Wooing foreign direct investment into Singapore - what role do tax incentives play?

Singapore has long been an attractive environment for multinational enterprises. The country’s strategic geographic location, political stability and ready availability of talent are just some of its strengths. Inspired from its earliest days of independence to build a model for prosperity from scratch, the government has fashioned a wide-ranging toolkit of incentives – from tax concessions and enhanced deductions to grants and subsidies – to drive foreign direct investment into target growth sectors.

Ahead of the Singapore Budget 2024, longstanding policies may now require careful recalibration as the Singapore government moves to implement the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting Pillar Two initiative.

Even as Singapore joins a global movement to compel multinational enterprises to pay their fair share of tax, our message is that recalibrated tax incentives still have a vital role to play in keeping Singapore buoyant as a global investment destination, especially to spur growth areas such as sustainability, advanced manufacturing, and innovation through artificial intelligence (AI).

Implications of Pillar Two

Under Pillar Two, multinational enterprises with global revenues exceeding €750 million (S$1.1 billion) must generally pay a minimum Effective Tax Rate (ETR) of 15% in the jurisdictions where they operate, subject to certain de minimis requirements and exceptions.

It was during last year’s Budget that the government announced it would, contingent on international developments, implement Pillar Two from 2025, including the Qualified Domestic Top-up Tax and Income Inclusion Rule for foreign headquartered groups whose adoption of tax incentives in Singapore mean they may be subject to a lower ETR than 15%.

About 1,800 multinational enterprises with headquarters and other operations in Singapore are expected to be in scope under the new tax regime. Small- and medium-sized enterprises as well as start-ups are unlikely to be impacted.

So, where does this leave Singapore’s tax incentive regime? Current incentives which aim to reduce a company’s effective tax rate, such as the Investment Allowance Scheme, the Pioneer Certificate Incentive and the Development and Expansion Incentive, will remain until at least 2028.

However, these and other incentives may need to be widened and future-proofed, both to entice companies evaluating Singapore as a potential investment destination, and to reassure those already operating here that they will be supported under the refreshed framework.

Enhancing the appeal of incentives

To simplify what can be a complex calculation, tax incentives catering for multinational enterprises in Singapore fall into three broad categories.

First, there are “below the line” tax incentives – such as concessionary tax rates or enhanced deductions – which may potentially reduce a company’s ETR and tax payable well below 15%. Under Pillar Two, these tax incentives are less advantageous as they trigger a top-up tax on excess profits for multinational groups with more than €750 million (S$1.1 billion) in global revenues.

Second, there are incentives that reduce or exempt the need for multinational enterprises to pay withholding taxes on payments to non-residents, such as interest and royalties, which, among others, promote innovation and technology transfer to Singapore. Currently, these incentives are limited to entities that perform specific activities such as high value-added manufacturing or meet investment thresholds in relation to spending and headcount. Under Pillar Two, these incentives should remain quarantined from ETR calculations. Accordingly, we believe the Singapore government could move to broaden eligibility so as to support a more diverse range of businesses and desirable economic activities in Singapore.

The third category of incentives involves providing grants that support operating or investment costs, which should have minimal impact on reducing the company’s ETR. Here, we understand that the Singapore government is exploring the introduction of Qualified Refundable Tax Credits (QRTCs).

QRTCs may be used to offset a company’s tax liabilities and are designed in a way where they must be paid out in cash or equivalent within four years from when the credits are awarded if the credits remain unused, to be considered qualifying by the OECD. Treated as income under the Pillar Two rules rather than a reduction in tax payable, QRTCs can potentially be an attractive new incentive tool in Singapore’s toolkit to encourage multinational enterprises to relocate and continue to do business in Singapore.

Provided QRTCs are flexibly designed, they could incentivise economically desirable activities related to sustainability, climate change, digital transformation, workforce development, research & development and innovation – all of which are perceived to benefit the Singapore economy.

Setting Singapore up for the future

For Singapore, we view that Pillar Two is not designed to be a revenue-raising measure and in any case, it is not expected to boost tax revenues in the long run as other economies develop their own plans to attract investments from multinational enterprises. We hope the government will consider reinvesting some of the funds raised to build Singapore’s national infrastructure, enhance digital connectivity, fund talent initiatives, and stimulate the start-up ecosystem in promising areas such as the green economy, AI and precision medicine, as well as key sectors that include semiconductors, healthcare and aerospace. There may also be scope to strengthen non-tax incentives, such as cash grants or the provision of shared facilities and utilities that make it easier for multinational enterprises to relocate.

Overall, it is heartening to see Singapore take a measured, staged approach to implementing Pillar Two – leaving time to incorporate international learnings and providing companies with plenty of time to adjust to the new rules. We hope the upcoming Budget enhances the robust incentive regime that has attracted decades of foreign direct investment to the island.

We believe Singapore’s incentive regime will continue to be modernised and future-proofed for a changing world – energising economic activity, accelerating growth, and generating high-quality jobs for Singaporeans.