Singapore proposes domestic implementation of Pillar Two and the Refundable Investment Credit

INTRODUCTION

On 10 June 2024, Singapore’s Ministry of Finance (MOF) proposed the Multinational Enterprise (Minimum Tax) Bill 2024 and subsidiary legislation, as part of Pillar Two of the Base Erosion and Profit Shifting (BEPS) 2.0 initiative, and legislative amendments to the Income Tax Act 1947 (ITA), also known as Income Tax (Amendment) Bill 2024.

Most significant are the proposals to implement (1) the Domestic Top-up Tax (DTT) and Income Inclusion Rule (IIR) under Pillar Two and (2) the Refundable Investment Credit (RIC) scheme. This is in line with earlier announcements and the 2024 Budget Statement of 16 February 2024. Please see our article on the highlights here.

The proposed legislation is open for public consultation until 5 July 2024.

PILLAR TWO OF BEPS 2.0 INITIATIVE

In the 2024 Budget Statement, Singapore announced that it will implement the IIR and DTT from Pillar Two of the BEPS 2.0 initiative starting in 2025. This move is aligned with global trends, as other countries have already implemented the Pillar Two rules, pressuring Singapore to follow to avoid losing revenue to these other countries which have implemented the IIR.

It was clarified that the implementation of the Undertaxed Profits Rule (UTPR) would be considered at a later stage, prioritizing the IIR and DTT to ensure a smooth rollout for in-scope companies.

Under the Multinational Enterprise (Minimum Tax) Bill 2024, the MOF proposes to implement the IIR and DTT. The proposed changes will apply to multinational enterprise (MNE) groups that are in scope of Pillar Two, ie with annual group revenues of EUR750 million at least two of the four preceding financial years. As announced in the 2024 Budget Statement, the proposed changes will be effective for financial years commencing on or after 1 January 2025.

The proposed Bill will:

• Apply a DTT to in-scope MNE groups in respect of any low-taxed profits of their group entities that are operating in Singapore, to ensure an effective tax rate of at least 15% for the Singaporean constituent entities of the group.
• Apply the IIR, referred to as Multinational Enterprise Top-up Tax (MTT), to in-scope MNE groups that are parented in Singapore, in respect of any low-taxed profits of their group entities that are operating outside Singapore, to also ensure an effective tax rate of at least 15% for the MNE group’s overseas constituent entities.

The MTT and DTT will be taxes on income and, if passed into law, the Multinational Enterprise (Minimum Tax) Bill 2024 will be construed as one with the ITA. Hence, certain provisions, such as the ones related to administration, enforcement, and appeal processes, with specific modifications in the proposed Bill, will also apply to the DTT and MTT.

The key provisions for the DTT and MTT include the registration and deregistration of in-scope MNE groups, the designation of the constituent entities to comply with the requirements of the Bill, filling obligations, tax payment obligations, and the information gathering powers of the Comptroller.

The proposed amendments to the ITA under the proposed Multinational Enterprise (Minimum Tax) Bill 2024 include clarifications on the treatment of the taxes imposed by Singapore and other jurisdictions under Pillar Two. These clarifications include whether these taxes are:

• Eligible for tax deduction (not allowed for IIR, UTPR and Domestic Minimum Top-up Tax (DMTT) imposed by foreign jurisdictions as well as MTT and DTT imposed by Singapore).
• Eligible for foreign tax credit (not allowed for IIR or UTPR imposed by foreign jurisdictions, but generally allowed for DMTT imposed by foreign jurisdictions, subject to conditions).
• Eligible to satisfy the conditions for the foreign-sourced income exemption and foreign tax credit pooling system (not considered for the IIR and UTPR, and not considered for the DMTT imposed by foreign jurisdictions for determining the “headline tax rate” condition but considered for the “subject to tax” condition).

The proposed subsidiary legislation details the adjustments to the financial accounting net income or loss and the qualifying tax expenses, for the purposes of calculating the effective tax rate (ETR) and top-up tax based on the GloBe Model Rules.

