you and the taxman, issue 2, 2016 - ey.com · 2 you and the taxman issue 2, 2016 you and the taxman...

Y o u a n d t h e T a x m a n In si g h t s o n t a x i ssues t h a t m a t t er I s s u e 2 , 2 0 1 6

W r i t i n g o ur S G 100 st o r y

B e b o l d t o sei z e o p p o r t un i t i es i n a d v er si t y

E i g h t w a y s f o r S M E s t o t a p S i n g a p o r e B ud g et 2016

The Singapore financial hub: staying in the game

UK Budget: minding the gaps

Europe’s increasing transparency tax rulings a n d m o r e

Post-anti-avoidance package: what’s next f o r S i n g a p o r e?

Investing in India: the time is now

CH Pte Ltd v Comptroller of Income Tax

2 | You and the Taxman Issue 2, 2016

You and the Taxman

2 | You and the Taxman Issue 2, 2016 2 | You and the Taxman Issue 2, 2016

“ As we watch with bated breath how the ripple effects of tax changes globally and locally will pan out, it is imperative that we keep up, add value and remain relevant in a disruptive future.“

3You and the Taxman Issue 2, 2016 |

Issue # – M o n t h Y ea r

3 You and the Taxman Issue 2, 2016 |

“When a butterfly flutters its wings in one part of the world, it causes a stir in another”.

This adage aptly reflects how businesses and communities are compelled to adapt and respond to shifts in the global landscape so as to remain resilient and competitive in the future. Singapore is no exception, judging from this year’s Budget announcement.

Not only are the country’s people primed to upskill themselves, businesses are encouraged to review their strategies, optimise operations and explore innovation for growth opportunities.

In this issue, we explore the implications of the Budget measures at length. In Writing our SG100 story, we address Singapore’s hopes and aspirations for the future. In Be bold to seize opportunities in adversity, Eight ways for SMEs to tap Singapore Budget 2016 and The Singapore financial hub: staying in the game, we discuss how different industries and business segments could benefit from the Budget.

Given Singapore’s open economy, the “butterfly effect” is also felt as we look beyond our shores at developments elsewhere and the repercussions for us locally.

The articles UK Budget: minding the gaps and Europe’s increasing transparency tax rulings and more further look at the development in the two respective jurisdictions and what these mean for investors. Post-anti-avoidance package: what’s next for Singapore? examines the impact on Singapore on the tax front with the release of EU’s anti-avoidance package.

Investing in India: the time is now reviews the issues and opportunities that follow from the country’s recent Budget announcement and updates to the India-Mauritius treaty.

Lastly, in CH Pte Ltd v Comptroller of Income Tax, we shed light on whether interest earned by a Singapore company — one that is not in the business of lending — from the provision of a loan to an overseas party is always considered as foreign-sourced.

As we watch with bated breath how the ripple effects of tax changes globally and locally will pan out, one thing is certain: as a tax professional, it is imperative that we keep up, add value and remain relevant in a disruptive future.

Have a fruitful read.

Tax watch

M r s C hung - S i m S i ew M oonPartner and Head of Tax Ernst & Young Solutions LLP


In t h i s i ssueY o u a n d t h e T a x m a n

Y o u a n d t h e T a x m a n

06 W r i ti ng our S G 1 0 0 s tor y What lies ahead after SG50 as Singapore strives to transform through

enterprise and innovation for a progressive society and thriving economy?

09 B e b ol d to s ei z e op p or tuni ti es i n adv er s i ty In order to succeed, companies need to shift their mindsets, be

open to collaboration and make innovation “business as usual”.

11 E i g ht w ay s f or S M E s to tap S i ng ap or e B udg et 2 0 1 6 SMEs should fully utilise the fiscal incentives and opportunities

available to secure growth. Here’s a checklist.

13 The Singapore financial hub: staying in the game Several measures announced in the Singapore Budget 2016 can

impact the country’s standing as a financial services hub.

E l sew h er e o ut si d e S i n g a p o r e

15 UK Budget: minding the gaps How will UK’s Budget 2016 measures impact its local economy as

well as global investors?

18 Europe’s increasing transparency tax rulings and more A number of developments within the European Union has led

to the potential sharing of information. What should companies make of the potential impact of information sharing?




I s s u e 2 , 2 0 1 6

Managing editor: Chung-Sim Siew Moon Editor: Russell Aubrey Contributors: Amy Ang, Chai Wai Fook, Chia Seng ChyeChung-Sim Siew Moon, Gagan Malik, Ivy Ng, Louise Phua, Jerome van Staden, Billy Thorne, Toh Ai Tee, Barbara VoskampC h e s t e r W e e Editorial: Linda Lee Design: I r e n e L e e

The editors, contributors, Singapore Tax Partners, Executive Directors and Directors are from Ernst & Young Solutions LLP.

Email: [email protected] Website: www.ey.com/sg For more information on the articles published in this issue, please contact: The Editor, You and the Taxman, Ernst & Young Solutions LLP, One Raffles Quay, North Tower, Level 18, Singapore 048583 Tel: +65 6535 7777 Fax: +65 6532 7662

Editor note: You and the Taxman is published exclusively for clients of Ernst & Young Solutions LLP. Although every care has been taken in its production, it cannot take the place of specific advice for clients’ particular circumstances. Readers are advised to contact Ernst & Young Solutions LLP for more details and any update on the topics discussed in any of our publications before taking action based on the advice and views expressed by our writers. For specific tax questions, please contact the Ernst & Young Solutions LLP tax executive who handles your tax affairs.

MCI (P) 154/12/2015 Printed by Hock Cheong Printing Pte Ltd

21 Post-anti-avoidance package: what’s next for Singapore? How will the latest step by the European Commission to align tax

laws in all 28 EU countries impact Singapore?

In conversation with

24 Investing in India: the time is now Amidst policy reforms, local enterprises and investors looking to

expand their operations in India must keep abreast of the changes to tap on the opportunities available.

Lessons in case law

28 CH Pte Ltd v Comptroller of Income Tax Is interest earned by a Singapore company — one that is not in

the business of lending — from the provision of a loan to an overseas party always considered as foreign-sourced?

At a glance

3 1 This section lists the latest Inland Revenue Authority of Singapore e-Tax guides, Monetary Authority of Singapore circulars, and

treaties signed or ratified.


You and the Taxman


You and the Taxman

“Building a shining narrative requires partnership and ownership of the

responsibility for progress by individuals, businesses and the nation collectively.”

T he future cannot be predicted, but futures can be invented,” wrote Nobel Laureate Dennis Gabor in his book Inventing the Future.

Last year, Singapore celebrated its 50 years of nation-building and economic progress, made possible through the sheer grit of our pioneer generation. Budget 2016 marks the beginning of our journey into the next 50 years.

I wonder how radically different and successful this little red dot might be by 2065, and how much of that is a result of the vision and ambition of the annual Budgets. More curiously, I wonder if this year’s Budget will find its way as a landmark chapter of our SG100 story. What is for sure is that the Singapore Story belongs to all of us. Building a shining narrative requires partnership and ownership of the responsibility for progress by individuals, businesses and the nation collectively.

W r i t i n g o ur S G 100 st o r yWhat lies ahead after SG50 as Singapore strives to transform through enterprise and innovation and moulding a competitive, caring and resilient population Chung-Sim Siew Moon reflects.

“




T r a n sf o r m a t i o n t h r o ug h en t er p r i se a n d i n n o v a t i o n

In 2065, I imagine we will be living in a hyper-connected world where everyday objects sense and communicate information with one another in the “Internet of Things”. The way we live, work, play, learn, create and consume will seem foreign by today’s standards. We will make better decisions using real-time data analytics and robots with built-in artificial intelligence will deliver our orders, drive our cars and dispense our medications.

These are not far-fetched thoughts — if innovative transformation truly takes flight in Singapore. Already, this year’s Budget aims to make that happen in various ways. The newly minted Industry Transformation Programme (ITP) seeks to enable a conducive ecosystem for innovation to flourish.

