Pillar Two in Singapore: A Primer for Businesses

As Singapore positions itself as a global business hub, the implementation of Pillar Two marks a significant shift in our tax landscape. This article aims to simplify these complex rules and highlight their impact on businesses operating in our city-state. Whether you're a CEO, CFO, or a business owner, understanding these changes is crucial for strategic planning in the years to come.

I. Introduction: What is Pillar Two and Why Does It Matter for Singapore?

Pillar Two is a global tax initiative affecting large multinational companies, designed to ensure a minimum level of tax is paid regardless of where a company operates.

Key Points for Singapore:

1. Effective Date: January 1, 2025

2. Minimum Tax Rate: 15%

3. New legislation: Multinational Enterprise (Minimum Tax) Bill introduced on July 3, 2024

4. New taxes:

- MTT (Multinational Enterprise Top-up Tax)

- DTT (Domestic Top-up Tax)

5. Oversight: Inland Revenue Authority of Singapore (IRAS)

Example:

Imagine TechGlobal Pte Ltd, a Singapore-headquartered multinational tech company. Currently, they benefit from a 5% concessionary tax rate under the Development and Expansion Incentive (DEI). Under Pillar Two, if their effective tax rate (ETR) in Singapore is below 15%, they may need to pay additional tax to meet this minimum rate.

Commentary: Singapore's swift action in introducing the Multinational Enterprise (Minimum Tax) Bill demonstrates our commitment to international tax standards. However, it also signals a need for businesses to reevaluate their tax strategies, particularly those benefiting from Singapore's various tax incentives.

II. Who Does Pillar Two Affect in Singapore?

A. Multinational Enterprise (MNE) Groups

Example: TechGlobal Pte Ltd

- HQ: Singapore (established 2000)

- Subsidiaries: Malaysia, Indonesia, Thailand, Vietnam

- Offices: USA, UK, Germany, Japan, Australia

B. Revenue Threshold

- ≥ €750 million (about S$1.1 billion) in 2 of the last 4 years

Example: TechGlobal Pte Ltd's Revenue

- 2021: S$1,230,000,000

- 2022: S$1,180,000,000

- 2023: S$1,320,000,000

- 2024: S$1,275,000,000

Result: Subject to Pillar Two in 2025

Counter-Example: SmallTech Pte Ltd

- 2021: S$100,000,000

- 2022: S$120,000,000

- 2023: S$150,000,000

- 2024: S$180,000,000

Result: Not subject to Pillar Two (below threshold)

C. Constituent Entities in Singapore

Example: TechGlobal entities in Singapore

1. TechGlobal Pte Ltd (Parent company)

2. TechGlobal Asia Pacific Pte Ltd (Wholly-owned subsidiary)

3. TechGlobal R&D Center (Branch office)

4. TechGlobal-LocalTech JV Pte Ltd (60% owned joint venture)

Commentary: While Pillar Two primarily targets large MNEs, its ripple effects will be felt across Singapore's business ecosystem. Smaller companies in the supply chain of these MNEs may indirectly feel the impact. For instance, if TechGlobal needs to restructure its operations to optimize its tax position, this could affect its relationships with local suppliers or partners.

III. How Pillar Two Works in Singapore: Key Calculations

A. GloBE Income/Loss Calculation

Step-by-step example for TechGlobal Asia Pacific Pte Ltd (FY 2025):

1. Singapore accounting profit: S$10,000,000

2. Add back disallowed expenses:

- Fines and penalties: S$50,000

- Entertainment expenses exceeding tax deduction limit: S$100,000

3. Subtract exempt income:

- Foreign-sourced dividend: S$500,000

4. Timing difference adjustments:

- Depreciation difference: S$200,000

5. Other adjustments:

- Stock-based compensation adjustment: S$300,000

GloBE Income calculation:

S$10,000,000 + S$50,000 + S$100,000 - S$500,000 + S$200,000 + S$300,000 = S$10,150,000

Example 2: TechGlobal R&D Center (Branch office)

