Can Tax Incentives Survive the 15% Global Minimum Tax? Singapore’s New Pillar Two Rules Offer an Important Answer

For decades, countries have competed for international investment by offering lower corporate tax rates, tax holidays and preferential incentives.

A multinational planning a new manufacturing facility, regional headquarters or R&D centre would compare the expected profits, operating costs and available tax concessions across jurisdictions.

Then came the OECD's 15% global minimum tax.

For large multinational groups, a tax incentive reducing the effective tax rate below 15% could trigger additional tax under the Pillar Two framework, potentially offsetting some of the benefit the host country intended to provide.

That created a difficult question for governments and investors alike:

If a tax incentive encourages genuine investment, jobs and innovation, should the global minimum tax neutralise that incentive?

Singapore's latest development offers an important answer.

On 13 October 2026, the Inland Revenue Authority of Singapore (IRAS) updated its guidance to reflect the adoption of the Substance-based Tax Incentive Safe Harbour (SBTI Safe Harbour), introduced through the OECD's January 2026 Side-by-Side package.

Singapore has announced its adoption for financial years beginning on or after 1 January 2026, subject to its domestic implementation framework.

The development points towards an important shift in international tax policy.

Under Pillar Two, the way a tax incentive is designed may matter as much as the incentive itself.

Why the Global Minimum Tax Changed Investment Incentives

The OECD's Global Anti-Base Erosion (GloBE) rules are designed to ensure that large multinational groups face a minimum effective tax rate of 15% in each jurisdiction where they operate.

Broadly, the rules apply to multinational groups with consolidated annual revenue of at least EUR 750 million in at least two of the four preceding financial years.

Where a jurisdiction's GloBE effective tax rate falls below 15%, additional tax may arise through a Qualified Domestic Minimum Top-up Tax (QDMTT), an Income Inclusion Rule (IIR), or the Undertaxed Profits Rule (UTPR), subject to the applicable rules and safe harbours.

The calculation is jurisdictional and uses GloBE-specific income and tax adjustments. It is not simply a comparison between the domestic statutory tax rate and 15%.

Consider a multinational establishing a major manufacturing operation in Singapore.

Singapore's headline corporate income tax rate is 17%. However, the company may qualify for investment incentives that materially reduce its actual tax liability.

Before Pillar Two, that reduced liability could be a substantial attraction.

Under the GloBE framework, the same incentive might lower the jurisdictional effective tax rate and contribute to a top-up tax liability.

The commercial concern is understandable: a country offers an incentive to attract investment, but the multinational potentially loses some of that benefit through additional tax.

What Changed in January 2026?

On 5 January 2026, the OECD/G20 Inclusive Framework agreed on a comprehensive Side-by-Side package addressing the operation of the global minimum tax.

One important component was the new Substance-based Tax Incentive Safe Harbour.

The OECD recognised that certain incentives encouraging real economic activity present a different policy concern from arrangements designed primarily to shift profits into low-tax jurisdictions.

The safe harbour therefore allows qualifying incentives to receive more favourable treatment in the GloBE effective tax rate calculation, subject to defined limits.

This is not a general exemption from Pillar Two.

Instead, an eligible multinational group can elect to treat specified Qualified Tax Incentives (QTIs) as additions to Adjusted Covered Taxes, up to the permitted substance-based cap.

The result can be a reduction in the top-up tax otherwise attributable to those incentives.

Other causes of a low effective tax rate may continue to generate top-up tax.

Not Every Tax Incentive Qualifies

This is the most important technical distinction.

The new safe harbour is directed principally at two categories.

Expenditure-based incentives provide benefits calculated by reference to qualifying expenditure. Examples can include R&D-related tax credits, enhanced deductions and certain investment allowances.

Production-based incentives provide benefits linked to the volume of tangible goods or qualifying output produced in the jurisdiction. The OECD framework includes certain manufacturing and energy-production incentives.

