Budget 2024: Upcoming corporate tax changes under Pillar 2 of BEPS 2.0 provide ‘welcome certainty’ to affected firms

• A new Income Inclusion Rule will subject the overseas profits of MNEs that are parented in Singapore to a minimum effective tax rate of 15 per cent

• In parallel, the new Domestic Top-up Tax will see MNE groups pay a minimum effective tax rate of 15 per cent on their Singapore profits

• Another component of Pillar 2, the undertaxed profits rule, will be considered at a later stage

SINGAPORE’S corporate income tax regime will move ahead with two components from the second pillar of the Base Erosion and Profit Shifting (BEPS) 2.0 framework.

First, an Income Inclusion Rule (IIR) will take effect for businesses’ financial years starting on or after Jan 1, 2025, Finance Minister Lawrence Wong said in his Budget speech on Friday (Feb 16).

The IIR will subject the overseas profits of multinational enterprise (MNE) groups that are parented in Singapore to a minimum effective tax rate of 15 per cent, regardless of where they operate.

A second component, the Domestic Top-up Tax (DTT), will also be introduced on the same date.

With the DTT, MNE groups have to pay a minimum effective tax rate of 15 per cent on their Singapore profits.

It is in Singapore’s interest to implement the DTT, so that the Republic can collect the tax, “rather than have it go somewhere else”, Wong said.

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Both the IIR and DTT will apply to MNE groups with annual group revenues of at least 750 million euros (S$1.1 billion) – in line with Pillar 2 of BEPS 2.0.

Another component of Pillar 2, the undertaxed profits rule, will be considered at a later stage, Wong said.

Singapore’s commitment to implement corporate tax changes under Pillar 2 of BEPS 2.0 was first announced in Budget 2023.

Since then, several jurisdictions have made moves to implement tax changes related to Pillar 2, Wong said.

These include markets such as the European Union, the United Kingdom, Switzerland, Japan and South Korea, which are implementing Pillar 2 rules from this year, while Hong Kong and Malaysia have announced plans to do so from 2025.

In his speech, the minister added that in the short term, the implementation of Pillar 2 will provide additional revenues to government coffers.

Yet, Singapore may see a reduction in its tax base, should MNEs shift some of their activities to other jurisdictions, in response to the new business environment, Wong said.

He added: “In any case, whatever additional revenues we obtain from Pillar 2 will need to be reinvested for Singapore to stay competitive in a post-BEPS world.”

Friday’s announcements to the corporate tax regime “provides welcome certainty” for affected MNEs to plan their overall business strategies, noted James Choo, international tax and transaction services partner at professional services firm EY.

The other pillar of BEPS 2.0, Pillar 1, deals with the allocation of taxing rights to jurisdictions where the consumers are based.

But when implemented, it will result in revenue losses for Singapore, noted Wong: “Pillar 1 has been delayed for now, and the implementation date remains unclear.”

For more of BT’s Budget 2024 coverage, go to bt.sg/budget24