What is the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project?
- Since 2013, there have been concerted efforts to strengthen international cooperation in taxation matters, to stamp out harmful practices and combat tax avoidance by multinational enterprises or MNEs. The G20 had tasked the Organisation for Economic Co-operation and Development (OECD) to study and deal with the issue of Base Erosion and Profit Shifting, or BEPS, by MNEs. This resulted in the OECD release of a study and action plan in 2013. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to locations with no/low tax rates and no/little economic activity.
- To ensure a consistent and co-ordinated implementation of the BEPS recommendations and to make the project more inclusive, OECD/G20 subsequently broadened its BEPS discussion to include more than 140 jurisdictions through a platform called the Inclusive Framework (IF) on BEPS.
- Singapore has been actively involved in these international discussions at the IF. We are among the first few non-G20 and non-OECD countries to join the IF. In October 2021, the IF agreed to a Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy commonly known as BEPS 2.0. The Two-Pillar solution was accepted by more than 135 member jurisdictions of the IF, including Singapore.
What are the two Pillars under BEPS 2.0?
- Currently, jurisdictions where MNEs conduct their activities (e.g. manufacturing, strategic decision making) have the right to tax MNEs fully on the profits attributable to these activities. Profits are fully allocated to the jurisdiction where the economic activities giving rise to the profits are conducted. (To ensure that cross-border transactions between related entities in MNE groups are not subject to tax planning, there are also robust rules, known as transfer pricing rules, imposed on such cross-border transactions. Many jurisdictions impose transfer pricing rules, including Singapore.) MNEs pay different effective tax rates, or ETRs, in the different jurisdictions that they operate in, depending on the types of economic activities conducted and the domestic corporate tax regime.
- Pillar 1 seeks to re-allocate some profits and in turn, taxes, from where the economic activities are conducted to where the markets (i.e. the customers) are. This is the case even if profits are currently allocated in line with transfer pricing rules.
- Pillar 1 requires affected MNE groups to re-allocate globally 25% of their profits in excess of 10% of their global revenue (i.e. 25% of their residual profits) to the jurisdictions where the markets are. There are ongoing discussions among governments on how to determine which jurisdictions to surrender their profits, and how much each is to surrender. Some jurisdictions may have to give up taxing rights over more than 25% of their residual profits. This can happen because the method used to determine the amount to be reallocated may lead to certain jurisdictions having to surrender more.
- Pillar 2 introduces a minimum ETR of 15% for affected MNE groups via the Global Anti-Base Erosion (GloBE) Model Rules. If an affected MNE has an ETR of less than 15% in Singapore at the group level, other jurisdictions can collect the difference of up to 15%.
- Pillar 2 also includes a Subject-to-Tax Rule (STTR). STTR allows a jurisdiction A to impose additional tax of up to 9% on certain payments (such as interest and royalty) that an entity in A makes to related entities in another jurisdiction B, if that payment is taxed at less than 9% in B.
What does BEPS 2.0 mean for Singapore?
- Under Pillar 1, 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.
- In response to the GloBE rules under Pillar 2, Singapore is exploring a Minimum Effective Tax Rate (METR) top-up tax on affected MNE groups, which will raise the group’s effective tax rate in Singapore to 15%.
- It is difficult to assess the potential impact of both pillars of BEPS 2.0 (including METR) on our revenue collections:
o Pillar 1 will result in a loss of revenue for Singapore.
o METR may result in higher tax revenue if Singapore can retain all the economic activities that are currently conducted here (and the accompanying profits). But this is not assured. Companies will review their existing and new investments.
o International negotiations on key implementation rules are ongoing, including rules to determine which and how much jurisdictions surrender profits and taxes under Pillar 1, and how the two Pillars interact. The finalised rules and parameters will affect the revenue impact of BEPS 2.0 on Singapore.
o Some data points are not collected under our corporate tax system currently e.g. the group effective tax rate based on the proposed revised international rules. It is difficult to accurately estimate the revenue impact without such data.
- The eventual impact of BEPS 2.0 (including METR, if implemented) on our tax revenue depends on how other Governments and companies respond to the changes in international tax rules. Whatever additional corporate tax revenue that can be generated from BEPS 2.0 will need to be reinvested to maintain and enhance our competitiveness.
- While BEPS 2.0 may reduce the room for tax competition among countries, it does not reduce competition for investment. We will need to strengthen non-tax factors and reinvest to stay competitive in a post-BEPS 2.0 world. Only then will we be able to thrive, with steady economic growth and good jobs for Singaporeans.
Link to BEPS 2.0 Infographic.