The Inland Revenue Authority of Singapore (IRAS) has released directives regarding the Global Anti-Base Erosion (GloBE) Rules and Domestic Top-up Tax (DTT).
As outlined in Budget 2024, Singapore will adopt the GloBE Income Inclusion Rule (IIR) and implement a domestic minimum top-up tax effective from fiscal years commencing on or after 1 January, 2025.
The implementation of the Undertaxed Profits Rule (UTPR) will be reviewed later.
Global Anti-Base Erosion (GloBE) Rules and Domestic Top-up Tax (DTT)
The GloBE Rules provide for a coordinated system of taxation intended to ensure large multinational enterprise (MNE) groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. It does so by imposing a top-up tax on profits arising in a jurisdiction whenever the effective tax rate (ETR), determined on a jurisdictional basis, is below the minimum rate of 15%.
Introduction to the GloBE Rules
Under the Organisation for Economic Co-operation and Development (OECD)/ G20’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), jurisdictions are collaborating on the implementation of measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
Singapore is a member of the Inclusive Framework (IF) and was among more than 135 jurisdictions which joined a multilateral consensus reached on 8 October, 2021 to reform international taxation rules and ensure that MNEs pay a fair share of tax wherever they operate. A two-pillar solution (commonly known as BEPS 2.0) under the consensus seeks to address the tax challenges arising from the digitalisation of the economy.
Pillar 2 comprises two components – GloBE rules and Subject To Tax (“STTR”) Rule. As part of Pillar Two under BEPS 2.0, the GloBE Model Rules (also known as GloBE Rules) and its Commentary were released on 20 December, 2021, and 14 March. 2022, respectively.
What are the GloBE Rules?
The GloBE Rules are designed to ensure that large MNE groups operating in more than one jurisdiction pay a minimum level of tax on the income arising in each jurisdiction where they operate. This is achieved by applying a system of top-up taxes that brings the total amount of taxes paid on an MNE group’s excess profits in a jurisdiction up to the minimum rate of 15%.
The GloBE Rules comprise two rules – the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).
The IIR is the primary rule. It imposes a top-up tax on a relevant parent entity of an MNE group with respect to its ownership interests in a low-taxed constituent entity (LTCE) that has an ETR (determined for the MNE Group on a jurisdictional basis) below 15%.
The UTPR serves as a backstop to the IIR, where a top-up tax would be collected in the jurisdictions which the MNE group operates and where UTPR has been adopted, if no top-up tax is collected from the parent entity under the IIR (as the parent entity jurisdiction does not implement an IIR). This is done by way of denying deductions or by imposing tax in the form of an equivalent adjustment.
The GloBE Rules also recognise that jurisdictions may introduce domestic minimum top-up taxes to bring the ETR of LTCEs operating in those jurisdictions up to 15%. Where such taxes are regarded as a Qualified Domestic Minimum Top-up Tax under the GloBE rules, they would reduce the top-up tax in respect of those LTCEs that would otherwise be brought into charge under the IIR or UTPR.
Implementation of the IIR and Domestic Top-up Tax (DTT) in Singapore
In Budget 2024, Singapore announced that it will implement the IIR and a domestic minimum top-up tax (DTT) from businesses’ financial years starting on or after 1 January, 2025. The implementation of the UTPR will be considered at a later stage.
The IIR and DTT will apply to MNE groups with annual revenues of at least €750 million in the consolidated financial statements of the ultimate parent entity (UPE) in at least two out of the four financial years immediately preceding the financial year in which the IIR and DTT would apply. For example, in determining whether IIR and DTT would apply to an MNE group in the financial year 2025, the relevant financial years for purposes of applying the revenue threshold would be 2021 – 2024.
Businesses are also encouraged to refer to the GloBE Model Rules, Commentary and accompanying administrative guidance released by the OECD for further information and guidance.
Useful documents and materials
The GloBE Model Rules and its Commentary were released by the OECD on 20 December, 2021, and 14 March, 2022.
Some other relevant documents published by the OECD have also been listed below for reference. As discussions at the IF are still ongoing.
The OECD’s website will post future internationally agreed documents and guidances.
