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Navigating unchartered waters
A GLOBAL effort to tackle the problem of companies that attempt to reduce their tax burden by exploiting loopholes in tax rules will impact the way global businesses based in Singapore manage their operations.
The phenomenon known as base erosion and profit shifting (BEPS) refers to strategies employed by corporates to artificially shift profits to low or no-tax locations, resulting in little or no overall corporate tax being paid.
BEPS has emerged as a result of national tax laws not being able to keep pace with global corporations, the fluid movement of capital, and the rise of the digital economy, leaving gaps that can be exploited, experts say.
This impacts developing countries in particular due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs). Revenue losses from BEPS are conservatively estimated at US$100-240 billion annually, or anywhere from 4-10 per cent of global corporate income tax (CIT) revenues.
To deal with the problem, 15 specific actions are being developed as part of a project by the Organisation for Economic Cooperation and Development (OECD) and the Group of Twenty (G-20) economies to equip governments with the tools needed to address this challenge.
Earlier this month, the OECD presented a final package of measures which was discussed by G-20 finance ministers at their meeting in Lima, Peru. The OECD/G-20 BEPS project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to "disappear".
"Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust," says OECD secretary-general Angel Gurria. "BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has also been eroding the trust of citizens in the fairness of tax systems worldwide."
Despite the progress being made, industry experts say that the BEPS may not be sufficient to alter corporate behaviour.
Says Simon Clark, Asia Pacific regional leader, alternative investments at KPMG in Singapore: "The BEPS project does not produce binding law. In the end the proposals are just recommendations and it's up to the individual countries to adopt and legislate the various proposals. While there is broad support for the general concept of BEPS, levels and methods of implementation will vary.
"Some countries like China and Australia are already pursuing a BEPS agenda. Other countries have yet to make any changes. Over the next five plus years we will see how much of the BEPS output is translated into law."
He notes that transfer pricing - which refers to the pricing of goods, services and intangibles between related parties - is currently the most well developed concept under the BEPs project and many countries are already upgrading their transfer pricing rules to bring them in line with the BEPS proposals.
Transfer pricing 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.
The BEPS initiative will also require finance and tax practitioners to deviate from their usual practice of following the letter of the income tax code, as the recommendations remain "soft-law" until countries adopt it legislatively.
Sam Sim Tzi Yong, chartered accountant & accredited tax advisor (income tax) says: "Notions such as reputational risk, paying a fair share of taxes as a corporate social responsibility and dealing with the implications of greater transparency on a global scale are unfamiliar territory to many financial and tax executives.
"Hence, an MNE needs to remain vigilant, hire and retain good talent and have a coherent yet nimble strategy to sail these uncharted waters."
Singapore supports the BEPS initiative in principle - believing that the right amount of tax should be levied in the right jurisdiction - and participates actively in BEPS-related discussions through several platforms.
Josephine Teo, then Senior Minister of State for Finance in a speech made in September, said: "Our interest in the BEPS movement stems from the basic belief that tax policies and administration play an important and positive role in a country's development. As an open economy that is fully plugged into the global ecosystem, we support having a level playing field across all tax jurisdictions."
As Singapore is a regional hub, finance practitioners here not only have to keep abreast of changes to local regulations arising from BEPS, but also manage regional changes and their impact on the Republic.
"These developments need to be supported by the regional accounting or tax team if they are based in or report to the Singapore regional hub," says accredited tax advisor (income tax & GST) Fang Fang, who is a board member at the Singapore Institute of Accredited Tax Professionals.
The Singapore-based regional headquarters of global MNEs, being closest to the ground in this region, must play a critical role in monitoring, interpreting and translating regional developments to their head office effectively, she adds.
In particular, regional finance and tax executives need to be aware that different countries may adopt the changes that arise from BEPS at a difference pace and to different degrees. For instance, the parent company of a European-headquartered MNE may be subject to many of the new rules introduced by BEPS, while its subsidiaries operating in developing countries may face less onerous requirements.
Says Mr Sim: "Hence, they play an important role in effectively communicating and dealing with such differences."
The views expressed in this article are personal opinions, not intended to represent the position of any company or institution