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You and the Taxman Insights on tax issues that matter Issue 4, 2015

anniversary commemorative edition

10th

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ut10 years50 issues400 articles156 thought leaders

From insights into current and emerging tax issues to practical tips for tax planning and tax risk management

A unique publication written by EY’s tax professionals that’s about You and the Taxman

Cutting edge thought leadership

Diverse range of topicsYour resource for the latest tax trends and issues

1You and the Taxman Issue 4, 2015 |

Issue # – Month Year

110th anniversary commemorative edition You and the Taxman Issue 4, 2015 |

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ut You and the Taxman had its roots as a weekly tax column by EY in The Business Times. Running for a year from September 2004 to August 2005, the column provided tax tips and updates on tax issues of the day.

After the end of the column’s run, EY’s then Head of Tax — Pok Soy Yoong — decided to turn it into a magazine as a continued showcase of EY’s tax thought leadership and in-depth knowledge on tax matters. The publication was to include practical and up-to-date analysis and commentary of tax issues and trends. To the best of our knowledge, we were the only Big 4 firm at that time to publish a full-fledged tax magazine.

A small committee was formed to chart the direction of the magazine, brainstorm topics, assign writers, allocate resources and sort out logistical issues — in short, to get the magazine up and running as soon as possible.

The inaugural bi-monthly issue was published in November 2005. The magazine was subsequently changed into a quarterly publication at the beginning of 2011.

For 10 years, You and the Taxman has been providing our clients with insights on a broad range of current and emerging tax issues and trends in Singapore and beyond. With updates, commentary and analysis on a wide range of tax topics written by EY’s tax partners and directors, the magazine reaches out to CEOs, CFOs and Tax Directors of listed companies, MNCs and SMEs in Singapore. You and the Taxman is an authoritative and informative guide and your resource on the key tax issues affecting companies today.

Past and present issues of You and the Taxman can be found at: www.ey.com/SG/en/Services/Tax/EY-you-and-the-taxman

You and the Taxman

2 | You and the Taxman Issue 4, 2015 10th anniversary commemorative edition

You and the Taxman

2 | You and the Taxman Issue 4, 2015 10th anniversary commemorative edition2 | You and the Taxman Issue 4, 2015 10th anniversary commemorative edition

“You and the Taxman would not have had its success had it not been for all our contributors from our tax team — both past and present.“




This year, Singapore celebrates its 50th year of independence. The nation has celebrated its Jubilee anniversary with great pomp

and pageantry.

Here at EY, we celebrate a milestone of a different kind. It is our pleasure to present you with this special 10th year commemorative issue of You and the Taxman — EY Singapore’s flagship tax magazine with insights on tax issues that matter. Coincidentally, this edition (Issue 4, 2015) is also the 50th issue of the magazine!

As of this edition, we have published 400 articles over 50 issues, written by 156 thought leaders! As we were planning this issue and reviewing our past articles, I was struck by the amount of coverage in such breadth and depth of tax developments throughout the years.

In this issueThis commemorative edition is anchored by the theme Singapore taxation: past, present and future. It contains our observations on the trends and changes that are shaping the tax landscape today.

It is befitting that Pok Soy Yoong, You and the Taxman’s Founding Editor, kicks off this commemorative edition. With his vast experience in the field of taxation, Pok provides his take on how the tax profession has evolved and what he feels make a trusted and competent tax professional.

The world is changing quickly and Singapore has to adapt. Tax policy has to shift in response to or in anticipation of changing business trends both locally and globally. We explore how Singapore’s tax policy has evolved overall and specifically in areas such as transfer pricing, tax incentives, real estate investment trusts, and goods and services tax. We also take a fresh look at certain tax legislation to consider, whether certain areas could be further refined to enhance Singapore’s competitiveness.

This issue wouldn’t be complete without considering the impact of base erosion and profit shifting. We also cover the tax issues to consider in going global and in adopting certain growth strategies, impact of certain business models, and tax issues in specific industries such as shipping, oil and gas and cloud computing.

Special thanksYou and the Taxman would not have had its success had it not been for all our contributors from our tax team — both past and present. It is a huge commitment to take time out from our client work and busy schedules to pen these articles. Thank you to you all.

Special thanks goes to Pok who launched this magazine and laid the foundations for its direction. And my heartfelt thanks goes to Russell Aubrey who has diligently edited each issue since end-2006.

I would also like to thank our guest contributors from IE Singapore, the Economic Development Board and the Monetary Authority of Singapore.

Looking ahead, we can continue to expect more changes, more challenges and more shifts in the tax landscape. As a tax profession, we must continuously adapt and embrace change.

We hope you will enjoy this special edition of You and the Taxman. Thank you for your support.

Tax watch

Mrs Chung-Sim Siew MoonPartner and Head of Tax Ernst & Young Solutions LLP

Looking back, looking ahead


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Is your biggest tax burden the one you can’t see?Taxes can quickly become prohibitive. Find out how we can help navigate your tax complexities at ey.com/tax #BetterQuestions




It’s been a pleasure and privilege to edit You and the Taxman and to bring the magazine to you. Tax can be an interesting subject and our readers are not limited to

the tax and finance community.

I am grateful to all the contributors who have kept us going. Their dedication and enthusiasm

has been inspiring. In bringing you the latest tax developments and thought leadership, I hope we have provoked your thoughts in the process.

The tax landscape is changing at an ever-increasing pace, so I am sure we will have enough material for another 10 years.

Preface

Russell AubreyTax PartnerTransaction Tax LeaderErnst & Young Solutions LLP

| You and the Taxman Issue 4, 2015 10th anniversary commemorative edition6 | You and the Taxman Issue 4, 2015

Managing EditorChung-Sim Siew Moon

EditorRussell Aubrey

Founding Editor and guest contributor Pok Soy Yoong

Guest contributorsGina Lim Jillian Lim Carolyn Neo

Acknowledgements

ContributorsAmy Ang Ang Lea Lea Ang Sau TzeRussell Aubrey Aw Hwee Leng Andy Baik Samir BediHelen Bok Stephen BruceJohanes Candra Chai Wai Fook Kerrie Chang Michele Chen Chew Boon Choo Chia Seng Chye

Chionh Huay KhengChua Xiu MeiRandy Chung Chung-Sim Siew Moon Luis Coronado Goh Siow Hui Goh Su Ling Jow Lee Ying Darryl Kinneally Kor Bing KeongStephen Lam Lee Poh KwangLeow Yuet Yong Lim Gek Khim Latha Mathew

Shubhendu MisraBen MuddRajesh NathwaniIvy Ng David Ong Louise Phua Senaka Senanayake Soh Pui MingMonica Sum Henry Syrett Angela Tan Cedric Tan Jessica Tan Sharon Tan Tan Bin Eng

Tan Ching Khee Tan Lee Khoon Teh Swee Thiam Desmond TeoDonald Thomson Toh Shu HuiJerome van Staden Chester WeeWong Hsin Yee Grahame Wright Wu Soo MeeSandie Wun Yeo Kai EngYeo Ying

Project Manager/Editorial Karen Lew

DesignIrene LeeSoo Soon Tat BCS — Creative Design Services




Singapore Tax Partners, Tax Executive Directors and Asia-Pacific Tax Centre Leaders From left to right

Row 1 (seated): Yeo Kai Eng, Lim Gek Khim, Russell Aubrey, Tan Lee Khoon, Chung-Sim Siew Moon, Soh Pui Ming, Amy Ang, Angela Tan, Grahame Wright

Row 2: Goh Siow Hui, Kerrie Chang, Jeffrey Teong, Helen Bok, Wu Soo Mee, Choo Eng Chuan, Chester Wee, Kor Bing Keong, Nadin Soh, Lim Joo Hiang, Ivy Ng

Row 3: Ang Lea Lea, Tan Bin Eng, Chia Seng Chye, Teh Swee Thiam, Chai Wai Fook, Hugh von Bergen, Latha Mathew, Grenda Pua, Tina Chua, Desmond Teo

Row 4: Stephen Lam, Tan Ching Khee, Kenji Ueda, Paul Griffiths, Samir Bedi, Jerome van Staden, Henry Syrett, Barbara Voskamp, David Scott, David Ong

Absent: Andy Baik, Adrian Ball, Stephen Bruce, Cheong Choy Wai, Luis Coronado, Graham Frank, Rick Fonte, Darryl Kinneally, Gagan Malik, Shubhendu Misra, Nick Muhlemann


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Founding Editor’s contribution

14 Straight from the gut: a retired taxman shares a few thoughts EY’s former Head of Tax shares his insights on what it takes to

succeed in the tax profession and how to instil confidence and trust in the client-advisor relationship.

In this issueYou and the Taxman

Evolution of Singapore’s tax policies

20 The role of tax policy: what works, what stays, what changes?

The primary purpose of taxation is, of course, to raise revenue. But tax policy is also used to enhance competitiveness and shape social behaviours.

24 Singapore tax incentives: the Jubilee vantage point Singapore’s incentive schemes have always been refined

in line with economic priorities. Government agencies have played a critical role in administering these incentives to attract and retain businesses with substantive activities in Singapore.

30 The evolution of transfer pricing in Singapore The transfer pricing scene in Singapore has progressed since

the first guidelines were introduced in 2006. With base erosion and profit shifting in the international limelight, the tax authority’s focus on transfer pricing will continue to intensify.

34 Singapore GST: past, present and future Since its introduction, the goods and services tax (GST) rate

has increased and self-review programmes have been introduced. The future is likely to bring increasing use of data analytics to enforce GST.




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Issue 4, 2015 10th anniversary commemorative edition

39 Expatriate taxes: past, present and future Drawing talent from abroad helps Singapore to inject greater

vibrancy into the economy and retain its position as a key business hub in Asia. In reviewing the tax regime for expatriate taxation, the key is to strike the correct balance.

44 Singapore REITs: the next lap The regulatory and taxation framework for Singapore real estate

investment trusts (REITs), including tax transparency, has contributed to the sector’s success. Going forward, other key taxation areas that can be reviewed include the sunset clause.

48 Singapore thrives as a fund management hotspot Singapore’s tax incentive regime has been instrumental in

positioning Singapore as an attractive fund management centre. Despite this, there’s still room to encourage further fund domiciliation in Singapore.

52 Keeping taxes competitive for the insurance industry Targeted tax policies have helped to create a vibrant insurance

sector in Singapore. An area that could be refined is to allow the application of general tax principles to evaluate the tax implications of business operations and transactions.


A fresh look at Singapore taxation

56 Demystifying the 2015 Singapore Transfer Pricing Guidelines The release of the 2015 Singapore Transfer Pricing Guidelines in

January 2015 has been a game-changer, requiring companies to prepare annual transfer pricing documentation.

60 Enhancing the renovation and refurbishment deduction scheme To further support small and medium-sized enterprises, the

renovation and refurbishment deduction scheme can be refined by increasing the spending cap, amongst other measures.

63 Defining the status of an investment holding company In determining the tax treatment of an investment holding company,

it is important to differentiate between a pure investment company and a section 10E company which “carries on a business of making investments”.

67 Nailing withholding tax compliance Withholding tax is a key concern in cross-border transactions.

Companies need to consider the various withholding tax compliance requirements, as well as the developments in this area, in multiple jurisdictions.

70 Broadening deductions for intangible assets In tax, the line between capital and revenue expenditure is

difficult to draw. For telecommunication providers, it would be helpful if the payments for spectrum rights and licences can be deducted or amortised for tax purposes.

73 In the spirit of giving Despite their contribution to society, voluntary welfare organisations

in Singapore do not receive special GST relief or status. Perhaps it is time to fine-tune the GST legislation to reverse this.

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7676 Finding tax upside with accounting reclassification In determining whether a receipt is capital or revenue in nature,

taxpayers need to examine the facts and circumstances surrounding the transactions and consider these against guidance developed through case law.