For example, the creation of the Jurong Innovation District, an integrated approach to urban planning where entrepreneurs, researchers, students can test-bed their new ideas, will be a boost to innovation. Businesses will also benefit from the Automation Support Package, where investment allowances can be claimed on new automation equipment, with grants and loans made available, to support the drive for productivity.

Also, SMEs who lament the lack of resources to undertake R&D will no longer have to walk alone. The government will partner Trade Associations and Chambers (TACs) to reach out to businesses to develop capabilities and industry-wide solutions. TACs will receive funding support for taking on industry-wide transformation projects. Further, various financing and tax incentives to support internationalisation and step-changes in scale are also enhanced and made available.

The government is also better engaging with businesses to enable growth. The new Business Grants Portal will bring various government grants onto a single platform for ease of access, which should drive utility by business. The envisaged National Trade Platform would improve the way trade data is shared electronically among businesses and government, thereby easing the manner of doing business.

If businesses seize the opportunities presented in these measures to restructure and grow, the SMEs of today could be the regional, or even global, players when 2065 arrives.


C h un g - S i m S i ew M o o n Partner and Head of Tax [email protected]

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A competitive, caring and r esi l i en t p eo p l e

In 2065, I imagine our people to be equipped with new, niche and higher value-adding skills, as well as deepened capabilities that may not exist today. Our human capital will be differentiated in the global economy, commanding higher wages by virtue of delivering higher productivity and value.

This is where the new skills and development job placement hub, TechSkills Accelerator, comes into play. By focusing on sectors such as the Information and Communications Technology sector, and partnership with employers and agencies, it enables our people to acquire new expertise and seize employment opportunities in new growth areas.

By 2065, I see our youths being entrepreneurial and not afraid to venture; programmes like the National Outdoor Adventure Education Masterplan announced this year would have instilled in them a bold and open mindset underpinned by a societal culture that is accepting of change and failure.

Our culture will also be one of compassion: people will participate actively in community work to care for the senior citizens, low wage workers

and persons with disabilities. The newly launched Business and Institutions of Public Character (IPCs) Partnership Scheme will be a success by then, as more businesses embed volunteering into their corporate social responsibility, and consider it important to their talent strategies. As businesses receive a 250% tax deduction on associated costs incurred (with a cap), employees will look beyond their paycheck and “pay it forward” in the community.

Conclusion

Singapore is at the heart of the Asian trade growth story. The ASEAN Economic Community, the Trans-Pacific Partnership, and China’s One-Belt One-Road initiative will open up new frontiers and opportunities that will set the backdrop for our SG100 story.

The key to seizing these opportunities is the spirit of partnership. It is no longer a debate of whether it should be a top-down or bottom-up, or public versus private sector approach. We need an all-inclusive commitment to work together.

With the work by the Committee on the Future Economy to be completed by the end of 2016, what’s next for our Singapore Story?

To be continued.…




B e b o l d t o sei z e o p p o r t un i t i es

i n a d v er si t yChia Seng Chye highlights why businesses need to have

a mindset shift, be open to collaboration and make innovation “business as usual.”

T o say that business confidence is low amidst the economic uncertainty is hardly an understatement. Businesses, in particular the Small and Medium Enterprises (SMEs),

which had waited with bated breath for Budget measures to offer some form of relief from cost and market pressures, were not disappointed.

Budget 2016 introduced a comprehensive package that comprises near- and mid-term measures that aim to help businesses ride out the economic slowdown with an eye on staying the course for the long-term.

Tackling rising costs and falling profits

Businesses have repeatedly called for the government to help them chart a steady path in these uncertain times. While not all businesses and sectors are equally hit by the slowing economy, high operating costs and tightening credit impact businesses across the board.

With the corporate tax rebate to be increased from 30% to 50% for the Years of Assessment 2016 and 2017, albeit still capped at S$20,000, this calibrated move will no doubt offer the smaller enterprises some financial reprieve.

“The weak global economy may yet offer opportune conditions for local

enterprises to capitalise on depressed cost structures and seek out new

markets and opportunities elsewhere outside of the limited domestic market.”

You and the Taxman


C h i a S en g C h y e Partner, Tax [email protected]

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SMEs, by virtue of their scale — or lack of — often face obstacles obtaining credit from banks and financial institutions. The SME working capital loan scheme, where the government will co-share 50% of the default risk of working capital loans of up to S$300,000 with participating financial institutions, is a welcomed relief for cash-strapped SMEs. The loan assistance will allow SMEs with immediate sustainability concerns to tide over the near term and others with mid-term needs to start their next phase of growth.

In addition, the extension of the special employment credit (SEC) for another three years until 2019 will help to defray labour costs while enabling the older workers to remain employed — a smart move with two-prong benefits indeed. While businesses, except for those in the Marine and Process sectors, may lament the increase in foreign workers levy, the package of other measures will still provide the needed immediate relief.

The beauty of these measures is that they provide the necessary support for businesses and yet are not excessive such that there continues to be strong enough impetus for companies to want to take responsibility for investing in their own growth — whether through innovation or internationalisation — so as to get to a higher level of play.

D r i v i n g i n n o v a t i o n a n d i n t er n a t i o n a l i sa t i o n

Productivity has been a consistent theme in recent Budgets with the introduction and subsequent tinkering of the Productivity and Innovation Credit (PIC) scheme. However, productivity gains have proven to be lacklustre.

To truly motivate and enable businesses to embrace productivity and more importantly, the culture of innovation, more should be done to embed innovation in the DNAs of businesses. This Budget has been spot on in doing that — underpinned by private and public partnerships.

The government will be funding and partnering with Trade Associations and Chambers (TACs) to reach out and support businesses to share best practices and build capabilities to drive industry-level transformation.

The Jurong Innovation District will be a test-bed to experiment and showcase the benefits of individual, private and public collaboration through innovation and technology. Another means of private and public collaboration is the sharing of data via the National Trade Platform. The government has also introduced an Automation Support Package to incentivise businesses that wish to roll out or scale up automation projects to drive productivity growth.

To truly reap the benefits of these measures, businesses have to be open to collaboration as well as be bold to accept and make innovation “business as usual”. This requires a mindset shift no less.

Beyond innovation, businesses seeking growth must also be daring to consider internationalisation as part of their strategy. The weak global economy may yet offer opportune conditions for local enterprises to capitalise on depressed cost structures and seek out new markets and opportunities elsewhere outside of the limited domestic market.

Yet, SMEs may be short on both the relevant expertise and funds to allow them to look into overseas expansion seriously. Although there is a wide range of incentives and agencies available to offer advice, businesses are often at a loss on how and where to begin. The newly announced Business Grants Portal, which is intended to be a “one-stop shop” to simplify the process for businesses to seek assistance at various stages of their growth cycle, will be highly useful.

With a set of targeted measures that seeks to help the neediest and reward the “hungriest” businesses, the message from the government is clear. The government is looking for strategic partnerships with enterprises to innovate and transform the economy. It will not dish out help without discretion to avoid businesses becoming dependent on bail-outs every time the economy takes a turn for the worse.

Businesses should heed this cue and look to turn adversity into opportunities by relooking at their operating model, taking advantage of the measures available, and restructuring to emerge stronger — and smarter.

11You and the Taxman Issue 2, 2016 | 11 You and the Taxman Issue 2, 2016 |

E i g h t w a y s f o r S M E s t o

t a p S i n g a p o r e B ud g et 2016

SMEs should fully capitalise government fiscal incentives and opportunities sooner than later.

Chai Wai Fook and Louise Phua sum up the ways.

You and the Taxman

This year’s Budget announcement is done and dusted and clearly, the small and medium enterprises (SMEs) are one segment of the economy that the government had targeted to support through the budget proposals. Government fiscal incentives are only useful if the intended beneficiaries are fully aware — and make best use — of them.

One of the common issues that SMEs face is not knowing the myriad of government assistance available, let alone meaningfully assessing whether the schemes are fit-for-purpose. The new Business Grants Portal, which seeks to house all government schemes in a single platform will make it easier for businesses to access the schemes. SMEs should be proactive in using this new portal to leverage schemes that can support the upgrading of their capabilities and expansion plans.

