Global minimum tax and its potential impact on business planning for MNCs in Singapore

Singapore is a well-known magnet for global hubs, alongside Hong Kong, Ireland and Switzerland, with many multinational companies (MNCs) choosing Singapore as their base for the region.

Eligible MNCs are being offered generous and accessible incentive programmes that enable them to reduce their operating costs or upgrade their capabilities in Singapore.

In anticipation of the proposed implementation of a 15% global minimum tax rate under Pillar Two by 2023, MNCs subject to Pillar Two and operating in Singapore are waiting for Singapore’s response to Pillar Two so that they can consider the potential impact on their businesses, model the available options and plan ahead.

In the second half of 2021, the international tax system witnessed important developments. A detailed implementation plan was published by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on BEPS (IF) in response to the high-level political agreement on reallocating a share of global residual profits to the market countries (Pillar One) and implementing global minimum tax rules (Pillar Two).

Under this plan, Pillar One will be introduced by way of multilateral convention (MLC) whereas Pillar Two will be implemented through domestic legislation based on the “model rules” that were published on 20 December 2021 supplemented by a detailed commentary on the rules. Both measures are expected to take effect by 2023.

There have been directions/developments from the European Union (EU), the United Kingdom (UK) and Switzerland towards Pillar Two. Specifically, on 22 December 2021, the European Commission released a proposal for Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union. The Directive includes the principal method for implementing Pillar Two in the EU.

In January 2022, the UK’s HM Revenue & Customs started a consultation process on implementing Pillar Two in the UK with a particular focus on the UK application of the “model rules” as well as a series of wider implementation questions.

The Swiss Government has also approved the Pillar Two implementation starting 2024. Those rules have been drafted to indicate that irrespective of what any other governments do (say for e.g., whatever the Singapore Government may do in terms of its tax incentive programmes in Singapore), if the Effective Tax Rate (ETR) of an MNC group is less than 15% in a particular jurisdiction, then the ultimate parent entity located in any of the countries that has implemented the model rules will be impacted.

According to Lawrence Wong, Minister for Finance, there are about 1,800 MNCs in Singapore that meet the revenue threshold of 750 million euros under Pillar Two and most of these will have group ETR below 15%.

Singapore has yet to provide comment on Pillar Two or announce how it plans on updating the existing tax regulations. There have also been few comments to Singapore’s commitment to follow international standards, creating uncertainty for Singapore’s business environment.

In an article published last October, the Economic Development Board (EDB) stated that the overarching objective of any prospective adjustments is to continue to ensure that tax outcomes rightfully reflect profits attributed to economic substance and value-creation activities in Singapore. In a similar vein, the Inland Revenue Authority of Singapore (IRAS) said that the Government is committed to delivering on its proven track record of minimising compliance efforts of businesses and will consult businesses through the policy and implementation process for the Two Pillar solution.  

Due to the ongoing pandemic, it is hard to predict how the new normal would be and what changes it would bring. With Pillar Two due to be implemented in 2023, MNCs have even more reason to be anxious.

As Singapore prepares its Budget Statement to be delivered on 18 February, MNCs would appreciate some clarity regarding how Singapore will make changes to its tax system (especially tax incentive programmes) or introduce any new non-tax measures in response to Pillar Two.

A number of potential areas in which guidance is needed for businesses include expected changes to the tax regime for tax (e.g., a minimum tax rate, cash-based forms of incentives etc.) and non-tax incentives (e.g., payroll incentives, reducing regulatory compliance burdens etc.) to encourage investment, as well as a roadmap for the transition period for businesses in Singapore.

MNCs should start assessing the potential impact from Pillar Two by February or March if they have not already done so. The assessment should cover both the financial and operational aspects of MNCs across the globe as well as explore all possible scenarios to understand whether and how significantly Pillar Two would affect their businesses. MNCs could then visualise the impacts, discuss with relevant stakeholders, and develop appropriate response strategies.

Any MNC having doubts regarding its financial and operational sustainability in Singapore – regardless of whether it has a headquarters based in Singapore or is a tax-incentivised business – should seek advice from their tax consultants and if necessary, request a one-on-one discussion with the relevant government agencies for guidance on unclear areas and ways to mitigate any potential adverse impacts.

The upcoming Budget might be an avenue for tax and finance professionals to gain clarity on Singapore’s response to Pillar Two and help facilitate business planning and financial impact assessment while taking into account all the pros and cons of the Two Pillar solution / Pillar Two. This might also present a good opportunity for Singapore to outline its plans to continue to encourage investment.

This article is written by Avik Bose and Anh Pham, Transfer Pricing Partner and Director respectively with the Deloitte Singapore Tax & Legal practice. The views expressed are their own.