Impact of base erosion and profit shifting (BEPS)

80 The big deal about BEPS The Organisation for Economic Co-operation and Development’s

(OECD) BEPS project affects businesses with overseas operations. Companies need to assess the impact of BEPS and implement measures to mitigate any negative impact.

84 Going global: consider before you leap Before going global, companies need to consider these tax

issues: the holding and financing structure for new investments, local tax considerations in the foreign country, transfer pricing and supply chain issues, and expatriate tax implications.

87 Preserving Singapore’s status as a regional hub for business In light of growing transfer pricing scrutiny worldwide, Singapore

has to defend its stature as an international business hub by ensuring that companies anchored here have sufficient business substance.

90 Recent trends in the application of tax treaties Recent trends observed in tax treaties of late include the narrowing

of permanent establishment exclusions and the inclusion of anti-abuse provisions to disallow treaty benefits. The fight against BEPS is also likely to impact the negotiation of tax treaties.

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Growth strategies and going global

94 Staying competitive in an evolving global tax landscape Many countries are embarking on tax reforms, driven by the OECD’s

BEPS Action Plan and the move towards greater transparency. Multinational enterprises thus need to keep themselves updated on these tax policy shifts.

97 Venturing abroad: five tax issues SMEs need to consider Before going overseas, SMEs need to consider the local tax

implications of the entity structure, the local tax impact of funding arrangements, tax deductibility of borrowing costs, future profit repatriation, and the tax implications of disposal of the investment.

100 The “art” of investing in ASEAN While the ASEAN region offers a plethora of opportunities

for foreign investors, they need to be aware of the diverse regulatory and tax compliance requirements in the region.

116 Divestments: the new black? Divestments can catalyse growth as the funds from a sale

can be deployed into more exciting opportunities. To maximise value, businesses need to ensure that the divestment is tax-efficient.

Business models

120 Singapore centralised business models and transfer pricing documentation

The centralisation of managing transfer pricing documentation can ensure a coherent and consistent messaging across groups, which is increasingly important given the BEPS requirements.

125 Top four customs implications of cross-border structuring Singapore’s customs environment can be just as complex as

other customs jurisdictions in Asia-Pacific. Redesigning operating models with a Singapore element therefore requires careful consideration of customs issues. 125

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129 Embracing a data driven era Tax departments face challenges in mining and managing data

for better decision making. Tax functions can harness the use of big data to make better decisions, meet transparency demands and reduce tax risk.

132 Managing the talent and reward agenda To grow talent, organisations need to emphasise their future

competencies and align their development with business plans. Organisations should also customise reward programmes and align these with business strategy and employee needs.

Industry trends

136 Navigating new tax headwinds in the shipping industry As the international tax landscape evolves, players in the

shipping industry need to assess their business models to ensure that they can proactively manage tax risks and support their adopted tax positions.

140 Oil and gas sector facing structural shift Oil and gas players will need to consider the tax implications of

further consolidation in the sector, amid a backdrop of falling oil prices.

143 Top five considerations in entering transactions in the financial services sector

Before proceeding with a transaction, financial services institutions should consider the following: reputational concerns and internal governance, codes of conduct, BEPS concerns, transfer pricing and anti-avoidance provisions.

146 Tax and the cloud: is the sky clearing? Cloud computing has increased exponentially, but uncertainty

remains on its tax treatment. Key tax issues relating to cloud computing include the sourcing of income and the characterisation of payments.

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You and the Taxman


Founding Editor’s contribution

“Mastery of the IRAS statements of practice is not a mastery of the

tax law. To get there one starts with knowing and understanding the

legislative provisions.”

Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.”

Oscar Wilde wrote this in “A few maxims for the instruction of the over-educated”, first published anonymously in November 1894.

Knowing, as in knowing how and what to do, comes from an accumulation of actual experience. It is hands on. It is personal. Fully absorbed into our memory muscles.

What is experience? It is knowledge or practical wisdom gained from what one has observed, encountered, or undergone. And honed over time to crisp sharpness. Deeply fused into one’s gut.

So how can I teach another what and how I know in my gut? How could I transplant my personal experiences into the gut of another person so that he or she could apply the same experience in the way as I did?

The reality is that none of us could.

Straight from the gut: a retired taxman shares a few thoughtsFormer EY Singapore Head of Tax and guest contributor Pok Soy Yoong shares his views on what it takes to succeed in the tax profession

“




Often I am asked what are my secrets. It is as if I have discovered clever shortcuts to gaining knowledge and experience. But I know of no secrets or shortcuts. Whatever I know I gained from long years of immersion in the profession and walking the hard journey every inch of the way.

Be that as it may, I am convinced that it is possible to lead a person towards the path of knowing, of experience, and thus experience the observation, the encounter, or feeling. And on this path one gets a chance to flourish. Edmund Phelps put it well in Mass Flourishing1 — “A person’s flourishing comes from the experience of the new; new situations, new problems, new insights, and new ideas to develop and share”.

I would go a step further though. I would say that a person’s “flourish” or “experiential growth” comes not only from the new. Even a seemingly repeated situation is a new situation. It is new because the context around it is

different. The circumstance around it is different. Or the players involved are different. Just as client after client approached me over the years for advice on, say, withholding tax, the contexts of the withholding issue were invariably different. And so I approached each advice as a “new” situation and gained a new shade of insight each time.

I come back to the question — How can knowing be taught, even if indirectly?

Awareness. That’s the key.

Again I quote Edmund Phelps in Mass Flourishing — “I believe the sole problem (of not flourishing) as the terrible unawareness”. (Words in brackets added.)

What is awareness? It is the state of ability to perceive, to feel, or to be conscious of events, objects or sensory patterns; having knowledge; consciousness.

With awareness we plant in our mind the seed of change. But will it germinate and grow? It depends. It depends on how much will we garner to make the change. Awareness does not make the change. It makes change a possibility.

And so it is with the object of creating awareness that I share a few of my thoughts on what I think hinder our capacity to flourish to our full potential as a tax professional.

You don’t learn from cutting and pasting. Your experience is just that — cutting and pasting

They say you must work smart. They say if it is already invented, you should not reinvent it. They say if it is already written, you just copy it and paste it. You save time. You increase your productivity. And why not if you can bill for what you cut and pasted? The same piece of material is recycled for more fees, with less effort. Indeed, why not?

1Phelps, E. (2013). Mass flourishing: How grassroots innovation created jobs, challenge, and change. Princeton: Princeton University Press.


Just that if we want to cut and paste, we better make ourselves a top in class expert in this. And one more thing. Never get caught, whether we are in the profession or in commerce and industry. I am not against all forms of cut and pastes. But we need to know the effect of indiscriminate cutting and pasting over time. We stop thinking. We stop analysing. We stop seeing pitfalls and opportunities. Without knowing it we restrict our creativity to touch only the surface. As we accept the cut and pasted materials at their face value, as correct we leave our deep thinking ability undeveloped.

In other words, we stop experiencing new insights. But our experience in cutting and pasting increased multifold. But what happens if the situation is new? What if there aren’t existing materials for us to cut and paste? So we fall back on our deep thinking ability and creativity? But what if we have never bothered to practice and hone these traits over time?

We may have covered the same subject matter 50 times with 50 cuts and pastes. It is just the very first experience repeated another 49 times. We do not achieve mastery of our subject matter. We do not develop the gut feel that a maestro exhibits all the time.

Over the years I made it a habit to write all my tax advices, tax opinions, tax memorandums, technical position papers and what not from scratch, with minimal cuts and pastes2. It did not matter that I had dealt with the subject matter umpteen times before. I invariably started the analysis from scratch. I try to make what I learnt come alive, in the context of the facts and circumstances that I was looking at. So each time I wrote on a subject matter I had dealt with before, I gained new insights. I honed my creativity. I learnt to look at the same or similar thing from different angles and different perspectives. I became better at handling the nuances. I became better at making the complex simple. I became better at figuring out what matters

and what not. I became sharper in my decision-making. It is hard work. But it helps my brain revs and keeps it in good shape. More importantly, increased mastery of the subject matter aided me in the speed and quality of my written work. Tremendously.

Beware. We cannot achieve mastery with cuts and pastes, except as a maestro of cuts and pastes. Instead, it holds back the development of our deep thinking ability and creativity; and our ability to articulate effectively.

Work smart but not work hard

We read about this in books. We are lectured on this. Literally, we grew up on this.

Over the years I know of many people that embraced this teaching fervently, and practiced it quite religiously.

But what does this mean? Invariably, it means one or more of these — look for the easiest way to get something done; find the best way to get things done to make life simpler; figure out the quickest and most effective way to rise in ranks without having to toil. By and large, it means minimum effort or pain but maximum upsides or glory. No wonder this teaching has such wide following.

Practitioners of this teaching have found it a rewarding practice as they rise in rank in their careers. That is, until they are promoted to their level of incompetence. At that level, they are no longer confident of what to do, even less of the how to do. And so they persistently keep doing what they used to do before the promotion to the level of incompetence.

The point is that practitioners of this teaching unknowingly shortchange their own potentials in longer run. They become grand masters in shifting their own burdens to others. They delegate when they should have done it themselves3. They become grand

champions at talking but have great difficulty walking their talks (because they just don’t have the skills to do the walk). Some even acquire the fine skills of taking others’ credit. Then some days they wonder why they stagnate while their peers ignorant of the teaching are still rising.

How do practitioners of this teaching shortchange themselves?

They rob themselves of hands-on experience. Without enough hands-on experience they leave their gut feels undeveloped relatively to others.

Hands-on hard work is what that gives experience. This is what that gives the acute sensing of the most likely issues well ahead of others. It is this sensing that helps us derail the issues before those issues derail us. This is also the sensing that helps us focus our energy and resource only on things that count in producing the output we wanted.

How can we smarten up if we have not made the mistakes and distressed over these? How can we figure out where we slipped and why we slipped if we have not made enough mistakes? How can we ever learn from mistakes if we have not rolled up our sleeves and thrown ourselves into the problems and manage them?

Practitioners of this teaching focus on finding short cuts in life. The harshest fact of life is that there aren’t many short cuts in the mastery of life. Indeed, as they rise in their career they become increasingly ineffective. Why? It is simply because they make others learn new skills and accumulate those skills. They just act as middlemen getting their jobs done through others. Now, in a world that focuses on productivity there is very little room for the middlemen!

For me, the rule has always been Work Hard and Work Hard, and experience every aspect of the subject matter that I could possibly experience. And before long, I seemed to be Working Smart without Working Hard. Or so it seemed!

2Even on those occasions I did cut and paste, the “imported materials” became the start point of my draft and was rewritten to follow my technical analyses.3Some of them even excel at delegating upwards to their bosses!




Ben Horowitz said it all in The Hard Thing About Hard Things4: “There are no shortcuts to knowledge, especially knowledge gained from personal experience. Following conventional wisdom and relying on shortcuts can be worse than knowing nothing at all.”

Learn the law and the practice

Learn the law, then the practice. That’s how I learnt my craft.

But for some years now a different trend has taken hold. It is even more evident in recent years. Increasingly, tax positions taken are based on practice statements of the Inland Revenue Authority of Singapore (IRAS), with the provisions in the Income Tax Act (ITA) taking second place or no place at all.

IRAS statements of practice evince the interpretation the IRAS places on the law. But these are not necessarily the only interpretations of the law. For that matter, these may not even be the only correct interpretations of the law. As Yong Pang How CJ famously said in Comptroller of Income Tax v GE Pacific Pte Ltd [1994] 2 SLR(R) 948, “Practice is not law”.

Mastery of the IRAS statements of practice is not a mastery of the tax law. To get there one starts with knowing and understanding the legislative provisions. And a very good grasp of all or nearly all the landmark decisions in case law, both local and foreign.

