A MILESTONE was achieved when Singapore and 68 other countries signed the multilateral tax convention to counter base erosion and profit shifting (BEPS) on June 7. Once ratified by each country, the convention will modify over 2,000 tax treaties by including certain internationally accepted standards to defeat tax avoidance schemes. This will change the way MNCs and investors operate globally.
Reaffirming its position as a compliant and transparent jurisdiction, Singapore has also introduced the country-by-country (CbC) reporting norms which require MNCs headquartered here, with a consolidated group revenue of at least S$1.125 billion in their last financial year, to disclose information on the global allocation of profits, taxes and other financial data. Singapore has recently signed another multilateral convention to facilitate worldwide sharing of CbC data and around 23 bilateral agreements for automatic exchange of information, with many more to follow.
The tax convention introduces the principal purpose test, which can lead to denial of tax treaty relief if one of the main purposes of an arrangement is to obtain a tax benefit that is contrary to the treaty's purpose. While the IRAS has clarified that this is only meant to address abusive arrangements, Singapore structures could potentially be exposed to risks in countries such as Indonesia, China and India due to certain interpretation issues and ambiguities. Realising tax treaty benefits is always considered to be one of the key objectives of a cross-border structure apart from various genuine commercial factors.
Sharing of CbC data is likely to increase transfer pricing scrutiny and litigation in each country where an MNC operates. Many of the larger MNCs are already investing in robust systems to price intra-group transactions and manage transfer pricing compliances. CbC reporting puts greater pressure on the quality and depth of transfer pricing documentation and value-chain analysis. If each country receiving CbC reporting data uses different methods to allocate taxable income, it can create double-taxation risks which have to be resolved through efficient bilateral dispute resolution. While Singapore has boldly endorsed the arbitration of tax disputes in the latest convention, other countries have to do the same for tax arbitration to become a reality. Countries sharing information should ensure that systems and processes are secure and do not permit data breaches or loss of confidentiality.
TAX INCENTIVES FOR MNCs
The tax convention, CbC reporting norms and similar initiatives worldwide do not, however, signify the end of tax planning. MNCs still have to manage global tax costs within acceptable levels and mitigate double taxation. MNCs will need to increase their budget for international tax compliance and maintaining cross-border structures. Corporate tax directors have to play a more strategic role while developing transfer pricing policies and executing structures. They have to work more closely with business leaders across the group to align strategies. Today, tax structures can impact business reputation, and it therefore pays to be compliant.
MNCs have to develop a strong business case for setting up Singapore structures, beyond just the need to benefit from tax treaties. Key differentiators in Singapore include overall stability, ease of doing business, high standards of corporate governance, proactive regulators and cross-border investment protection frameworks. Companies headquartered in Singapore enjoy a premium as they are generally known to have better prospects of accessing sophisticated investors and larger funding rounds. Corporate laws have also been recently amended to help companies re-domicile and migrate to Singapore.
There is a global move to target preferential or harmful tax regimes around the world which has pushed several countries in Europe to revisit their patent box regimes. Countries, however, still use tax incentives to compete for capital and investments. Even the US and UK are exploring major reductions in corporate tax rates close to, or below, that of Singapore.
To maintain its competitive edge, Singapore has to be creative and continue to provide meaningful tax and business incentives to stay attractive to global investors. The incentives should be based on actual economic activity in Singapore, thereby excluding shell companies.
It is hoped that the forthcoming Intellectual Property (IP) Development Incentive promised in Singapore's 2017 Budget will play a major role in strengthening the country's tech ecosystem and provide sufficient motivation for MNCs to shift IP research and development to Singapore. This cannot be achieved by merely lowering Singapore tax on IP-related income, especially if the Singapore entity is exposed to high foreign withholding taxes. The right approach should focus beyond tax and address the key business challenges faced by tech companies which include sourcing talent and managing costs. It is also time for Singapore to conclude a long-awaited tax treaty with the US so that local companies can tap the world's largest economy without being subject to high US withholding taxes.
MNCs have to revisit their cross-border strategies to stay compliant in a transparent world, and at the same time, manage worldwide tax costs. Singapore, on the other hand, has to continue developing innovative tax and other incentives to retain its position as a preferred regional and global hub.
• The writer is a partner at Withers KhattarWong. All views are personal.