OECD's proposed tax changes may hit revenue for Singapore

Singapore

THE international community is considering resetting the rules that could fundamentally change the global tax landscape. Singapore's position is to improve the current value creation concept rather than have it replaced by an approach that focuses on the size of the market.

The city-state further asks that there be no minimum effective tax and to let jurisdictions be allowed to pursue their own policy mix appropriate to their circumstances and developmental needs, said Indranee Rajah, Second Minister for Finance and Education.

Tax professionals said if the international community's proposals on direct taxation are adopted, Singapore may well see a reduction in tax revenue.

The Organisation for Economic Co-operation and Development (OECD) is working on a global consensus solution by 2020 for tax issues presented by the digitalisation of the economy. It was proposed that taxing rights be shifted from where value is created to jurisdictions where consumers are or the destination-based approach.

The other aspect that is being explored is putting a floor on tax competition.

Some have termed these two pillars of proposals BEPS 2.0; BEPS or Base Erosion and Profit Shifting refers to tax avoidance strategies that the OECD felt some companies may have been using to exploit gaps.

The global consensus being sought is meant to target the digital economy's tax issues, but Singapore thinks the proposals affect economies across the board and could have far-reaching implications, especially for smaller economies or developing countries.

Ms Indranee, on Oct 4, gave Singapore's position at the International Fiscal Association Singapore Branch - Tax Academy 2019 Digital Tax Conference. She said Singapore advocates improving the current value creation concept rather than have it replaced by a destination-based approach.

She said that the value creation concept aligns tax outcomes with companies' deployment of economic substance and more broadly, economic realities. The effect of this is any jurisdiction that is able to develop its competitive advantages can ascend the global value chain.

"Accordingly, they are rewarded for their competitiveness in anchoring substantive economic activities. Big and small economies alike. This is sound and it is fair," said Ms Indranee.

The destination-based approach of allocating taxing rights and corporate profits based on the size of consumers' markets would distort behaviour of firms and government, she pointed out. This could result in firms being less incentivised to invest in innovation activities and research and development.

Chris Woo, tax leader at PwC Singapore, told The Business Times that the changes considered would favour those countries in which customers are based over those countries in which things like IP (intellectual property) and manufacturing are based.

Alia Lum, a partner at KPMG Tax Services, Singapore, said there is concern that Singapore is likely to lose out on revenue, as it is a popular IP holding jurisdiction but has a relatively small population.

"Until there is more certainty on which approach the OECD will take, the potential revenue loss is difficult to estimate," Ms Lum said.

While hub locations such as Singapore may well see a reduction in their tax base as a result of the re-allocation of taxing rights, Mr Woo thinks that the operational logic for hubs and the wider benefits of the Singapore ecosystem will remain undiluted.

On the proposal of a minimum tax level, Singapore prefers that jurisdictions be free to set their own policy mix based on their circumstances and developmental needs.

Ms Indranee said: "The optimal revenue mix for one jurisdiction may simply not work for another."

For smaller or developing economies looking to attract investment and stimulate growth, there is scope for them to have at their disposal a range of policy tools which include certain tax incentives to attract new economic activities with substance.

KPMG's Ms Lum said that the new rules should not eliminate legitimate and non-harmful tax competition.

An update is expected from the OECD on the proposals on Oct 9.