We need to build a firm grasp of what the law is. Then fortify this with a strong grounding in the tax principles from case law. Then develop a good working knowledge of the IRAS statements of practices; bearing in mind always that practices are not law and that the IRAS’ interpretations in these statements do not cover every conceivable situation. Otherwise, as tax professionals we heighten the risk of taking the incorrect or inappropriate tax positions. And bear the consequences, including that of a potential negligence suit.

AVD v Comptroller of Income Tax [2011] SGTTBR is a good example. A tax practitioner honing his craft based on statement of practices of the IRAS only would have accepted the outcome described in the 1993 IRAS Circular. Understanding the law in Section 37(16) of the ITA, however, should prompt the tax practitioner to enquire whether that Circular should have been interpreted as if it were the law. Admittedly the AVD case was concerned with the exercise of a discretion by the IRAS. But if the veracity of the Circular was not challenged based on the legal provisions in Section 37(16), this case would never have been heard.

And so, learn the law, then the practice.

But how to get there?

The vast majority of the tax practitioners are accountants turned tax consultants. Unlike their counterparts in the legal profession, they are not trained to read the law or read into the nuances of the law. So they claimed. But this has not stopped the older generation of the tax accountants from some impressive mastery of the tax laws.

For those aspiring to hone their craft with the tax law, I recommend they take to heart two chapters in The Law and Practice of Income Tax, second edition. Chapter 1 deals with “Framework of Interpretation in Tax” and Chapter 2 focuses on “Analysing Tax Decisions”. Both chapters were written with the tax accountants in mind. So that is a good starting point for the journey into the lore of taxation.

The older generation of tax accountants have another trick in their hats — their deep knowledge in case law, both local and foreign court cases. Reading, understanding and analysing case law is the other area to invest time and effort in.

The rest of the learning comes from the actual practice of the law and a keen enquiry of the statement of practice

especially whether in the context it was written it has overtly narrowed down the meanings and intents of the words in the legislation.

One does not achieve mastery within a short period of time. If this is possible I am yet to hear or see one. There is no work smart here. There is only work hard to gain the mastery inch by inch.

About key performance indicators (KPIs)

KPIs can be extremely effective in shaping performance behaviours at the workplaces. Just google it and you will find lots of entries about it. I want to focus on only one behavioural aspect of the KPIs.

It has the powerful effect of shaping our behaviour to protect our own interest and pursue this to the exclusion of almost anything else. I have seen and personally experienced instances where clients’ senior executives push the tax advisors for unrealistic targets or positions. When what they pushed for could not come about, they threatened to seek second opinions or issue an RFP. A few even deliberately spoke untruths and put all the blame on the tax advisors when some or all of the trails for the faults could be traced directly back to them. To be fair, I have also had the good fortune to serve many clients with a keen sense of fair play and integrity.

But these self-centered and self-interested behaviours are not confined to the clients’ executives. They are prevalent also in the workplaces of the tax advisors, whether in the profession or otherwise.

KPIs are supposed to be measures of level of performance. Increasingly they are construed as targets. Since rewards or threats of dismissals are pinned to achieving targets (a la KPIs), self-serving behaviors emerge, and emerge strongly.

4Horowitz, B. (2014). The hard thing about hard things: Building a business when there are no easy answers. New York, NY: Harper Collins


And so we have multiple tax advisors from the same organisation competing to serve the same clients but do not talk to each other on what serves the best interest of the client. Or who should best serve the client. And so we have tax advisors serving clients in areas out of their area of competence rather than parading before the clients the subject matter specialists that could serve the interest of the client far better. And so we have tax advisor or advisors hoarding a client list that is far more than they can realistically attend to the interests and needs of these clients. And so on and so forth.

I am not certain whether those practicing such behaviours are even aware of their self-interested traits. Some probably do but justify these on some righteous grounds. But quite certainly, they have little or no understanding how these behaviours affect how they serve their clients in the longer term and their standing in the marketplace.

Plainly, self-serving or self-interest guarding behaviors are major hindrances to achieving a trusted tax advisor status. And this leads me to the next thought.

Trusted tax advisors

Many of us aspire to be a trusted tax advisor and be recognised as such by our clients and in the marketplace. More often than not, we embark on that journey without a road map. I will not even attempt to re-craft what is bountifully available in the internet. A Google search will give you more materials than you can reasonably handle on the traits, and therefore behavioural patterns, of a trusted tax advisor5.

I will share only a few of my thoughts.

There is a strong but misplaced perception that a rainmaker or a superstar salesman is a trusted tax advisor.

In my experience, a trusted tax advisor does not sell. Rather, he sells by not trying to sell. When presented with a tax issue by the client or potential client, he typically offers his thought quite fully and outlines what he thinks are the options available. In so doing, he demonstrates to the client his grasp of the tax and related business issues, the depth of his tactical and technical experience. He does not, for example, say “I know the solutions to the issue. Sign the appointment letter first and I will tell you the answer.”

“It is not what you know but who you know” brings to the fore another misconception. There is this perception that relationship building ability is key to achieving the trusted tax advisor status. Ability to connect with others is one of the many traits of a trusted tax advisor. But relationship alone does not translate to trust. More likely than not, the existence of this relationship turns us into the touch point for an enquiry that may lead to a wider relationships with others in our organisation.

Bending backwards all the way to meet every want and desire of a client is not the trait of a trusted tax advisor. I had come across clients dictating the outcome of tax opinions or advices even before these were written! Some of them even threatened to disengage us or go to the competitors for a more palatable piece of opinion or advice6.

In the early 90s, the tax manager of a US MNC was in town to “interview” the tax partners in the then major public accounting firms. I met her with two of my colleagues. The meeting was pleasant enough. As the meeting drew to an end, she remarked casually

that she was “looking for the most aggressive tax advisors to represent us in Singapore”.

I was silent for a moment trying to bite my tongue. But then I decided to say what I thought ought to be said — “If you are looking for the most aggressive tax advisors, you have come to the wrong place”. When the initial shock was over, I explained that our philosophy was to look after the long term best interest of our clients. For that, we only took technically sustainable tax positions that aligned to the business objectives of the organisation, not aggressiveness for the sake of aggressiveness.

After the meeting, all three of us thought we had lost the opportunity.

A couple of weeks later, we received the letter to confirm our appointment! I continued to serve this client till my retirement and was amply rewarded for our services over those years.

This example is anecdotal of the issue of our self-interest or self-serving behaviours. The more of such behaviours we exhibit, the more likely that our relationship with a client is short term. The drive is primarily to meet the revenue KPIs. In so doing our focus is on the fee potential and anchoring it. The fear of losing the fee holds us back from doing the right thing. And so we seldom pause to ask questions such as whether the best interest of the client would be better served by not going ahead with a piece of work or by scoping down the work or whether the client should re-frame the issue appropriately? Would we have asked these questions if that entails foregoing a large fee?

To further understand and learn the behavious of a trusted advisor two of the books that offer good grounding are The Trusted Advisor7 and The Trusted

5For example, follow this link to a very comprehensive set of materials by David Maister — http://davidmaister.com/wp-content/themes/davidmaister/pdf/pm_clients.pdf 6There is a different perspective to this. We might have taken a conservative or a strict technical view on the issue. But a professional opinion is just that. It is a professional’s judgement call. If we are technically sound, have a firm grasp of the circumstances and issues and consider that an aggressive or more liberal reading of the law is not tenable, I see no reason not to hold firm to our views. This is one of the risks that a trusted tax advisor takes — not bending backwards when he has no conviction in the position he is asked to take. 7Maister, D., Green, C., & Galford, R. (2002). The trusted advisor. New York, NY: Free Press.




Advisor Fieldbook: A Comprehensive Toolkit for Leading with Trust8. You really want to read them and figure out where you are on your journey to becoming a trusted tax advisor.

I quote what the authors said in The Trusted Advisor Fieldbook:

“ Over and over again, you will discover that the things that create trust are the opposite of what you may think. That is why we say trust is paradoxical — in other words, it appears to defy logic. The best way to sell, it turns out, is to stop trying to sell. The best way to influence people is to stop trying to influence them. The best way to gain credibility is to admit what you do not know.

The paradoxical qualities of trust arise because trust is a higher-level relationship. The trust-creating thing to do is often the opposite of what your baser passions tell you to do. Fight or flight, self-preservation, the instinct to win — these are not the motives that drive trust. The ultimate paradox is that, by rising above such instincts, you end up getting better results than if you had striven for them in the first place.”

Profound. But true. I wish this book was published twenty years earlier!

Final thoughts

I begin my final thoughts with what Edmund Phelps said:

“ I believe the sole problem (of not flourishing) as the terrible unawareness”. (Words in brackets added.)

“If I am not aware that there is a problem, as far as I am concerned, there is no problem.” I quipped this often. Sometimes, as a sarcasm. Other times, meaning every word of it, gravely serious.

Unawareness, or not knowing, often robs us of the chance to develop and hone our experience. Cut and paste is one example. This rising tide is almost an uncheckable trend. Yes, doubtlessly it increases productivity. Yet, if we do not fully understand the contents of the cut and paste materials, we could not leverage on it to create new materials, new insights, new knowing and therefore experience. It is just a mindless exercise of cut and paste.

Clearly work smart but not work hard works, to some extent. But practicing this persistently and pervasively means we rarely ever roll up our sleeves to do the heavy lifting. We place a limit on our accumulation of experience. At some point in time our prior experiences will put a limit on our potential to flourish. There is nothing very much we can do with KPIs. With extreme focus on revenue and profitability growth, KPIs are nowadays increasingly considered as targets rather than measures of performance levels. This is what it is, if it is.

There is nothing to stop us from getting keenly aware of how relentless pursuit of these KPIs may heighten our self-interested behaviours. Some argue that these are moralistic and ethical issues. They probably are. But I do not intend to take on this debate here. My message is simply this — awareness of these tendencies helps keep our behaviours in check. It offers us the chance to think about what are the right things to do

8Green, C., & Howe, A. (2012). The trusted advisor fieldbook: A comprehensive toolkit for leading with trust. Hoboken, N.J.: Wiley.9You will see many of the traits described in the pdf materials by David Maister — http://davidmaister.com/wp-content/themes/davidmaister/pdf/pm_clients.pdf. See also notes 5 and 6 above.

and what ought not to do. And by the way, doing the right thing takes a lot of courage and practice.

Trusted Tax Advisor is not an award. It is the confidence and trust our clients have in us over long years of the client-advisor relationship.

A trusted advisor embodies a long string of traits9. The more we are aware of what these traits are, and practice them as consistently as possible, the faster we accumulate the experience and strengthen our reputation in the marketplace.

Knowing and developing gut feel takes much more than awareness of the five thoughts in this little piece. There are many others. Not getting emotional with a tax issue is one. The knack to simplify the complex is another. Writing clearly, plainly, investing in extensive reading (and for those claiming to have no time, re-prioritise our time to make this investment), learning to admit and say we do not know to the clients are some of the others.

Awareness of these and more, in my experience, is what that shaped my personal development and my career in tax. I hope these little thoughts are of some help to you, whether you are in the profession or in commerce and industry.

And my best wishes to you on your journey to knowing, experiencing and flourishing.

Pok Soy Yoong was Head of Tax in EY Singapore from 2002 to 2008. He retired in 2008 after more than 30 years in the tax profession, 20 of which were spent with EY. Pok is currently a Board Member of the IRAS. He is also the Technical Editor of the book “The Law and Practice of Singapore Income Tax”, second edition.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.



“The fundamental tenet of Singapore’s tax policy is to maintain the nation’s competitiveness in the global arena for corporations and individuals by

keeping tax rates competitive for both, amongst other measures.”

The history of taxation can be traced as far back as over 3,000 years ago. For centuries, taxation has been generally used as a

method for governments to raise revenue to finance public sector spending. Indeed, higher taxes were levied during and after the two World Wars to help pay for the cost of these wars. Some reports even cited that the withholding tax system was introduced during World War II to meet the higher demand for revenue.

