During the Budget Speech by Deputy Prime Minister (DPM) Lawrence Wong, on 16 February 2024, a lot of plans were unveiled for how to make Singapore a more resilient economy. One new initiative that was brought up was an intention to move ahead with two components from the second pillar of the Base Erosion and Profit Sharing (BEPS) 2.0 framework.
But what exactly is the BEPS 2.0 and how will these new reforms impact Singapore and its economy?
What Is BEPS 2.0?
BEPS refers to the tax planning strategies that multinational corporations (MNCs) often deploy to exploit gaps and loopholes in tax rules globally, which allows them to shift profits to jurisdictions with low or no taxes and enjoy tax savings. This practice has caused some countries to suffer disproportionately due to their higher reliance on corporate income tax.
In 2013 the Organisation for Economic Co-operation and Development (OECD) released a study and action plan on how to tackle BEPS. The OECD and G20 – a grouping of large global economies – subsequently broadened the BEPS discussions so that 140 jurisdictions could be included through a collaborative platform that is known as the Inclusive Framework (IF) on BEPS framework.
Under the IF, a “two-pillar” solution was agreed upon. Pillar 1, Profit Allocation and Nexus, seeks to reallocate profits to where economic activities are conducted and where the customers are. Pillar 2, Global Minimum Taxation, seeks to ensure that the taxes paid in various jurisdictions meet certain minimum criteria.
These two pillars under the IF – that were accepted by 135 countries including Singapore – are more commonly referred to as “BEPS 2.0”.
Pillar 2 comprises an Income Inclusion Rule (IIR), a Domestic Top-Up Tax (DTT) rule, and an Undertaxed Profits Rule. The IIR will impose a minimum Effective Tax Rate (ETR) of 15% on the overseas profits of MNCs parented in Singapore, and the DTT ensures that if the IIR is not met, other jurisdictions have the right to collect the difference as a top-up tax.
In Budget 2024, DPM Wong announced that pillar 1 has been delayed for now, and the implementation date remains unclear, but Singapore will be implementing the IIR and DTT under Pillar 2 on 1 January 2025, with the Undertaxed Profits Rule under consideration for implementation at a later stage.
Read Also: From Loss Carry-Back Relief To BIPS: How To Save Corporate Income Tax In Singapore
What’s The Impact On Singapore?
BEPS 2.0 is designed to discourage corporations from shifting profits to low-tax countries to enjoy tax savings, since the savings from tax is likely to be still charged in another country under the DTT. Since corporations have to pay the tax one way or another, these aforementioned low-tax countries will also see their low-tax competitive advantage negated as a result. This is designed to provide an incentive for countries to implement BEPS 2.0.
Within pillar 1, specific taxing rights will be reallocated from MNCs’ home countries to the markets where their consumers are, or products sold. The timing for implementing this first pillar is unclear, but Singapore will likely lose tax revenue overall, given that its population and domestic markets are small.
Within pillar 2, many MNCs parented in Singapore currently pay less than 15% ETR due to tax subsidies offered by the government. In response to this, Singapore is exploring a Minimum Effective Tax Rate (METR) to ensure that Singapore does not lose tax revenues to another jurisdiction as a result of BEPS 2.0. This will negate the benefit of tax incentives for most companies, and will likely cause Singapore to lose its attractiveness as a destination for corporate investments.
Overall, according to the MOF, while METR may result in higher tax revenue in the short term, companies will review their investments and react accordingly. It also remains to be seen how other Governments react to the changes in international tax rules. This makes the final impact difficult to estimate. Nevertheless, international negotiations are still ongoing.
Read Also: How Companies Can (Legally) Reduce Their Corporate Income Tax In Singapore
What Next For Singapore?
The announcement of the implementation of the IIR and DTT during Budget 2024 will provide some certainty on the tax front for large businesses in Singapore, following the fact that it was first mentioned in Budget 2023.
Other large economies have already moved to implement tax changes, including the UK, Switzerland, Japan, and South Korea.
To retain Singapore’s competitive edge in a post-BEPS 2.0 world, DPM Wong announced the Refundable Investment Credit scheme, which is GloBE-compatible and functions as an OECD-endorsed workaround to offering tax incentives. You can read more about it here.
Read Also: Guide To Understanding The Refundable Investment Credit
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