BT Explains: How might Singapore stay competitive with tax changes under BEPS 2.0?

SINGAPORE is implementing a minimum effective tax rate of 15 per cent for multinational enterprise (MNE) groups from January 2025, in line with global tax changes. But this means the Republic will no longer be able to offer traditional tax incentives to attract such companies.

Does Singapore thus have to rethink how it attracts foreign investment, and introduce new non-tax incentives?

Why is Singapore introducing a minimum effective tax rate?

Announced in Budget 2023, this move is to implement Pillar Two of the inclusive framework on Base Erosion and Profit Shifting (BEPS 2.0), a global tax pact that over 140 countries and jurisdictions have inked.

BEPS 2.0 arose from a landmark tax deal in 2021 led by the Organisation for Economic Co-operation and Development (OECD) to create a fairer system of paying tax.

Pillar Two prescribes a global minimum tax of 15 per cent for MNE groups with annual group revenues of at least 750 million euros (S$1.09 billion). MNE groups with an effective tax rate of less than 15 per cent in a particular jurisdiction would be a target for additional taxation in other jurisdictions.

Watchers have said that this will help level the playing field and end harmful competition that has “created a relentless downward spiral in statutory corporate tax rates worldwide”.

A number of countries have put up draft or final legislation for this, including Australia, Canada, South Korea, Vietnam and several countries in the European Union.

What does this mean for Singapore?

There are about 7,000 MNE groups in Singapore. About 1,800 of them would meet the revenue criteria of Pillar Two, with a majority having group effective tax rates below 15 per cent.

Although Singapore has a headline corporate tax rate of 17 per cent, many companies pay a lower rate thanks to a slew of tax reliefs and incentives.

These have sweetened the deal for companies to enter the city-state, alongside other pulls such as its business-friendly and stable political environment, as well as the skilled labour force.

With a minimum effective tax rate, Singapore will no longer be able to offer such tax perks.

Some analysts and businesses are thus concerned that the country may lose its shine as a business hub.

At Budget 2023, Deputy Prime Minister and Finance Minister Lawrence Wong said the tax changes will be implemented for businesses’ financial years starting on or after Jan 1, 2025.

Singapore will review and update its broader suite of “industry development schemes” to stay competitive in attracting and retaining investments, he added.

Analysts are looking to Budget 2024 to provide clarity on Pillar Two implementation guidelines, timeline and the fiscal revenue impact of the minimum effective tax rate.

To help Singapore remain competitive, EY called on the government to “keep an open mind and (have) flexibility” in reassessing existing tax incentives in Singapore.

What could Singapore offer instead?

Watchers have proposed various BEPS-compliant ways in which Singapore can attract and retain MNEs, some of which might be introduced in Budget 2024. These include:

Qualified refundable tax credits (QRTCs): Similar to government grants, these are treated as income rather than a tax reduction. Typically paid as cash or cash equivalents, they apply to particular business activities.

For instance, such credits could be introduced for research and development (R&D) and training, said Maybank economists Chua Hak Bin and Brian Lee.

As these incentives are not meant to reduce an MNE’s effective tax rate, they will still be in line with BEPS 2.0, said Ajay Sanganeria, partner and head of tax at KPMG in Singapore.

Deloitte Singapore global investment and innovation incentives leader Yvaine Gan said: “We hope that Budget 2024 will provide clear guidelines on QRTCs, with flexibility incorporated to cater to a broad range of potential investors, accommodating their specific circumstances and business models.”

For current investors in Singapore, understanding how these credits align with existing tax incentives is critical, said Deloitte. Investors must be incentivised not just to maintain current activities but also expand their operations in Singapore.

MNEs now enjoying concessionary tax rates should be offered the choice to transition to Pillar Two-compliant incentives such as QRTCs or cash grants, said Deloitte, and adjust their economic commitments accordingly.

Expanding existing tax incentives: Current incentive schemes that are BEPS-compliant could be broadened to cover more activities.

EY suggested, for example, expanding the scope of qualifying activities under the Approved Foreign Loan incentive. This incentive currently supports interest payments on overseas loans for the purchase of equipment. In addition to this, it could be extended to other economically productive activities such as commodity trading and intellectual property (IP) rights acquisitions.

Deloitte proposed removing activity-specific limitations so that these incentives become universally accessible, thus enhancing Singapore’s appeal in the global market.

KPMG in Singapore tax partner Mark Addy suggested broadening the list of qualifying IP for tax depreciation purposes, to align Singapore with other countries that have attractive IP regimes.

He also hopes for less restrictive rules concerning tax deductibility in equity-based remuneration schemes, since many tech companies attract top tech talent by offering them equity-based incentives.

Participation exemption: From January, gains on the disposal of foreign assets by an entity belonging to a relevant group may be subject to tax when received in Singapore, unless an applicable exclusion applies.

PwC suggested a participation exemption scheme to exempt certain share disposal gains from tax. This is so that Singapore stays attractive to MNEs as a platform jurisdiction from which to invest overseas.

This would be in line with the treatment in many overseas jurisdictions, including the Netherlands, Germany and France, where a participation exemption scheme applies to gains on sale of foreign shares.

Non-tax factors: Singapore can continue to focus on the many non-tax draws that it has for MNEs, such as its business environment and skilled labour force.

Sanganeria said both tax and non-tax factors have played a role in establishing Singapore as an innovation hub, but for the city-state to maintain its leadership position, it would have to be at the forefront of data innovation and emerging technologies like artificial intelligence.

To do so, he said it is important for Singapore to tap regional talent as well, by strengthening partnerships where talent and ides can be shared. “These sharing of ideas and capabilities will go a long way in establishing Singapore as a data innovation and technology hub,” he said.