The evolving use of tax policy

Even today, the main objective of tax policy is still revenue raising. However, taxation is now no longer just a means of funding for government operations. Over time, it has evolved into a tool widely used by governments to influence business, social and regulatory behaviours.

Most textbooks, scholars and policymakers agree that the overarching goals of tax policy are raising sufficient revenue, equity, efficiency and simplicity. Through

The role of tax policy: what works, what stays, what changes?Chung-Sim Siew Moon and Russell Aubrey review how Singapore’s tax policy has evolved throughout the years and consider the likely direction of future tax policy




these goals, governments try to, amongst others, influence social behaviour, whether aggressively or subtly through tax provisions, incentives and disincentives built into the country’s tax policy.

Closer to home — Singapore’s tax policy

In Singapore, the government sees tax policy as a cornerstone of Singapore’s fiscal policy. According to the Inland Revenue Authority of Singapore, the main objectives of tax policy in Singapore are revenue raising and the promotion of economic and social goals.

Understandably, revenue raising is the traditional aim of tax policy as tax revenue is a substantial source of funding for government operations in Singapore. As for the promotion of economic and social goals, tax has been used to influence the behaviour of corporations and individuals in Singapore towards desirable social and economic goals.

For example, to encourage mechanisation and automation, Singapore allows accelerated capital allowances for most assets used for business purposes. Elsewhere, property cooling measures, such as the Additional Buyer’s Stamp Duty and the Seller’s Stamp Duty on properties together with total debt servicing ratio framework, were introduced to moderate the property market and encourage greater financial prudence among property purchasers. To boost Singapore’s birth rate, the government has also enhanced procreation measures and the Marriage and Parenthood package over the years such as removing the cap on the number of children qualifying for child reliefs.

The fundamental tenet of Singapore’s tax policy is to maintain the nation’s competitiveness in the global arena for corporations and individuals by keeping tax rates competitive for both, amongst other measures. For corporations, this helps to ensure that Singapore attracts

a good share of foreign investments. For individuals, the rates are purposefully kept low and progressive to encourage a hardworking society, and to foster entrepreneurship by making risk-taking worthwhile.

Corporations in Singapore enjoy a suite of tax “baits” targeted at the various stages of a corporation’s life, implemented to encourage certain economic or social behaviours.To spur entrepreneurship, the start-up exemption scheme was introduced to provide newly incorporated companies with some level of tax exemption in their initial years. To help small and medium-sized enterprises (SMEs) grow, a partial tax exemption scheme (with the exemption threshold targeted to benefit the SMEs) is in place to lower the taxable profits of these SMEs.

As companies expand their operations and organise into multiple entities within a group, the government introduced the loss transfer system of group relief. This relief recognises group companies


as a single economic entity by allowing the unabsorbed tax losses, unabsorbed capital allowances and unabsorbed donations from one company to offset the profits of another company in the same group, thereby reducing the overall tax burden for the whole group. This is to facilitate risk-taking and entrepreneurial activities by entities within a group.

To further support companies in going global and earning a large share of their income from overseas operations, exemption from tax is given to foreign-sourced dividend income, foreign-sourced branch profits and foreign-sourced service income, subject to prescribed conditions. This aims to simplify the tax system — a key focus of the tax legislation. Over the years, tax breaks in the form of grants, financing and tax incentives have been enhanced by the government to support companies in expanding overseas and entering into new markets. Singapore recognises that businesses need to innovate and internationalise to remain commercially competitive and viable in a knowledge-based economy. To encourage businesses to conduct high value-added activities and to create value-added activities, tax deduction is provided on spending on qualifying research and development activities. Tax allowance is also granted on the acquisition of qualifying intellectual property rights.

Introduced in Budget 2010, the Productivity and Innovation Credit provides additional tax deduction or allowance for qualifying activities to spur a broader range of innovative activities. These generous tax deductions or allowances are no doubt given to push for and inculcate an innovative culture in Singapore. It has not been easy — Singapore’s quest for productivity growth has not

yielded significant fruits fast enough. We remain hopeful that the planting of these innovation seeds will eventually make innovation pervasive in our economy.

Singapore’s move towards a fair and inclusive society

Tax policy can play a major role in making post-tax income distribution more equal. As the government moves to build a more inclusive society and mitigate inequality, the use of tax policy for social purposes has become more prevalent over the past decade. The government’s emphasis is not about how much to redistribute but about strengthening the core values that sustain a fair and inclusive society.

To temper inequality, a permanent Goods and Services Tax voucher scheme was introduced as a redistributive policy tool to help the lower-income households. To encourage the community to take responsibility, the enhanced deductions scheme was introduced for donations.

To help the lower-income households, various schemes were introduced. For example, the Workfare scheme is a permanent feature in our social security system. It includes the Workfare Training Support (WTS) which helps older lower-wage workers upgrade their skills through training. For employers, WTS also provide generous absentee payroll funding to encourage employers to send their lower-wage older workers for training. The Workfare Income Supplement (WIS), part of the Workfare scheme, is a tool used to redistribute incomes and temper inequality. It aims to reward older lower-wage workers in regular work and individual effort by providing Central Provident Fund (CPF) payouts. Let’s not forget the housing grants, education subsidies

and healthcare subsidies which have benefitted the middle-to-low income Singaporeans.

To transform our people with deep skills and knowledge, the government introduced the SkillsFuture programme. SkillsFuture emphasises a culture of lifelong learning for Singaporeans — this extends from the schooling years into their careers and even further into their silver years. It provides a whole array of education and training options for Singaporeans to develop their fullest potential, involving employers, unions and industry associations. This initiative speaks volumes of the inclusiveness and investment in Singaporeans — one of the economy’s greatest assets.

Tax policy — a continuous refinement and what’s to come

Clearly, Singapore has been refining its tax policy to raise revenue and to support and promote various economic and social goals. For example, a progressive property tax regime for residential property was introduced in Budget 2010 and enhanced subsequently. Prior to this progressive tax regime, property tax was levied at a flat rate for all residential properties.

Property tax is now the only form of tax on asset after the removal of estate duty in 2008. Then, the government felt that the estate duty was unduly impacting the middle and upper-middle groups disproportionately compared to wealthier ones. The government is of the view that a moderately progressive tax regime on property wealth is socially equitable — taxpayers with more valuable properties pay higher property tax. The same logic probably applies to more taxes on high-end assets, such as luxury cars.




Chung-Sim Siew Moon Partner and Head of Tax [email protected]

Siew Moon leads the Singapore Tax practice and is an International Tax Services Partner. She has over 30 years of experience providing tax compliance, controversy and advisory services to her multinational and local clients. She is experienced in negotiating and applying for tax incentives, advanced tax rulings, tax clarifications and remissions.

Russell Aubrey Partner, Transaction [email protected]

Russell leads the Transaction Tax practice in Singapore. He has more than 25 years of experience in providing tax due diligence and structuring advice on M&A. His experience includes corporate tax structuring for effective operating, ownership and financing structures. Russell pioneered the development of the tax regime for registered business trusts as listing vehicles in Singapore.

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As Singapore’s tax policy keeps pace with global reforms and developments, overarching this is the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) project. Without doubt, Singapore is proactively responding to BEPS by ensuring that its tax policy and administration are aligned with global rules and OECD principles.

Singapore has rules and guidelines in place to address the BEPS concerns. These include general anti-avoidance provisions, transfer pricing provisions, guidance on income tax treatment on hybrid instruments and a robust incentive tax regime which is based on real substance and where business value is created. In addition, Singapore is committed to implementing the international standard on transparency and exchange of information on request, as well as participating and contributing to the peer review process.

From taxing income to taxing wealth?

The move to tax wealth, instead of income, is perhaps a step in the right direction. After all, “most researchers agree that wealth is much more unevenly distributed than income”, according to a report by American think tank Pew Research Centre published

in 2013. We have already seen tweaks to property taxes, stamp duties on properties and levies on car ownership. Further, a tweak was made to the marginal income tax rates of the top 5% of Singapore income earners. The tax rate increase for high-income earners from 20% to 22% in Year of Assessment 2017 will strengthen Singapore’s revenue position and enhance progressivity.

We may see more use of tax policy to redress inequality in wealth in time to come.

Perhaps using “sin taxes” in conjunction with wealth taxes could be an option in funding safety nets, including the social transfers. Higher duties on alcohol, betting and cigarettes mean more revenue, quite substantially when added together, for the government.

Use of tax policy in future

In his Budget Debate Round-up Speech 2015, Deputy Prime Minister and then Minister for Finance, Mr Tharman Shanmugaratnam said: “We cannot solve problems if we leave things entirely to the market and the natural workings of society. … But neither can we think that social policy interventions alone can create a fair and cohesive society, without a culture of personal responsibility …”

Inevitably, economic strategies are closely bound with social strategies and the use of tax policy to drive social and economic trends of the country is here to stay. The key is to continuously balance the collective responsibility with personal and family responsibility while maintaining relevance and competitiveness in a fast changing environment.



The tale of Singapore’s economic miracle — how a small country with no natural resources made the

leap from third world to first — has been recounted many times in the press. Indeed, Singapore’s GDP per capita increased a stunning 109 fold in the 49 years up to 20141. Out of more than 240 countries, Singapore’s absolute growth rate in the past 50 years is among the highest in the world. Putting the numbers in context, Singapore’s nominal GDP was on par with Mexico and Jamaica in 1965, but it has since caught up with the likes of developed nations like Germany and the US in 2014.

To promote its economic development, Singapore has successfully implemented astute policy decisions to ensure political stability, a robust regulatory system, superior infrastructure and a skilled workforce with the aim of encouraging investment

and international trade. All this, combined with pragmatic social policies, to improve the living standards of Singaporeans.

Singapore’s economy is powered by four main engines of growth: manufacturing (our largest sector), wholesale and retail trade, finance and insurance, and business services. Together, these sectors contributed to more than 60% of Singapore’s total GDP in 2014.

The sectors did not grow overnight nor by accident. With much foresight, the Singapore government recognised the importance of active industry development policy as a cornerstone of economic strategy. It assigned the responsibilities to promote and develop these sectors to mainly three government statutory boards: the Economic Development Board (EDB), International Enterprise Singapore (IE) and the Monetary Authority of Singapore (MAS).

Singapore tax incentives:

the Jubilee vantage point

Tan Bin Eng and Johanes Candra take stock of the success of Singapore’s incentives

schemes to promote investment, with guest contributions by EDB, MAS and IE Singapore.

1GDP per capita data published by the World Bank.

25You and the Taxman Issue 4, 2015 | 2510th anniversary commemorative edition You and the Taxman Issue 4, 2015 |

The EDB is the lead agency that promotes, facilitates and supports investment in the manufacturing and services sectors of Singapore. EDB promotes investment in various industrial sectors that include but are not limited to electronics, petrochemical, pharmaceutical, transport engineering and clean technology.

As Singapore’s central bank, the MAS has a dual mandate to develop and supervise Singapore as a sound and progressive international financial centre.

IE is the government agency that spearheads the overseas growth of Singapore-based companies and promotes wholesale trade. Its vision is to establish a thriving business hub in Singapore with Globally Competitive Companies (GCCs) and leading international traders.

These agencies work with existing businesses as well as future investors to identify industry development priorities and strategies, and to develop tools required to achieve their goals. One such tool is the suite of incentives administered by these agencies to attract and retain businesses with substantive activities in Singapore.

Some of the incentive schemes have existed for a number of years — with some even pre-dating Singapore’s independence. But the scope and roles of these incentive schemes have since evolved and have been refined in tandem with Singapore’s economic development and priorities.

Here, we have invited leading policy makers from the EDB, MAS and IE to provide their views on the following:

• How Singapore’s business environment, tax policies and tax incentive schemes have contributed to Singapore’s economic success over the years

“The scope and roles of these incentive schemes have since evolved and have been refined in tandem with Singapore’s economic development and priorities.”