1. Singapore accounting profit: S$5,000,000

2. Add back disallowed expenses:

- Non-deductible R&D costs: S$300,000

3. Subtract exempt income:

- Government R&D grant: S$200,000

4. Timing difference adjustments:

- Accrued expenses not yet deductible: S$100,000

5. Other adjustments:

- Transfer pricing adjustment: S$150,000

GloBE Income calculation:

S$5,000,000 + S$300,000 - S$200,000 + S$100,000 + S$150,000 = S$5,350,000

B. Adjusted Covered Taxes Calculation

Step-by-step example for TechGlobal Asia Pacific Pte Ltd (FY 2025):

1. Current year corporate income tax: S$1,500,000

2. Deferred tax expense: S$150,000

3. Withholding taxes paid: S$80,000

4. Excluded taxes:

- Property tax: S$100,000

5. Other adjustments:

- Uncertain tax position resolved: S$70,000

Adjusted Covered Taxes calculation:

S$1,500,000 + S$150,000 + S$80,000 - S$100,000 + S$70,000 = S$1,700,000

Example 2: TechGlobal-LocalTech JV Pte Ltd

1. Current year corporate income tax: S$800,000

2. Deferred tax expense: S$50,000

3. Withholding taxes paid: S$30,000

4. Excluded taxes:

- Stamp duty: S$20,000

5. Other adjustments:

- Additional tax from audit: S$40,000

Adjusted Covered Taxes calculation:

S$800,000 + S$50,000 + S$30,000 - S$20,000 + S$40,000 = S$900,000

C. Effective Tax Rate (ETR) Calculation

Formula: (Adjusted Covered Taxes ÷ GloBE Income) × 100%

ETR for TechGlobal Asia Pacific Pte Ltd (FY 2025):

(S$1,700,000 ÷ S$10,150,000) × 100% = 16.75%

ETR for TechGlobal-LocalTech JV Pte Ltd:

Assuming GloBE Income of S$6,000,000

(S$900,000 ÷ S$6,000,000) × 100% = 15%

D. Top-up Tax Percentage Calculation

Formula: 15% - ETR (if positive)

Top-up Tax % for TechGlobal Asia Pacific Pte Ltd (FY 2025):

15% - 16.75% = -1.75% (No top-up needed as ETR exceeds 15%)

Top-up Tax % for TechGlobal-LocalTech JV Pte Ltd:

15% - 15% = 0% (No top-up needed as ETR equals 15%)

E. Substance-based Income Exclusion Calculation

Example for TechGlobal Asia Pacific Pte Ltd (FY 2025):

- Eligible payroll costs: S$5,000,000

- Eligible tangible assets: S$20,000,000

- Payroll percentage (2025): 9.6%

- Tangible asset percentage (2025): 7.6%

Calculation:

1. Payroll component: S$5,000,000 × 9.6% = S$480,000

2. Tangible asset component: S$20,000,000 × 7.6% = S$1,520,000

Total Substance-based Income Exclusion: S$480,000 + S$1,520,000 = S$2,000,000

Example 2: TechGlobal R&D Center

- Eligible payroll costs: S$3,000,000

- Eligible tangible assets: S$5,000,000

- Payroll percentage (2025): 9.6%

- Tangible asset percentage (2025): 7.6%

Calculation:

1. Payroll component: S$3,000,000 × 9.6% = S$288,000

2. Tangible asset component: S$5,000,000 × 7.6% = S$380,000

Total Substance-based Income Exclusion: S$288,000 + S$380,000 = S$668,000

F. Excess Profit Calculation

Formula: GloBE Income - Substance-based Income Exclusion

Excess Profit for TechGlobal Asia Pacific Pte Ltd (FY 2025):

S$10,150,000 - S$2,000,000 = S$8,150,000

Excess Profit for TechGlobal R&D Center:

S$5,350,000 - S$668,000 = S$4,682,000

G. Jurisdictional Top-up Amount Calculation

Formula: (Top-up Tax % × Excess Profit) + Additional Current Top-up Amount - Qualified Domestic Minimum Top-up Tax

Example for TechGlobal Asia Pacific Pte Ltd (FY 2025):

Assuming:

- Top-up Tax %: 1% (for illustration; actual calculation showed no top-up needed)

- Additional Current Top-up Amount: S$50,000

- Qualified Domestic Minimum Top-up Tax: S$30,000

Calculation:

(1% × S$8,150,000) + S$50,000 - S$30,000 = S$81,500 + S$50,000 - S$30,000 = S$101,500

Example 2: Assuming TechGlobal R&D Center has a lower ETR of 13%

- Top-up Tax %: 2% (15% - 13%)

- Additional Current Top-up Amount: S$20,000

- Qualified Domestic Minimum Top-up Tax: S$10,000

Calculation:

(2% × S$4,682,000) + S$20,000 - S$10,000 = S$93,640 + S$20,000 - S$10,000 = S$103,640

Commentary: These calculations, while complex, are crucial for affected companies to understand. They represent a significant shift from traditional tax calculations and will require businesses to take a more global view of their tax position. For instance, TechGlobal may need to consider the interaction between its various entities in Singapore when optimizing its overall tax position.

IV. Impact on Singapore's Tax Incentives

A. Current incentives affected:

1. Development and Expansion Incentive (DEI)

- Normal rate: 5% or 10%

- Concessionary period: Up to 20 years

2. Pioneer Certificate Incentive (PC)

- Normal rate: 0%

- Concessionary period: Up to 15 years

3. Global Trader Programme (GTP)

- Normal rate: 5% or 10%

- Concessionary period: 3 or 5 years

B. Example: TechGlobal Asia Pacific Pte Ltd under DEI

Current scenario:

- Concessionary tax rate: 5%

- Qualifying income: S$8,000,000

- Normal tax payable: S$8,000,000 × 5% = S$400,000

Under Pillar Two:

- Minimum ETR required: 15%

- Potential top-up tax: (15% - 5%) × S$8,000,000 = S$800,000

C. Example: TechGlobal Trading Pte Ltd under GTP

Current scenario:

- Concessionary tax rate: 10%

- Qualifying income: S$5,000,000

- Normal tax payable: S$5,000,000 × 10% = S$500,000

Under Pillar Two:

- Minimum ETR required: 15%

- Potential top-up tax: (15% - 10%) × S$5,000,000 = S$250,000

Commentary: The potential erosion of Singapore's tax incentive effectiveness poses a challenge to our long-standing economic strategy. However, it also presents an opportunity for Singapore to innovate in how it attracts and retains businesses. We may see a shift towards grants, co-investment schemes, and other non-tax incentives. For instance, Singapore could offer more generous grants for R&D activities, offsetting the reduced tax benefits.

V. Compliance Requirements for Singapore Entities

A. Registration

Deadline: Within 6 months after financial year-end

Example for TechGlobal Asia Pacific Pte Ltd:

- FY end: December 31, 2025

- Registration deadline: June 30, 2026

Example for TechGlobal Trading Pte Ltd (different FY end):

- FY end: March 31, 2026

- Registration deadline: September 30, 2026

B. Filing Requirements

1. GloBE Information Return

2. DTT Return

Deadlines:

- General rule: 15 months after FY end

- Transition year (2025): 18 months after FY end

Example for TechGlobal Asia Pacific Pte Ltd:

- FY 2025 filing deadline: June 30, 2027

Example for TechGlobal Trading Pte Ltd:

- FY 2025/2026 filing deadline: September 30, 2027

C. Record Keeping

Duration: At least 5 years from the relevant tax year

Example for TechGlobal Asia Pacific Pte Ltd:

- Records for FY 2025 must be kept until at least December 31, 2030

Example for TechGlobal Trading Pte Ltd:

- Records for FY 2025/2026 must be kept until at least March 31, 2031

Commentary: The new compliance requirements represent a significant administrative burden for affected companies. For a group like TechGlobal, with multiple entities in Singapore, this may necessitate a centralized approach to Pillar Two compliance, potentially requiring new systems and processes to be put in place.

