Singapore has announced the implementation of the Base Erosion Profit Shifting’s Pillar Two rules, specifically the Income Inclusion Rule and Domestic Top-up Tax, commencing on or after 1 January 2025.

Whilst other countries such as Australia, South Korea, Japan, and Vietnam have implemented the Pillar Two rules from 1 January 2024, Singapore along with other countries such as Malaysia, Thailand, and Hong Kong will commence on or after 1 January 2025.

Under the Base Erosion Profit Shifting’s Pillar Two rules, a minimum effective tax of 15% will be imposed on businesses’ profits on or after 1 January 2025.  

For Singapore-parented in-scope MNE groups, the Income Inclusion Rule will apply to the profits of group entities operating outside of Singapore.

For profits of in-scope MNE groups that are operating in Singapore, the Domestic Top-up Tax will apply. 

The other mechanism under Pillar Two is the Undertaxed Profits Rule which allows Singapore to collect a share of the top-up tax on any MNE with operations in Singapore if the portion of the income overseas has not been subject to the minimum tax. The UTPR will be considered at a later stage.   

Note:
In-scope MNE groups refer to relevant multinational enterprise groups with annual group revenue of Euro 750 million or more in at least two of four preceding financial years.

In efforts to remain competitive and attractive for investments post-BEPS, Singapore will introduce the Refundable Investment Credit which is set to support investors of up to 50% of qualifying expenditures for a qualifying period of up to 10 years. The credits will be offset against corporate income tax payable.

Any unutilized credits will be refunded to the company in the form of cash within 4 years from when the company satisfies the conditions for receiving credits.

The Refundable Investment Credit focuses on supporting investments that bring substantive economic activities to Singapore in key economic sectors and new growth areas.  

Further details will be provided by the Economic Development Board and Enterprise SG by the third quarter of 2024.

In Singapore’s Budget 2024, the government has allocated S$1.3 billion as Enterprise Support Package which comprises of corporate income tax rebate of 50% for the year of assessment 2024 in view to support companies in managing rising costs.

In addition, a corporate income tax rebate cash grant will be granted to eligible companies. Companies that have employed at least one (1) local employee in 2023 will receive a minimum benefit of S$2,000 in the form of a cash payout.

The maximum total benefit of the corporate income tax rebate and corporate income tax rebate cash grant that a company may receive is S$40,000.

Historically, Singapore has built a strong reputation for its business environment, backed up by progressive tax policies and incentives.

Singapore’s  commitment to innovation and moving forward as an AI-powered nation sees an allocation of S$1 billion to foster talent and industry in Artificial Intelligence industry as well as S$3 billion investment in Research, Innovation and Enterprise 2025.

Singapore’s investment in local enterprises through Partnership Capability Transformation scheme provides businesses with opportunities to collaborate with multinational enterprises in raising the standards via capability training, internationalization, and corporate venturing.

With the increasing internationalization of businesses, companies will need to ensure transfer pricing compliance in each jurisdiction. As transfer pricing has been receiving attention from tax authorities around the globe, proper governance and compliance with local country regulations are essential in mitigating transfer pricing audits and disputes.

• Implementation of Base Erosion Profit Shifting’s Pillar Two rules aim to provide a mechanism to prevent profit shifting to jurisdictions with lower tax rates and ultimately, ensure MNE groups are paying their fair share of taxes globally.

• In-scope MNE groups should conduct impact assessments and consider the group’s data readiness (data source, manpower, technology) given the impending implementation timeline of the Pillar Two rules.

• As Pillar Two demands large and in-depth data of MNE groups, it is essential for efficient and reliable technology to support the MNE groups in Pillar Two compliance. The compliance efforts involve more than just the transfer pricing team within the MNE group but will also require support from the IT, Tax, and Finance teams.

• Under the Pillar Two rules, the Effective Tax Rate is computed based on income and covered taxes from consolidated accounts, which may not include year-end transfer pricing adjustments. Hence, it may be increasingly important for MNE groups to focus on operational transfer pricing for real-time management of intercompany pricing for more reliable and accurate reporting for Pillar Two compliance.

• MNE groups should also consider the potential benefits of Advance Pricing Arrangements for increased tax certainty and minimizing transfer pricing disputes.  

• Going forward, traditional transfer pricing measures and the arm’s length principle will continue to be of significance. With Pillar Two rules in place, this may reduce the level of tax planning in benefit of lower tax rate jurisdictions. On the other hand, tax planning will continue to be of concern for countries where corporate income tax is more than 15%.  

• The introduction of Refundable Investment Credit may reduce the likelihood of top-up tax liability under the Pillar Two rules, and therefore well position Singapore in the region post-implementation of the Global Minimum Tax of 15%.  

• Companies can consider if they are eligible for Refundable Investment Credit which is consistent with the “Qualified Refundable Tax Credits” under the Pillar Two rules.

• Based on a simplified illustration below, the treatment of qualified refundable tax credits for Pillar Two’s GloBE Income computation is that the qualified refundable tax credits will be treated as GloBE Income and added to the denominator of the Effective Tax Rate calculations. As such, this will minimize the decrease in Effective Tax Rate and hence, reduce the potential impact of top-up taxes under the Pillar Two rules.

Impact of Qualified Refundable Tax Credits on Pillar Two’s Effective Tax Rate Computation

Corporate income tax rebates of 50% for the year of assessment 2024 and corporate income tax rebate cash grant of minimum benefit of S$2,000 of cash payout, capped at S$40,000. This will benefit qualifying taxpaying companies as the minimum benefit is S$2,000.

Internationalisation of businesses highlights the continuous importance of adherence to local transfer pricing regulations and managing transfer pricing.