• How the incentives are likely to evolve over the next 10 years as Singapore enters a new phase of economic development

• The impact and results of the incentives to the growth of the economy

• Other critical factors that Singapore needs to maintain or grow to ensure our continued success


By Ms Jillian Lim, Executive Director, Business Environment, Economic Development Board (EDB)

Singapore accomplished a number of economic milestones over the last five decades. Faced with high unemployment rates and a reliance on entrepot trade in the 1960s and 1970s, to complement various measures to create an environment conducive to investments, the Economic Expansion Incentives Act was enacted to encourage industrial activities. In the 1980s and 1990s, the pressing need to upgrade our skills and move up the value chain prompted measures to encourage plant and machinery upgrading, while we continued to enhance our competitiveness by gradually reducing our corporate income tax rate. As the economy continued to evolve, Singapore turns to initiatives to promote skills, innovation and productivity to achieve sustained and inclusive growth.

The government continues to recognise the strong synergies between the manufacturing and services sectors and the need to diversify to cope with Singapore’s inherent vulnerabilities as a small, open economy. Since the late 1980s, Singapore has adopted policies to promote both sectors as twin engines of growth. Emphasis on growing our innovation and R&D base has drawn top scientific and creative talent and nurtured R&D collaborations between the public and private sectors. From the very start, EDB recognises that competitive and effective tax policies, while important, cannot in themselves attract and retain quality investment, skills and jobs if the non-tax factors

are not conducive for businesses. EDB works closely with the private and public sectors to improve the overall competitiveness of Singapore as a business hub in Asia and in the world. Today, Singapore is recognised as an internationally competitive business environment:

• Since 2007, Singapore has continued to top the global ranking on the ease of doing business in Doing Business reports by the World Bank

• Since 2011, Singapore rose to rank as the second most competitive in the world in the Global Competitiveness reports by the World Economic Forum

The achievements of Singapore’s economic development efforts are reflected in the leadership positions across a number of sectors:

• In oil trading and export refining, Singapore is among the top five hubs globally, with 1.38 million barrels per day of refining capacity

• In marine engineering, jack-up rigs accounting for 55% of global market share by value are built in Singapore

• In biomedical sciences, 6 out of the top 10 drugs are manufactured in Singapore

• In electronics, 40% of global hard disk drive media is manufactured in Singapore

• In aerospace, Singapore’s maintenance, repair and overhaul sector accounts for 10% of global MRO spend

• In logistics, Singapore is the world’s busiest transhipment hub, handling over 30 million TEUs a year and connected to 600 ports

Jillian Lim Executive DirectorBusiness EnvironmentEconomic Development Board (EDB)

EDB remains committed to attracting high quality and sustainable investments that are in line with Singapore’s stage of economic development, manpower and resource policies. EDB is also committed to helping existing companies and sectors strengthen their competitiveness and make more productive use of their resources. We are committed to supporting Singapore-based companies create new businesses through innovation, and in so doing, generate economic growth and good jobs for Singaporeans. Our tax incentives and policies will continue to evolve in order to meet the needs of the Singaporean economy, and to ensure that Singapore remains a conducive location from which businesses with substantive economic activities can grow.




By Ms Carolyn Neo, Head, Financial Centre Development Department, Monetary Authority of Singapore (MAS)

The financial sector contributes significantly to Singapore’s economic growth, with its share of GDP doubling from an average of 6.4% in the 1970s to 11.8% in 2014. The financial sector has also contributed to employment growth. Its share of total employment has risen from an average of 4.2% in the 1990s to 5.4% in 2014. In absolute terms, employment in financial services has grown more than three-fold since 1990, to almost 200,000 finance professionals in 2014.

Singapore’s financial sector offers a broad range of financial services including banking, insurance, capital markets, asset management as well as treasury services to support the economic and financial activities of corporates and investors in Singapore and the region. Today, more than 700 financial institutions operate in Singapore. This has come about through strong and consistent efforts of MAS and the Singapore Government, to continuously enhance our business environment, strengthen our regulatory regime, develop excellent infrastructure, and build a rich pool of financial talent. MAS works closely with the industry to put in place a comprehensive range of training programmes to enhance the competencies of financial sector professionals and to strengthen the local talent pipeline of finance professionals and leaders.

Carolyn Neo Director and Department Head Financial Centre Development DepartmentMonetary Authority of Singapore (MAS)

Many jurisdictions have tax incentives to promote the financial sector. In Singapore, we believe that good tax incentives must be built on substance, and be properly designed and administered so as to ensure their effectiveness. The Financial Sector Incentive (FSI) scheme offers concessionary tax rates on income from qualifying financial activities. The FSI is granted for a limited period of time, and only to financial institutions with plans to establish or expand their substantive operations in Singapore. Incentive recipients are required to demonstrate growth of activities through increased headcount or business spending. They are also subject to annual reviews on the scale and quality of their economic contributions. The FSI scheme has a sunset clause to ensure that the relevance of the scheme is reviewed periodically.

Over the years, Singapore has provided a conducive environment for financial institutions that want to establish and grow their regional businesses in a strong and credible jurisdiction.

In the coming years, the growth of Singapore’s financial centre will be driven by key trends such as Asia’s rising economic importance, growth of a strong middle class, rising urbanisation, and rapid developments in financial technology and innovation. Singapore will continue to build strong capabilities across asset classes, maintain a strong and robust regulatory regime, and leverage on technology and innovation to achieve high-quality growth in the financial services sector.


By Ms Gina Lim, Group Director, Trade Group, International Enterprise (IE) Singapore

Internationalisation With a limited domestic economy, venturing overseas enables Singapore companies to access a wider and more diversified consumer base. With economies of scale, Singapore companies are better able to innovate, develop new products and services and improve on their productivity.

IE Singapore has been supporting Singapore companies’ internationalisation efforts via the Double Tax Deduction for Internationalisation (DTDi). Expenses incurred during overseas market expansion and investment development activities such as trade fairs and market feasibility studies are eligible under the DTDi. In Singapore Budget 2015, this was expanded further to support the posting of Singaporeans to work abroad.

The International Growth Scheme (IGS) introduced in Budget 2015 supports Singapore companies with high growth potential to expand overseas, while their headquarters remains anchored in Singapore. The scheme aims to encourage companies to create international or international-facing job opportunities for Singaporeans. In doing so, companies are encouraged to grow their overseas presence and develop more Singaporeans as global business leaders.

Trade Services is one of the twin engines of the Singapore economy alongside manufacturing, and the wholesale trade is in turn the largest value-add contributor amongst the entire services sector, generating value-add of 16% of Singapore’s GDP in 2013.

Trade has been the lifeblood of Singapore’s economic journey, on account of our strategic geographical location. Singapore is a natural gateway to the expanding Asian markets and offers a robust, vibrant and advanced trading ecosystem. We have strengthened the value proposition of Singapore by building a vibrant trade infrastructure which includes but isn’t limited to areas such as financing, air and sea connectivity as well as anchoring key players from various geographies and commodities.

To continue building on our strength as a trading hub and to boost Singapore’s development as a regional hub for oil refining and commodities trading, the Global Trader Programme (GTP) was introduced in June 2001. The objective of GTP is to promote investments by international trading companies that are looking to set up an Asian headquarters, to serve the emerging Asian markets. The wholesale trade sector consists of more than 34,000 establishments in 2013 and only about 1% of these are under the GTP. Singapore is home to a large number of trading companies, spanning energy, agriculture and metals sectors. The wholesale trade sector is the second largest employer among service sector, with 327,100 employees and forms an integral part of our economy.

As GTP recipients’ trading operations in Singapore stabilise and mature, we urge them to consider growing further qualitative aspects of their trading operations. This would benefit all industry players and help contribute to the development of Singapore’s trading ecosystem. It includes tapping Singapore’s bond and capital markets, partnering with tertiary institutions on trading courses and/or providing internship opportunities for local students.

The trading community has also driven demand in ancillary services, such as the financial sector and the shipping and logistics sectors. Trade is interlinked with finance and the two sectors have a mutually beneficial relationship. Singapore is one of the largest corporate banking centres in Asia, with about 200 financial institutions providing services such as trade finance, corporate finance, loan syndication, cash management and transaction services. Many banks are expanding their trade finance offerings. Many trading companies have also expanded beyond trading activities to locate their logistics management functions to manage their supply chains or even set up separate shipping arm to charter vessels to transport their products, thereby increasing the vibrancy of the shipping and logistics sector in Singapore.

Singapore has a proven track record for delivering what businesses need. We are also a proven leading hub for global commodities trading in Asia. Singapore offers global businesses access to low-cost trade financing, sophisticated risk management solutions, world-class logistics and top trading talent. Besides a sophisticated financial infrastructure, our legal and regulatory framework is reliable and transparent. We also have a stable political environment that supports long-term business planning.

Gina Lim Group DirectorTrade GroupInternational Enterprise (IE) Singapore


Our view

Our interactions with multinational and Singapore clients alike suggest that Singapore’s stable and robust business environment are critical contributors to Singapore’s past and future successes. Tax incentive support for new investments certainly helps to sweeten the business case for selecting Singapore over other jurisdictions, but they are neither the sole nor the most important factor. New expansion or investment into unknown markets or regions is often fraught with uncertainties. It is no surprise that Singapore’s predictable business and investment policies are valued at a premium by businesses even as cost structures rise in step with the economic progress. Singapore continues to be recognised as the preferred manufacturing and headquarters outposts for multinationals within Southeast Asia or even the Asia-Pacific region.

While Singapore continues to fine-tune its policies to ensure that the investment environment remains conducive, the constantly changing economic and international tax landscape poses immediate and mid-term challenges to Singapore’s continued success. The on-going transformation of the Chinese economy could affect growth across Asia over the short term and might negatively influence the scale and timeline of companies’ expansion into the region — including Singapore.

In addition, the ongoing discussion among Organisation for Economic Co-operation and Development (OECD) members over base erosion and profit shifting (BEPS) is expected to yield a profound impact on the global tax environment. While the immediate impact of the BEPS project to Singapore remains uncertain and limited at most at this point, it adds a new layer of complexity and uncertainty to any new investment or expansion decision to be made by companies. This could translate to additional headwinds for Singapore’s growth.

To some observers, the challenges faced by Singapore today are unprecedented. Yet to many, it is perceived to be no greater than what Singapore’s founding members encountered and successfully overcame 50 years ago. If history is of any indication, Singapore’s willingness to face its challenges head-on, its careful planning and the ‘can-do’ spirit of its people will ensure that Singapore will continue to punch above its weight for at least another 50 years to come.

Happy Jubilee, Singapore.

Tan Bin Eng Partner, Business Incentives [email protected]

Bin Eng leads the Asean Business Incentives Advisory practice and is the Asean Tax Leader for the Government and Public Sector. She is actively involved in assisting clients with their R&D claims, tax and incentive matters with authorities in Singapore and in the region.

Johanes Candra Senior Manager, Business Incentives [email protected]

Johanes is a Senior Manager in the Business Incentives Advisory practice in Singapore. He is involved in assisting clients with their tax incentives matters in Singapore and the Asean region.

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The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.


You and the Taxman


The evolution of transfer pricing

in SingaporeLuis Coronado and Jow Lee Ying outline the development of

transfer pricing in Singapore and discuss what companies can expect going forward

Singapore celebrates 50 years of independence this year. Just as the economy has undergone many transformations, Singapore’s tax system has similarly evolved

throughout the years to remain relevant. It is thus timely to trace the evolution of the transfer pricing environment in Singapore against the backdrop of international developments. After all, it will soon be 10 years since the first comprehensive guidance on transfer pricing was issued by the Inland Revenue Authority of Singapore (IRAS) on 23 February 2006.

Pre-2006: MAPs and APAs

The IRAS applies the internationally recognised arm’s length standard for transfer pricing purposes. Although it only published Singapore’s first transfer pricing guidelines more than a decade after the Organisation for Economic Co-operation and Development (OECD) had published its guidelines in 1995, the IRAS has maintained that it has applied the arm’s length principle all along, particularly through Singapore’s tax treaties.





