For Singapore and many other countries that have traditionally leant on financial incentives to attract foreign direct investments, the ambition of a 15% minimum global tax presented by Pillar 2 Global Anti-Base Erosion rules (GloBE) heralds a new challenge. While there is little doubt that having a fairer international tax system is a much-needed move, is now the time to consider a change of mindset on what makes a country a good business location? 

In this respect, Singapore has some valuable benefits, including a stable political climate, a solid financial system and a deep talent pool. With all countries likely to arrive at a level tax playing field in the near future, such attributes will become more important and a key differentiator in choosing a businesses location. The need to look beyond Pillar 2 GloBE rules to envisage a business landscape that relies on a broader range of economic merits can only be a healthy development for the future of business. 

How will we get there? 

At present, however, countries are understandably focused on when and how to implement the Pillar 2 GloBE rules. In the case of Singapore, a more conservative approach is being taken to learn from early adopters and adapt a solution that is a close fit to Singapore’s business ethos. In this context, the Singapore Government has announced that it plans to implement the first part of the Pillar 2 GloBE initiative in 2025, which is one year after the OECD’s suggested timeframe. Other countries signed up to the Pillar 2 GloBE Inclusive Framework are taking similar approaches, others have yet to make any announcements at all. So while setting the foundations for a fairer global tax system is welcomed, the room for variation in implementing and applying the rules does create uncertainty for MNEs in Pillar 2 GloBE’s scope.  

In terms of the actual rules, Singapore plans first to implement an income inclusion rule (IIR) to determine whether the effective tax rate (ETR) will be achieved and, if not, whether a top-up tax would apply at the ultimate parent entity level or at the subsidiary level using the Qualified Domestic Top-up Tax (QDTT) rule. A second phase in 2026 would see the introduction of the Undertaxed Payments Rule (UTPR). 

Along with the timing, there are also unanswered questions about the precise detail of the rules and how they will be applied. How, for example, will safe harbour rules work if calculations are based on different reporting periods? Currently, clients and advisers are waiting on a government consultation to provide input on current plans, which will inform outcomes. 

Pivoting current logic to the new paradigm 

A key question moving forward is how current logic will apply when reporting under the Pillar 2 GloBE methodology. For example, internal pricing arrangements for products are established and preset based on transfer pricing logic. Yet at present, it’s unclear what the exact impact would be of an existing pricing model moving into a new model. Also, how will post-filing disputes resulting in profit adjustments be dealt with? Currently, the rules are not mature enough to see how the bridge between old and new methodologies will impact reporting under Pillar 2 GloBE. 

At the moment, we can only assess challenges based on what we know now. For example, if we are talking about a UK parent entity with a Singapore subsidiary, a QDTT can’t be applied in 2024 because, as it stands, Singapore’s QDTT will not be in place until 2025. The current state of play on how countries are timetabling and implementing Pillar 2 GloBE rules means this is not an uncommon situation. For many clients, the first year of reporting may differ from the second year and having to deal with such change may have to be part of the process. 

If we look at how business has evolved and how long it has taken to get to the level of sophistication we now expect, it should perhaps come as no surprise that attempts to implement a new and complex tax regime are unlikely to run smoothly from the get-go.  

If we accept that Pillar 2 GloBE is here to stay, we must all accept that change is inevitable and, with it, a mindset change.