Singapore sends strong signal on tax avoidance

THE stakes will soon be raised for taxpayers who stray close to the edge when planning their taxes.

On July 20, 2020, Singapore's Ministry of Finance (MOF) announced that it intends to amend the Income Tax Act and Stamp Duties Act to introduce a 50 per cent surcharge on tax avoidance arrangements. This will take effect for adjustments made to tax assessments for Year of Assessment (YA) 2023 and subsequent YAs. The MOF has indicated that it plans to do the same for the Goods and Services Act in due course.

The MOF's proposal is a timely and shrewd one.

In recent years, zero-tax and low-tax jurisdictions have faced increased scrutiny and pressure from financially-strapped developed countries and international organisations such as the Organization for Economic Cooperation and Development (OECD) and Financial Action Task Force (FATF). For example, FATF and the European Union (EU) have come up with their respective "blacklists" to identify allegedly non-cooperative states which were not taking active steps to combat unfair tax practices.

That said, global efforts have largely been trained on improving access to tax information and on redefining international tax jurisprudence to comply with Base Erosion and Profit Shifting (BEPS) principles. This has borne much fruit. For example, on July 15, 2020, the United Kingdom announced commitments from eight overseas territories - including Cayman and Bermuda - to introduce publicly accessible beneficial ownership registers by 2023. Automatic Exchange of Information (AEOI) treaties are now commonplace - Singapore has commenced more than 60 AEOI relationships with its tax treaty partners after becoming a signatory to the convention in 2013.

INTERNATIONAL EFFORTS

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In contrast, international efforts to combat alleged tax avoidance have floundered in comparison.

A recent example of this is the EU's General Court's July 15, 2020 decision to overturn a lower court's decision to impose a 13 billion euros tax bill on Apple where it had been found that Ireland had given the tech giant illegal tax breaks. This was a devastating blow for the European Commission, which had been fighting this tax avoidance case for almost a decade.

Against this context, MOF's proposal to impose a 50 per cent surcharge on tax avoidance arrangements sends a strong signal to the local and international community that it is committed to the global fight against tax avoidance. In short - Singapore is making it clear that tax avoidance will not be tolerated.

Singapore is actively wooing fund managers and family offices; encouraging MNCs to set up regional headquarters here; offering tax incentives for firms to locate their intellectual property and R&D activities here - these are all activities that will encourage fund flow into and through Singapore. As such, there will be numerous opportunities for taxpayers to plan and structure their taxes.

There is nothing wrong with taking advantage of the tax incentives available in Singapore such as those found in Section 13CA or 13X of the ITA, or in the Pioneer and Development and Expansion Incentive (DEI).

After all, as the famous Duke of Westminster adage goes: "every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be".

However, there is a limit to tax planning. Artificial or contrived tax arrangements which are not carried out for bona fide commercial reasons, and which are designed with the main purpose of avoiding or reducing tax, will be caught by the anti-avoidance provisions in Singapore's tax statutes.

As such, taxpayers should be careful not to stray too far in taking aggressive steps to save on taxes. Sound tax advice should be obtained before jumping on the bandwagon.

PENALTIES

While the worst that the Singapore authorities can do now is to reverse the tax avoidance transactions and clawback the rightful tax amounts due, come YA 2023, they will have the ability to impose an additional 50 per cent surcharge. The larger the tax "savings", the larger the penalty. Moreover, the reputational impact on firms that are found to have engaged in tax avoidance practices may be worse.

In the premises, I am all for the implementation of the 50 per cent surcharge. It will only further promote Singapore as a favoured and favourable jurisdiction to do business, without the need to "beggar thy neighbour" by allowing taxpayers to implement unfair tax practices that may affect its trading partners.