Indeed, the arm’s length principle had appeared as early as 1963 in Article 9 (Associated Enterprises) of the OECD’s Model Tax Convention. The Article and its subsequent revisions have generally been adopted in the tax treaties concluded by Singapore. The arm’s length principle is also present in Article 7 (Business Profits) in respect of attributing profits to a permanent establishment.

Arising from its tax treaty obligations, the IRAS had already handled a number of transfer pricing cases even prior to 2006, in particular cases filed under the Mutual Agreement Procedure (MAP) Article of the relevant tax treaty.

Taxpayers can use the MAP process to seek redress if they believe that a treaty partner has made upward transfer pricing adjustments that are not in accordance with the arm’s length principle.

The IRAS could be said to have started building up its transfer pricing expertise from these early MAP cases. For these cases, the Singapore taxpayer would have sought redress with the IRAS for upward transfer pricing adjustments made by the other treaty country, instead of the other way round.

A number of these MAP cases also progressed to be bilateral Advance Pricing Arrangement (APA) cases concluded between the IRAS and its treaty partners.

The IRAS’ early experience with transfer pricing related MAPs and APAs were the first signs of the increasing focus by countries worldwide on transfer pricing. By the early 2000s, many OECD countries such as Australia, France,

Germany, the UK and the US had already published transfer pricing rules. These rules continue to evolve.

In the Asia-Pacific region, Japan and South Korea were two of the first jurisdictions to issue transfer pricing guidelines. Japan introduced its guidelines as early as 1985 while South Korea unveiled its transfer pricing regulations in 1996. It is not surprising then that the IRAS’ early transfer pricing related MAP and APA cases were with treaty partners that had more established transfer pricing rules in place such as Japan.

The IRAS’ early experience with transfer pricing related MAPs and APAs was also a main reason why Singapore’s first transfer pricing guidelines issued in 2006 had a strong emphasis on the need for Singapore taxpayers to be aware of and maintain transfer pricing documentation in the event that they require the IRAS’ assistance in a MAP or APA.

2006 to 2008: Transfer pricing consultations

The next significant milestone in the evolution of transfer pricing in Singapore was the launch of the IRAS’ transfer pricing consultation programme, soon after the issuance of the 2006 transfer pricing guidelines. Transfer Pricing Consultation, or TPC in short, is the process adopted by the IRAS to review and audit selected taxpayers’ transfer pricing methods and documentation. Taxpayers were selected based on certain risk indicators such as the amount of related party transactions and consistent losses.

Initially, the TPC was conducted through questionnaires containing pointed queries that allowed the IRAS to assess whether to pursue each case further. The level of transfer pricing documentation and the degree of the Singapore taxpayer’s involvement in developing and implementing the transfer pricing policy were consistently areas of concern raised during the TPCs. This led to the observation that the IRAS appeared to be primarily concerned with raising the level of transfer pricing awareness amongst its taxpayers, rather than approaching transfer pricing from merely a revenue collection perspective.

2008 to 2012: Additional transfer pricing guidance and section 34D

From the findings of its first TPC cases, the IRAS issued specific guidance on the TPC process in 2008. In the same year, the IRAS issued detailed administrative guidance on APAs. The focus on transfer pricing continued in 2009, where it issued supplementary guidance to specifically address related party loans and services.

The year 2009 also saw the explicit enactment of the arm’s length principle under section 34D of the Singapore Income Tax Act. Section 34D enables the Comptroller of Income Tax to make upward adjustments where the transfer pricing between related parties is not at arm’s length.

The enactment of section 34D and the various supplementary guidance issued by the IRAS in 2008 and 2009 reflected the heightened interest by taxpayers on

“Singapore taxpayers should no longer think of transfer pricing documentation as a “nice to have” but rather a “must have”.”


transfer pricing and the need for clarity on the IRAS’ positions on these matters. This was not surprising considering that other countries in the region had also been picking up speed on their transfer pricing rules at that time.

Indonesia, for example, issued contemporaneous transfer pricing documentation requirements in 2008. Thereafter, it has been issuing various transfer pricing regulations consistently every year with audit activity correspondingly increasing almost exponentially. Other countries in the region such as Malaysia and Vietnam introduced transfer pricing guidelines early, but audit activity only intensified towards the late 2000s and beyond. APA activity in the region had also started picking up. Thailand, for instance, started concluding a number of bilateral APAs and issued guidance on the APA process in 2010.

2013 to 2015: The arrival of BEPS

The next jolt to the transfer pricing world was a big one. In 2013, the OECD launched the Base Erosion and Profit Shifting (BEPS) Action Plan, at the request of the G20 Finance Ministers and following several high profile international tax avoidance cases.

The BEPS Action Plan contains 15 action items aimed at arming governments with the tools to prevent multinational entities from paying little

or no tax. Out of the 15 action items, four are concerned directly with transfer pricing while others may indirectly impact transfer pricing (e.g., dispute resolution mechanisms). This is no surprise, as transfer pricing has been criticised as aiding multinationals in shifting profits between jurisdictions.

For a plan as ambitious and far reaching as the BEPS initiative, the timeline for its deliverables is extremely tight — all 2014 interim outputs and 2015 deliverables have been consolidated into a coherent package and submitted to the G20 Finance Ministers in October 2015.

2015: Singapore’s 2015 Transfer Pricing Guidelines

In the midst of BEPS and the intensifying transfer pricing audit activity internationally, the IRAS published its revised transfer pricing guidelines on 6 January 2015. The IRAS’ 2015 Transfer Pricing Guidelines consolidated all its previous transfer pricing guidance and provided additional clarification on certain aspects of transfer pricing.

A significant highlight of the 2015 Guidelines is the requirement for contemporaneous transfer pricing, defined as transfer pricing documentation prepared no later than the date of filing of the tax return for the relevant financial year. This sends a clear message that Singapore

taxpayers should no longer think of transfer pricing documentation as a “nice to have” but rather a “must have”. This requirement may have arose from the IRAS’ observation that as high as 73% of TPC cases had inadequate transfer pricing documentation.

From an international perspective, the emphasis on contemporaneous transfer pricing documentation in the 2015 Guidelines should be viewed positively. For one, it helps Singapore taxpayers manage their transfer pricing risks in light of the BEPS initiative and increased scrutiny by tax authorities worldwide. For another, it also provides a number of “exemptions” from transfer pricing documentation for certain types of related party transactions and amounts below certain thresholds. This relieves the compliance burden for small and medium enterprises likely to be undertaking less related party transactions.

It is also noteworthy that the 2015 Guidelines’ requirement for both group level and local entity level information in the Singapore transfer pricing documentation is aligned with the recommendation of the BEPS Action Plan to increase visibility of a multinational’s entire business value chain. However, the 2015 Guidelines have stopped short of requiring country-by-country reporting (CBCR), a key recommendation under action item 13 of the BEPS Action Plan.




2016 and beyond: Looking ahead

Singapore has come a long way since its first encounters with transfer pricing. Since its first experiences with APAs, the IRAS has now concluded more than 50 APAs, the majority of which are bilateral APAs. How do we expect transfer pricing in Singapore to develop in the near future? With transfer pricing and BEPS still very much in the international limelight, we foresee that the IRAS’ focus on transfer pricing will continue to intensify. Already, we have observed more TPCs commencing since the issuance of the 2015 Guidelines and an increase in transfer pricing queries in the annual tax return reviews.

There will also be increasing pressure for the IRAS to provide further guidance on complex transfer pricing issues, such as the transfer pricing of intangibles and financial services. This is especially as other countries in the region develop their own rules on such issues, if they have not already done so.

Luis Coronado Partner, Transfer Pricing [email protected]

Luis is the International Tax Services Leader for Asean. Luis has more than 20 years of advisory experience in international tax and transfer pricing. He has advised companies on the negotiation of advance pricing agreements and competent authority resolutions in Asia, Europe, the US and Latin America. Besides Singapore, Luis has also worked in China, Mexico, the Netherlands and the US.

Jow Lee Ying Associate Director, Transfer Pricing [email protected]

Drawing from her previous working experience at the Inland Revenue Authority of Singapore, Ministry of Finance and the Economic Development Board, Lee Ying has assisted numerous taxpayers on a wide spectrum of international tax issues including transfer pricing consultations, Advance Pricing Arrangements and Mutual Agreement Procedures.

Contact us

The CBCRs recommended by the BEPS Action Plan will kick in very soon, with the first proposed CBCRs to be submitted by 31 December 2017. The secondary mechanism in the CBCR recommendation means that Singapore cannot afford to ignore its development, and an early indication of Singapore’s position on this will be helpful to taxpayers.

Finally, transfer pricing dispute resolution will become an even more important consideration in the future as Singapore and other tax authorities build up their transfer pricing resources and competencies. Perhaps the next milestone for the transfer pricing landscape in Singapore will be when the first transfer pricing case gets heard in the Singapore courts!


The goods and services tax (GST) has been a fixture in Singapore for 21 years. It now makes up the second-largest

share of Singapore’s tax revenue pie. How has GST evolved in Singapore and what will the future bring?

Rationale for the GST

GST was first implemented in Singapore at a low rate of 3% in 1994. The introduction of GST has enabled Singapore to gradually reduce its reliance on direct taxes as a source of tax revenue. In connection with the implementation of GST, Singapore reduced the corporate income tax rate and the top personal income tax rate from 30% to 27% and from 33% to 30% respectively for the year of assessment 1994. Both of these taxes have been on a downward trend since.

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The decrease in income taxes has helped to attract more investment and talent into Singapore. As a result, Singapore has blossomed as an international centre for business.

GST developments over the past decade

1. GST rate increase

After the introduction of the GST, the GST rate remained at 3% for almost a decade before several stepped increases in a span of less than five years. The GST rate was raised to 4% in 2003, to 5% in 2004 and then to 7% in 2007 where it has remained since.

Along with the rate increases, the amount of GST revenue collected by the Inland Revenue Authority of Singapore

(IRAS) has almost tripled, from S$3.47b in the financial year ended 31 March 2005 to S$10.22b in the financial year ended 31 March 2015. As a contributor to the tax coffers, GST now stands just behind corporate income tax and ahead of personal income tax.

2. Introduction of self-review programmes

Voluntary compliance is at the cornerstone of the IRAS’ taxpayer compliance strategy. To help GST-registered businesses, the IRAS has rolled out two main voluntary compliance initiatives:

• Assisted Compliance Assurance Programme (ACAP)

• Assisted Self-Help Kit (ASK)


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“To keep pace with the ever-changing economy and meet the demands of social spending, the GST system would have to evolve.”

Assisted Compliance Assurance Programme (ACAP)

Launched on 5 April 2011, ACAP is a holistic framework that helps businesses to identify GST-related risks in their business processes.

The IRAS is the first tax administration in the world to incentivise businesses to adopt voluntary compliance, setting aside S$10m to co-fund the cost (capped at S$50,000 per participant) incurred by GST-registered businesses to take part in the ACAP programme. The fund was fully utilised on 30 June 2014. Apart from the co-funding, ACAP offers the following benefits:

• Full waiver of penalties on errors disclosed

• Step down of GST compliance activities by the IRAS

• Faster GST refunds

• Automatic renewal of GST schemes.

Since then, more than 300 businesses from different industries have successfully applied for ACAP with over 200 businesses having attained the ACAP status as at 30 June 2014. The strong response reflects the high importance these businesses place on validating their GST control frameworks and being self-compliant.

Assisted Self-help Kit (ASK)

ASK is a comprehensive self-assessment compliance package which helps GST-registered businesses to review the accuracy of their GST submissions. Businesses which discover any GST errors and disclose these errors on a timely basis to the IRAS can qualify for zero or reduced penalties under the IRAS’ Voluntary Disclosure Progamme (VDP).

