BEPS 2.0: The future impact on businesses in Singapore

Rapid digitalisation and globalisation have led to significant changes in business operations. The digital economy has also uncovered vulnerabilities in the basic rules that have governed global taxation in the past, creating opportunities for profits to be “shifted” to lower taxed jurisdictions and sparking debates surrounding a 'fair’ allocation of taxing rights.

Against this backdrop, the OECD launched the project on Base Erosion and Profit Shifting (BEPS) in 2013 with the aim to address the tax challenges of the changes in the business environment, including digitalisation. While this project has, up to now, dealt with many tax avoidances issues, profit shifting arising from digital activity has only recently been addressed.

After much discussion, consent has been reached between all relevant parties involved on a solution to change the landscape of international taxation. On 4 November 2021, 137 countries and jurisdictions, including Singapore, have come to an agreement on a reform of international taxation rules resulting in multinationals paying a fair share of tax wherever they operate, by the implementation of a two-pillar plan.

Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries.

Under Pillar One, taxing rights on 25% of residual profits made by qualifying, or so-called in-scope, multinational enterprises (MNEs) will be reallocated to market jurisdictions each year, whether or not the in-scope MNEs would have a physical presence in such jurisdiction.

Pillar Two seeks to put a limit on tax competition on corporate income tax through the introduction of a global minimum corporate tax of at least 15%

In-scope MNEs under Pillar One are MNEs with a global turnover exceeding 20 billion euros and profitability above 10%. The global turnover threshold will be revisited (downwards) after seven years of the successful implementation. Under Pillar Two, a global minimum tax would apply to companies with annual revenues of over €750 million.

Global impacts of BEPS 2.0

The implementation of the new tax rules will give rise to an increase and a different attribution of the tax revenue globally. Pillar One is likely to see over US$100 billion reallocated to market jurisdictions and Pillar Two is estimated to generate more than €150 billion in new tax revenues globally.

The two-pillar package would also lead to a better environment for investment and growth. Both taxpayers and tax administrators will benefit from the stabilisation of the international tax system and increased tax certainty.

Without the agreement, the world would expect to witness a proliferation of uncoordinated and unilateral tax measures and an increase in damaging tax and trade disputes, which could potentially reduce global GDP by more than 1%.

Attracting and retaining foreign investment

In 2019, Singapore was ranked as the world’s second-easiest country in which to do business, according to the World Bank. The city state has long been known for its attractive corporate tax rates and strong financial incentives.

Under Pillar One Singapore may see some additional tax revenue related to Singapore being a ‘market jurisdiction’ and where MNEs will be taxed in Singapore due to the fact of their goods or services are being used or consumed.

On the other hand, Singapore may lose traction to attract potential Foreign Direct Investments looking to benefit from one of the schemes of reduced/incentivized tax rates. Such benefit may no longer exists under Pillar Two, as it may lead to a top-up tax under Pillar Two in case the overall effective tax rate drops to below 15%.

That said, a key point of the ongoing discussion relates to potential carve-outs, which will highly benefit multinationals here. The OECD acknowledges that there is a direct link between the global minimum ETR and the carve-outs.

The Global Anti-Base Erosion Proposal (GloBE) rules will provide for a formulaic substance carve-out that will exclude an amount of income that is 5% of the carrying value of tangible assets and payroll over a transition period of 10 years.

Changes are around the corner

Based on its latest statement on 8 October 2021, the OECD ambitiously plans for Pillar Two to be brought into law in 2022, and come into effect in 2023.

Once a broad global consensus is reached, we can anticipate changes to the local tax legislations. MNEs need to stay vigilant and be ready for the impact on their business operations and tax burden.

It is now a good time for multinationals to re-evaluate their tax policies and start the process of identifying where new tax risks and/or opportunities lie and how these should be dealt with.

At Mazars in Singapore, we have significant experience in helping clients design and implement systems to meet dynamic tax reporting requirement. We can assist MNEs in these areas to see if any restructuring would be needed.