VI. Penalties for Non-Compliance in Singapore

A. Failure to Register

Penalty: 10% surcharge on MTT/DTT assessed

Example:

If TechGlobal Asia Pacific Pte Ltd owes S$1,000,000 in MTT and fails to register:

Surcharge = S$1,000,000 × 10% = S$100,000

B. Late or Non-filing of Returns

Penalties:

- Fine: Up to S$5,000

- Additional: S$100 per day for continuing offense

Example 1:

If TechGlobal Asia Pacific Pte Ltd files 20 days late:

Penalty = S$5,000 + (20 × S$100) = S$7,000

Example 2:

If TechGlobal Trading Pte Ltd files 45 days late:

Penalty = S$5,000 + (45 × S$100) = S$9,500

C. Tax Evasion

Penalties:

- Up to 4 times the tax amount evaded

- Potential imprisonment up to 5 years

Example 1:

If TechGlobal Asia Pacific Pte Ltd intentionally understates GloBE Income by S$10,000,000:

Assuming 15% tax rate, tax evaded = S$10,000,000 × 15% = S$1,500,000

Maximum penalty = 4 × S$1,500,000 = S$6,000,000

Example 2:

If TechGlobal R&D Center intentionally overstates expenses by S$5,000,000:

Assuming 15% tax rate, tax evaded = S$5,000,000 × 15% = S$750,000

Penalty = 4 × S$750,000 = S$3,000,000

Commentary: The substantial penalties underscore the seriousness with which Singapore is approaching Pillar Two implementation. Companies need to prioritize compliance to avoid these hefty fines. For a group like TechGlobal, with multiple entities in Singapore, a robust compliance framework becomes crucial. This may involve:

1. Centralizing Pillar Two compliance management

2. Implementing new tax reporting software

3. Training finance and tax teams on Pillar Two requirements

4. Establishing internal controls to ensure accuracy of GloBE Income calculations

5. Regular internal audits to catch potential issues before filing

VII. Singapore's Competitive Edge Under Pillar Two

Despite changes, Singapore remains attractive due to:

1. Strategic location in Asia

2. World-class infrastructure (e.g., Changi Airport, Port of Singapore)

3. Skilled workforce (e.g., 96.7% literacy rate)

4. Political stability (ranked 7th globally in Political Stability Index 2021)

5. Strong legal system (ranked 12th in Rule of Law Index 2021)

6. High quality of life (ranked 1st in Asia for quality of living)

Example 1: TechGlobal's Regional HQ

Despite potentially higher tax costs, TechGlobal maintains its regional HQ in Singapore due to:

- Easy access to ASEAN markets

- Availability of tech talent (e.g., from local universities NUS, NTU)

- Strong IP protection laws

- High-quality living environment attracting global talent

Example 2: PharmaCo's R&D Center

PharmaCo, a global pharmaceutical company, chooses to set up its Asian R&D center in Singapore, attracted by:

- Biomedical research ecosystem (e.g., Biopolis)

- Government support for R&D (e.g., Research Incentive Scheme for Companies)

- Availability of skilled researchers

- Efficient regulatory environment for clinical trials

Commentary: While Pillar Two may level the playing field in terms of tax rates, Singapore's non-tax advantages become even more critical. Our strategic location, excellent infrastructure, and skilled workforce will likely play a larger role in attracting and retaining businesses. Singapore may need to double down on these strengths and possibly develop new ones to maintain its competitive edge.

