Impact of BEPS 2.0: How risky is the road ahead for Singapore family offices?

Andy Baik, Partner, Real Estate & Asset Management, Tax, KPMG in Singapore

Pearlyn Chew, Partner, Real Estate & Asset Management, Tax, Family Office & Private Clients, KPMG in Singapore

As a leading business hub and the gateway to Asia, Singapore is well-regarded among high-net-worth individuals (HNWIs) as an ideal base for family offices and private wealth management. More than half of the family offices in Asia today are estimated to be located in Singapore, according to KPMG and Agreus’ 2023 Global Family Office Compensation Benchmark Report. However, with the Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two rules, family offices based in Singapore that are within scope could find it challenging to cope with a 15% incremental tax burden on their investments, as this will be a significant jump from the 0% tax that most currently enjoy due to tax incentives. Many are also not yet equipped with the right resources or talent to cope with new reporting and compliance requirements.

However, the Government has signalled its continued support in attracting quality family offices by playing an active role on international platforms on global tax, while boosting its non-tax factors. These are advantages which family offices can leverage to tide through this period of change. Beyond BEPS 2.0, Singapore also presents new opportunities, such as new schemes to facilitate efficient wealth distribution through philanthropic giving and environmental, social and governance (ESG) investments.

When the 15% global minimum tax rate kicks in from 2025, the impact on in-scope Singapore entities of family offices will be far greater than other Singapore operating multinational enterprises (MNEs), given that most family-owned investment vehicles have been enjoying tax exemptions which accord 0% tax. In comparison, Singapore operating MNEs do not generally enjoy 0% tax, even if they currently benefit from some tax incentives. As Singapore has announced that it will “top up” the effective tax rate, family offices should review their holding structures and ownerships of their family assets to assess the impact, if any, of the Pillar Two rules. This is because it may potentially bring about adverse tax consequences due to the aggregation of different business or family assets, which is a common feature in family-owned or family office structures.

With Singapore also set to implement its domestic top-up tax later than others, complications may arise for family offices with entities in other jurisdictions. This is because they will still be required to report and pay top-up taxes in those jurisdictions for 2024. Even if an ultimate parent entity is based in a jurisdiction that is not statutorily required to prepare financial statements in accordance with authorised financial accounting standards, it would still be obligated to do so under Pillar Two’s deemed consolidation rules.

However, from a global tax landscape perspective, Singapore-based family office groups could take advantage of the country’s active involvement in international discussions and the global recognition of its standards. It also provides the opportunity for family offices to reconsider anchoring their investments in Singapore. The Singapore Financial Reporting Standards are specifically included in the list of “Acceptable Financial Accounting Standards” under Pillar Two. Having this certainty is critical given that the Pillar Two rules rely wholly on the accounting definition of “control” and “consolidated revenue” to determine whether a family office group falls within scope.

While Singapore has not yet released any draft legislation, Singapore has been laying the groundwork to attract quality family offices through boosting its non-tax factors including prioritising the upskilling of its workforce. These include subsidised programmes to train and certify individuals as family office practitioners.

Going forward, family offices will need to have full visibility of their entire structure of stakeholders to evaluate the potential impact, with a lot more transparency needed to fulfil their obligations. However, many in Singapore are still at a nascent stage, operating in small teams. Having easy access to Singapore’s highly skilled workforce will be a critical value driver as family offices look to meet their evolving business needs, especially with around 40% of family offices surveyed by KPMG and Agreus saying they will be hiring this year.

Recent changes to Singapore’s tax incentives also highlight its unique value proposition as a wealth management hub. The new Philanthropy Tax Incentive Scheme and broadening in-scope of investments eligible for tax incentives to cover blended finance structures and climate-related investments overseas will facilitate efficient wealth distribution in the region and enhance Singapore’s attractiveness among HNWIs as a location to aggregate their wealth. Family offices can take advantage of these policies to reconsider their portfolio allocations, while channelling these towards philanthropic causes and ESG objectives.

With public consultations on BEPS 2.0 expected to go into high gear later this year, Singapore family offices will need to grasp the risks ahead before it is too late. However, these challenges should not overly dim the new opportunities that the country offers as a wealth management hub that remains ever-evolving and fit-for-purpose.