By contrast, an ordinary tax holiday that exempts all profits for several years does not automatically qualify merely because the business has substantial employees or assets.

The incentive must satisfy the specific QTI definition, including the requirement that it be generally available under qualifying conditions. For production-based relief, the incentive must be based on qualifying output volume, rather than simply revenue or production value.

That creates a meaningful distinction between two companies.

One earns substantial profits from a preferential tax-rate arrangement.

Another receives enhanced relief because it has invested in machinery, employees, R&D and productive activity.

The second company's incentive may be more compatible with the new safe harbour, assuming all eligibility requirements are satisfied.

How Does the Substance Cap Work?

The relief is not unlimited.

Under the OECD framework, the amount of qualifying incentive recognised is generally capped at:

5.5% of the greater of the group's eligible payroll costs or eligible tangible-asset depreciation and depletion in the jurisdiction.

The two amounts are compared, not added together.

Alternatively, an MNE group may elect to use 1% of the carrying value of eligible tangible assets, excluding land and other non-depreciable assets. This alternative involves a five-year election and related conditions.

A simple example illustrates the business consequence.

Suppose a multinational operates a substantial Singapore research centre employing highly qualified engineers. It receives a qualifying expenditure-based incentive connected with its research activities.

If the incentive satisfies the QTI requirements and falls within the applicable substance cap, the safe harbour may preserve some or all of the incentive's benefit against the top-up tax otherwise attributable to it.

But if the company receives a much larger incentive than the cap permits, the excess cannot automatically receive the same protection.

The safe harbour rewards qualifying incentives within a measured substance framework. It does not make every low-tax outcome acceptable.

Importantly, the SBTI cap is separate from the existing GloBE Substance-based Income Exclusion, which excludes a formulaic return on eligible payroll and tangible assets from excess profits. The two mechanisms should not be confused.

Why Singapore's Response Matters

Singapore has implemented the IIR and Domestic Top-up Tax for financial years beginning on or after 1 January 2025.

Its 13 October 2026 update confirms adoption of the SBTI Safe Harbour from financial years beginning on or after 1 January 2026, in accordance with the OECD package. The detailed application must follow Singapore's implementing legislation and relevant elections.

Singapore also has a Refundable Investment Credit (RIC) designed to support substantial economic investment.

The RIC can support qualifying expenditure on manufacturing, digital services, headquarters, R&D, innovation and decarbonisation activities. Depending on the approved project and expenditure category, support can reach 50%, with qualifying unused credits refundable in cash within four years after the relevant conditions are satisfied.

However, the RIC and SBTI Safe Harbour are not the same mechanism.

A refundable credit may already receive particular treatment under the ordinary GloBE rules. An election to treat a Qualified Refundable Tax Credit as a QTI requires separate eligibility analysis and can change how the credit enters the GloBE calculation.

Therefore, Singapore's incentives should not be assumed to qualify automatically for the new safe harbour.

The wider significance lies in the direction of policy: tax incentives are increasingly being evaluated by their connection to expenditure, investment and genuine economic activity.

What Does This Mean for UAE and European Investment Structures?

The implications extend well beyond Singapore.

The UAE introduced its Domestic Minimum Top-up Tax for financial years beginning on or after 1 January 2025, applicable to qualifying multinational groups meeting the EUR 750 million revenue threshold.

Consequently, an in-scope multinational operating through a UAE entity benefiting from a preferential domestic corporate tax rate must also consider the DMTT framework.

The UAE has separately discussed proposed expenditure-based R&D and high-value employment incentives. The UAE Ministry of Finance's published materials describe these as subject to legislative approvals, so their precise status and any SBTI qualification must be verified before inclusion in an investment model.

European jurisdictions have also implemented global minimum-tax rules, while the UK operates Multinational Top-up Tax and Domestic Top-up Tax regimes.

For a group choosing between Singapore, the UAE, the UK or a European manufacturing location, the comparison should therefore go beyond the headline corporate tax rate.

