Is Corporate Singapore ready for a new tax world?

WITH the 2019 Singapore Budget around the corner, the government faces complex and interconnected choices on how best to deploy fiscal tools to encourage job and wealth creation to enhance its economic competitiveness, while ensuring sufficient tax revenues to fund public spending. Policymakers are pressed to better fund healthcare and education, provide support for young parents, invest in infrastructure and keep the country secure.

This conundrum is similarly faced by governments around the world. However, tax systems sit within a broader dynamic of societal, economic and political change, and governments have limited scope to increase taxes. Thus, they are seeking alternative avenues to raise revenues, including reducing tax leakages due to non-compliance. Tax authorities around the world are also encouraging taxpayers to strengthen their tax compliance by including tax within their corporate governance frameworks.

International tax landscape

Most traditional tax systems are broadly designed such that tax is paid only once on profits generated in the country where the business operates. However, with the digital economy, taxable profits are increasingly separate from the location where traditional sales took place. They are instead often recognised where "higher value-add" activities take place.

Countries, including Singapore, are competing (often with tax concessions) to attract these higher value-add activities and businesses. This can generate tension as countries grapple with the ability of their tax systems to support domestic growth while generating sufficient revenue to meet the needs of their citizens.

Aggressive tax reforms, retaliatory measures and unfair tax competition are also some of the issues that countries face. The conflict between the US and the EU is one example, as are perceptions about countries seen to be tax havens.

International companies attempting to navigate this tangle will need to carefully tread any tax planning tightrope. Failure to plan may result in their profits being subject to double or even triple taxation, that is, the same profits could be taxed in multiple jurisdictions. Aggressive tax strategies, on the other hand, could result in severe penalties and have reputational repercussions for businesses.

Categories of concern

Against the backdrop of changing international tax landscape, the concerns around compliance can be grouped into three categories.

Tax fraud encompasses tax evasion, the hiding of taxable income and assets from tax authorities, the fraudulent claiming of reliefs, and "the hidden economy". It is illegal for taxpayers to be involved in any way in tax fraud. This is a clear no-go zone, and should not be regarded as tax planning.

At the other extreme is tax planning, where taxpayers ensure compliance with tax laws and seek to benefit from government-sponsored incentives only to the extent that the outcomes are consistent with the government's policy intentions.

It does not, however, automatically follow that this category of tax planning is risk-free. Tax laws and the policies behind them are not always well understood or considered "fair" or "acceptable" by ordinary citizens, governments or public interest groups.

Tensions are further exacerbated by globalisation and the digital age. Disagreements are likely to arise when countries feel that they are being deprived of their appropriate share of tax from globalisation as a result of unfair tax competition by other countries.

"Lux Leaks" is a classic example of tax structures that were known to, and endorsed by, both the Luxembourg tax authority and several EU member states, but which were branded as unfair competition by other member states.

Between the above two categories lies the grey area where planning is based on the letter of the law, but which may not reflect the intent of the law or commercial reality. The result is in an outcome that was unintended by the policymakers.

Defending this category often presents significant challenges. The government's intent can be difficult to establish when the law must be applied to a wide range of specific circumstances, some of which could not have been envisaged at the time of drafting. This complexity is magnified when an international dimension is overlaid, and competing interests come into the picture.

What this means for policymakers and Corporate Singapore

Ultimately, the tax system should facilitate the government in meeting the needs of its people, while being consistent with international standards and expectations.

Singapore has sought to ensure that the tax system is compliant with international standards, and cannot be accused of engaging in unfair tax competition or seeking to attract more than its fair share of taxable profits. It has put in place initiatives such as the Enhanced Taxpayer Relationship Programme and Assisted Compliance Assurance Programme for Goods and Services Tax to help taxpayers improve compliance.

Businesses should take a strategic approach towards their tax affairs, and consider incorporating tax into their overall corporate governance frameworks.

By instituting appropriate tax policies that are evaluated and approved by the board and senior management, along with controls that are embedded within their operations, companies will be better placed to consider the merits of any planning, and make informed decisions about their tax obligations as they balance their responsibilities to different stakeholders.

A tax governance framework, with controls and reporting that are enabled by technology, can result in enhanced compliance. In turn, it promotes greater efficiency in tax administration and collections for nation building, and should be seen as mutually beneficial to taxpayers and tax authorities alike.

I think it will be interesting to see how this year's Budget recommendations will allow Singapore to maintain fiscal prudence and ensure that our tax system remains progressive in years to come.