Small startups that face difficulties in obtaining loans from financial institutions can now avail of the new SME Working Capital Loan scheme to obtain loans of up to S$300,000 to support their growth plans, knowing that the government will co-share 50% of the default risk of such loans with participating financial institutions (PFIs).

“Government fiscal incentives are only useful if the intended

beneficiaries are fully aware — and make best use — of them.”


Chai Wai Fook Partner, Tax [email protected]

L o ui se P h ua Senior Manager, Tax [email protected]

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SMEs with plans to improve productivity, scale up and internationalise should take advantage of the new Automation Support Package (ASP) to grow through innovation. The ASP combines several enhanced versions of existing standalone incentives into one package: grant funding of up to 50% of qualifying automation project costs; a new investment allowance of 100% of approved capital expenditure (net of grants); and improved access to equipment loans where the government will bear 70% of the risk associated with such loans offered by PFIs.

With the lowering of the Productivity and Innovation Credit cash payout rate from 60% to 40%, SMEs and low- or non-tax-paying companies that need fiscal assistance for productivity efforts will “lose” part of the benefit. As the lower conversion rate is only applicable to qualifying expenditure incurred from 1 August 2016, SMEs may consider bringing forward their spending on qualifying PIC expenditure and should fully understand the policy rules when determining the dates that the qualifying expenditure is incurred.

Under the existing Double Tax Deduction (DTD) for Internationalisation scheme, businesses may claim a 200% tax deduction on qualifying expenses, including airfare and hotel accommodation, as well as salaries of Singaporeans posted to new overseas entities. This scheme has been extended to 31 March 2020 and is an opportunity for SMEs to consider mapping, executing or accelerating their overseas growth plans to reap the benefits.

Further, the existing automatic DTD on qualifying expenses up to S$100,000 will be extended to qualifying expenditure incurred from 1 April 2016 to 31 March 2020. SMEs should keep track of their qualifying internationalisation expenses to avoid missing out on this automatic DTD claims.

M&As make for a viable growth strategy for SMEs that wish to acquire market share, customer base and capabilities fast. The existing cap for qualifying deals under the M&A scheme, which was first introduced in 2010 and subsequently extended to 31 March 2020, will now be doubled to S$40m.

SMEs can now enjoy an M&A allowance of up to S$10m instead of S$5m per year of assessment (YA) and a stamp duty relief of up to S$80,000 instead of the current S$40,000. Larger SMEs can potentially partake in more ambitious deals with this boost.

To better utilise the higher CIT rebate of 50% introduced for YAs 2016 and 2017, subject to a cap of S$20,000 per YA, a tax-paying SME may wish to look at ways to optimise the amount of CIT rebate claimable in these two years. This may be achieved through the deferral of capital allowances claim, or proper planning of transferring of losses of group companies.

From 1 July 2016 to 31 December 2018, the pilot Business and Institution of Public Character (IPC) Partnership Scheme will allow businesses to enjoy an additional 150% tax deduction on qualifying expenses with a yearly cap of S$250,000 per business and S$50,000 per IPC, when they send employees to volunteer and provide services to IPCs, including secondments.

Perhaps tax-paying SMEs with cyclical businesses may consider seconding employees to IPCs during off-peak periods and benefit from this scheme, while at the same time, incorporate this in their talent strategy.

Time to take charge

Budget 2016 pushes on the economic restructuring journey while offering interim reliefs to ease business costs. It presents several key fiscal assistance and SMEs that have the ambition and are prepared to take charge of their future should look to fully capitalise these opportunities.


You and the Taxman

Singapore is widely recognised as one of Asia’s key financial hubs. Over the past few decades, financial institutions from all over the world have flocked to set

up shop on the island city-state. According to a recent newspaper report1 , Singapore has edged past Hong Kong to become the world’s third-ranking financial centre. In 20142 , the financial services sector contributed 12.5% of Singapore’s S$380b Gross Domestic Product.

Various factors have contributed to the rise of Singapore’s financial services sector: a stable government, favourable tax system, strong legal system; sound infrastructure and being a great place to live, work and play. The country’s long-term vision sets a solid foundation. Given its dependency on global trade and an open economy, Singapore has always been farsighted in outlook and focused on remaining competitive and relevant as it reinvents itself for the future.

In Budget 2016, the government has continued to review, extend and refine several tax incentives to drive targeted sectors and activities, in addition to giving the small and medium enterprises (SMEs) a much-needed boost.

“As the Singapore financial services industry matures and operates in a world

that demands for tax transparency and an end to BEPS, the authorities seem

to be moving away from an over-reliance on a no-tax regime.”

T h e S i n g a p o r e financial hub: st a y i n g i n t h e g a m eAmy Ang examines what some of the Budget 2016 measures mean for the financial services sector.

1 Article from The Straits Times on 8 April 20162 According to singstat.gov.sg


A m y A n g Partner, Financial Services and Corporate [email protected]

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For the finance and treasury activities, insurance sector and trustee companies, the Finance and Treasury Centre scheme has been extended for another five years till 31 March 2021 with enhancements including the lowering of the concessionary tax rate from 10% to 8%.

Tax incentives in relation to the insurance sector have also been extended and consolidated into a new Insurance Business Development incentive (IBD), which is effectively an umbrella scheme introduced at last year’s Budget. The IBD will provide a concessionary tax rate of 10% on qualifying income derived from the underwriting of offshore insurance risks and by approved captive insurance companies3. Further, insurance companies underwriting certain specialised insurance risks including marine hull and liability risks, terrorism risks, aviation and aerospace risks could apply for a concessionary tax rate of 5%, 8% or 10% under an enhanced-tier award of the IBD.

Tax incentive for approved trustee companies will be subsumed into the existing Financial Sector Incentive (FSI) Standard Tier scheme, whereby a concessionary tax rate of 12% is available.

The Budget also extended the exemption on companies’ gains on disposal of equity investments by five years up till 31 May 2022, with all conditions remaining unchanged. This exemption was originally available on gains from disposals made on or before 31 May 2017. The move to extend this exemption a year in advance signals the government’s desire to provide upfront tax certainty to companies that may seek to revisit holdings and streamline structures to drive growth. However, a similar extension was not granted to the exemption on interest and other income related to Qualifying Project Debt Securities issued on or before 31 March 2017.

While tax is not the only factor for consideration, having a comprehensive list of tax incentives is important to the successful development of Singapore into a leading financial centre. Based on the updates announced to the various tax incentives, there is an obvious shift away from tax exemption.

In the past, the government had offered a zero percent tax rate to catalyse and kick-start the growth of various sectors relating to financial services. As the Singapore financial services industry matures and operates in a world that demands for tax transparency and an end to base erosion and profit shifting

(BEPS), the authorities seem to be moving away from an over-reliance on a no-tax regime. Instead, more holistic and targeted measures are proposed to support the continued development of specific financial services sectors. The government is also partnering industry players to strengthen connectivity, spur innovation and ensure that Singapore continues to provide a conducive environment for the upskilling of its workforce and the growth of businesses.

The authorities’ move to consolidate various tax incentives is a positive one. The FSI is generally applicable to banks while the newly introduced IBD relates to insurance businesses. While it may be difficult to quantify how such measures would directly help in boosting Singapore’s competitiveness, the steps that have been taken to improve awareness and accessibility of potential concessions to encourage financial institutions to consolidate their presence in Singapore are nonetheless significant.

Singapore’s keen competitor, Hong Kong, has already cut its corporate tax rate by half to 8.25% on income derived by corporate treasury centres set up in the locality, as well as captive insurance companies underwriting offshore risks out of the island. As Singapore continues to see strong competition pressure, it is important that the country focuses on staying ahead.

3Current approved captive insurance companies enjoy tax exemption


On 16 March 2016, the UK Chancellor delivered the Budget speech, which emphasised that the government was looking for sound public finances to deliver

security and lower taxes on business and enterprise in order to create jobs. Measures were introduced to support these as well as tackle tax avoidance by multinational enterprises, as evident from the UK’s ongoing support for the Organisation for Economic Co-operation and Development’s (OECD) work on Base Erosion and Profit Shifting (BEPS). Below are some of the key tax measures in the Budget.

