Singapore commits to landmark global reform aimed at MNC tax avoidance

Singapore

SINGAPORE will commit to a landmark piece of international tax reform to weed out tax avoidance by global corporations, it said on Thursday.

One tangible implication is that large companies headquartered here will have to submit detailed reports to the authorities. And as multinational corporations headquartered in countries that sign onto this reform will have such reports shared between relevant tax authorities around the world, this sweeping global cooperation is aimed at deterring large entities from artificially shifting profits to low-tax jurisdictions.

Singapore's Ministry of Finance (MOF) said the country will implement measures outlined under a tax reform led by the Organisation for Economic Co-operation and Development (OECD). The reform - known as base erosion and profit shifting (BEPS) - has been in the works for more than two years, and in February, an inclusive framework was adopted such that jurisdictions outside the OECD and the G-20 can implement BEPS.

The Republic will join in under this inclusive framework, making public its stance ahead of the first meeting under the new framework at the end of this month. Singapore is one of the earliest countries outside of the OECD and the G-20 to join the inclusive framework, noted Chester Wee, partner, international tax services, Ernst & Young Solutions.

The OECD has said that "jurisdictions that have decided not to commit but which are relevant for ensuring a level playing field in tackling BEPS issues globally would be subject to review". Singapore has been actively providing input to the reform since 2013, MOF said.

The reform takes aim at tax arbitrage. The loss in global tax revenue over the years, conservatively estimated at between US$100 billion and US$240 billion annually, comes as MNCs engineer lower profits in countries where taxes are high, and correspondingly lift their profits in low-tax jurisdictions.

Singapore has made clear that while it uses tax incentives to draw investments, the policies are used to attract MNCs that create jobs. These companies have to maintain a minimum turnover and local business spending, among other things, to qualify for incentives too.

In a statement, Deputy Prime Minister, Coordinating Minister for Economic and Social Policies, and Minister for Finance Tharman Shanmugaratnam said: "Singapore is committed to working with the international community to counter artificial shifting of profits, and continues to welcome substantive economic activities. We will be actively involved with the OECD and G-20 in ensuring the consistent implementation of the BEPS standards across all jurisdictions, so as to ensure a level playing field."

Henry Syrett, partner, transfer pricing services, Ernst & Young Solutions, said BEPS seeks to create transparency through more reporting requirements and automatic exchange of information, coherence in international tax regulations, and in aligning tax outcome with economic substance.

"BEPS is not just about tax. The changes in international tax rules will impact all businesses with a global footprint, including their intellectual property and investment holding structures, operating model, human resources mobility, and financing arrangements," he said.

Singapore will commit to the BEPS reform and, in particular, to the four minimum standards that focus on countering harmful tax practices; preventing treaty abuse; implementing detailed reporting to prevent sneaky transfer pricing; and boosting dispute resolution. Large corporations will be expected to file a report that breaks down (for each tax jurisdiction where they do business) the revenue, profit and income tax paid, the staff count, as well as describe the business activities each entity engages in. In keeping with BEPS guidelines, Singapore will implement this reporting standard for large companies that have ultimate parent entities here, and that have a group turnover of more than 750 million euros (S$1.14 billion). This will apply for the financial years beginning on or after Jan 1, 2017.

Based on PwC's estimates, the country-to-country reporting should affect fewer than 100 companies in Singapore, said Nicole Fung, transfer pricing leader, PwC Singapore.

Singapore's tax authority will automatically exchange these country-by- country reports it collects with those from jurisdictions with whom Singapore has signed bilateral agreements. These countries must have strong rule of law and be able to ensure the information will be kept confidential and for authorised use, it said.

The cross-border earnings transfer - mainly through inter-company sales and unjustified pricing of intangible assets such as royalties - can be disingenuous when large profits booked in the low-tax jurisdiction do not reflect proportionate economic value added to such tax havens. Transfer pricing is kosher, but becomes suspicious when the mark-up is dramatically higher than the transaction price from market competitors. Starbucks, Amazon, Apple and Google are among those singled out for complex tax structures.

In 2015, the Inland Revenue Authority of Singapore updated its guidelines on transfer pricing. It said it would consult Singapore-headquartered MNCs further on country-by- country reporting, and release implementation details by September 2016. Singapore will also work with other jurisdictions to monitor how minimum standards on dispute resolution will be implemented, MOF said.