2022 Budget includes announcement on Pillar Two minimum effective tax rate
2 March 2022
Singapore’s 2022 budget, announced by the Minister for Finance on 18 February 2022, focuses on strengthening Singapore’s social compact, innovation and sustainability as the country charts a new way forward post-pandemic.
This alert summarises the key budget announcements that will affect businesses (click here for a comprehensive analysis of the 2022 budget measures).
The minister acknowledged in his budget speech that the corporate tax system will need to be updated due to global tax developments, specifically the measures under Pillars One and Two of the BEPS 2.0 initiative. Pillar 1 will re-allocate the profits of the largest and most profitable multinational enterprises (MNEs) from the place where activities are conducted to the place where consumers are located. While discussions are ongoing on how to determine the jurisdictions that will surrender profits for re-allocation to the markets under Pillar One and how much each will have to surrender, Singapore will likely lose tax revenue under Pillar One, given the small size of its domestic market and the extent of MNE activities conducted in the country. Pillar Two will introduce a 15% global minimum effective tax rate for MNE groups with annual global revenues of EUR 750 million or more under its Global Anti-Base Erosion (or GloBE) model rules. If such an MNE were to have an effective tax rate of less than 15% in Singapore at the group level, other jurisdictions, such as its home jurisdiction, can collect the difference up to 15%.
Singapore intends to adjust the corporate tax system in response to the Pillar Two GloBE rules and is exploring a top-up tax, called the minimum effective tax rate (METR), which would be used to top up an MNE group’s effective tax rate in Singapore to 15%. Singapore’s tax authorities will study this further and consult with industry on the design of the METR. The minister noted that the net impact of Pillars One and Two ultimately will depend on the rules that still are under development at the OECD/Inclusive Framework level. He also pointed out that, although BEPS 2.0 may reduce the scope for tax competition, it has not had the same impact on competition for investment, which is likely to escalate as governments around the world take steps to recover from the economic impact of the COVID-19 pandemic.
Other measures announced in the 2022 budget include the following:
- Withholding tax exemptions:
- Container lease payments made to nonresident lessors under operating lease agreements entered into on or before 31 December 2027 will be exempt from withholding tax.
- Ship and container lease payments made by specified Maritime Sector Incentive recipients to nonresident lessors under finance lease agreements entered into on or before 31 December 2028 will be exempt from withholding tax.
- The withholding tax exemption for the following payments will be extended through 31 December 2026:
- Payments made under cross-currency swap transactions by Singapore swap counterparties to issuers of Singapore dollar debt securities;
- Interest payments on margin deposits made under all derivatives contracts by approved exchanges, approved clearing houses, members of approved exchanges and members of approved clearing houses;
- Specified payments made under securities lending or repurchase agreements by specified institutions; and
- Payments made under interest rate or currency swap transactions by the Monetary Authority of Singapore.
- Tax incentives for project and infrastructure finance: The following incentives will be extended through 31 December 2025:
- Exemption of qualifying income from qualifying project debt securities; and
- Exemption of qualifying foreign-source income from qualifying offshore infrastructure projects/assets received by approved entities listed on the Singapore Exchange.
- Foreign worker policies: Singapore currently has in place a comprehensive foreign worker policy framework to allow companies to access a diverse pool of manpower, which is reviewed and adjusted, as needed. The framework for Employment Pass (EP) holders will be updated to ensure that EP holders are professionals and senior executives who can contribute to the economy and generally strengthen the Singapore workforce. To this end, the qualifying salary will be increased as from 1 September 2022 and the EP application process will be refined to improve the diversity of the foreign workforce, and to increase certainty and transparency for businesses. Similar changes will be made to the S pass framework (which deals with middle-level skilled staff).
- Goods and Services Tax (GST): A two percentage point increase in the GST rate increase will take place in two stages from 7% to 8% on 1 January 2023, and from 8% to 9% on 1 January 2024 (rather than in 2022). In addition to the GST rate change, the minister also announced changes to the GST rules governing the supply of travel arranging services. Currently, services for arranging the international transport of passengers (as well as insurance relating to international transportation) are zero-rated. Services for arranging local accommodation are subject to the normal GST rate, but arranging accommodation outside Singapore is zero-rated. This will change on 1 January 2023. As from that date, zero-rating will apply if the services are contractually supplied to an overseas customer and they directly benefit an overseas person or a GST-registered person. Travel arranging services to Singapore customers will be subject to the standard GST rate.
- Personal tax: The top marginal personal income tax rate for resident individual taxpayers will increase from 22% to 24% with effect from year of assessment 2024 (i.e., income earned in calendar year 2023).
Wong Sook Ling