B usi n ess t a x r o a d m a p

Covering several key areas of tax policy including reductions in tax rates, addressing tax avoidance and aggressive tax planning and simplifying and modernising the UK tax regime, the business tax roadmap (BTR) was implemented with the intention to make Britain’s business tax system operate more efficiently and fit for the future beyond 2020.

UK Budget 2016: m i n d i n g t h e g a p s

Billy Thorne summarises the key measures and lends insights into the implications for businesses and beyond.

E l s ew her e outs i de S i ng ap or e

“The measures will, by and large, impact corporate entities

operating in the UK, albeit to different extents and depending on the time of implementation.”


Interest restrictions

The UK’s interest relief rules are set to change with effect from April 2017, with the introduction of a fixed ratio rule, in line with the OECD’s recommendation under the BEPS project.

Although legislation will not be introduced until Finance Bill 2017, the Chancellor did announce that this will limit net interest deductions to a maximum of 30% of earnings before interest, taxation, depreciation and amortisation (EBITDA) and likely to be based on taxable rather than accounting earnings. (There will be a group threshold of £2m of net UK interest expense before the rules apply.)

As well, rules will be enacted to ensure that the restriction does not impede private finance for certain public infrastructure in the UK, plus rules to address volatility in earnings and interest. Additionally, the existing worldwide debt cap will be repealed. However, under the new rules, a group’s net UK interest deductions will be restricted based on the global net third party expense of the group.

The start date of 1 April 2017 announced at the Budget gives groups little time to restructure their operations, especially given that detailed rules have yet to be published. The breadth of the exemption for certain industries such as infrastructure and the extent to which unused interest capacity can be utilised are critical questions left unanswered.

Introduction of new legislation to tax profits f r o m t r a d i n g a n d d ev el o p i n g U K l a n d

An unexpected change related to the proposals announced was to get non-UK residents to pay corporation tax on their trading profits arising from dealing in or the development of UK land.

The new rule targets property development structures, which exploit current tax rules such that non-UK

resident developers of UK land pay much less tax than UK resident property developers.

New legislation will provide that profits of a trade carried on by a company will be subject to corporation tax where the trade comprises dealing in or developing UK land, regardless of the company’s tax residence or where the trade is carried on.

The basic charge will be supplemented by a “targeted anti-avoidance provision” — targeted at arrangements designed to reduce the charge through fragmentation of trading activities and a charge on the sale of shares in the property owning company — to prevent avoidance of this new charge through artificial arrangements.

Changes have also been made with effect from Budget Day to the double taxation agreements that the UK has with the Isle of Man, Guernsey and Jersey to ensure that Britain has taxing rights over UK land under those treaties.

Given these comprehensive changes to the taxation of offshore property development structures, groups affected should plan on the basis that trading profits from existing and future property dealing or development will fall within the scope of UK corporation tax.

N ew r ul es o n t h e use o f corporation tax losses

Another change that was not anticipated by many was one that relates to the use of corporation tax losses. New flexibility on use of losses to be provided from 1 April 2017 will come at a price of the restriction of the amount of taxable profit that can be offset by losses carried forward.

Under existing rules, it is only possible to surrender current year losses via group relief and there are a number of restrictions on the use of brought forward losses, specifically trade losses can only be used against future profits of the same trade. For corporation tax losses incurred on or after 1 April

2017, companies will be free to use carried forward losses against profits from other income streams or from other companies within a group.

However, from 1 April 2017, only 50% of taxable profit can be offset through losses carried forward. This restriction will only apply to profits in excess of £5m. For example, a company with profits of £6m will be restricted to offsetting losses against 50% of its profits over £5m, in this case allowing it to offset losses against £5.5m of profit with the remaining £0.5m carried forward to be available for utilisation against future periods.

For companies under a single group, the £5m allowance will apply per group rather than per company. The group will exercise discretion on the application of the allowance.

The government appears to be particularly concerned with companies that make profits in one year but pay no taxes due to losses brought forward. Although the proposals are in line with other international regimes, they do put additional strain on groups’ cash flow and on the recognition of deferred tax assets in respect of carried forward tax losses for reporting purposes.

Changes to corporation tax r a t es a n d p a y m en t d a t es

The main rate of corporation tax will be cut from 18% in 2015 to 17% from 1 April 2020. This means the current rate of 20% will be cut to 19% from 1 April 2017 and then cut by a further 2% from 1 April 2020.

This obviously has a cash tax impact, but the inclusion of the new rate for 2020 means that for accounting periods ending after the date of substantive enactment (under International Financial Reporting Standards, UK Generally Accepted Accounting Practice (GAPP)) or enactment (US GAAP) of the Finance Bill, companies will be required to measure deferred tax at differing rates, depending on when the deferred tax is expected to reverse.


Separately, the government had been intending to amend the quarterly instalment payment regime from 1 April 2017 for companies with annual taxable profits of over £20m, such that these companies would be required to make payments four months earlier than what would have been required under the current system (where instalment payments are made quarterly from the seventh month in the accounting period to which the liability relates). This change will now come into effect from 1 April 2019.

The government has, for a number of years, had an ongoing policy of reducing corporation tax rates and as emphasised in the BTR, this further reduction is intended to help support investment in the UK and deliver further on the government’s pledge for the UK to have the lowest rate in the Group of Twenty (G20). The acceleration of payment dates for very large companies will have a significant impact on cash flow, so a deferral spells good news.

R o y a l t y p a y m en t s a n d deduction of income tax at source

A package of measures is being introduced with regard to royalty payments and the deduction of income tax at source. These measures include:

• The introduction of a new anti-avoidance provision to counteract connected party arrangements, which constitutes one of the main purpose of avoidance of withholding tax as a result of a double taxation agreement. In such a case, the benefits of the relevant double tax agreement will be denied. The new rule applies to royalty payments made on or after 17 March 2016.

• Broadening the definition of a royalty for the purposes of the rules on the deduction of income tax at source to ensure that income tax is withheld from all royalty payments to non-resident persons where the royalty has a UK source. Currently, some royalties are only subject to withholding if they are “annual payments”, which amongst other things, require that they be classified as pure income profit in the hands of the recipient.

• Extending the rules to determine whether a royalty has a UK source to include scenarios where a royalty is connected with a UK permanent establishment (or an avoided UK permanent establishment under the diverted profits legislation).

These updates were relatively unexpected, with no real details having been previously announced. These proposals appear to be designed to bring the UK rules on the taxation of royalties more in line with international practices and the rule should limit the scope for the artificial erosion of the UK tax base via royalty payments, particularly where royalties are paid to low substance entities.

Expanded scope of anti-h y b r i d r ul es

The government had already committed to include anti-hybrid rules in Finance Bill 2016, reflecting best practice recommendations in the OECD’s final BEPS report on neutralising the effect of hybrid mismatches. It was announced in the Budget that the scope of these rules will be expanded to nullify advantages where a mismatch arises through the use of exempt branches.

As the rules come into effect from 1 January 2017, it should be noted that there is no scope for transitional or grandfathering arrangements, which makes reviewing the implications of these rules a priority for any groups with hybrid entities or those that hold hybrid instruments.

The scope of the legislation and the lack of a purpose test means that even structures that have previously been cleared by Her Majesty’s Revenue and Customs may now need to be relooked at.

P a t en t b o x

Lastly, the government also confirmed that it will move forward from 1 July 2016 with the modification of the existing patent box regime such that it complies with the OECD proposals to deal with preferential intellectual property regimes and the EU’s complaints on harmful tax practices.

In particular, the benefits of the patent box should be dependent on the extent to which research and development expenditure is incurred by the company claiming the patent box as opposed to it being outsourced to related parties or acquired intellectual property.

Conclusion

The above measures will, by and large, impact corporate entities operating in the UK, albeit to different extents and depending on the time of implementation. With changes announced in Budget 2016 to be legislated in 2017, businesses will need to track developments carefully.

B i l l y T h o r n e Senior Manager, UK Tax Desk, Global Tax Desk Network — [email protected]

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R ecently, a number of developments within the European Union (EU) has led to the potential

sharing of information, which was previously treated as and considered strictly confidential. This is in line with the global trend on increased transparency. For companies, it is necessary to assess the potential impact of this sharing of information. This article explains the recent proposed developments and adopted regulations, as well as our recommendations going forward.

