Singapore’s Pillar 2 Tax Rules for MNEs

In response to the Organisation for Economic Co-operation and Development’s (OECD) Pillar 2 initiative, Singapore has enacted new standards into its domestic law. This global reform aims to ensure large multinational enterprises (MNEs) pay a minimum level of tax on their profits. The new framework is formalized through the Multinational Enterprise (Minimum Tax) Act 2024. This legislation introduces a 15% minimum effective tax rate for in-scope companies, with rules set to take effect for businesses whose financial years begin on or after January 1, 2025.

Determining Applicability to Your Enterprise

The Pillar 2 rules target large multinational enterprise groups based on a revenue threshold. A group falls within the scope if its consolidated annual revenues are €750 million or more in at least two of the four preceding financial years. This test is based on the revenue reported in the consolidated financial statements of the ultimate parent entity.

Within an MNE group, the rules apply to each “Constituent Entity,” which is any company or permanent establishment included in the group’s consolidated financial statements.

Certain types of entities are designated as “Excluded Entities” and are not subject to the top-up tax calculations. These include:

• Government entities
• International organizations
• Non-profit organizations
• Pension funds

The exclusion also extends to investment funds or real estate investment vehicles that function as the ultimate parent entity. These carve-outs are designed to shield entities with particular public service or investment functions.

Singapore’s Implementation Framework

Singapore is adopting the Pillar 2 framework through two rules effective in 2025. The first is the Income Inclusion Rule (IIR), which Singapore calls the Multinational Enterprise Top-up Tax (MTT). This rule means a parent entity in Singapore will be liable for tax on its share of income from a foreign subsidiary if that subsidiary’s profits are taxed below 15%.

A component of Singapore’s approach is a Domestic Top-up Tax (DTT), structured as a Qualified Domestic Minimum Top-up Tax (QDMTT). The DTT allows Singapore to collect the top-up tax directly from any low-taxed profits of MNEs operating within its borders. This ensures Singapore collects the tax revenue on profits generated locally, rather than another country collecting it through their IIR.

The DTT applies to the Singapore-based entities of an in-scope MNE group if the group’s effective tax rate on its Singaporean profits falls below 15%. Singapore will continue to monitor international developments before deciding on the implementation of the Undertaxed Profits Rule (UTPR).

Calculating the Top-Up Tax

The top-up tax is calculated on a jurisdictional basis, meaning all entities within one country are aggregated. The calculation begins with a formula where the top-up tax is the product of the top-up tax percentage and the excess profit. The top-up tax percentage is the difference between the 15% minimum rate and the jurisdiction’s effective tax rate (ETR).

Calculating the Effective Tax Rate (ETR)

The ETR is determined by dividing the adjusted covered taxes by the GloBE income for a specific jurisdiction. This ratio provides a standardized measure of the tax paid on profits in that location. If this ETR is below 15%, a top-up tax liability is triggered.

Determining GloBE Income

The starting point for calculating GloBE income is the financial accounting net income or loss of a constituent entity, as reported in the ultimate parent entity’s consolidated financial statements. This figure is then subjected to a series of specific adjustments to align it with the standardized GloBE tax base. These adjustments include the exclusion of items like dividends from other group entities and specific capital gains to prevent double counting and distortions. The goal is to create a consistent measure of profit across different jurisdictions.

Identifying Covered Taxes

Covered taxes are the taxes included in the numerator of the ETR calculation. This includes taxes on corporate income and profits recorded in the financial statements of the constituent entity, and taxes that are functionally equivalent to an income tax. Deferred tax expenses and benefits are also factored in, though they may be remeasured to the 15% minimum rate if the local statutory rate is higher. The amount of covered taxes can be reduced by certain tax credits.

Substance-Based Income Exclusion (SBIE)

A feature of the Pillar 2 rules is the Substance-Based Income Exclusion (SBIE). This provision reduces the amount of profit that is subject to the top-up tax by recognizing substantive economic activities within a jurisdiction. The exclusion is calculated as a percentage of the carrying value of eligible tangible assets and eligible payroll costs.

For a transitional period, the exclusion rates start at 8% for tangible assets and 10% for payroll costs, before gradually decreasing to 5% for both over ten years. This carve-out directly reduces the “excess profit” in the top-up tax formula.

Preparation and Compliance Requirements

Complying with Pillar 2 rules requires significant preparation for data collection. Multinational enterprises will need to gather extensive information for each constituent entity, as the OECD estimates over 200 data points may be necessary for each one, covering financial data, tax details, and corporate structure.

This information is required for completing the GloBE Information Return (GIR), the standardized document for reporting calculations to tax authorities. While an MNE group can designate a single entity to file the GIR, the underlying data must be collected from every constituent entity.

Companies must develop systems to collect, validate, and consolidate the required information from all jurisdictions in a timely manner. The deadline for filing the first GIR is 15 months after the end of the financial year, with an 18-month deadline for the initial transition year. MNEs must begin adapting their financial and tax reporting systems now to be prepared.