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Singapore will implement a Domestic Top-up Tax (DTT) that will top up the Multi-National Enterprise (MNE) groups' effective tax rate to 15 per cent, Minister for Finance and Deputy Prime Minister Lawrence Wong announced in his Budget 2023 speech on Tuesday (Feb. 14).

This is part of Singapore's plan to implement Pillar 2 under the Global Anti-Base Erosion (GloBE) rules of the Base Erosion and Profit Shifting (BEPS) 2.0 project, beginning 2025.

What is BEPS 2.0?

Base erosion and profit shifting is where companies use tax planning strategies to exploit gaps and mismatches in tax rules to artificially shift profits to locations with no or low tax rates and little to no economic activity, according to the Ministry of Finance (MOF) website.

BEPS 2.0 is the outcome of the OECD's efforts to tackle such tax evasion activities, as tasked to do so by the G20.

It is a two-pillar solution that has been accepted by more than 135 member jurisdictions, including Singapore.

Currently, jurisdictions where MNEs conduct their activities have the right to tax MNEs fully on the profits they generate.

MNEs therefore pay different effective tax rates depending on the activities they are engaged in and the domestic tax regimes of the jurisdiction they are operating in.

Under the Pillar 1 of BEPS 2.0, profits can be re-allocated according to where the customers of an MNE are as opposed to where its activities are conducted.

Pillar 2 introduces a minimum effective tax rate of 15 per cent for affected MNEs via the GloBE Model Rules.

What this means is that if one jurisdiction (Singapore, for example) imposes an effective tax rate of less than 15 per cent on an MNE at the group level, other jurisdictions can collect the difference of up to 15 per cent.

Room for tax competition reduced

Under Pillar 1, Singapore is expected to lose tax revenue.

"Singapore will have to give up some taxing rights over profits from economic activities conducted here, but will receive very little in return due to our small domestic market", MOF wrote on its website.

As for Pillar 2, it is difficult to assess the impact of its implementation, given that negotiations are ongoing, MOF states.

Its impact is also dependent on how other governments and other MNEs react to the rules.

It may result in higher revenues if Singapore can retain all economic activities currently conducted here.

For Singapore, BEPS 2.0 will "reduce the room" for tax competition among countries, MOF wrote.

Wong announced last year in his budget speech that Singapore was exploring a top up tax, in line with BEPS 2.0, The Straits Times reported.

This top up tax would affect MNEs operating in Singapore with an annual group revenue of at least €750 million (about S$1 billion), as reflected in the consolidated financial statements of the ultimate parent entity.

Sufficient notice will be provided ahead of changes: Wong

In his Budget 2023 speech, Wong noted that other jurisdictions like the EU and the UK have announced plans to implement Pillar 2 of the global tax rules starting from 2024.

"Given these developments, I intend to implement Pillar 2 from 2025, as part of the broader international move to align minimum global corporate tax rates for large MNE groups", Wong said.

"When we do so, we will implement a Domestic Top-up Tax, which will top up the MNE groups' effective tax rate in Singapore to 15 per cent", he added.

However, Wong highlighted that developments of the BEPS 2.0 are fluid, and Singapore's implementation timeline will be adjusted according to international developments.

"We will continue to engage companies and give them sufficient notice, well ahead of any changes to our tax rules or schemes", Wong pointed out.

Singapore's broader suite of industry development schemes will also be reviewed and updated to ensure the country "remains competitive in attracting and retaining investments".

Top image via Unsplash