T a x r ul i n g s a n d st a t e a i d

There has been a lot of discussion on the status of rulings in the EU currently. In the last decades, tax rulings have been an important instrument for collaborative compliance in Europe. Tax rulings are confirmation letters issued

by tax authorities giving specific companies clarity on how their corporate tax will be calculated. Typically the nature and content of such tax rulings are confidential. These rulings are generally entered into by multinationals to create certainty around tax and compliance risks, especially in cross-border transactions.

In 2013, the European Commission (EC) requested a number of EU Member States (including Ireland, the Netherlands, Belgium, Luxembourg, Gibraltar, the UK, Cyprus and Malta) to provide information on their tax ruling practices. On the basis of this information, the Commission opened formal investigations into the potential for state aid in specific tax rulings issued by Ireland, Luxembourg and the Netherlands in 2014.

E ur o p e’ s increasing

transparency: t a x r ul i n g s a n d m o r e

What should companies make of the potential impact of information sharing, which has previously been considered confidential,

in light of recent EU developments? Barbara Voskamp discusses.


According to the Treaty on the Functioning of the European Union, any aid granted by a Member State through state resources in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States be incompatible with the internal market, qualifies as unlawful state aid. It is settled case law that the notion of aid can encompass not only the positive benefits such as subsidies and loans, but also interventions that in various ways, mitigate charges, as in the case of taxes.

The EU State Aid rules prohibit favouring of specific undertakings or production of specific goods. In other words, they prohibit selective aid. In order to determine whether a tax measure is selective, it must be examined in the context of a particular legal system — whether that measure constitutes an advantage for certain undertakings in comparison with others in a comparable legal and factual situation. State measures that differentiate between undertakings, and are therefore prima

facie selective aid, may only be justified should that differentiation result from the nature of the general scheme of the tax system of which they form part. If and when the EC (or in final resort, the European Court of Justice) decides that a certain beneficial advantage indeed constitutes illegal state aid, the Member State that rendered such advantage is ordered to recover the advantages rendered from the taxpayer that received those advantages over a period of up to 10 years.

By the end of 2015 and early 2016, the EC adopted decisions in three state aid cases into tax rulings issued by the Netherlands, Luxembourg and Belgium, while four other investigations into Ireland (one specific tax ruling), Luxembourg (two specific tax rulings) and Gibraltar (the broader ruling practice) are pending.

On top of that, around 300 other rulings are still being examined by the Commission. The majority of these cases revolve around transfer pricing and advance tax rulings. The EC found that the tax rulings applied methods

“With the new transparency concepts and rules being drafted, implemented or for some that are already in force, it is more critical than ever that companies with investments in Europe perform a full assessment of the information they will need to submit.”


Barbara Voskamp Partner, European Tax Desk for Asean and [email protected]

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which, in the Commission’s view, did not reflect economic reality. The Netherlands, Belgium and Luxembourg have lodged appeals with the EU General Court against the respective decisions issued by the EC. Pending these appeals, the Commission has ordered the Member States involved to recover the advantages rendered from the taxpayers over a period of 10 years.

E n d t o r ul i n g s?

Although it has been explicitly confirmed by the EC that tax rulings are accepted and supported as a means of collaborative compliance between taxpayers and tax authorities as long as they reflect a proper application of the tax laws, the decisions illustrate at the same time the growing influence of the EC on Member State’s sovereign rights to organise their domestic taxes and policies.

Companies that entered into an advance tax ruling with the competent tax authorities generally and genuinely lived under the assumption that the endorsed and vetted tax modus operandus as described in the tax ruling could not at any later stage be scrutinised as long as the conditions, facts and circumstances as per the tax ruling were duly met. With the EC stepping into the arena forcing Member States to claim back alleged beneficial advantages from taxpayers if and when tax rulings are considered illegal state aid, the presumed legal certainty is no longer a given.

Increased transparency

The EU, like the rest of the world, is striving for a higher level of transparency. In order to achieve this, a number of policies and actions have been proposed and adopted recently.

In December 2015, a Directive was adopted, which requires Member States to automatically exchange information on cross-border tax rulings as well as advanced pricing arrangements from 1 January 1 2017.

A secure central data base will be developed, where the information will be stored and be accessible to all Member States. Member States receiving the information will be able to request further information, if and when appropriate. The purpose of the exchange of rulings is to ensure that if one Member State issues an advance tax ruling or transfer pricing arrangement, any other Member State is in a position to monitor the situation and the possible impact on its tax revenue.

Following the package of initiatives that were issued by the EC in early 2016 (sometimes referred to as the anti-BEPS directive), further proposals have been launched to increase transparency, such as the country by country (CbC) reports of multinationals that operate in the EU.

Under these rules, multinational groups with more than €750m in revenues will have to provide certain tax- and non-tax-related information on an annual basis for each tax jurisdictions in which they do business. The information includes the amount of revenue, the profit or loss before income tax; the income tax paid and accrued; the number of employees; the stated capital; the retained earnings; and the tangible assets of the group.

The main rule is that the group parent company will provide the information to the tax authorities of its country of establishment. Those tax authorities will then submit the information to the countries where business operations are conducted. However, if the parent country does not have a CbC regime in

place, the subsidiary countries can request the information directly from the MNCs’ operating units in their jurisdiction.

The EU Member States — once having adopted this rule — will require this information from EU-headquartered enterprises or any other enterprises with operations in the EU. In addition, the EU commission has recently launched a draft amendment to the accounting directive that would require a subset of this information to be made public via the websites of many companies that operate in the EU.

Also, MNCs need to take note of the EU master file requirements. The master file will require MNCs to share significant information on their global operations including rulings directly with tax authorities that have included the master file concept in their legislation. The threshold for master file varies per country but is much lower than the €750m mentioned for CbC reporting.

G et r ea d y

With the new transparency concepts and rules being drafted, implemented or for some that are already in force, it is more critical than ever that companies with investments in Europe perform a full assessment of the information they will need to submit, as well as the information that will be shared among authorities including tax rulings. Companies should proactively map out their go-forward strategy, which will need to have a strong emphasis on consistency in all tax-related filings and public statements. It is key to pre-address potential controversy rather than to wait till tax authorities make their assessment. In short, companies should be well-prepared for increased transparency.



“ It will be interesting to see how the EU will regard Singapore’s tax incentive regimes,

particularly from a transparency perspective.”

On 28 January 2016, the European Commission (EC) published an anti-tax avoidance package, which called for a coordinated European Union-wide (EU)

response to corporate tax avoidance, following the global standards against base erosion and profit shifting (BEPS) developed by the Organisation for Economic Co-operation and Development (OECD) since October 2015.

This package is the latest step by the EC in delivering its ambitious agenda to align the tax laws in all 28 EU countries in order to fight aggressive tax practices by large companies efficiently and effectively.

The anti-tax avoidance package consists of four separate documents, namely a proposed EU Anti-Tax Avoidance Directive (the ATA Directive), a proposal on mandatory automatic exchange of tax-related information amongst EU tax administrations on a country-by-country basis (CbCR Directive), a communication on an external strategy for effective taxation, and a recommendation on the implementation of measures against treaty abuse.

The package is formulated around the three core pillars of the EC’s agenda for fairer taxation: ensuring effective taxation in the EU, increasing tax transparency, and securing a level playing field.

P o st - a n t i -avoidance package: w h a t ’ s n ex t f o r S i n g a p o r e?With the release of European Union’s anti-avoidance package, how will Singapore be impacted on the tax front? Chester Wee and Jerome van Staden share their analysis.




On the surface, these measures appear only to be applicable to EU countries. However, they can have an impact on existing transactions and arrangements of multinational corporations (MNC) in those EU countries and also influence the tax policies of non-EU countries. Therefore, it is imperative for non-EU countries like Singapore to revisit their tax systems to align with and implement the required to-be global standards.

