Singapore seeks to explore a 15% Minimum Effective Tax Rate

Singapore is looking to update its corporate tax system to account for global tax developments relating to BEPS 2.0.

The Minister for Finance, Lawrence Wong, in the Singapore Budget 2022 announced the need to update Singapore's corporate tax system, to account for global tax developments relating to Base Erosion and Profit Shifting (“BEPS”) 2.0.

The Minimum Effective Tax Rate (“METR”) will apply to Multinational Enterprise (“MNE”) groups operating in Singapore with annual revenues of at least €750 million (S$1 billion), as reflected in the consolidated financial statements of the ultimate parent entity. The METR, if introduced eventually, will be aligned with the Pillar 2 Global Anti-Base Erosion (“GloBE”) rules as far as possible.

Under Singapore's current income tax regime, Singapore has a standard corporate tax rate of 17%. However, due to various tax incentives, the Singapore groups of companies could have effective rate lower than 15%.

If the METR is adopted, the affected MNE groups in Singapore will need to pay a “top-up tax” on their income to the minimum effective tax rate of 15%. Inland Revenue Authority of Singapore (“IRAS”) and the Ministry of Finance (“MOF”) are exploring the detailed rules under the METR, how and when it would be implemented in consultation with various industry stakeholders. While it is unknown yet how the rules will eventually look like, it is useful to consider how other countries are implementing Pillar 2 rules.

The United Kingdom (“UK”) government recently launched a consultation on implementation of Pillar 2 legislation which is expected to apply to accounting periods beginning on or after 31 December 2023:

  1. UK income inclusion rule (“IIR”) which applies to MNEs with consolidated annual revenue over €750m, headquartered in the UK and certain UK intermediate parent entities of foreign headquartered groups. The IIR imposes a top-up tax on these entities based on their interests in overseas subsidiaries and branches which are located in jurisdictions in which the MNE has an overall effective tax rate in the jurisdiction below 15%.
  2. UK undertaxed profits rule (“UTPR”) which applies to UK entities of foreign-headquartered groups with revenue over €750m and in relation to the group’s overseas profits when:
  • the MNE’s ultimate parent entity is not subject to an IIR;
  • there are low-taxed entities within a group for which a top up tax is due; and
  • this top up tax has not been fully collected or charged under the IIR in other jurisdictions.

It could also apply to the extent there are low-taxed profits in the jurisdiction in which the foreign headquartered group is parented. The detailed rules under the GloBE which countries will look to for guidance in local rule implementations are very complex. METR when implemented in Singapore will and can have material impact on the financial results of Singapore groups that are subject to top up tax. Businesses will have to study the rules carefully to determine the impact on group tax reporting templates, tax provisions, etc. and prepare ahead for compliance before implementation.

Businesses considering mergers and acquisitions will also need to consider the impact of these new rules on the tax provisions included in the financial projections, valuations and completion accounts.

Public government consultation provides a valuable opportunity for businesses to share practical perspective of the burden of compliance and the need for simple rules so as to facilitate the ease of implementation. Singapore together with several other countries such as UK, Ireland and New Zealand are considering Pillar 2 rules in their domestic tax legislation.

How can we help

If you would like to seek updates and guidance on how these new developments can affect your businesses and how you can plan ahead to react to these developments, please contact Mazars.

At Mazars in Singapore, we have experience in providing our clients with specialist tax advice, ranging from M&A transaction support, international tax planning, transfer pricing and compliance.