By joining BEPS, Singapore enhances its reputation in the business community

ON JUNE 16 2016, Singapore announced that it is joining the inclusive framework for the global implementation of the base erosion and profit shifting (BEPS) project which was proposed by the Organisation for Economic Co-operation and Development (OECD) and endorsed by the G-20 in February 2016. The BEPS initiative began in the aftermath of austerity measures resulting from the recent global financial crisis. During that period, some sectors - including governments - started to look at the line between legitimate tax planning and aggressive avoidance, and the focus turned to the idea of corporations paying a fair share of taxes.

In response, OECD has led the charge with a comprehensive package of measures developed over two years to change national and international tax laws to close perceived loopholes, clarify financial reporting, and tighten rules on the taxation of certain activities (eg, in digital economies). Effective implementation of the BEPS package requires joint action from tax authorities worldwide; hence there is an invitation to interested countries and jurisdictions to put in place this BEPS implementation framework.

The announcement by Singapore's Ministry of Finance on June 16 reaffirms Singapore's position that it supports the OECD BEPS initiative. Indeed, Deputy Prime Minister, Coordinating Minister for Economic and Social Policies, and Minister for Finance Tharman Shanmugaratnam reiterated that "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".

Singapore has over the years successfully attracted multinational corporations (MNCs) to invest and bring technology, know-how and market access to the region. They are attracted to Singapore for its strong infrastructure, connectivity, adherence to international legal and tax principles, highly skilled workforce as well as its tax competitiveness.

The BEPS initiatives represent a change in the international tax landscape; by joining the framework and being part of the larger group, Singapore will be able to play a role in developing international standards to address the remaining BEPS issues on an equal footing with other members as well as review and monitor the implementation of the whole BEPS package.

This approach will have a two-way effect of enabling Singapore to provide input in areas of particular national importance to the international BEPS framework and to commit to incorporate internationally accepted principles into its local laws. In the eyes of the international business community, this will only enhance Singapore's competitiveness index. The BEPS initiatives can be seen as an opportunity for Singapore to reinvent itself to further enhance its competitiveness and attractiveness going forward.

BEPS concerns are chiefly around the artificial shifting of profits to locations with low tax and little or no economic activity. Singapore's competitiveness has always been linked to its location - as a city-state, it makes up for its limited domestic market by maximising the benefits of its strategic location in the region, with a fast growing middle class coupled with a highly skilled workforce and a tax-competitive landscape.

The BEPS project advocates the principle that the location of economic activity dictates the location of profits (and therefore taxation). This principle should continue to underpin the policies adopted by Singapore for its national development. Failure to do so will result in diminished competitiveness.

Due to Singapore's size and relatively high costs, economic activity centring on owning a customer base and manufacturing will not be its natural strength. Instead, with its highly educated workforce and knowledge-based economy, it will tend to focus on innovative economic activities which are highly valued - for example, the creation, management as well as ownership of intellectual property (IP). Research and development (R&D) by itself is not the best driver of profitable economic activity. It needs to be coupled with ownership of the IP itself. Singapore therefore needs to look at attracting not only the activity but also to keeping the ownership of the relevant IP created. Moving forward, Singapore should look to encouraging the transfer of ownership of IP related to the R&D or manufacturing activity to this country. Even where the IP is not related to any current activity, transfer of ownership of such IP to Singapore should still be encouraged as long as the company has other substantial activity in Singapore. The reason is that the mere ownership of IP will drive future decisions to locate the relevant activity into Singapore.

We should not be fearful that this will be seen as overly aggressive tax avoidance schemes. Where the company already has substantial activity in Singapore, IP onshoring is a commercial decision and how that IP is rewarded should still be dictated in accordance with internationally accepted tax principles.

If carefully managed, such IP ownership may be the precursor for Singapore to further anchor and develop economic spin-offs to derive a strong nexus of future economic growth in Singapore. From this perspective, our current tax regime on ownership of IP can be further enhanced to encourage companies to increase their economic activity and substance into Singapore in response to BEPS while maintaining a robust framework that is "BEPS-proof".

In conclusion, Singapore's commitment to the BEPS project under the inclusion framework will enhance and strengthen its reputation in the business community. Global MNCs look to many factors in determining the best location for their operations. Our highly skilled workforce, strong rule of law and coherence with international principles are valued by MNCs. Such commitment will make Singapore more attractive for MNCs as it is clear that Singapore embraces these international tax principles.