REFUNDABLE INVESTMENT CREDIT (RIC) SCHEME

The implementation of Pillar Two aims to establish an effective minimum tax rate of 15% in each jurisdiction where an in-scope MNE group has physical operations, which may impact tax incentives that reduce the ETR below this threshold. Hence, tax incentives that typically provide for a lower corporate income tax (CIT) rate or tax holiday on qualifying income derived from certain activities, as well as traditional tax credits may no longer provide the same benefits, as any reduction below an ETR of 15% will be topped up to meet the minimum rate.

Unlike individual country tax systems, the Pillar Two system does not allow for many openings for tax competition, except for allowances like accelerated depreciation and Substance Based Income Exclusion (SBIE). However, Pillar Two does leave room for Qualified Refundable Tax Credits (QRTCs). QRTCs do not decrease the ETR as much as traditional tax credits and tax incentives and therefore may result in lower top-up taxes. This is because the formula to calculate the ETR is the Adjusted Covered Taxes divided by the net GloBE income, and QRTCs, unlike traditional tax credits and tax incentives, are treated as income (the numerator) instead of a reduction in the Adjusted Covered Taxes (the denominator), lowering the impact on the ETR.

Several European countries such as the United Kingdom, Ireland and Belgium, and the United States have recently introduced their own domestic QRTCs, structured within the Pillar Two framework. Singapore announced the Refundable Investment Credit (RIC) incentive scheme in the 2024 Budget Statement on 16 February 2024, which qualifies as a QRTC.

The RIC is designed to incentivize businesses undertaking sizeable investments in high-value and substantive economic activities, by offering refundable investment credits with cash features. These high-value and substantive economic activities are:

• investing in new productive capacity;
• expanding or establishing digital and professional services as well as supply chain management;
• expanding or establishing headquarter activities or Centers of Excellence;
• setting-up or expansion of activities by commodity firms;
• carrying out R&D and innovation activities, and
• implementing solutions with decarbonization objective.

The credits are to be offset against any tax, DTT or MTT levied on and other amounts due from the qualifying company. Any unutilized tax credits will be refunded to the company in cash within 4 years. The RIC will be awarded based on the support rates predetermined for the company’s different qualifying expenditure categories (such as capital expenditure, manpower and training costs, professional fees and intangible asset costs), as specified in the award letter, during a period of up to 10 years (subject to the conditions set out in said letter).

Companies can receive up to 50% of support on each qualifying expenditure category. However, the total quantum of RIC that a company is eligible for will be determined by the Singapore Economic Development Board (EDB) and EnterpriseSG.

The proposed legislative amendments in the Income Tax (Amendment) Bill 2024 include the incorporation of the RIC scheme through a newly created Section of ITA, ie Section 93B. However, detailed information regarding the specific activities and expenditures that will qualify for RICs has not been provided. This aligns with expectations, as such details are typically outlined in subsidiary legislation and are subject to the discretionary authority of the granting bodies, namely the EDB and EnterpriseSG. More information about this is expected to be released by the EDB and EnterpriseSG in Q3 2024.

The most eye-catching elements of the proposed legislation are (1) the option for election by the awardee company of payment of the RICs to them instead of offsetting taxes (subject to approval) and (2) the group offset provision that allows the awardee company to apply for its RICs to offset due taxes of its group companies.

With respect to the period in which the qualifying expenditure is incurred, the proposed Section 93B of the ITA allows the approving authority to specify a period that begins from a date before the one set out in the Income Tax (Amendment) Bill 2024, but no earlier than 1 July 2024.

The amendments further detail the application process, conditions for awarding, what must be stated the award letter, the order to offset due taxes (on a “first in, first out” basis), payment requirements, how contraventions will be handled (with potential amendments or revocation of awards), transferability during amalgamations and the ineligibility for deduction.

CONCLUSION

Singapore’s approach to implementing Pillar Two and a QRTC scheme aligns with global trends, pursuing competitiveness while adhering to the BEPS 2.0 framework. The first steps have been taken with the proposed Multinational Enterprise (Minimum Tax) Bill 2024 and the Income Tax (Amendment) Bill 2024, but there are still many expected clarifications. As we await the end of the consultation process and for the Bill to be finalized, as well as further details to be released by EDB and EnterpriseSG in Q3 2024, this will remain a hot topic for businesses planning their investments.

Stay tuned for more updates as Singapore navigates these significant global tax reforms and please contact Barbara Voskamp, Anne Klaassen or Victor Sanlorien Cobo to learn what this means for your business.