Knowing the Implications of Global Tax Suppression
Singapore must clarify its stance on tax avoidance and aid local businesses in preparing for the new rules. There was a financial crisis in 2008. But then, Singapore experienced years of consistent economic growth due to global tax suppression.
All banks in Singapore are quickly analyzing and scrutinizing their account holders. This is because of an earlier deadline on the stricter tax evasion guidelines. This pushes them to choose whether to send away their richest clients or not.
It is not surprising that Europe to Indonesia taxmen are looking for the money they believe is supposed to be paid to them, especially the large corporations.
The global authorities are fighting with the corporate giants to pull back the tax revenues they can afford. Likewise, to make the headlines.
The financial institutions in Singapore started identifying accounts that they strongly suspect to hold proceeds of fraudulent tax evasion acts, and if necessary, to close them. After they do that, the handling of proceeds from tax crimes will have a criminal offence. This is based on the changes of the anti-money laundering law.
Find out more about global tax suppression now.
Base Erosion and Profit Sharing
A lot of the battles between tax authorities and multinationals focus on a practice called “base erosion and profit shifting” (BEPS).
To better explain it: For instance, a multinational company with businesses around the world with huge factories in the USA where it employs a lot of workers to produce their goods and sells them for more profits.
This corporation must pay a certain income tax to the US government yearly. However, it could use accounting techniques to direct its profits somewhere else.
What they would do is instead of marking those as US profits, it may say that they made their profits somewhere else that has a lower income tax rate than the USA.
That is why in recent years, the Organization for Economic Cooperation and Development (OECD) and 20 developed economies have started a BEPS project that aims to involve tax authorities in the world to have a set standard.
Singapore is a “BEPS Associate” and has been helping with the project since 2013.
BEPS Response
During the past years, the OECD has been working together with the BEPS initiatives. Despite the COVID-19 situation, OECD is not stopping with its ambitious developments. OECD also wants to address tax challenges in the economy’s digitalization.
The BEPS project scope is not only for the digital economy, but it includes corporates with cross-border operations in at least two jurisdictions. A lot of global multinational enterprises and Singapore corporates that work in foreign markets might fall under the BEPS.
BEPS drastically changes the international tax system, including the proposal and counter-proposal, but two main factors stand out.
Firstly, there is a very strong shift that goes beyond the principle of an arm’s length. Namely, this is the typical method of profit allocation of multinational groups in several jurisdictions. Secondly, BEPS wants to impose an effective tax on multinationals that are kept to a minimum no matter where they operate.
These principles can greatly impact corporate financials that lead to a greater burden on taxes, which could influence corporate behaviour. If this is implemented, it will most likely push Singapore to make changes in its corporate tax system to go with international standards.
How It Will Affect Singapore
The developments made all lead to greater scrutiny on global tax issues. Singapore cannot escape the attention, and truly, when it signed up with the BEPS Project, the tax incentives of the Singapore scheme came under review to determine if they are harmful.
A tax incentive only becomes harmful if it provides a lower tax effective rate applied to the taxpayer’s income. This applies even if the taxpayer did not perform substantive activities that increased the income.
The incentive must be rewarding for shifting their profits to a jurisdiction with lower taxes.
One harmful tax incentive is patent exploitation, but it will not be harmful if the patent is only because of the R&D that the taxpayer performed. This happens if the R&D is done by a related company or party, or if the patent used is licensed to a taxpayer, or if the patent was bought by the taxpayer.
The tax incentive is not harmful if the patent is because of the R&D that the taxpayer performed. Therefore, a company is only entitled to a tax break if the R&D was conducted by them, which led to the patent, and not by a partner company or a subsidiary in a bigger group of companies. Even if some of the tax incentives are totally compliant with BEPS principles. However, there is a possibility that some would have to be amended.
Possible Changes
Introduction of a Formula-based Apportionment
This is for the purpose of allocating profits of one entity on different markets where customers can be found. This will be done whether or not the whole entity is present in markets relevant to that. This concept is new in Singapore, which means subjecting profits to an income tax jurisdiction if there are customers there. The current source will generally analyze where business operations happen. There will be some amendments in Income tax laws for this.
Introducing this might be revolutionary and businesses may have to discharge additional compliance obligations. Group effective taxes may have more customers if customers are in high tax jurisdictions and there could be more disputes between corporates and taxing jurisdictions. This could cause a higher chance for the same profits to be taxed several times. Considering that the Singapore consumer market is small, there is a chance that this formula could cause a new tax revenue outflow.
Imposing of Minimum Effective Tax
This is applicable to global group profits of multinational companies, which means more tax system changes are necessary. Based on this proposal, the profit groups must have a minimum effective tax rate. If not, jurisdictions may implement their own rules for a more relevant tax base and tax revenue.
The tax regime of Singapore now is not used to addressing the aforementioned issue. Singapore now has a quasi-territorial taxation basis. This is where the income from Singapore and abroad is taxable when received in Singapore. Therefore, Singapore must introduce new rules. For instance, the government might have to consider granting corporates an option to have their foreign-sourced income taxable. This also applies even if it was not received in Singapore.
It is also important to evaluate the rules of minimum effective tax rates on how it will collide with the current tax incentive regimes of Singapore (if it will). The government of Singapore must rethink the policy of corporate tax objectives. Moreover, when these external factors that impact domestic tax regime are implemented.
Changes Impacting Corporations
Another huge change in the future, which is part of the BEPS project is the country-by-country implementation reporting (CbCR).
When it takes effect, the multinational companies would have to make a report. This sets out key data for the countries where they have operations, like revenue, paid taxes, employee numbers, and pretax profits.
The tax authorities will be receiving that report in the countries where they operate. All tax regulators can see whether you pay the right amount or not.
Companies can expect this kind of scrutiny and analysis when CbCR is enforced. It will have a lot of implications for Singapore companies that want to open branches abroad.
There Needs to Be a Good Balance
Stability has always been one of the strongest features of Singapore when it comes to the corporate tax regime. It has played a significant role in making it an attractive hub for businesses worldwide.
The BEPS along with the very challenging environment of the economy are forces that may cause the government to review the tax regime of Singapore from a wider perspective and make confident changes that protect the tax base of Singapore and maintain their competitiveness.
Conclusion
A lot of the work in fixing issues involves regulators having open communication amongst themselves and treaties that will avoid double taxation for companies on the same income source. However, companies would also have to do tax planning with a more congruent understanding of these issues and minefields. Companies might not have all the time to look for their dollar revenue and to pay attention to their taxes, but there must really be a balance.
It is best to understand how your taxes work to avoid being legally chased by the institutions because of tax evasion. If you want to know how the global tax suppression will affect your company and to have a better understanding of it, you can contact 3E Accounting to assist you in everything you might need, especially with Singapore tax services.
