Budget 2022: Singapore looking to impose minimum effective tax rate of 15% on certain MNEs

[SINGAPORE] Singapore is looking to impose a Minimum Effective Tax Rate (METR) to top up the effective tax rate of certain multinational enterprise (MNE) groups operating here to 15 per cent. The move is expected to have an impact on Singapore's competitiveness, but experts believe other non-tax measures are likely to be introduced to make up for this.

Plans to impose this "top-up tax" comes as Singapore recognises the need to update its corporate tax system, to account for global tax developments relating to the Base Erosion and Profit Shifting initiative (BEPS 2.0), said Finance Minister Lawrence Wong in his Budget speech on Friday (Feb 18).

The initiative comprises two pillars. Pillar One reallocates the profit of the largest and most profitable MNEs from where activities are conducted to where consumers are located. "Given our small domestic market and the extent of activities conducted here by MNEs, Singapore will lose tax revenue under Pillar One," he said.

Pillar Two introduces, among other things, a global minimum effective tax rate of 15 per cent. This will affect MNE groups with an annual global turnover of at least 750 million euros (S$1.15 billion) and which pay an effective corporate tax rate of less than 15 per cent.

"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," the minister said.

Singapore will therefore adjust its tax system in response to Pillar Two global rules, and explore the possibility of introducing the METR; tax experts say this will mean that Singapore won't have to cede revenue to other countries.

Mr Wong said: "Iras (Inland Revenue Authority of Singapore) will study this further and consult the industry on the design of the METR. We will also continue to monitor international developments before making any decisions on the METR."

Chester Wee, EY Asean International Corporate Tax Advisory leader, said Iras will be forming a committee comprising tax professionals to study the METR. He expects the study to take up to a year: "The global minimum tax proposal is impacting not just Singapore, but also other countries with competitive tax regimes. For example, Switzerland has also indicated its intention to implement a minimum tax rate of 15 per cent as of January 2024."

Finance Minister Wong also said that, while the METR might yield some additional tax revenue in the short term, the eventual impact of Pillar Two on Singapore's revenue will depend on how governments and companies respond. The rules and details of both pillars are still being developed by the Inclusive Framework on BEPS.

Mr Wong also noted that 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. And we will have to take this into consideration and ensure that Singapore remains one of the best places in the world for business."

Chris Woo, tax leader at PwC Singapore, said: "We can therefore expect other non-tax measures to continue to enhance Singapore's attractiveness to foreign enterprises and negate the impact of the METR."

He added that he believes the minister made the right move to announce the need to introduce the METR, but to qualify that more deliberation is required as details around the potential implementation of Pillar Two have not been released and will be complex.

"Further, we need to see if and when other countries will be implementing the Pillar Two so as to better assess Singapore's competitive positioning," Mr Woo said.

Liew Li Mei, international tax leader, Deloitte Singapore, added that, aside from details of the METR, businesses would possibly also appreciate guidance in terms of "expected changes to the tax regime for tax, for example, cash-based forms of incentives, and non-tax incentives such as payroll incentives, reducing regulatory compliance burdens to encourage investments, as well as a roadmap for the transition period for Singapore businesses".

Get the latest updates on Budget 2022 here: bt.sg/budget22

READ MORE:

• 5 things to know about BEPS 2.0
• Singapore must adapt, adjust tax policies to fit into new tax world
• By joining BEPS, Singapore enhances its reputation in the business community