Looking beyond tax incentives

Understanding BEPS Pillar Two

Looking beyond tax incentives

13 February 2023 | 5 minute read

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Pillar Two Readiness

Tax incentives have historically been an integral part of Singapore’s fiscal toolkit in attracting foreign direct investments. There has been much interest in how Singapore’s tax system (and specifically its incentive regime) will be affected by Pillar Two since the GloBE 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 any concessionary tax rates enjoyed in Singapore through incentives awarded in return for making substantial investments locally.

Are tax incentives still relevant?

Tax incentives have been a component of structuring foreign investments in Singapore. And this is for both new companies coming to Singapore as well as existing businesses looking to expand their operations.

Tax incentives are not completely irrelevant as there are businesses which are not affected by Pillar Two. For these businesses, tax incentives are still very attractive and relevant.

In-scope MNEs however should start to explore alternatives and evaluate their options, especially when they know that the tax benefits from their tax incentives are going to be eliminated by Pillar Two. This is an important consideration for both new businesses as well as existing businesses looking to renew their incentives in Singapore.

Is Singapore still an attractive investment location without tax incentives?

Once Pillar Two comes into effect, there is going to be a new floor for tax costs across the world and it seems inevitable that the after-tax cost of doing business will go up.

But at the end of the day, a multitude of factors goes into investment decision making, and tax incentives and grants are only a part of that. There are broader considerations that are equally important in arriving at the final investment decision. And it must be borne in mind that Singapore does not compete on the basis of low costs; Singapore’s value proposition is that it is a high-value driving jurisdiction.

That said, some key factors that in-scope MNEs should bear in mind as they evaluate whether operating model changes are needed:

If Singapore continues to be the right location to perform certain activities and functions, and if not, where should they be carried out?
Non-tax considerations such as the availability of talent, business infrastructure, ease of doing business, political stability, and more.
MNEs applying or renewing tax incentives should consider optionality in case there are changes when Pillar Two comes into effect. As always, MNEs should be careful not to overcommit.
Businesses should also evaluate the availability of grants and subsidies, although the benefits from these schemes are not going to be able to replace tax benefits from tax incentives on a dollar-for-dollar basis.

The takeaway

In-scope MNEs need to evaluate their plans, consider their after tax position, and also consider what grants and incentives are available in the light of the circumstances and also given the global developments. They should reach out to the relevant authorities early to understand the implications and discuss their concerns. Importantly, they should also discuss with authorities what happens if companies have to voluntarily exit from the incentives due to Pillar Two coming into effect.