Singapore may see ‘short pause’ in investments as businesses await refundable credit details: PwC tax leader

SINGAPORE is likely to see a “short pause” in investments in the near term, as large multinational enterprises (MNEs) wait to see what incentives other countries will offer in light of global tax changes, said PwC global tax policy leader William Morris in a recent interview with The Business Times.

This is especially because Singapore will lose two major tax incentives following these tax changes: the Pioneer Certificate Incentive, which provides a tax exemption for qualifying activities; and the Development and Expansion Incentive, which provides a concessionary tax rate of either 5 or 10 per cent on income derived from qualifying activities.

“I don’t think businesses are going to leave as a result of that,” said Morris. “But it does mean that the amount of investment that takes place in the next year might be affected.”

No more concessions?

Singapore will introduce a minimum effective tax rate of 15 per cent for large MNEs from January 2025. This is in line with the second pillar of the Base Erosion and Profit Shifting initiative (BEPS) 2.0 – a global tax pact that more than 140 countries and jurisdictions have inked.

This is a significant change for MNEs, especially if they were previously enjoying a concessionary tax rate of 5 per cent, said Morris. “Particularly, when you’re talking about very large investments… that 10 per cent difference can have quite an impact.”

Ahead of the change, a new Refundable Investment Credit (RIC) for high-value economic activities was announced in Budget 2024, as part of Singapore’s investment promotion toolkit.

But with further details only expected in the third quarter of 2024, businesses are likely to hang tight before making fresh investment decisions, said Morris.

“At least from some of the businesses that I’ve been speaking to, there is some indication that they’re pausing gently.”

MNEs are also waiting to see what incentives other jurisdictions will offer, and much uncertainty remains on that front too.

Of the countries that have taken action, most tend to have just made existing expenditure-based tax credit schemes refundable, and thus compliant with BEPS 2.0.

Others such as Vietnam have signalled intentions to introduce similar refundable credit schemes, but have not specified what these could entail, noted Morris.

“If over time, it turns out that other countries – particularly in the region – have found ways of using credits to provide bigger benefits to investors, then quite possibly that would have an effect (on whether businesses will reconsider being in Singapore),” said Morris.

Based on what was announced during Budget 2024, one advantage of the upcoming RIC is that it is more broadly applicable than some of the schemes announced by other jurisdictions.

For example, Ireland’s R&D Corporate Tax Credit chiefly targets research and development (R&D) expenditure. The RIC also covers R&D, but goes beyond it to include investments in new productive capacity; expanding or establishing headquarter activities; and implementing solutions with decarbonisation objectives.

But ultimately, much still depends on how the Singapore government will administer the scheme, said Morris. For instance, questions remain on whether the credit itself will be taxable – which would reduce the benefit.

The government has also said that support rates will be commensurate with each project’s economic or decarbonisation outcomes. More details are needed on how this will be assessed, said Morris.

Aside from refundable credits, other approaches could also emerge from jurisdictions which do not have large enough coffers to disburse credits on a refundable basis.

“There are many countries which are quite concerned they’ve now lost the ability to incentivise investments through non-refundable credits, and they don’t have the income to be able to turn those into grants,” he said.

Such countries may thus think about “whether there are other measures that could be used other than simple expenditure”, he added.

Morris expects increased clarity in the next six months as more countries figure out how they will navigate incentives post-BEPS 2.0.

“In the end, there is no limit to how people think of ways to try and incentivise investment or to protect jobs… so the tax system is really quite adaptable, and the tax system will continue to adapt,” he said.