On 8 October 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) agreed on a detailed implementation plan relating to the two-pillar solution to address the tax challenges arising from the digitalisation of the global economy.
Key areas agreed on
- Pillar 1 – re-allocation of profits based on customer’s location
This pillar is aimed at re-allocating a portion of the profits of the biggest and most profitable multinational enterprises (MNE) to the countries where their consumers are. It is expected that only about 100 companies will be in-scope in this initial phase where thresholds are set at global revenues of above Euro 20 billion and profit margin above 10%. However, it is expected that these thresholds will be reduced in about seven years once the infrastructure of implementing the system has been shown to work.
Under the detailed implementation plan, the amount of residual profits to be re-allocated to the market jurisdiction is now fixed at 25%.
- Pillar 2 – global minimum corporate tax
This pillar ensures that the income of MNEs that are subject to an effective tax rate of less than the agreed minimum tax rate in their operating jurisdictions will have the tax rate topped up to the minimum rate in their home country.
This global minimum corporate tax rate will be imposed on MNEs with turnover over Euro 750 million and is now fixed at 15%.
- Effective implementation date
Both pillars are scheduled to be implemented from 2023 onwards.
- Multilateral Instruments
The provisions of Pillar 1 and 2 will be implemented through a Multilateral Instrument (MLI).
- Industries excluded from two-pillar solution
Certain industries are excluded (or “carved-out”) from the provisions. These include mining, shipping, regulated financial services and pension funds.
What the two-pillar solution may mean for Singapore
Re-allocation of profits based on customer’s location unlikely to cause significant loss of tax revenue
Given that Singapore is a small market, the amount of profits that will be re-allocated to Singapore is likely to be minimal.
On the flip side, Singapore is also unlikely to lose significant taxable profits. The Euro 20 billion entry level requirement for turnover will exclude any home-grown Singapore companies comfortably for the time being. Moreover, some of the largest entities in Singapore fall into the financial services carve-out. So, the only group affected would be MNEs in the top 100 bracket already exporting from a Singapore base. This means that there will unlikely be any significant loss of tax revenue, particularly if these businesses already enjoy tax incentives here.
MNEs in Singapore might review their plans in light of the global minimum corporate tax
Based on a parliamentary reply by Finance Minister, Mr Lawrence Wong, there are currently around 1,800 MNEs in Singapore with global revenues above 750 million euros which have an effective tax rate below 15%. As such, the implementation of Pillar 2 may translate into higher tax costs and impact their decision to continue to invest in Singapore (as opposed to any other regional location). It may also cause other potential MNEs to review their plans.
Keeping Singapore competitive
At first glance, the two-pillar solution may appear to impact Singapore adversely. However, many MNEs choose to be based in Singapore for reasons other than tax, for example a well-educated workforce, strong rule of law, stable political environment, world class financial services environment, etc. Thus, we believe that Singapore will remain attractive to MNEs, particularly since the initiative is levelling the tax playing field for its competitors as well.
Moreover, we should bear in mind that regulated financial services and pension funds are excluded from the scope of the two-pillar solution. Singapore has traditionally been an attractive financial hub and recently, it has also increased its footprint in the financial technology sector. Thus, this is an area where Singapore can continue to grow in, particularly to cushion itself against the impact of the two-pillar solution.
Not all is lost - yet. But watch this space. Implementation across 136 countries, all with differing political, tax and accounting systems, will be ‘fun’.