ASK is available to all GST-registered businesses that wish to enhance their GST compliance. It is also a prerequisite for the application or renewal of certain GST schemes, such as the Major Exporter Scheme (MES).


GST schemes and remission

To ease tax compliance for various industry players and remove any GST disincentives to the businesses, the IRAS has introduced various new schemes or extended existing schemes. These include:

Approved Third Party Logistics Scheme (3PL)

The 3PL scheme was enhanced in 2006 to allow third party agents to remove goods from zero GST warehouses with GST suspended, as well as import goods belonging to themselves or their overseas principals with GST suspended.

Approved Import GST Suspension Scheme (AISS)

Introduced in 2009, AISS aims to alleviate cash flow issues faced by companies in the aerospace industry by suspending import GST on qualifying aircraft parts.

Approved Marine Customer Scheme (AMCS) Introduced in 2011, AMCS eases compliance within the marine sector by allowing zero-rating on qualifying ship-related purchases and rental, as well as maintenance services.

Enhanced Approved Contract Manufacturer and Trader (ACMT) Scheme

The ACMT scheme was enhanced in 2011 to allow contract manufacturers of active pharmaceutical ingredients (APIs) in the biomedical industry to be able to apply for the ACMT scheme. This enabled them to enjoy a range of benefits, such as relief of GST on the value added services supplied to overseas client and suspension of import GST.

The IRAS has also introduced or extended several GST remissions to relieve the GST costs of certain industries. These remissions include:

Singapore-listed real estate investment trusts (S-REITs)

GST remission has been extended to 31 March 2019 to allow S-REITs to claim GST on business expenses incurred. Furthermore, the remission has been enhanced to allow GST claims on expenses incurred to set up special purpose vehicles (SPVs) that are established solely to raise funds for the S-REITs.

Fund management industry GST remission has been granted from 1 April 2015 on the supply of services to a qualifying fund or overseas fund manager who wholly relies on a Singapore fund manager to carry on its business.

Simplification and clarification of GST rules

To facilitate GST compliance, the IRAS has also simplified certain GST rules to the extent the revenue collection is not undermined.

One significant change involves the time of supply rule which determines when output tax should be accounted for. The rules have been simplified by removing both the basic tax point (i.e., when goods are made available and when services are performed) and the 14-day rule. With effect from 1 January 2011, output tax is accounted for at the earlier of when the invoice is issued or when payment is received.

The deeming rule on gifts, an anti-avoidance provision under the GST law, has also been simplified. From 1 October 2012, the series of gifts condition was removed. In addition, GST-registered businesses have also

been given a choice of not accounting for deemed output tax if they do not claim the input tax on the purchase of the gift.

Over the years, the IRAS has also published more in-depth e-Tax guides to provide GST-registered businesses with a greater understanding of the GST rules, as well as guidance or clarity on the IRAS’ position on certain GST treatments.

Taking a hard stance against tax evasion

As GST has been around in Singapore for more than 20 years, it can be observed that the IRAS is less tolerant of non-compliance by GST-registered businesses. In 2014 alone, 11 cases of GST fraud and evasion were publicised in the press, with the highest penalty involved being S$1.2m.

Outlook for the next decade

Potential for GST rate increase?

In his 2012 National Day Rally speech, Prime Minister Lee Hsien Loong said: “Let me tell you the truth, as our social spending increases significantly, sooner or later our taxes must go up”.

Indeed, any increase in government spending must be covered by sufficient tax receipts. However, the government has been more inclined to reduce its reliance on income taxes. After all, maintaining a low corporate income tax is important in keeping Singapore competitive.

Therefore, a potential candidate to help finance social spending is the GST. It’s been eight years since the GST rate was last raised and at 7%, Singapore’s current GST rate is still one of the lowest in the world (see chart).




Prevailing standard GST/VAT rates in selected countries as at 1 January 2015

Asia-Pacific

5

6 (a)

7 (b)

7

8

10 (c)

10

10

10

12

15

17

0 2 4 6 8 10 12 14 16 18

Taiwan

Malaysia

Thailand

Singapore

Japan

Vietnam

Korea

Indonesia

Australia

Philippines

New Zealand

China

Percentage

Country

Europe

8

19

20

20

21

22

25

25

0 5 10 15 20 25 30

Switzerland

Germany

France

UK

Netherlands

Italy

Sweden

Denmark

Percentage

Country

Notes:

1. With effect from 1 April 2015

2. 10% rate will apply from 1 October 2016, unless further extension of the 7% rate is announced

3. 5% for certain goods

Many countries have increased their value-added tax (VAT) or GST rates in recent years. The average standard VAT or GST rates for European Union member states and Organisation for Economic Co-operation and Development (OECD) member countries have increased from 19.5% and 17.5% respectively in 2008 to 21.6% and 19.2% respectively in 2015.

Therefore, it should not be a surprise if there is a Singapore GST rate increase within the next decade.

Expanding the GST base

As an alternative to a GST hike, could the current GST base be widened to achieve higher GST collection? This would mean certain transactions may no longer enjoy tax exemption — they would be subject to tax. Currently, transactions that are exempted from GST in Singapore are the sale and lease of residential properties, the provision of certain prescribed financial services and the supply of investment precious metals (IPM).

However, charging GST on residential properties would contradict the current housing policies set out by the government, while the exemption for the supply of IPM was only announced in Budget 2012 and made effective from 1 October 2012. Hence, there is little possibility for the Government to reverse the GST treatment for these two categories in the near future.

The last item that remains on the exemption list is prescribed financial services. Currently, several fee-based incomes (e.g., upfront fee on provision of loans, fees relating to operation of deposit accounts, merchant discount for credit card transactions) are exempt from GST. This is not the case in certain countries. Taxing all fee-based financial services could be an option for expanding the GST base.

Taxing of the digital economy

The evolution of technology has led to a radical change in business models over the years. The creation and existence of the digital economy magnifies the scale of cross-border trading of goods and services. This poses new tax and regulatory challenges.

The OECD/G20 Base Erosion and Profit Shifting Project on “Addressing the Tax Challenges of the Digital Economy” noted the evolution of technology has dramatically increased the ability of private consumers to shop online and the ability of businesses to sell to consumers around the world without the need to be present physically or otherwise in the consumer’s country. This has an adverse impact on a country’s GST revenue collection and on the level playing field between resident and non- resident suppliers.

Singapore generally adopts a pragmatic and pro-business approach in its design of the GST system. This approach has however compounded the GST leakage brought forth by the digital economy. More specifically, Singapore currently does not levy GST on the following transactions:

a. Supplies of services (e.g., downloadable software) by overseas suppliers to Singapore businesses as the reverse charge mechanism (where customer self-imposes GST on purchase of services) in Singapore is currently not operative.

b. Supplies of services (e.g., e-book, music) by overseas suppliers to Singapore consumers as such supplies are considered as made outside the Singapore GST regime.

c. Supplies of low value goods (e.g., sale of fashion items through online stores) by overseas suppliers to Singapore consumers due to the GST import relief on importation of non-dutiable goods by air or post where the value does not exceed S$400.


Issues (a) and (c) are largely not applicable to most developed economies as they do impose a reverse charge mechanism and do not grant the import relief. However, issue (b) remains a challenge, especially when goods (e.g., shrink wrapped software) are being re-characterised to services (e.g., downloadable software) when they are sold online. To address this issue, many countries including Norway and member states of the European Union have started to tax cross-border services and intangibles by treating such services as supplied in the country where the consumers are located and require the overseas service providers to register for GST in the country where the consumers are located. Simplified registration systems are also introduced for these overseas service providers. Australia and New Zealand have also issued exposure draft and government discussion document in May and August 2015 respectively to gather feedback on adopting similar approaches in taxing the digital economy and registering overseas service providers.

It is currently unclear the extent of GST leakage posed by the digital economy to our tax collection. However, against the background of the measures taken by other countries in taxing the digital

economy, Singapore may one day consider adopting the same approach in boosting its tax revenue base to finance its social spending. On the other hand, considering the complexities in the implementation of these new measures and the pragmatic approach of our government, we do not expect this day to come soon.

Increasing use of data analytics

In today’s ever complex environment, data analytics is assuming a new and elevated status. Tax authorities worldwide have shown interest in applying data analytics in tax enforcement as the ingenuity of predictive analytics could detect outliers in the GST declarations.

Close to home, it was mentioned in the press in October 2014 that the IRAS was able to detect a case of failure to register for GST using data analytics tools and prosecute the taxpayer. The use of data analytics is likely to increase as the IRAS focuses on enforcement of GST. The benefits to the IRAS are clear: the more efficient use of technology lowers costs of collection and increase the chances of fraud or error detection.

Expansion of self-review programmes

The trend of encouraging voluntary compliance is likely to continue and even expand in the years to come. Further refinements to the existing programmes should be considered.

The current ASK and ACAP are “one-size-fits-all” programmes. As these programmes evolve and the IRAS gathers more information on the specific errors or issues facing each industry, it will be useful for the IRAS to develop industry-specific ASK and ACAP programmes. This will enhance the usefulness of these programmes and increase the probability of error detection.

Conclusion

We have witnessed how GST has grown in importance over the years. To keep pace with the ever-changing economy and meet the demands of social spending, the GST system would have to evolve. The question is would this involve changes to the tax rate, the tax rules or the tax base? Change is inevitable. To remain relevant, Singapore has to continually reinvent itself in all areas — be it taxation or otherwise. As the saying goes “The future belongs to those who prepare for it today”.

Kor Bing Keong Partner, GST [email protected]

Bing Keong has more than 20 years of experience in providing advice on GST issues to companies in a wide range of industries such as real estate, financial services, REITs and manufacturing. In addition to GST advisory work, he regularly conducts workshops for companies and speaks at both EY and at external seminars.

Chew Boon Choo Director, GST Services [email protected]

Boon Choo has more than 15 years of GST experience. Her experience covers a wide range of GST engagements such as GST ACAP review, ASK review, GST due diligence, GST training and GST advisory work. Her client base covers a wide spectrum of industries such as the pharmaceutical, consumer products, financial services and logistics sectors.

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Expatriate taxes: past, present

and futureWu Soo Mee and Kerrie Chang reflect on the evolution of the tax regime relating to expatriates and discuss what the future holds

Singapore has won its fair share of accolades as a centre for international business, thanks to its strategic location, stable business environment and competitive tax

rates. Its spanking clean streets, harmonious society, low crime rate, lush greenery and vibrant arts scene also make it one of the top liveable cities in the region and a magnet for expatriates. It’s no accident that Singapore is a great place to live, work and play.

The changing profile of the expatriate

According to figures by the Ministry of Manpower, there are currently over 110,000 expatriates in Singapore, out of a population of just under 5m1.

Despite the sizeable number of expatriate postings to Singapore, the expatriate profile has changed significantly over the past decade. Traditional postings of between two to five years are no longer the norm.

Instead, international assignments are often a lot shorter and involve more frequent business travel. Others often arrive as local transfers with no support for housing or children school fees and they usually sever economic ties with their home countries with


1http://www.mom.gov.sg/working-in-singapore/living-in-singapore


no further contribution to home country pensions. As a result, assignments inbound into Singapore are now less costly.

What has brought about this trend? For one, employees no longer need to be physically present, thanks to advances in communication and data storage. Indeed, globally-integrated companies can even operate with minimal physical relocation. In addition, strong transport links around the world have enabled businesses to move people for short periods, as and when required. When it comes to cost, this clearly trumps a long-term posting.

Due to changing business needs and trends, more companies are establishing or expanding regional hubs in Singapore. These regional hubs provide support functions to affiliated companies in the region. This has led to demand for foreign employees with specific expertise to meet short-term needs or to transfer technical knowledge.

