPR, which serves as a back-stop in the overall scheme, is intended to capture profits not otherwise taxed under the IIR. As countries would not wish to give up their taxing rights, they will likely seek to adopt IIR to avoid ceding tax rights to another country that implements UTPR, thus ensuring that in-scope MNEs will pay tax on profits (as defined) at an effective rate of at least 15%. Whilst more than 20 countries have announced that they will be adopting UTPR, its implementation is still being developed. Hence, it is wise for Singapore to watch these developments and learn from those countries that have implemented UTPR. This will allow Singapore to take a more measured approach after considering what others will do.

What leaders of relevant MNEs must appreciate is that complying with the new tax regimes will not be a simple matter. The amount of data required to calculate the impact and report is significant and not all data required is or will be readily available in a company's accounting systems. Companies will need to consider whether their current tax compliance processes are adequate (and consistent in all foreign locations where a company has constituent entities) to capture the required data accurately. Based on the reviews so far by PwC with many affected MNEs, there will be a significant increase in efforts and resources needed to comply with these complex rules. This burden is magnified by the fact that the lead time given to MNEs to prepare to meet the requirements under the new tax legislation will be short given the impending implementation in 2025. What is paramount is to embrace digital solutions that will help to reduce the data gathering burden, model the impact and facilitate tax reporting. This has been the case of MNEs which have begun this journey early and appreciated the challenges of having the right and accurate data from different functions within the MNE group.

For more information on the latest updates on Pillar Two adoption globally, please refer to Pillar Two Country Tracker.