ATA Directive

With the ATA Directive, the EC wants to achieve an EU-wide aligned implementation of several Actions of the BEPS reports and provide the EU Member States with legal proposals on how to reflect this in their national law.

Besides interest deduction limitation rules and hybrid mismatch rules, the ATA Directive provides for exit taxation rules and a general anti-abuse rule. According to the switch-over clause of the ATA Directive, the EU Member States will no longer apply the participation exemption in respect of dividends and capital gains on the disposal of shares received from a non-EU country unless the statutory tax rate of that non-EU country is at least 40% of the tax rate in the relevant EU Member State. As Singapore’s statutory corporate tax rate is 17%, the switch-over clause will not be applicable as none of the EU Member States provides for a corporate tax rate higher than 42.5%.

However, under the controlled foreign company (CFC) rules, the impact might be different for an EU corporation holding shares in a Singapore subsidiary. The CFC rules generally aim to avoid non- or low- taxation by interposing subsidiaries in low-tax countries having only passive income (i.e., no operating income). The CFC rules suggested within the ATA Directive would impose a charge on undistributed profits of controlled non-listed entities that are subject to taxation at an effective rate lower than 40% of the equivalent effective rate in the controlling EU Member State where the entity principally receives financial income.

Effective tax rate of controlling E U M em b er S t a t e

Threshold effective tax rate of controlled n o n - l i st ed en t i t i es un d er C F C r ul es

35.0% 14.0%

30.0% 12.0%

25.0% 10.0%

20.0% 8.0%

15.0% 4.5%

10.0% 4.0%

As the effective rate — not the statutory one — is a deciding factor for the CFC rules, this could result in EU taxation of undistributed profits of Singapore subsidiaries having lower effective tax rate due to the partial tax exemption or tax incentives. This could well neutralise Singapore’s tax competitiveness.

Whether all EU Member States (including those that are not members of OECD) would implement the CFC rules or if some would opt for the switch-over rules as an alternative remains to be seen.

It is noteworthy that there is a provision in the Ireland-Singapore avoidance of double taxation agreement (DTA), which provides for Irish dividends to qualify for exemption under Singapore’s foreign-sourced income exemption (FSIE) scheme notwithstanding that the highest rate of tax levied in Ireland is below the qualifying headline tax rate of at least 15% under the FSIE scheme. With this as a reference, Singapore might consider negotiating a similar provision in its DTAs with other EU Member States to neutralise any negative tax outcome arising from the ATA Directive for investments in Singapore.

CbCR Directive

Complementing the OECD recommendations in its BEPS final report on Action 13, the EU has included CbCR rules in an EU context.

According to the CbCR Directive, the EU Member States should implement CbCR regulations in their national tax law by 31 December 2016, with filing requirements applicable to fiscal years commencing on or after 1 January

2016. As a consequence, all MNC groups (including those with the ultimate parent in a non-EU country) having at least one subsidiary within the EU and having consolidated group revenue equating to or higher than €750m, have to comply with the automatic exchange of information on CbCR.

Separately, the EC is pushing for public disclosure of certain tax information as one of the main changes to the so-called Accounting and Transparency Directives of 2013 for companies established in the EU. This will also affect the adjustments to be made.

Good tax governance

Based on the communication paper of the EC, a common external strategy for effective taxation must be founded on clear, coherent and internationally recognised tax good governance criteria, which are consistently applied in relation to third countries. Good tax governance is based on three main criteria: transparency, information exchange and fair tax competition.

As a first step, Singapore has ratified the Multilateral Convention on the Mutual Administrative Assistance in Tax Matters on 20 January 2016 and insofar accepted the international standards on the exchange of information.

Singapore has already given its commitment on implementing the common reporting standards (CRS) in order to comply with the automatic exchange of information required by the respective Multilateral Competent Authority Agreement (MCAA). However, Singapore has yet to sign the MCAA in




Tax Matters to implement CRS and the MCAA for the automatic exchange of CbCR. Nevertheless, the EU’s ambitious tax transparency agenda goes further than the international requirements by requesting an automatic exchange of information on cross-border tax rulings and advance pricing agreements.

As a further criterion for good tax governance, the EU mentioned fair tax competition, which was originally defined based on the Code of Conduct on Business Taxation and is the EU’s own tool for countering harmful tax regimes.

Such a Code of Conduct has been developed further within the BEPS reports, which have created new international standards for fair corporate taxation — something that all Group of 20 or OECD members and associated countries have committed to implement. Within the EU, Member States have already taken several important steps in this respect, for example, by agreeing to apply the modified nexus approach for patent box regimes.

Although Singapore’s tax incentive regimes are substance-based and generally aligned with the nexus approach, details of the underlying conditions of the incentives are currently not published. It will be interesting to see how the EU will regard Singapore’s tax incentive regimes, particularly from a transparency perspective.

Based on the proposals issued by the EC, the EU Member States should publish blacklists of non-complying third countries that are not acting in

accordance with the minimum standards of good tax governance. Further, they should seek to renegotiate, suspend or terminate any existing DTA with non-complying third countries. On the other hand, EU Member States should take measures in favour of third countries complying with the minimum standards of good tax governance by removing them from blacklists, initiating negotiations of bilateral double tax conventions and offering closer cooperation.

As the aforementioned sanctions can have quite a considerable impact on the global tax landscape, it is important for third countries to position themselves and revisit their tax systems in order to comply with the minimum standards of good tax governance and avoid a blacklisting.

In this context, how might Singapore navigate the challenge? One possible scenario: Singapore could accept an exchange of information regarding cross-border tax rulings and provide for greater transparency on the application and evaluation process of tax incentive regimes. This would also provide greater assurance and comfort to other jurisdictions that the tax incentive regimes in Singapore are substance-based, and aligned with OECD recommendations against BEPS. This would allow the country to proactively comply with the EU tax good governance criteria too.

Im p l em en t a t i o n o f m ea sur es a g a i n st t r ea t y a b use

Finally, the anti-avoidance package includes a recommendation to EU Member States addressing the implementation of measures against tax treaty abuse in two ways.

One recommendation is to include a general anti-avoidance rule in tax treaties with third countries. Such an anti-abuse rule should be based on a principal purpose test. The other recommendation refers to the definition of a permanent establishment based on the proposed new provisions to Article 5 of the OECD Model Tax Convention in order to address artificial avoidance of permanent establishments as mentioned in the BEPS final report on Action 7.

Im p l em en t a t i o n and conclusion

The ATA and CbCR Directive are still in draft form and in order for them to be implemented, a unanimous agreement of all EU Member States is necessary. Therefore, despite the political support, it will be rather likely that the final directives will differ from the current draft.

However, it is clear that the implementation of all or parts of the anti-avoidance package — be it in the current or amended form — will have a huge impact on the taxation of MNCs and will also challenge third countries like Singapore to revisit their current tax systems.

C h est er W ee Partner, International Tax [email protected]

J er o m e v a n S t a d en Partner, International Tax [email protected]

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You and the Taxman


In conversation with

T he global community watched with bated breath as Arun Jaitley, India’s Finance Minister (FM) delivered the recent Budget announcements

amidst uncertain sentiments and much anticipation of positive changes.

With the new Modi government determined to make new programmes like “Skill India” and “Make in India” work and gain traction around the world, sentiments surrounding India have gone up a notch.

What does this translate into both for local enterprises and investors looking to expand their operations in India? Here are some insights.

What are the key differences b et w een t h i s a n d p r ev i o us y ea r s’ B ud g et ?

GM: In this Budget, Modi’s government did not undertake any retrospective amendment in tax law i.e., no changes that date back to

“With the new Modi government determined to make new

programmes work and gain traction around the world,

sentiments surrounding India have gone up a notch.”

Investing in India: t h e t i m e i s n o wGagan Malik (GM) discusses the impact of India’s Budget measures and what it means for businesses and investments in the global context.




a time in the past were passed. This contrasts with Budget 2012, which witnessed a watershed moment when a plethora of retrospective amendments were announced. There were hardly any surprises this year. It was an extremely balanced and predictable Budget based on a transformative agenda. There was a clear focus on socio-economic development and enabling an environment for ease of doing business in India.

