Bills Introduced in Parliament to Implement BEPS 2.0 Pillar Two, Amend Income Tax Act

Introduction

On 9 September 2024, the Multinational Enterprise (Minimum Tax) Bill (“MNE Bill“) and the Income Tax (Amendment) Bill 2024 (“ITA Bill“) (collectively, the “Bills“) were first read in Parliament.

1. The MNE Bill will introduce a minimum effective tax rate (“ETR“) of 15% for large multinational enterprise (“MNE“) groups pursuant to the Global Anti-Base Erosion Model (“GloBE“) Rules. The MNE Bill will also amend the Income Tax Act 1947 (“ITA“) to clarify the income tax treatment of taxes imposed by Singapore and foreign jurisdictions pursuant to BEPS 2.0 Pillar 2.
2. The ITA Bill will effect various tax measures announced in Budget 2024, such as the introduction of the Refundable Investment Credit (“RIC“) scheme. The draft ITA Bill also proposes seven amendments arising from the Ministry of Finance’s (“MOF“) periodic review of Singapore’s income tax regime to improve tax administration.

The First Reading of the Bills follow on from public consultations on the draft Bills held in June 2024 by MOF, which we covered in our June 2024 Legal Update titled “MOF Launches Two Consultations on Implementation of BEPS 2.0 Pillar Two, Amendments to Income Tax Act“. MOF subsequently published its responses to feedback received from the two public consultations on 31 August 2024.

In this Update, we outline the salient features of the Bills and provide an overview of the feedback accepted by MOF.

MNE Bill

As announced in Budget 2024, Singapore will implement two components of BEPS 2.0 Pillar 2, which aims to introduce a global ETR of 15% for large MNE groups with global revenues of at least €750 million annually.

Under the MNE Bill, Singapore will implement a Multinational Top-Up Tax (“MTT“) and Domestic Top-Up Tax (“DTT“). The MTT will impose a top-up tax on constituent entities (“CEs“) of MNE groups to which the MNE Bill applies (“in-scope MNE groups“) that are located in Singapore if the CE has ownership interests in CEs located in jurisdictions with an ETR of less than 15%. In turn, the DTT aims to ensure that a foreign equivalent of the MTT will not be levied on CEs located in Singapore. It imposes a top-up tax on CEs located in Singapore to raise their ETR to at least 15%.

Per clause 8, the MNE Bill will apply to in-scope MNE groups for a financial year (“FY“) beginning on or after 1 January 2025 if its consolidated group revenue (determined by reference to the consolidated financial statements of its ultimate parent entity) for at least two FYs out of the four FYs immediately before that FY is equal to or exceeds the following threshold: €750m × (months in the FY)/12.  Kindly note that the equivalent in another currency determined under regulations may be used in calculating the threshold.

For in-scope MNE groups who are required to pay DTT and MTT, the MNE Bill will impose several obligations, including designating a CE located in Singapore as the designated local DTT filing entity (“DFE“) or designated local GloBE information return (GIR) filing entity (“GFE“).

Accepted feedback

MOF has accepted the following responses:

1. Allowing a branch registered in Singapore to be appointed as the DFE and GFE. This will be subject to conditions to be set out in subsidiary legislation.
2. Empowering the Comptroller of Income Tax (“Comptroller“) to grant an extension of time for re-designating another CE as the DFE and GFE. The MNE Bill currently allows one month for re-designation; an extension will be granted by the Comptroller if the CE can justify the need for more time to identify a replacement.
3. Removing the mention of shares that carry only voting rights from the definition of “portfolio shareholding“, since shareholders with only voting rights do not have rights to the profits, capital or reserves of the entity. This definition is used to ascertain whether income in respect of an ownership interest (e.g. dividends) can be excluded in the computation of GloBE income or loss.

In due course, the Inland Revenue Authority of Singapore (IRAS) will also provide more guidance on the records to be kept for MTT and DTT purposes and provide clarity on the dispute resolution process to eliminate double taxation, as requested in feedback to the consultation.

ITA Bill

The ITA Bill includes:

1. Amendments to effect measures announced in Budget 2024 (for more information, see our February 2024 Legal Update titled “Singapore Budget 2024: Building Our Shared Future Together“), including:
   • introducing the RIC scheme to support up to 50% of qualifying expenditures for qualifying activities on an approval basis; and
   • allowing the qualifying income of shipping entities to be taxed by reference to net tonnage for three Maritime Sector Incentive (“MSI“) sub-schemes: (i) MSI-Shipping Enterprise (Singapore Registry of Ship) (“MSI-SRS“); (ii) MSI-Approved International Shipping Enterprise (“MSI-AIS“); and (iii) MSI-Maritime Leasing (Ship) (“MSI-ML(Ship)“).

2. Amendments arising from MOF’s periodic review of Singapore’s income tax regime to better reflect policy objectives and to improve tax administration, including clarifying the tax treatment of real estate investment trust (“REIT“) units held by REIT managers as part of their management fees.

Introduction of the RIC scheme

MOF accepted the following feedback:

1. Clarifying the tax treatment of RIC, which will be aligned with that for grants.
2. Amending the definition of “group” for the purposes of using RIC to offset the taxes of related companies, to also cover other common holding structures.

MOF will further study the possible expansion of the scope of qualifying activities to include other activities, such as aviation and financial services. It noted that companies from all industries can apply for RIC if they meet the current scope of qualifying activities.

Net tonnage basis of taxation

MOF accepted the following feedback:

1. Relaxing the irrevocable election such that entities under the MSI-SRS may re-elect for the net tonnage basis of taxation after a period of ten years or the end of the period that they own or operate a qualifying ship, whichever is earlier. For MSI-SRS entities that are concurrently on the MSI-AIS or MSI-ML(Ship) award, the end date of the election period will follow the MSI-AIS/MSI-ML(Ship) award tenure.
2. Clarifying that the total net tonnage will be rounded down to the nearest 100 Net Tonnes.

Tax treatment of REIT units held by REIT managers

MOF accepted the following feedback:

1. Allowing REIT managers the option to compute the market value of REIT units transferred to employees based on the full basis period.
2. Clarifying that the method to be used to compute the total amount of section 34AA of the ITA adjustments in relation to REIT units transferred to employees must be the same method used to compute the market value of REIT units transferred to employees.
3. Including a new provision to allow the Comptroller to consider any other basis period that is reasonable, so as to cater for situations where the REIT manager changes its financial year-end.