As we are already aware, in July 2021, over 130 countries came together for a historic agreement on a two-pillar approach to reform international tax rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

 

A broad overview of the two-pillar approach is as follows:-

 

Pillar One – Re-allocation of taxing rights

 

Objective

Pillar One aims for fairer distribution of Multinational Enterprise (MNE) profits and taxing rights among countries. It seeks to re-allocate some profits, and in turn, taxes from where the economic activities are conducted to where the markets (i.e. customers) are. Certain taxing rights will be reallocated from the MNEs home countries to the markets where they have business activities and earn profits. This is regardless of whether the MNEs have a physical presence there.

 

MNEs in-scope

Pillar One will apply to MNEs with a global turnover of above 20 billion euros and profitability above 10 per cent (i.e. profit before tax/revenue) calculated using an averaging mechanism. Certain activities such as extractives and regulated financial services are excluded.

 

Taxing rights reallocation

New nexus rules aims to allocate to market jurisdictions when the MNE derives:

  • At least one million euros in revenue from that jurisdiction.
  • At least 250,000 euros for smaller jurisdictions with Gross Domestic Product lower than 40 billion euros.

 

Quantum of profits reallocated

25 per cent of residual profit defined as profit in excess of 10 per cent.

 

Basis of reallocation

The intent is to use a revenue-based allocation key. Discussions for this are still underway and the details will be made known in the near future.

 

Pillar Two – Global anti-base erosion mechanism

Objective

To work towards creating a level playing field, Pillar Two seeks to introduce a global minimum corporate tax rate of 15 per cent.

 

The Pillar Two Rules

  • The Global anti-Base Erosion (GloBE) rules consists of:-
  1. An Income Inclusion Rule (IIR) which imposes top-up tax on a parent entity in respect of the low taxed income of other entities in the Group; and
  2. An Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of other entities in the Group is not subject to tax under an IIR.
  • A treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate (i.e. 9 per cent).

 

MNEs in-scope

  • Applies to MNEs that meet the 750 million euros revenue threshold. Certain entities such as government entities, non-profit organisations are excluded.

 

Expected date of implementation and procedure -

The intent is to introduce Pillar One and Pillar Two in 2023 and / or 2024. Discussions are ongoing on implementation procedures as countries will be required to review and revise their domestic laws to cater for this change. Further details are expected to be issued by the Organisation for Economic Co-operation and Development (OECD) in the near future.

 

Our comments

For Pillar One, only very large MNEs will need to comply, due to the high threshold of 20 billion euros in global revenue. Given Singapore’s small domestic market, Singapore-based MNEs will likely face higher overseas corporate taxes.

 

On the other hand, Pillar Two is bound to impact more MNEs as the threshold is much lower (i.e. 750 million euros). In short, MNE Group holding companies are expected to pay a top-up tax on the income of its entities in the Groups that are not subject to a tax of at least 15 per cent. 

 

As announced in Budget 2022, Singapore is currently studying the possible implementation of a domestic top-up tax, the “Minimum Effective Tax Rate (METR)”, to bring up the local minimum effective tax rate to 15 per cent. Although it may appear that Singapore will benefit from the METR implementation, the Government is mindful of whether this will indeed benefit Singapore as a whole.

 

Other non-tax factors such as having quality infrastructure, good connectivity, a skilled workforce, an open and business-friendly regime that is founded on the rule of law could prove to be more compelling factors for MNEs to relocate to Singapore.

 

Given that the OECD intends to operationalise both Pillars in the coming two years, the time is ripe for entities, who anticipate that they will fall under either or both Pillars, to evaluate their position on what would need to be done to meet the requirements of the respective Pillars.

 

For businesses not directly impacted by the two Pillars, changes may still be felt depending on how the Singapore Government revises its tax policies in response to international developments.

 

As matters unfold, companies should budget and be prepared for the above changes.

 

These revisions are internationally introduced to avoid tax abuses and until the rules are finalised, it may or may not be possible to revise current structures to minimise its impact. We are monitoring these matters closely and will keep you updated once new rules or announcements are made.