W h a t w er e t h e m a i n i ssues t h a t B ud g et 2016 p ur p o r t to address and tackle?

GM: China is struggling with low manufacturing output. Persistent fall in crude prices has hurt many oil-producing countries and growth has slowed in several European giants like France, Germany and Italy. The US economy faced the first decline in service sector business activities since October 2013.

With all of these in perspective, the FM took on a balanced approach to focus on agriculture welfare, infrastructure and investment, ease of doing business as well as positive tax reforms. Investment continues to be the underlying theme. The FM did not lose sight of areas that most impact foreign investors — reducing litigation and providing certainty, including simplification and rationalisation of tax laws.

With impetus given to schemes like “Skill India” and with the Budget deemed as a “farmer-first” one, the government is placing emphasis on boosting domestic demand and generating growth from within, rather than relying heavily on global drivers.

Speaking of tax certainty, what’s your take on the recent In d i a M a ur i t i us ( I- M ) t r ea t y renegotiation and its impact on investors, particularly t h o se f r o m S i n g a p o r e?

GM: There have been many discussions on this for years, possibly lasting over a decade. It was only a matter of time, especially in light of the BEPS developments as well as forthcoming introduction of General Anti Avoidance Rule (GAAR) in India with effect from 1 April 2017, that the new Protocol was signed.




With certainty of taxation, investors in general do not have to evaluate the potential litigation on every transaction made or based in India now. The government has given significant clarity by confirming that all investments up to 31 March 2017 will begrandfathered, i.e., even if the exit of such investments happen any time after this date, the gains would not be taxed in India. It has also provided transition provisions for two years (1 April 2017 — 31 March 2019) wherein subject to specific conditions (including the fact that any shares bought after 1 April 2017 and sold by or before 31 March 2019), taxability would be at 50% of the applicable tax rate. Any shares bought anytime after 1 April 2017 and sold after 1 April 2019 would be fully taxable in India. These clearly support the government’s stance on avoidance of double non-taxation.

This change has significant impact on investors investing into India via Singapore (I-S). It is critical to note that the I-S treaty exemption was made co-terminus with that of I-M’s. With a revision to the I-M tax treaty shifting the taxing right for capital gains from Mauritius to India now, the exemption afforded under the I-S treaty may cease to operate effective from 1 April 2017. This means that once India gets the right to tax capital gains in its treaty with Mauritius, it will get a similar right

under its treaty with Singapore. However, whether the grandfathering approach or transition provisions would apply to the I-S treaty automatically is not a given.

It is therefore imperative that a new Protocol be signed between India and Singapore at the earliest so as to revise the I-S tax treaty and provide certainty and clarity to investors.

Back to the Budget: what a r e t h e r eg ul a t o r y m ea sur es taken that could help drive b usi n esses a n d i n v est m en t s i n t o In d i a ?

GM: To support the reform process of the business climate in India and the economy as a whole, the government has come up with a multitude of laws over the past couple of years and also proposed a few measures (such as reforming the Goods and Services Tax and the Insolvency and Bankruptcy Law) in the current Budget. Further, steps are taken to remove the impediments to doing business in India and keep local Indian entrepreneurs competitive with global counterparts.

Foreign Direct Investment (FDI) regulations have seen significant relaxation in foreign ownership caps. The FDI cap for the Insurance and Pension sector is now set at 49%, a rise from 26%; as well as 100% in

Asset Reconstruction Companies. The government has also announced a 15% FDI cap in stock exchanges, increasing it from the current five percent. Many businesses have been waiting for such enhanced limits for investments and it could be an opportune time for them to take action now.

How do local-centric programmes make operating b usi n esses o r set t i n g up manufacturing operations in India more attractive?

GM: Benefits surrounding manufacturing could potentially be divided between Central incentives and State incentives. Under Central incentives, the government is offering the Modified Special Incentive Package Scheme to benefit Electronic System Design and Manufacturing units, giving them a capex subsidy (refund of capital expenditure that reduces project cost) of 20 to 25%, including duty refunds on the basis of meeting certain conditions.

On the other hand, the Merchandise Exports from India Scheme grants duty benefits for the export of specified Indian-manufactured products. Additionally, the government is significantly exempting import duties on various parts and components required in the manufacturing of specific products in India such as cell phones, cameras and CCTVs.




Under State incentives, various states are robustly competing to offer a range of benefits such as stamp duty waiver or exemption, electricity duty exemption, duty subsidies, concession on land charges or registration, single window clearances etc. to attract investments.

What about changes on the i n t er n a t i o n a l t a x f r o n t ?

GM: We see a heavy influence of the Base Erosion and Profit Shifting (BEPS) Project on the current Budget. With a steady rise of Indian multinationals on the global stage, the Indian government seems to have renewed interest to claim their fair share of the tax pie. This is evident from several international tax proposals emanating on account of BEPS from Budget 2016.

For example, with the introduction of Country-by-Country (CbC) Reporting and Master file (BEPS Action 13) for entities with a consolidated revenue exceeding €750m, reporting obligations including significant penalties on failing to comply have been prescribed in detail.

Gagan Malik International Director, Asia Pacific Tax Centre — India Tax Desk [email protected]

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The FM also introduced an equalisation levy at the rate of 6% under Action item 1 of BEPS, which would require withholding on gross basis for all payments made to non-residents in relation to specified digital service currently including online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements. Aimed at taxing business-to-business e-commerce transactions, the scope of the levy may be expanded to cover a larger gamut of goods and services as time passes. Businesses operating in India that have similar payments to overseas companies may need to revaluate their models or set up procedures to ensure compliance with this additional requirement.

The government also introduced a new concessional tax regime for income from patents: any global royalty income earned by an Indian resident from a patent developed and registered in India shall be taxable on a gross basis at the rate of 10% (plus applicable surcharge and education cess). All these will redirect a decent share of income back into the country in one way or another.

What are the key takeaways f r o m t h i s B ud g et ?

GM: This Budget saw the implementation of Place of Effective Management as a test for determining corporate residency in India. The key aspect to review here is whether offshore companies can be considered resident in India and be taxed on their worldwide income on account of any business decisions or activities undertaken in India.

The FM also reiterated his commitment to implement the GAAR from 2017. This essentially means that those looking at some potential restructuring in India may want to evaluate the impact, if any, on their transaction.

In addition, the Dispute Resolution Scheme introduced would provide relief for companies wishing to close their litigation in India, subject to specified conditions.

Enterprises and fund managers can look forward to tax benefits for setting up REITS (business trusts). With the Minimum Alternate Tax being made inapplicable to foreign companies amongst other investment-friendly approaches, companies, especially those in the manufacturing sector, seeking to expand their footprint globally must know when to strike while the iron is hot.


You and the Taxman


Is interest earned by a Singapore company — one that is not in the business of lending — from the provision of a loan to an overseas party always foreign-sourced? The answer is a “yes” in general, but that may not always be the case.

Singapore taxes income on a territorial basis such that “any income accruing in or derived from Singapore” or “received in Singapore from outside Singapore” is liable to Singapore income tax. This is governed by section 10(1) of the Income Tax Act (Cap 134, 2001 Rev Ed) (ITA). The ITA also contains various provisions to deem certain income to be derived from Singapore. Section 12(6) is one of such provisions and reads as follows:

“There shall be deemed to be derived from Singapore:

(a) Any interest, commission, fee or any other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness which is

“It is not always the case that interest is treated as having a source outside

Singapore where the loan is provided to a foreign borrower.”

C H P t e L t d v C o m p t r o l l er o f

Income TaxIvy Ng and Toh Ai Tee analyse the application of

section 12(6)(b) of the Income Tax Act and its implications for businesses.

Lessons in case law




(i) Borne, directly or indirectly, by a person resident in Singapore or a permanent establishment in Singapore except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore or any immovable property situated outside Singapore; or

(ii) Deductible against any income accruing in or derived from Singapore; or

(b) Any income derived from loans where the funds provided by such loans are brought into or used in Singapore”

Section 12(6)(b) has two limbs: it applies if the funds provided by the loan are brought into or used in Singapore. In considering whether interest is deemed to be sourced in Singapore, Section 12(6)(b) is often overlooked.

