Why a new global taxation phase requires a new response

Why a new global taxation phase requires a new response

5 minute read 09 Sep 9999

How Singapore responds to the new tax world order can impact its competitiveness and ability to attract global investors.

In brief

  • Singapore must adapt to the new global minimum tax rules — or Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two — to remain an attractive investment hub.
  • In response, the government can consider revamping tax regulations and incentive schemes and refining the writing-down allowance for greater flexibility.
  • Introducing BEPS-compliant qualified refundable tax credits is another potentially beneficial action.

On 1 January 2024, a milestone in tax history was reached. The new global minimum tax rules — commonly known as Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two — became effective for numerous jurisdictions worldwide, marking the beginning of a new international tax world order for large multinational corporations (MNCs). 

Pillar Two aims to halt the erosion of tax bases and ensure that large MNCs pay their fair share of tax in every jurisdiction where they operate, thereby addressing the challenges posed by an increasingly digitalized and global economy. The design of the rules leaves jurisdictions with limited choices — either implement Pillar Two or cede the taxing rights to other jurisdictions. Singapore is not spared.

Over the decades, Singapore has adeptly used tax incentives to attract and support foreign direct investments. This strategy was instrumental in the nation’s transformation into a vibrant economy with one of the highest per capita incomes globally. Pillar Two will dilute the effectiveness of such preferential tax regimes by forcing a top-up tax if the effective tax rate on the Singapore profits of an eligible MNC drops below the 15% minimum tax.  

Maintaining trust and adaptability

For many investors, the true worth of Singapore's incentives goes beyond the nominal tax rate or cash grant. In fact, many countries offer lower tax rates with fewer strings attached. However, Singapore has built a firm foundation as a trustworthy partner for investors. This is supported by its established reputation for honoring incentive commitments and readiness to adapt the incentives in line with business changes and industry evolution.

All things being equal, tax incentives are still critical as they are quantifiable and can be compared between jurisdictions for objective decision-making. Therefore, Singapore’s continued ability to draw substantial investments hinges on successfully revamping its tax regulations and incentive schemes to adapt to the evolving global tax environment as the nation continues to strengthen its relevance and position as a regional business hub.

How can Singapore maintain its appeal with the implementation of Pillar Two?

Effective revamping of tax regulations and incentive schemes to adapt to the evolving global tax landscape is critical to Singapore’s continued ability to attract substantial investments.

Refine the writing-down allowance for greater flexibility

One of the ways Singapore can maintain its attractiveness to investors is strengthening its intellectual property (IP) regime and refining its tax amortization on capital expenditure incurred to acquire qualifying intellectual property rights (IPRs) to give taxpayers greater flexibility in managing the jurisdictional effective tax rate.

To enhance the competitiveness of Singapore’s IP regime, the government may consider liberalizing the tax amortization treatment for acquiring IPRs. Currently, no tax amortization is allowed on the acquisition of economic rights of IPs, unless approval for waiver of the legal ownership requirement is obtained from the regulators. This strict treatment, compared with other investment hub locations such as Ireland and Switzerland, puts Singapore at a slight disadvantage as an IP holding location.

Furthermore, under the existing tax legislation, the tax amortization must be claimed over a duration of five, 10 or 15 years. This often results in a mismatch between the amortization rates for accounting and tax purposes.

Along with the Pillar Two rules, the OECD also published a set of guidelines around Pillar Two-compliant incentives known as qualified refundable tax credits. The QRTC is defined as “a refundable tax credit designed in a way such that it must be paid as cash or available as cash equivalents within four years from when a Pillar Two Constituent Entity satisfies the conditions for receiving the credit under the laws of the jurisdiction granting the credit”.

As Singapore reviews its toolbox of investment promotion strategies, the QRTC is an essential upgrade.

While tax credit is new within Singapore’s tax legislation, the QRTC is well known among other developed countries. QRTCs are often considered interchangeably with cash grants, but there are clear distinctions between them. Firstly, cash grants require upfront funds to be set aside by the government, while QRTCs can be used to offset against other forms of taxes and may reduce the upfront cost to the government. Secondly, in jurisdictions such as the European Union, state aid rules may limit the excessive use of cash grants to support investments but consider QRTCs in a different light.

Pillar Two regulations attempt to address these book-tax differences by necessitating the “recapture” of the mismatch (known in accounting as deferred tax liabilities) that remains unpaid or unused over five years. However, this provision may inadvertently lead to a revisiting and recalculation of the prior year’s effective tax rates, thereby significantly increasing the compliance complexities for companies. One potential solution is to harmonize the tax amortization period with the economic lifespan of the IPRs. This reduces potential discrepancies between reported and actual tax liabilities.

Introduce BEPS-compliant qualified refundable tax credits (QRTCs)

Along with the Pillar Two rules, the OECD also published a set of guidelines around Pillar Two-compliant incentives known as qualified refundable tax credits. The QRTC is defined as “a refundable tax credit designed in a way such that it must be paid as cash or available as cash equivalents within four years from when a Pillar Two Constituent Entity satisfies the conditions for receiving the credit under the laws of the jurisdiction granting the credit”.

As Singapore reviews its toolbox of investment promotion strategies, the QRTC is an essential upgrade.

While tax credit is new within Singapore’s tax legislation, the QRTC is well known among other developed countries. QRTCs are often considered interchangeably with cash grants, but there are clear distinctions between them. Firstly, cash grants require upfront funds to be set aside by the government, while QRTCs can be used to offset against other forms of taxes and may reduce the upfront cost to the government. Secondly, in jurisdictions such as the European Union, state aid rules may limit the excessive use of cash grants to support investments but consider QRTCs in a different light.

How EY can Help

A pivotal juncture for Singapore

As Singapore navigates the complexities of the new global tax landscape, it stands at a pivotal juncture. The rise in minimum corporate tax rates and the weakening of preferential tax rate regimes pose significant obstacles. But history has shown that through resilience, innovation and a forward-looking approach, Singapore has not only survived but also thrived amid challenges.

As the world grapples with geopolitical and tax uncertainties, Singapore’s unwavering commitment to an open economy, integrity, innovation and collaboration positions it to not only compete but also lead in the global arena. The future, though uncertain, looks bright.

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    Summary

    With the new BEPS 2.0 Pillar Two in force, the Singapore government can consider key actions to help the nation remain an attractive investment hub. These include revamping tax regulations and incentive schemes to adapt to the evolving global tax environment, refining the writing-down allowance for greater flexibility and introducing BEPS-compliant qualified refundable tax credits.

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