Rethinking Singapore’s tax regime amid OECD’s side-by-side package

OECD’s side-by-side package could reshape how Singapore balances tax competitiveness, certainty and investment appeal.

On 5 January 2026, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) unveiled a side-by-side (SbS) package that reconfigures how BEPS 2.0 Pillar Two (or global minimum tax) will operate.

The SbS package allows a qualified SbS regime to run in parallel with Pillar Two, adding a suite of safe harbours and simplifications to the Pillar Two framework, to alleviate compliance requirements while safeguarding the domestic tax base of participating jurisdictions.

Coexistence of the US global minimum tax regime with Pillar Two

To date, the US is the first and only jurisdiction to qualify for the SbS regime. This represents a significant political compromise, acknowledging the pre-existing US global minimum tax framework and mitigating the risk of potential retaliatory tax measures by the US.

From fiscal years (FYs) on or after 1 January 2026, US multinational enterprises (MNEs) will be excluded from the income inclusion rule and the undertaxed profits rule under the Pillar Two framework. For the earlier FYs, US MNEs remain subject to their prior Pillar Two obligations and compliance timelines.

The SbS regime does not deactivate the qualified domestic minimum top-up tax (QDMTT) in the jurisdictions where it has been implemented. Instead, the QDMTT continues to apply, maintaining the integrity of the relevant jurisdiction’s first “right to tax” even as the SbS approach is adopted for US MNEs.

Mechanically, the two systems operate differently.

Pillar Two employs a jurisdictional blending approach, where the effective tax rate is calculated separately for each jurisdiction in which an MNE operates. In contrast, the US global minimum tax regime utilises global blending, aggregating income and taxes across all jurisdictions to determine if the minimum tax threshold is met.

A key consequence of this divergence arises when a QDMTT is absent. Under the SbS approach, the 15% minimum tax may not be consistently enforced across all jurisdictions for US MNEs as some jurisdictions may not be fully subject to the Pillar Two regime. This creates tax arbitrage opportunities and increases the risks of profits and activities moving to “Pillar Two-free” jurisdictions.

Recognising these risks, the Inclusive Framework is closely monitoring the interaction of these regimes. The QDMTT is viewed as the primary mechanism to maintain a level playing field and to prevent BEPS, as it ensures that domestic tax base is protected even where global blending methods might otherwise allow for lower effective taxation in certain jurisdictions.

Singapore’s dilemma and stance

The US is a significant contributor to Singapore’s foreign direct investment (FDI). With the SbS agreement, Singapore faces a critical policy choice: repeal its QDMTT to enhance its appeal to US investors or uphold the QDMTT even though many jurisdictions (including the US) have not implemented the Pillar Two rules.

This decision is fraught with tension.

Repealing the QDMTT can make Singapore more attractive, potentially boosting FDI inflows. However, maintaining the QDMTT is essential for preserving the objectives of Pillar Two in ensuring a global minimum tax “floor”. The challenge for Singapore is to navigate these competing priorities, weighing the benefits of international investment against the need to adhere to international tax standards. 

Shortly after the release of the SbS package by the OECD, the Ministry of Finance confirmed in February 2026 that Singapore would proceed with the implementation of its QDMTT as originally planned. This decision underscores a deliberate policy stance:  tax certainty, consistency and credibility remain central to Singapore’s value proposition as a stable investment hub in an increasingly fragmented global tax environment.

Implications for incentives

At the inception of Pillar Two, the OECD adopted a stringent stance by refraining specific carve-outs for tax incentives. Instead, the Inclusive Framework implemented a substance-based income exclusion, which is calculated based on specific percentages of payroll costs and the carrying value of tangible assets located within the jurisdiction. Additionally, favourable treatment is extended to qualified refundable tax credits.

During the negotiations that culminated in the SbS agreement and in recognition of national sovereignty concerns, a new substance-based tax incentive (SBTI) safe harbour was introduced. This safe harbour is designed to mitigate the top-up tax impact by allowing an increase in covered taxes, specifically for tax benefits derived from SBTI. However, this reduction is subject to a substance cap. In addition, incentives that would not have arisen independently of a governmental arrangement are excluded.

Singapore’s current portfolio of tax incentives is predominantly income-based, rather than expenditure-based or production-based. This places most of Singapore’s tax incentives outside the scope of the SBTI safe harbour provisions.

Given these limitations, Singapore faces the necessity of re-evaluating – and potentially redesigning – its incentive schemes in response to these Pillar Two developments. The evolving global tax environment, particularly with the implementation of SbS, introduces new complexities and constraints for jurisdictions seeking to attract FDI. As a result, Singapore may encounter greater challenges in using traditional incentive schemes to draw new FDI, highlighting the importance of adapting its incentive framework to align with international standards and managing the value of doing business in Singapore to maintain competitiveness.

At the same time, Singapore recognises the intensifying global competition for FDI, driven not only by tax incentives but also by non-fiscal factors such as costs, infrastructure, talent and innovation ecosystems. In response, the Singapore government has committed significant resources during Singapore Budget 2026 to support development expenditure under the Ministry of Trade and Industry. This reflects a strategic shift to maintaining competitiveness and sustaining long-term economic growth.

The road ahead

While the foregoing represents the current state of Pillar Two, the regulatory environment remains dynamic and is still developing. Singapore will continue to face difficult policy choices as global developments unfold. In this context, it may be useful to adhere to certain principles as the government and taxpayers go through this journey.

Firstly, taxpayers require certainty in tax law. It is recommended that the government communicates its policy intent clearly, timely and in sufficient detail, enabling businesses to plan effectively and make informed investment decisions.

Secondly, the Singapore government should consider all feasible means to reduce the compliance burden for impacted taxpayers. Given the increased complexity introduced by Pillar Two, administrative requirements should remain practical and manageable.

Last and certainly not the least, there should be recognition that the current political and business environment is unprecedented. The current state of international tax policy illustrates the need for creative and forward-looking solutions, particularly in the arena of incentives. Incentives have been and will continue to be the main fiscal tool to attract FDI. The task ahead for Singapore is clear – new incentives alongside targeted refinements to existing incentives will be required.

Businesses should anticipate a next generation of incentives emerging in due course. In the meantime, businesses and investors should undertake robust modelling and scenario analysis to assess the potential impact of these changes and to position themselves effectively in an increasingly complex and evolving tax environment.

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The co-authors of this article are James Choo and Yeo Ying, Partners, International Tax and Transaction Services from Ernst & Young Solutions LLP.