VIII. Action Steps for Singapore Businesses

1. Assess if your company meets the €750 million threshold

2. Review current effective tax rates

3. Evaluate impact on existing tax incentives

4. Prepare for new reporting requirements (e.g., update accounting systems)

5. Consider potential restructuring

6. Engage with tax advisors

Timeline example for TechGlobal Asia Pacific Pte Ltd:

- July 2024: Initial assessment of Pillar Two impact

- September 2024: Engage tax advisors for detailed analysis

- January 2025: Pillar Two rules come into effect

- March 2025: Begin system upgrades for Pillar Two compliance

- January 2026: Conduct dry run of GloBE calculations

- June 2026: Register with IRAS for Pillar Two

- December 2026: Prepare first GloBE Information Return

- June 2027: File first GloBE Information Return and DTT Return

Example: TechGlobal's Pillar Two Task Force

TechGlobal forms a dedicated Pillar Two task force, including:

- CFO

- Head of Tax

- Financial Controller

- IT Director

- External tax advisors

The task force's responsibilities include:

1. Assessing Pillar Two impact across all Singapore entities

2. Coordinating with global headquarters on group-wide approach

3. Overseeing system upgrades for Pillar Two compliance

4. Developing new internal processes for GloBE calculations

5. Training finance staff on new requirements

6. Liaising with IRAS on compliance matters

Commentary: Proactive preparation is key to navigating the Pillar Two landscape successfully. Companies should view this not just as a compliance exercise, but as an opportunity to reevaluate their global tax strategies. Early movers may find opportunities to optimize their structures within the new rules, potentially gaining a competitive advantage.

IX. Key Takeaways for Singapore

1. Pillar Two affects large MNEs from 2025

2. 15% minimum tax may impact companies with Singapore tax incentives

3. New compliance requirements for affected companies

4. Singapore likely to adapt incentives to maintain competitiveness

5. Companies should start preparing now for the changes

Example: Adapting Singapore's Economic Strategy

In response to Pillar Two, Singapore is looking at:

1. Enhance non-tax incentives (e.g., co-investment schemes, grants)

2. Focus on developing high-value industries (e.g., AI, biotechnology)

3. Invest in upskilling workforce to maintain talent advantage

4. Strengthen IP regime to attract R&D activities

5. Improve ease of doing business to offset potential higher tax costs

Final Commentary: Looking Ahead

The implementation of Pillar Two represents both a challenge and an opportunity for Singapore. While it may disrupt our traditional tax-based attractiveness, it also pushes us to evolve and innovate in how we position ourselves as a global business hub.

For businesses, the key lies in preparation and adaptability. The complex calculations and stringent compliance requirements of Pillar Two demand attention and resources. However, companies that approach this proactively may find new efficiencies and opportunities in their global operations.

As we move towards 2025, expect to see further refinements to Singapore's approach to Pillar Two. The government will likely introduce new measures to maintain our competitive edge, and businesses should stay alert to these developments.

Ultimately, Pillar Two is part of a global shift towards greater tax transparency and fairness. By embracing these principles while leveraging our unique strengths, Singapore can reinforce its position as a trusted, substance-based economy in the evolving global business landscape.

For business leaders, the message is clear: start preparing now, seek expert advice, and be ready to adapt. The Pillar Two era is coming, and with the right approach, Singapore and its business community can turn this challenge into an opportunity for growth and innovation.

Example: Future-Proofing Your Business

Consider how TechGlobal might adapt:

1. Increase substance in Singapore (e.g., expand R&D activities)

2. Explore new business models less reliant on tax incentives

3. Invest in advanced tax technology for seamless Pillar Two compliance

4. Collaborate with Singapore government on new non-tax incentives

5. Develop strategies to leverage Singapore's non-tax advantages

Remember, while this article provides an overview of Pillar Two in the Singapore context, it remains a complex area of international tax law. Large multinationals operating in Singapore should seek professional advice to ensure proper compliance and strategic planning. The future of business in Singapore under Pillar Two will reward those who are well-prepared, adaptable, and innovative in their approach.

Afternoon: As much as it has helped for me to write this - I hope this article would be useful to you (as the reader) as well. Any comments/feedback would always be useful and welcome.