It should examine the local incentive's legal design, GloBE treatment, domestic top-up tax, qualifying expenditure, available substance cap and actual after-tax cash benefit.

The OECD agreement provides a common framework, but domestic implementation, eligibility and elections must still be verified in each relevant jurisdiction.

What About Indian Multinationals and Transfer Pricing?

India remains commercially relevant even where the investment incentive arises outside India.

An Indian-headquartered multinational group meeting the Pillar Two revenue threshold may operate subsidiaries in Singapore, UAE or Europe that are subject to local domestic minimum top-up taxes.

The tax implications of those foreign operations must be analysed under the applicable host-country rules, regardless of the separate treatment of the Indian parent.

There is also a transfer pricing connection.

A Singapore R&D company may undertake substantive development activities while its Indian or US parent funds the research, controls strategic risks or owns particular intangibles.

The OECD Transfer Pricing Guidelines require profits and remuneration to reflect the actual functions, assets and risks of the relevant entities.

An investment incentive does not establish which group company should earn the underlying business profit.

A company must first support its intercompany transactions and profit allocation under the arm's-length principle. The Pillar Two analysis then determines the relevant jurisdictional effective tax consequences under a separate framework.

Likewise, the new safe harbour does not rewrite bilateral tax treaties or alter ordinary withholding tax obligations.

For global tax directors, the challenge is ensuring that investment incentives, transfer pricing, financial reporting and global minimum-tax calculations are internally consistent.

The Practical Investment Decision Has Changed

Imagine a multinational comparing two possible locations for a new advanced manufacturing facility.

Location A offers a ten-year exemption on profits.

Location B offers tax credits linked to capital expenditure, technical employees and production activity.

Historically, Location A's exemption might have appeared more attractive based on projected taxable profits.

Under Pillar Two, the group should calculate whether that exemption creates top-up tax and whether Location B's incentives qualify for more favourable treatment within the substance cap.

That does not necessarily make Location B the better investment.

Labour availability, logistics, infrastructure, regulatory certainty and operating costs still matter enormously.

But the after-tax comparison may now look materially different.

In my view, multinational groups should evaluate incentives at the consolidated global effective-tax level, rather than relying only on the local tax saving promised in an investment approval.

The group should also maintain reliable records of qualifying expenditure, employee costs, fixed assets, depreciation and the precise tax benefits utilised.

Those records will become increasingly relevant to both incentive administration and Pillar Two compliance.

Closing Perspective

The 15% global minimum tax has not ended international competition for investment.

It has changed the terms on which that competition takes place.

Singapore's adoption of the new Substance-based Tax Incentive Safe Harbour illustrates how the international framework is evolving to distinguish certain investment-linked incentives from preferential arrangements driven principally by low taxation.

For multinational businesses, the conclusion is increasingly important:

A tax incentive's real value is not what the host country offers. It is what the multinational group can retain after the global minimum-tax rules are applied.

For governments, the challenge is designing incentives that encourage real investment without unnecessarily undermining the minimum-tax framework.

And for CFOs, international-tax teams and investment advisers, the next investment decision should compare not merely headline tax rates, but the interaction between qualifying expenditure, local incentives, operational substance and Pillar Two.

That is where the future economics of international investment incentives will increasingly be determined.

Research basis

This article has been prepared using the OECD/G20 Inclusive Framework's Side-by-Side Package dated 5 January 2026, including its detailed SBTI Safe Harbour rules; the IRAS GloBE and Domestic Top-up Tax guidance updated on 13 October 2026; Singapore's Refundable Investment Credit guidance; the UAE Ministry of Finance's DMTT and incentive-policy materials; and HMRC's UK Pillar Two guidance.

The OECD framework is distinguished from domestic implementation, and no specific incentive is treated as automatically qualifying without examining the applicable conditions.

Research cut-off: 18 October 2026.