The Dawn of BEPS 2.0 in Singapore: An Uncertain Road, A Certain Destination

The global wave of the two-pillar solution to address base erosion and profit shifting, commonly known as BEPS 2.0, has formally washed ashore in Singapore. It is now certain that multinational enterprises (MNEs) with local operations will be affected and must begin to plan for changes in international taxation, if not already ongoing.

In the recent budget, the Minister for Finance announced that Singapore intends to implement Pillar 2 of BEPS 2.0 in 2025, as part of the broader international move to align minimum global corporate taxes for large MNE groups. When this happens, a domestic top-up tax (DTT) will be implemented to top up the MNE groups’ effective tax rate (ETR) in Singapore to 15%.

While Singapore’s corporate tax rate stands at 17%, many MNEs with Singapore operations benefit from tax incentives and enjoy an ETR lower than the upcoming 15%. What lies in store? Will existing incentives and exemptions continue to apply? Will Singapore’s territorial basis of taxation change?

These are common questions asked by those concerned. With scant details provided locally and international developments on BEPS 2.0 yet to be settled, many are naturally anxious facing an uncertain road ahead. Every country has unique circumstances and considerations that spur different responses. In this LawFlash, we highlight our high-level observations and analysis to help guide affected MNEs prepare for the new dawn.

Importance of Pillar 2 to Singapore

During the pandemic, Singapore had to draw on past reserves to cope with the unexpected disruptions of COVID-19. Even though the economy is gradually recovering, Singapore continues to be in a tight fiscal position. Its unwavering commitment to safeguard the country’s reserves as a key strategic asset means that revenue must be raised from other ways, such as corporate income tax.

Under BEPS 2.0, Pillar 1 seeks to reallocate profits to the countries where the markets are located instead of where economic activities are conducted. With a small domestic market, Singapore is disadvantaged by having to give up taxing rights to bigger markets and receiving very little in return. Consequently, it is expected that Pillar 1 will result in a loss of revenue for Singapore when implemented.

On the other hand, with a DTT to top up the ETR of affected MNEs to 15%, there is a reasonable opportunity for Pillar 2 to bring about higher revenue for Singapore, assuming that existing economic activities are retained. Therefore, in a post-BEPS world, it appears that Singapore will strive to ensure that the opportunity under Pillar 2 can be realized to fortify its fiscal position.

At this juncture, it is unclear how other governments will react to the impending change in international taxation. It is certain, however, that MNEs will be reviewing their existing and new investments in light of Pillar 2. But as the new rules will be implemented progressively around the globe, the full effects are expected to be felt in 2025 or later. Unsurprisingly, Singapore has chosen a cautious approach to delay the implementation until then, giving itself time and a chance to learn from the effects and experiences of other countries before determining the best way forward.

The Signposts

With the importance of Pillar 2 in mind, signposts are already in place to indicate how Singapore may reinvent itself.

Critically, the key to Singapore’s continued success is staying competitive in attracting and retaining investments. The use of tax incentives may have worked well thus far, but that will largely become obsolete (or at least significantly compromised) once the effects of BEPS 2.0 are felt. Other countries may roll out support in the form of subsidies and tax breaks, but it is highly unlikely Singapore will do the same given its strong fiscal prudence policy.

Singapore has therefore signaled that it will seek to reinvest and strengthen nontax factors to remain competitive. Whatever additional corporate tax revenue can be generated from BEPS 2.0 (likely Pillar 2) will be reinvested to maintain and enhance its competitiveness. Together with the intended implementation of Pillar 2, Singapore will also review and update its broader suite of industry development schemes.

Lastly, overall productivity and workforce quality will also be enhanced by expanding the scope of existing initiatives (e.g., the National Productivity Fund) and introducing new ones (e.g., the Enterprise Innovation Scheme) to push new frontiers and differentiate the workforce in quality and value.

Navigating Through the Fog

The delayed implementation of Pillar 2 and the lack of details suggest that policymakers are likewise looking for the light to illuminate the fog that surrounds us all. If there are additional delays internationally, it is very likely that Singapore will adjust its implementation timeline. Singapore has also provided assurances that it will continue to engage companies and give them sufficient notice, well ahead of any changes to its tax rules or schemes.

What does this mean? From now until the implementation of Pillar 2 in 2025, select companies may be engaged by the Ministry of Finance and/or the Inland Revenue Authority of Singapore. We can also expect public consultation exercises to be conducted, to seek feedback on income tax implications arising from the implementation of Pillar 2, propose amendments to the income tax legislation, issue new and updated e-Tax Guides, and more. If the timeline remains unchanged, the legislative changes will likely be tabled for first reading in the Parliament of Singapore near the last quarter of 2024.

Before the die is cast, MNEs that may be affected should actively participate in these upcoming public consultation exercises, whether directly or through their tax advisors. Those who currently benefit from an existing tax incentive should consider reaching out early to the relevant authorities if they are not approached.