In deeming interest as sourced in Singapore, we expound on the case of CH Pte Ltd v Comptroller of Income Tax [1988] 1 MSTC 7,022 (CH v CIT) for a better appreciation of how section 12(6)(b) is applied.

Facts of the case

CH was a company incorporated in Singapore to negotiate loans and procure capital for any company. It provided a loan of S$9m (the loan) to DI Pty Ltd (DI), a company incorporated in Australia that has a branch in Singapore, to enable DI to settle part of the purchase price arising from its purchase of certain mineral rights in Australia from NPJ Pte Ltd (NP).

At the time the loan was provided to DI, CH had in place credit facilities of up to S$9m from the Singapore branch of Bank Nationale de Paris (BNP-SB). Each of CH, DI and NP had an existing account with BNP-SB. On 26 May

1976, representatives from CH and DI executed and signed a loan agreement in Johore Bahru, Malaysia for the loan to be provided by CH to DI. Immediately after this, the representative of CH handed over a cheque payable on BNP-SG to the representative of DI, who in turn drew a cheque for the same amount and payable at BNP-SG, in favour of NP. Both cheques were payable at BNP-SB in Singapore and were credited into the bank accounts of DI and NP maintained with BNP-SB on the same day.

The interest payable to CH was accrued by DI as amount owing to CH from time to time and there was no actual payment of the interest to CH. The Comptroller of Income Tax (CIT) assessed CH to tax on the interest derived from the loan to DI on the basis that the interest was sourced in Singapore.

CH appealed to the Board of Review.

3 0 | You and the Taxman Issue 2, 2016

You and the Taxman

3 0 | You and the Taxman Issue 2, 2016

Board of review decision

The Board of Review (BoR) upheld the decision of the CIT on the grounds set out below.

Although the cheque for the loan was drawn and handed over to DI in Johore Bahru, Malaysia, the origin of the loan was the funds in the account of CH with BNP-SG in Singapore. The fact that the loan agreement was executed in Malaysia and that the cheque handed over to DI in Malaysia did not alter the source of funds to Malaysia.

The BoR further commented that if the handing over of the cheque in Malaysia was material to determine the source of the loan, when the cheque was brought into Singapore and banked into DI’s bank account with BNP-SG, the funds provided by such loan had been brought into Singapore within the ambit of the first limb of section 12(6)(b). The interest on the loan was henceforth deemed to be sourced in Singapore on application of the first limb.

CH appealed to the High Court.

High Court decision

The High Court arrived at the same conclusion reached by the BoR that the source of interest was in Singapore — but on a different application of section 12(6)(b).

The High Court agreed with the counsel for CH that the funds had all the time been in BNP-SG in Singapore and hence the funds were not brought into Singapore. The first limb of section 12(6)(b) thus did not apply. The question was whether the second limb of section 12(6)(b) applies.

The second limb requires the funds from the loan to be “used in Singapore”. From the statement of agreed facts, Judge Thean J discerned and concluded the following points:

Firstly, DI used the whole of the loan for payment of part of the purchase price of the Australian mineral rights. It drew a cheque for S$9m payable to NP,“ which was handed over in Johore Bahru”; that cheque was payable at the Singapore branch of BNP.

Secondly, the cheque drawn by DI — having been received on behalf of NP — was credited to the latter’s account with the Singapore branch of BNP, as according to the statement, the cheque drawn by CH and the cheque drawn by DI were “banked into the bank accounts of the parties with Banque Nationale De Paris Singapore on 26 May 1979”.

Hence, there was a transfer of the funds from the account of CH to the account of DI to the account of NP, with all these having taken place in Singapore. If this was the factual position, then the legal consequence is this: DI, by so paying S$9m to NP, had employed in Singapore the funds provided by the loan in Singapore in discharging pro tanto its contractual obligation to NP.

On this basis, the funds provided by the loan of S$9m to DI were used in Singapore within the meaning of Section 12(6)(b) of the Income Tax Act, and by virtue of that provision, the interest on the loan was deemed to be derived from Singapore.

L esso n s l ea r n t

Very often, we confine the relevance of section 12(6) in the context of a withholding tax responsibility and ignore its broader application as a provision that deems certain income to be sourced in Singapore under specific circumstances.

This instance shows that it is not always the case that interest is treated as having a source outside Singapore where the loan is provided to a foreign borrower. One has to be mindful of the deeming provision of section 12(6)(b) in order to avoid erroneously treating the interest as foreign-sourced income and hence not bringing the income to tax in the year of accrual.

Iv y N g Partner, Tax [email protected]

T o h A i T ee Associate Director, Tax [email protected]

Contact us

3 1You and the Taxman Issue 2, 2016 |


3 1 You and the Taxman Issue 2, 2016 |

Income tax

18 March 2016 Simplification of claim of rental expenses for individuals (second edition)

4 January 2016 Transfer pricing guidelines (third edition)

I nl and R ev enue A uthor i ty of S i ng ap or e ( I R A S ) e- Tax g ui des i s s ued or r ev i s ed f r om 1 J anuar y 2 0 1 6 to 3 0 A p r i l 2 0 1 6

Goods and Services Tax (GST)

5 April 2016 GST guide for the market participants in the National Electricity Market of Singapore (NEMS) (second edition)

5 April 2016 GST: general guide on group registration (second edition)

1 April 2016 GST: general guide for businesses (fourth edition)

1 April 2016 GST: the electronic tourist refund scheme (eTRS) (fifth edition)

1 April 2016 GST: guide on divisional registration

1 April 2016 GST: how do I prepare my GST return? (second edition)

4 March 2016 GST: partial exemption and input tax recovery (second edition)

19 February 2016 GST: zero-rating of sale & lease of containers and container services

11 February 2016 GST guide for the marine industry

11 February 2016 GST: approved marine customer scheme (AMCS)

At a glance

Agreements for Avoidance of Double Taxation (DTAs) signed or ratified from 1 January 2016 to 30 April 2016

D TA s s i g ned

16 March 2016 Singapore — United Arab Emirates (Second Protocol)

15 February 2016 Singapore — Rwanda

15 February 2016 Singapore — Thailand

3 2 | You and the Taxman Issue 2, 2016 3 2 | You and the Taxman Issue 2, 2016

Tax services in SingaporeOur tax professionals in Singapore provide you with deep technical knowledge, both globally and locally, combined with practical, commercial and industry experience. We draw on our global insights and perspectives to build proactive, truly integrated direct and indirect tax strategies that help you build sustainable growth, in Singapore and wherever else you are in the world.

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are also familiar with all aspects of the accounting function like management reporting, debtors/ creditors control and XBRL conversion.

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Transaction Tax ServicesEvery transaction has tax implications, whether it’s an acquisition, disposal, refinancing, restructuring or initial public offering. Understanding these implications can mitigate transaction risk, enhance opportunity and provide crucial negotiation insights. Transaction Tax Services comprises a worldwide network of professional advisors who can help you navigate the tax implications of your transaction. We mobilise wherever needed, assembling a personalised, integrated global team to work with you throughout the transaction life cycle, from initial due diligence through post-deal implementation. And we can suggest structuring alternatives to balance investor sensitivities, promote exit readiness and raise opportunities for improved returns.

3 4 | You and the Taxman Issue 2, 2016 3 4 | You and the Taxman Issue 2, 2016

If you would like to know more about our services or the issues discussed, please contact:

T a x l ea d er sh i p

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Japan Tax Desk Kenji Ueda +65 6309 [email protected]

Korea Tax Desk Cho Hyun-Mi +65 6309 [email protected]

UK Tax Desk Billy Thorne +65 6718 [email protected]

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I f w e b uy ab r oad b ut 3 D p r i nt at home, will there be indirect tax to pay?F i n d o ut h o w E Y t a x professionals can help buyers, vendors and governments navigate complexity. ey.com/tax #BetterQues ti ons

Tax thought leadership Ernst & Young Solutions LLP’s Tax practice aims to give you insights on the tax issues that matter in today’s fast-changing business environment. To find out how these tax issues impact your business, read You and the Taxman.

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