- Ajay Kumar Sanganeria, Partner and Head of Tax, KPMG in Singapore
- Harvey Koenig, Partner, Telecommunications, Media & Technology, Tax, KPMG in Singapore
As the new global minimum tax rules under the Based Erosion and Profit Shifting (BEPS) 2.0 framework look set to be introduced from 2024, many countries have been hard at work reconsidering legislative changes and broader incentives to keep their jurisdictions attractive for Multinational Enterprises (MNEs). European Union (EU) member states have just reached agreement to implement minimum taxation at the bloc level. Singapore is also studying a domestic top-up tax regime for affected local and foreign MNE groups.
To recap, one measure to be expected under the latest rules is the global minimum tax of 15 percent. MNEs will face top-up taxes in any jurisdiction where they currently pay an effective rate of below 15 percent. In addition, a subject-to-tax rule (STTR) will be imposed on certain cross-border related party payments currently subject to tax below a minimum rate of 9 percent in the payee jurisdiction.
Some 68 percent of Singapore respondents to KPMG’s global 2022 CEO Outlook survey responded that the new global tax regime poses significant concern for their organisation’s growth, down from 80 percent in 2021. While this shows some gradual acceptance of tax contributions to come, our interactions with MNEs in Singapore indicate that not all enterprises here have a realistic estimation of the potential costs for their businesses and countries, as well as the additional time, resources and processes that may be involved in compliance. This could create some short-term challenges for MNEs, which may in turn hinder Singapore’s overall economic drive.
First, some companies may still believe that the global minimum tax only targets digital operations. However, the global tax rules will affect all groups with annual global revenue of 750 million euros (S$ 1.1 billion) or more, regardless of industry. Companies may wish to seek advice on the implications that they may face, including higher cash tax costs and reduced earnings per share, on top of what their tax leaders could help explain. In jurisdictions with tax incentives – such as Singapore – costs may increase significantly. For example, a group operating in Singapore that currently takes advantage of the country’s Pioneer Status tax holiday could face an effective tax rate for its local operations up to 15 percent.
Second, compliance with the new rules will take additional human and technical resources, and increase tax compliance risks. For example, where tax filings in Singapore used to be done on an entity-by-entity basis, the latest rules will require MNEs to appoint a single entity to be responsible for the compliance requirements of all group operations in the country. This may oblige entities to share financial information across the group, requiring new governance processes, including allocating liability of any top-up taxes across different entities. Such taxes could also affect the performance reviews of individual entities. What this entails for enterprises is that new governance processes and larger tax function budgets will need to be considered to support compliance with reporting requirements at a global level, as well as in each country of operations. Companies may also need to upgrade their information systems to cope with the high volumes of data, and enhance coordination across and within jurisdictions.
Third, following the implementation of these global tax rules, some jurisdictions may change their tax incentives for attracting foreign investment, or replace them with grants, subsidies or other investment incentives. This could greatly affect tax, business (including supply chains) and financing strategies.
Finance Minister Lawrence Wong has acknowledged that Singapore will have to work harder on non-tax factors to attract foreign investment amid a tighter tax regime. Measures could include upgrading the country’s workforce, infrastructure and overall business environment. Carrying out these measures also mean that there should be business alignment from enterprises. Business and tax leaders will need to update their colleagues across business units in various jurisdictions on such changes to help them adapt their strategies to shifting local investment and operating contexts.
Fourth, complying with the new rules calls for closer cooperation between tax and finance teams, within jurisdictions and globally. The rules require extensive financial information for computation of the tax base for the global minimum tax, including the use of deferred tax accounting to reconcile tax and financial accounts. It is critical for teams to work together to make the appropriate accounting data available. Faced with new global and domestic requirements, tax and finance teams need to remain responsive to issues such as data gaps and which accounting standards apply (for example, US Generally Accepted Accounting Principles or International Financial Reporting Standards). The Singapore government may consider additional support for companies to cope with this change.
In short, the impending impact of the global minimum tax rules should not be underestimated, and wide-ranging effects on the tax, business and finance strategies of many international businesses will need to be expected. In a challenging global economic environment, the readiness of individual enterprises in responding to these changes will be critical not just for their business growth, but also for Singapore’s longer-term prosperity and viability as a destination for business.
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