Singapore Taxation—Singapore, along with Hong Kong, Ireland, and Switzerland, is a well-known global center, with many multinational corporations (MNCs) choosing Singapore as their regional headquarters.
MNCs that qualify for Singapore’s effective and accessible incentive programs might lower their operational expenses or increase their capabilities.
A 15 percent global minimum tax rate under Pillar Two is expected to go into effect in Singapore by 2023, and multinational corporations subject to Pillar Two and operating there are awaiting Singapore’s response to Pillar Two to assess the potential impact on their businesses, model the available options, and make preparations for the near future.
The international tax system saw significant changes in the second half of 2021. An implementation plan for the OECD/G20 Inclusive Framework on BEPS (IF) has been produced following the high-level political agreement on reallocating a portion of global residual profits to market countries and implementing international minimum tax regulations (Pillar One) (Pillar Two).
A multilateral convention (MLC) is proposed for Pillar One. In contrast, domestic legislation based on the “model rules” issued on December 20, 2021, along with a complete commentary on the regulations, is proposed for Pillar Two. All this should be in place by 2023, at the latest.
Towards Pillar Two, Europe (EU), the UK (UK), and Switzerland have provided guidance and developments. Proposals by the European Commission to ensure that multinational corporations pay at least the minimum amount of tax in Europe were issued on December 22, 2021. A primary technique for implementing Pillar Two in the EU is included in the Directive.
With an eye toward UK implementation of “model rules” and other more general implementation concerns, the UK’s HMRC began a consultation process in January 2022 to begin putting Pillar Two into action.
According to the Swiss Government, pillar Two will be implemented beginning in 2024. According to the model rules, if the Effective Tax Rate (ETR) of an MNC group in a particular jurisdiction is less than 15%, the ultimate parent entity located in any country that implemented the model rules will be impacted. This is regardless of what other governments do (say, for example, what the Singapore Government does in terms of its tax incentive programs in Singapore).
According to Finance Minister Lawrence Wong, around 1,800 multinational corporations (MNCs) in Singapore fulfill the revenue criteria of 750 million euros under Pillar Two. The majority of these will have group ETR below 15%.
Singapore has not commented on Pillar Two or stated how it intends to amend the current tax legislation. As a result, Singapore’s business environment remains in limbo due to the country’s adherence to international norms.
The EDB noted that the overriding goal of any future modifications is to continue to guarantee that tax outcome appropriately reflect profits ascribed by Singapore’s economic substance and value-creation activities in an essay released last October. By way of IRAS, the Government is dedicated to delivering on its established track record of minimizing firms’ compliance efforts and will consult businesses throughout policy development and implementation for the two-pillar approach.
How Will the New Normal Affect Singapore Taxation?
We don’t know what the new normal will be like or what changes it will bring because of the ongoing pandemic. MNCs have an even greater cause for concern as Pillar Two is set to effect in 2023.
For now, it is unclear how Singapore will respond to Pillar Two by making changes to its tax system (particularly tax incentive programs) or introducing new non-tax measures as the country prepares to issue a Budget Statement on February 18.
There are a few areas where businesses need guidance, including expected changes to the tax regime for taxation (e.g., a minimum tax rate and cash-based forms of incentives, as well as a roadmap for the transition period for businesses in Singapore) as well as non-tax incentives to encourage investment (e.g., payroll incentives).
If they haven’t already, multinational corporations should begin evaluating the potential impact of Pillar Two by the end of February or early March. To determine the extent to which Pillar Two will affect MNCs around the world, the analysis should look at both the financial and operational components of each organization. Visualization and discussion with relevant stakeholders helped MNCs establish suitable reaction strategies for the implications of climate change.
For any MNC with concerns about its financial and operational sustainability in Singapore, regardless of whether it has a Singapore headquarters or is a tax-incentivized business, tax consultants should be consulted and, if necessary, the relevant government agencies should be contacted for guidance on dark areas and ways to mitigate any potential adverse impacts.
The next Budget may provide tax and finance experts with a better understanding of Singapore’s response to Pillar Two and its impact on business planning and financial impact assessment. This could also be a good time for Singapore to lay out its strategy for attracting more foreign investment.