Key Tax Considerations on M&A and Corporate Restructuring (Section 10L & Pillar 2) PDF

Tax Practice IV: Key tax considerations on M&A and corporate restructuring Allen Tan Contents 1. New Section 10L 2. Pillar Two – Global Minimum Tax a. Income Inclusion Rule b. Qualified Domestic Minimum Top-up Tax...

Tax Practice IV: Key tax considerations on M&A and corporate restructuring Allen Tan Contents 1. New Section 10L 2. Pillar Two – Global Minimum Tax a. Income Inclusion Rule b. Qualified Domestic Minimum Top-up Tax 2  Section 10L Section 10L of the Income Tax Act 1947 (“ITA”) Recall that section 10(1) of the ITA generally charges to tax (1) Singapore-sourced income, and (2) foreign-sourced income that is received or deemed received in Singapore (refer to Lecture 1). Section 10L treats gains from the sale or disposal by “an entity of a relevant group” of “foreign assets” that are received or deemed received in Singapore as income chargeable to tax under section 10(1)(g). Section 10L only applies if: – the gains would not otherwise be chargeable to tax as income under section 10(1) – e.g., capital gains; or – the gains would otherwise be exempt from tax under the ITA. Applies to sale or disposal of foreign assets that occurs on or after 1 January 2024. 3 Section 10L Scope of Section 10L “Entity of a relevant group” refers to a member of a multinational enterprise (“MNE”) group, i.e., the entities of the group are not all incorporated, registered or established in a single jurisdiction or any entity of the group has place of business in more than one jurisdiction. – The plain meaning is potentially broad, but IRAS has published administrative guidance (see IRAS e-Tax Guide on Income Tax: Tax Treatment of Gains or Losses from the Sale of Foreign Assets) that foreign entities (i.e., not incorporated, registered or established in Singapore) that are not operating in or from Singapore will not be within the scope of section 10L. “Foreign assets” means movable or immovable property situated outside Singapore at the time of the sale or disposal. There are specific rules on the situation of property under section 10L(15). Similar to concept of deemed receipt under section 10(25) (refer to Lecture 1), the sale or disposal gain is deemed received in Singapore under section 10L(9) if it is: (a) remitted to, transmitted or brought into, Singapore; (b) applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; and (c) applied to purchase any movable property which is brought into Singapore. 4  Section 10L Exceptions Exceptions apply to gains from disposal of foreign assets (other than IP rights) that are carried out (among others): – as part of, or incidental to, the business activities of a prescribed financial institution; – as part of, or incidental to, the incentivised business activities or operations of entities enjoying certain tax incentives; or – by an “excluded entity” in the basis period in which the sale or disposal occurred. “Excluded entity” refers to an entity that has adequate economic substance in Singapore. There are different requirements for pure equity-holding entities vs. other entities. Tighter rules apply to exceptions for gains from the disposal of IP rights – see section 10L(6) and (7). 5  Pillar Two – Global Minimum Tax Introduction Part of the OECD’s Two-Pillar solution (commonly known as BEPS 2.0) comprising: – Pillar One: Re-allocation of profits (and taxes) from where economic activities are conducted to where the markets (i.e., customers) are. – Pillar Two: Introduction of a global minimum effective tax rate (“ETR”) of 15% for affected MNE groups via various mechanisms. Expected to result in annual global revenue gains of around USD 220 billion. Pillar Two comprises various rules: – Income Inclusion Rule (“IIR”) – Qualified Domestic Minimum Top-up Tax (“QDMTT”) – Undertaxed Payments Rule (“UTPR”) – Subject to Tax Rule (“STTR”) Singapore has announced that it will introduce its IIR and QDMTT (also known as the domestic top- up tax or “DTT”) with effect from businesses’ financial years starting on or after 1 January 2025, but has reserved its position on the UTPR. 6  Pillar Two – Global Minimum Tax IIR and QDMTT The relevant legislation has not yet been enacted in Singapore, but Singapore has announced that its rules will be aligned with the OECD’s Global Anti-Base Erosion (“GloBE”) Rules as far as possible. IIR: – Minimum tax of 15% in respect of income of subsidiaries that are not in the ultimate parent entity’s (“UPE”) jurisdiction. – Top-up tax is collected in the UPE’s (or other intermediate parent entity’s) jurisdiction from the parent entity. – Top-up tax is imposed on “Net GloBE Income” (minus certain exclusions) in a jurisdiction to the extent that the ETR in that jurisdiction is below 15%. QDMTT: – A jurisdiction may impose a QDMTT to collect top-up taxes on entities of an MNE group in its jurisdiction up to the minimum tax of 15%. – Top-up taxes collected under a QDMTT is to be deducted against the top-up tax payable under the IIR. 7  Pillar Two – Global Minimum Tax Simplified Illustrative Example (e.g., in 2024) Implements IIR from Top-up tax of $1,050 to be paid in UPE HoldCo 31 December 2023 Jurisdiction under IIR, comprising: (UPE Jurisdiction) Country A: N.A. Country B: N.A. Country C: Jurisdictional ETR < 15% $3,000 x (15% - 5%) = $300 Sub A Sub B Sub C Sub D SG Sub Country D: N.A. (Country A) (Country B) (Country C) (Country D) (Singapore) Singapore: Jurisdictional ETR < 15% Jurisdictional ETR: Jurisdictional ETR: $5,000 x (15% - 0%) = $750 Jurisdictional ETR: Jurisdictional ETR: Jurisdictional ETR: 10% (with tax 0% (with tax 22% 5% 24% incentive) incentive) Net GloBE Income: Net GloBE Income: Net GloBE Income: Net GloBE Income: Net GloBE Income: $1,000 $3,000 $3,000 $2,000 $5,000 Top-up tax under Top-up tax under Assume no QDMTT Top-up tax under Assume no QDMTT QDMTT: $0 QDMTT: $2,000 x in 2024 yet. QDMTT: $0 in 2024 yet. (15% - 10%) = $100 8 Copyright Notice Copyright © 2024, Singapore Institute of Legal Education. All rights reserved. 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