S'pore exploring top-up tax for MNCs amid global rule changes

Singapore is exploring a top-up tax in response to changes to international tax rules, Finance Minister Lawrence Wong said yesterday.

"Our corporate tax system will need to be updated due to global tax developments relating to the Base Erosion and Profit Shifting initiative, or BEPS 2.0," he said in his Budget speech.

Singapore expects greater competition for investments as governments seek to rebuild their countries' post-pandemic economies, Mr Wong added.

The Republic was among 130 jurisdictions to join a landmark agreement in October last year. BEPS 2.0 provides a framework for the reform of international tax rules, and backs a global minimum effective corporate tax of 15 per cent from next year.

The tax deal aims to discourage multinational companies from shifting profits - and tax revenues - to low-tax countries regardless of where their sales are made.

There are two pillars in BEPS 2.0.

The first reallocates profit of the largest and most profitable multi-national enterprises (MNEs), from where activities are conducted to where consumers are located.

"There are ongoing international discussions on how to determine the jurisdictions which will surrender profits for reallocation to the markets under Pillar 1 and how much each will surrender," said Mr Wong.

"Given our small domestic market and the extent of activities conducted here by MNEs, Singapore will lose tax revenue under Pillar 1."

The second pillar introduces the 15 per cent global minimum effective tax rate for MNE groups with annual global revenues of €750 million (S$1.1 billion) or more, under its Global Anti-Base Erosion (GloBE) Model Rules, among other things.

"What this means is that if such an MNE were to have an effective tax rate of less than 15 per cent in Singapore at the group level, other jurisdictions such as its home jurisdiction can collect the difference up to 15 per cent," said Mr Wong.

Singapore will adjust its tax system in response to Pillar 2 GloBE rules. It is exploring a top-up tax called the Minimum Effective Tax Rate, or METR, which will top up the MNE groups' effective tax rate in Singapore to 15 per cent.

The METR will apply to MNE groups operating in Singapore that have annual revenues of at least €750 million as reflected in the consolidated financial statements of the ultimate parent entity.

The Inland Revenue Authority of Singapore will study the tax rate further and consult industry stakeholders.

"We will also continue to closely monitor international developments before making any decisions on the METR," said Mr Wong.

"At this stage, it is premature and difficult to determine the eventual fiscal impact of both pillars. There will be a negative revenue impact under Pillar 1.

"METR might yield some additional tax revenue in the short term, but the eventual impact of Pillar 2 on our revenue will depend on how governments and companies respond," he added.

The net impact of both pillars depends on rules and details that are still being developed by the Inclusive Framework on BEPS.

It allows interested countries and jurisdictions to work with the Organisation for Economic Cooperation and Development and the Group of 20 to implement measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

"While BEPS 2.0 may have reduced the scope for tax competition, it has not reduced global competition for investments.

"In fact, competition is likely to intensify as governments worldwide seek to restore and rebuild their economies after the effects of the pandemic," said Mr Wong.

He said the Government will have to take this into consideration and ensure that Singapore remains one of the best places in the world for business.

"We will therefore need more time to study these issues thoroughly, and will announce changes in the corporate tax system when we are ready."