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 (MNEs). The G20 had tasked the Organisation for Economic Co-operation and Development (OECD) to study and deal with the issue of BEPS by MNEs. 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. In 2015, the OECD published its study and action plan on BEPS.
- 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 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 released a Statement on a Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy commonly known as BEPS 2.0.
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 profit shifting, there are 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 (ETRs), in the different jurisdictions that they operate in, depending on the types of economic activities conducted and the domestic corporate tax regime.
- Pillar One 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. Affected MNE groups are required to re-allocate 25% of their residual profits (i.e. profits in excess of 10% of their global revenue) to the jurisdictions where the markets are. 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 Two introduces a minimum ETR of 15% for large MNE groups via the Global Anti-Base Erosion (GloBE) Model Rules. If an affected MNE has an ETR of less than 15% in any jurisdiction at the group level, other jurisdictions can collect the difference of up to 15%.
- Besides GloBE Model Rules, Pillar Two 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 jurisdiction (B), if that payment is taxed at less than 9% in B.
What does BEPS 2.0 mean for Singapore?
- Under Pillar One, 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 Model Rules under Pillar Two, Singapore will implement the Domestic Top-up Tax (DTT) and Income Inclusion Rule (IIR), which will impose a minimum ETR of 15% on large MNE groups with annual group revenue of 750 million euros or more in at least two of the four preceding financial years.
- It is difficult to assess the potential impact of both pillars of BEPS 2.0, including Singapore's implementation of DTT and IIR on our revenue collections:
o Pillar One, when implemented, will result in a loss of revenue for Singapore.
o In response to Pillar Two implementation, MNEs are re-evaluating their plans and strategies, while other governments are also enhancing and refreshing their investment promotion toolkits. The eventual impact on our tax revenue will depend on how they respond to the changes in international tax rules.
- While BEPS 2.0 may reduce the room for tax competition among countries, it does not reduce competition for investment. Singapore will need to refresh our investment promotion toolkit, and strengthen non-tax factors, such as maintaining our world class infrastructure and quality workforce. Only then will we continue to thrive, with steady economic growth and good jobs for Singaporeans. Any additional revenue from BEPS 2.0 will therefore need to be re-invested into the economy to ensure that we remain competitive in a post-BEPS 2.0 world.