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CHANGES to international tax rules aimed at foiling companies that exploit loopholes to pay less tax will impact the way businesses operate across multiple jurisdictions.
The new rules are designed to counter what is known as base erosion and profit shifting (BEPS), where companies artificially shift profits to low or no-tax locations to lower their overall tax burden.
This impacts developing countries in particular due to their heavy reliance on corporate income tax, especially from multinational corporations (MNCs). Revenue losses from BEPS are conservatively estimated at US$100 billion to US$240 billion annually, or anywhere from 4-10 per cent of global corporate income tax revenues.
Tax consultants note, however, that the impact of the BEPS measures go far beyond tax, and are forcing companies to take a fresh look at how they are legally structured globally, their transfer-pricing policies and even the way they control, manage and finance their global operations.
"The tax changes sweeping the globe, whether already implemented or proposed, will affect almost every element of the global business model," says Chung-Sim Siew Moon, tax partner and head of tax, Ernst & Young Solutions LLP.
For instance, global businesses will need to rethink their value chain and where to locate business operations, people and resources. Meanwhile, increased transparency standards such as common reporting standards and country-by-country reporting means that companies will need to provide more information about their global operations in a consistent and organised manner.
Sivakumar Saravan, executive director, Crowe Horwath Singapore, says: "Increased transparency and compliance requirements arising from the measures recommended to counter BEPS has resulted in businesses rethinking the way they collect, organise, process, analyse, store and present information.
"Multinational enterprises may have disparate information systems to deal with specific country-level compliance such as customs, labour law, tax concessions, business licensing, value-added tax and so on. Harmonising the information-gathering process across the globe is becoming a key priority."
These changes will place an additional burden and cost on companies at a time when business is generally slowing amid a sluggish global economy.
Kwan Chang Yew, head of tax, group tax, DBS Bank, says: "The challenge for businesses, and particularly the tax departments, is that all these additional demands are happening in a period where the global economy does not support the case to increase resources available for tax work."
In Singapore, which has used competitive tax rates and the award of tax incentives to attract investments, some have questioned whether such practices will be allowed when the new rules kick in.
Sum Yee Loong, board member, Singapore Institute of Accredited Tax Professionals, says: "In light of Action 5 of the BEPS Report (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance), there is speculation as to whether Singapore can continue to award tax incentives."
The professor of accounting at the Singapore Management University adds, however, that "as the award of tax incentives in Singapore is based purely on merit and substance, Singapore should be able to substantiate and justify these awards".
As a result of the BEPS Project, the last three years has been particularly challenging for professionals across the tax spectrum, from in-house finance and tax functions, tax professionals and also tax administrations.
Explains Mrs Chung-Sim, who is also an accredited tax adviser (income tax & GST): "Tax issues, specifically cross-border tax issues including disputes, are getting more complex. We play a critical role in assisting companies to comply with tax laws and their changes. With rapid tax changes, it is critical to keep abreast of tax developments to access the impact on our clients' businesses."
Notes Mr Kwan, who is also an accredited tax adviser (income tax): "In addition to resolving technical tax issues, in-house tax professionals will now need to become greater partners with the rest of the organisation. Going forward, tax professionals will also be expected to fully understand the business, the regulatory and economic impact over that business, as well as the consequent implications to tax compliance and reporting."
One area of focus for BEPs is transfer pricing, which refers to the pricing of goods, services and intangibles between related parties. It is a major tool for tax avoidance when misused to lower profits in a division of a company that is located in a high-tax country and raise profits in a country that is a tax haven.
Companies planning to expand overseas will have to pay more attention and provide more resources to transfer pricing issues, according to Prof Sum. "This is particularly pertinent for SMEs taking their initial steps beyond Singapore and whose attention may be on other business issues, unaware of the downstream implications of transfer pricing."
According to him, the Singapore authorities may wish to consider whether it is appropriate to have legislation for transfer pricing to provide more clarity for businesses.
Indeed, says Mr Sivakumar, who is also an accredited tax adviser (income tax), the BEPS Project may cause some uncertainty among organisations that are considering starting operations in the city-state.
"This is because as the implementation of the BEPS recommendations unfolds, businesses may take an overly cautious approach while other tax administrations may take an overly aggressive stance. This might cast a shadow on Singapore's status as a regional business hub. But I feel this will be temporary."