Developing a competitive tax system

In 2006, the Inland Revenue Authority of Singapore (IRAS) set up the Tax Competitiveness Forum, which included senior IRAS members and other economic agencies to study longer-term tax strategies that would enhance the competitiveness of Singapore’s economy. From this, tax policies that encouraged business and enterprise were introduced, while those that stifled business were phased out.

A robust and competitive tax system has played a critical role in attracting foreign investment and talent to Singapore and in encouraging multinational companies to establish regional hubs in Singapore to serve the Asia-Pacific region.

In this article, we visit how the tax regime for expatriates has evolved in Singapore and what we can expect in the future.

Personal income tax rates

Singapore’s personal income tax rates are progressive in nature, with rates starting at 0% and capped at 20% for income over S$320,000. From the year of assessment (YA) 2017, the highest personal tax rate will increase to 22% for income over S$320,000. Still, this is low by world standards — based on data from 2014, the average top marginal personal income tax rate amongst Organisation for Economic Co-operation and Development (OECD) nations is 41.9%2.

Most non-resident individuals in Singapore with taxable income of up to S$370,000 are taxed at a flat rate of 15% with no personal reliefs. Even then, they are still likely to pay less in tax in Singapore than they would if assessed at the minimum tax rate on the same salary in their home country. This makes Singapore a very enticing destination for expatriates.

In addition, Singapore granted personal tax rebates to provide relief during economic downturns in the 2008, 2011, 2013 and 2015 tax years3.

Wealth taxes

Singapore exempts most investment income under the law. Income derived from the rental of property is taxable after deducting qualifying expenses. Furthermore with effect from YA 2016, to simplify the claim of rental expenses, a taxpayer can opt to claim rental expenses based on 15% of gross rental for residential property. This is in lieu of actual deductible expenses and in addition to the 15%, a taxpayer may claim interest on loan taken to purchase the rental property. There is also no tax on capital gains in Singapore.

Overseas income remitted into Singapore is not taxable unless it is remitted through a partnership. Such an exemption allows individual taxpayers to avoid the complications of applying for exemptions under the double taxation treaties or of utilising tax credits in other tax jurisdictions.

Interestingly, this exemption applies only if it is to the taxpayer’s benefit. If a situation arises which gives the taxpayer a better overall tax position, the taxpayer can choose to have the remitted income taxed in Singapore. This usually happens when the double tax treaty relief comes into play.

There is no gift tax in Singapore and the IRAS has also abolished estate duty for deaths occurring on or after 15 February 20084. Other countries, however, still continue to impose death taxes.

These fiscal exemptions illustrate the use of the tax system as a tool to encourage high net worth individuals to invest into Singapore. In turn, this spurs economic growth and helps to create a globally competitive business environment. In recent years, there has been an increase in the number of global organisations and high net worth individuals setting up businesses in Singapore. This is an indication that such fiscal initiatives, as well as other factors, have worked.

Benefits-in-kind

Reliefs are provided to all resident taxpayers in Singapore, including earned income relief, spouse relief and child relief. In addition, expatriate employees are also entitled to certain tax concessions on their Singapore employment income. This is aimed at mitigating the impact of taxation on benefits provided by the company.

2http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I73https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Income-Tax-Rates/4https://www.iras.gov.sg/irashome/About-Us/Our-Organisation/History-and-Milestones/


“As a small nation with limited resources, Singapore needs foreign talent and investment to retain its position as a key business hub in Asia. The key is to strike the correct balance.”

Up to 2014, accommodation benefits provided by companies to expatriates were taxed at a value well below the rental paid for the property. This concession has since been removed as it is now more common to hire expatriates under local terms which exclude the housing benefit provided in-kind. Instead, employers are now giving cash allowances. Employers are likely to provide housing benefits only for selected top executives.

The tax concession for home leave passage, where only 20% of the cost of home leave passage provided by the company to an expatriate employee and the employee’s family is taxable, is still available.

Tax treaties

To date Singapore has concluded Avoidance of Double Taxation Agreements (DTAs) with 75 countries5, doubling the number of agreements over the last 20 years. The agreements provide business travellers and expatriates with clarity on their tax liabilities, and decreases the individual cost of business travel between treaty countries and Singapore. The DTAs also strengthen diplomatic and economic ties between Singapore and other countries, highlighting the parties’ commitment to “tax cooperation based on international standards.”

The DTAs usually provide for exchange of information to prevent tax evasion, an area which has attracted increasing

scrutiny in the last few years. Indeed, the DTAs could be seen as a stepping stone towards the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which Singapore signed in 20136.

The convention was introduced as a framework to help tax authorities better cooperate with each other on exchange of information requests. The ultimate aim is a transparent model, allowing automatic exchange of information, simultaneous tax examinations and assistance in tax collection. The convention is coming into force progressively for the 60 countries that have signed the convention. Singapore is one of those which has signed the convention but it has not yet entered into force.

Singapore has an extensive tax treaty network, but Hong Kong is fast catching up especially over the last five years7. Companies could potentially pick Hong Kong as a regional hub over Singapore, in order to benefit from the double taxation treaty exemption. Given its low tax rates, its location as a gateway to China, as well as its number of tax breaks for expatriates, Hong Kong is seen as a keen rival to Singapore as a global business hub and particularly for those with regular work in China. To remain competitive, Singapore will need to strengthen its tax treaty network and revisit outdated treaties. For example, in June 2015 the Income Tax Treaty with Thailand, originally signed in 1975, was revised to amend

rules on withholding tax on interest and dividends, as well as the rules on elimination of double taxation8.

Enhancing the tax treaty network will improve political connectivity as well as reduce business and personal costs for individuals working in Singapore.

Given the ASEAN Economic Community coming into being on 31 December 2015, it would be good if the ASEAN countries could work towards harmonising their treaties with each other to simplify and encourage intra-ASEAN business. For example, a common ASEAN standard for the treaty Permanent Establishment rules.

Area representative scheme9 and Not Ordinarily Resident scheme10

Over the last 10 years, Singapore has introduced the Area Representative (AR) scheme and the Not Ordinarily Resident (NOR) scheme to encourage expatriates who travel regularly to make Singapore their base by allowing favorable tax treatment.

The AR scheme targets expatriates with a foreign employer operating from a representative office in Singapore to perform promotional and liaison duties in the region. The scheme allows time apportionment of employment income, taxing only remuneration attributable to the number of days spent in Singapore, subject to certain conditions. This can greatly reduce an individual’s tax liability.

As Singapore gains further recognition as a good location to base a regional hub, there will be employees working for Singapore hubs who normally will be required to travel in the region.

5https://www.iras.gov.sg/IRASHome/Quick-Links/International-Tax/6http://www.tax-news.com/news/Twelve_New_Signatories_To_OECD_Multilateral_Convention____60907.html7http://www.lowtax.net/information/hong-kong/hong-kong-double-tax-treaties.html8EY Global Tax Alert (10 July 2015 ) - Singapore and Thailand sign revised income tax treaty9https://www.iras.gov.sg/IRASHome/Schemes/Individuals/Area-Representative-Schemes/10https://www.iras.gov.sg/IRASHome/Schemes/Individuals/Not-Ordinarily-Resident--NOR--Scheme/


In 2002, to encourage more regional hubs of global organisations, Singapore introduced the Not Ordinarily Resident (NOR) Taxpayer Scheme which extends a favourable tax treatment to such regional employees by exempting from tax the portion of their Singapore employment income that corresponds to the number of days they have spent outside Singapore for business reasons. Without this concession, such regional employees working for a Singapore employer will be subject to tax on all of their income.

Unlike the AR scheme, the NOR concession is available only for a continuous five-year period. Singapore should consider lifting this five-year limit to continue benefiting employees with regional duties. The condition that the employees must be “newcomers” to Singapore so as to first qualify for the concession (i.e., the employees must be a non-resident for the last three years before the first year of claim for the concession) should also be revisited.

Employee incentive share plans11

Singapore changed the tax treatment of employee share ownership plans and options in 2002, treating gains related to shares or options granted during a Singapore employment as fully taxable at the time of vesting, exercise or deemed exercise, whichever is earlier. The time of deemed exercise for shares granted during Singapore employment is considered to happen one month before cessation of Singapore employment and this rule only applies to foreign employees.

Many other countries, however, tax only gains that correspond to the period of employment in their specific jurisdiction, in accordance with OECD principles. As no tax credit is allowable in Singapore, individuals who are granted shares during a Singapore employment can end up paying double tax on a portion of the gain. Singapore could perhaps consider taxing gains in accordance to the OECD principles whereby gains are pro-rated and matched to the respective source of employment in the different countries the employees had been working in during the vesting period. With increased cross-border transparency and exchange of information, Singapore could revisit the entire tax framework for share plans to align with the OECD model while still being reasonably assured of collecting a fair share of tax.

Retirement schemes

An important issue facing expatriates working in Singapore is the potential loss of retirement benefits. Foreigners are not allowed to contribute to the Central Provident Fund (CPF), unlike Singapore citizens or Singapore permanent residents (SPR) who are eligible to do so.

This penalises foreign employees who are working on local terms as they are likely no longer able to contribute to their home country pension fund and this causes an issue for multinational companies which have to compensate these employees for the future loss of retirement income. In addition, this acts as a deterrent for individuals who do not want a fragmented contribution history or who do not want to lose certain benefits.

An alternative pension scheme which foreigners can voluntarily participate in is the Supplementary Retirement Scheme (SRS). Although SRS contributions are eligible for tax relief and only 50% of withdrawals are taxable at retirement, these two benefits cannot be enjoyed if the employees withdraw their contributions within 10 years from the date of the first contribution. Furthermore, a penalty is also imposed on any amount that is withdrawn prematurely. Expatriates who are on short-term assignments, of say up to five years, could be disadvantaged if they choose to withdraw the SRS contributions upon departure.

Technology

The increase in and ease of business travel mean substantial tax liabilities could arise in multiple jurisdictions without the knowledge of individuals or companies. With more business travellers and short time assignees coming into Singapore due to increasing business needs, these employees can easily exceed the 60 days tax exempt threshold. Singapore has therefore strengthened its link between Immigration and the Inland Revenue to track such employees for tax accountability reasons.

The switch from a paper-based system to an online submission system allows all the information to be stored in a central location and enables the IRAS to reconcile the submissions from employers and employees to the Immigration records easily.

11EY Singapore Budget 2014 Wish list




Looking ahead

Like the European Union (EU), the Asia-Pacific region is well connected by air, with many individuals working regularly in multiple countries within the region. Construction of the high speed rail between Singapore and Kuala Lumpur is expected to start by early 2016 and is expected to shrink the travel time between the two cities to 90 minutes12. With a decrease in time for travel and immigration processing, Singapore and Malaysia could possibly move towards a model similar to the Benelux region of Europe, where individuals living in one country could be employed or could be performing the majority of their work duties in the other country. Taking a broader view, individuals could base themselves in one country and travel regularly by plane to a number of countries within the region to perform their work.

Unlike the EU, there is no overarching governing body for the Asia-Pacific region to oversee and ensure that national tax rules are consistent with regional policies. However many countries in the region have been trying to align their policies and legislation with the OECD’s guiding principles.

The IRAS sees taxes as a way of developing Singapore into a “stronger community, a better environment and a more vibrant economy.”13 In recent years, Singapore has tightened the rules for the hiring of foreign employees such as by raising the income threshold for skilled workers to qualify for a work permit. Will Singapore tax rules follow this trend by, for instance, tightening expatriate concessions? Still, any potential change in policy needs to be carefully considered.

Drawing talent from across the globe injects greater vibrancy into the economy. As a small nation with limited resources, Singapore needs foreign talent and investment to retain its position as a key business hub in Asia. The key is to strike the correct balance.

12The Business Times (May 2015); Update: Singapore, Malaysia push back deadline for high-speed rail link -http://www.businesstimes.com.sg/government-economy/update-singapore-malaysia-push-back-deadline-for-high-speed-rail-link13IRAS (2015); The Singapore Tax System – Taxes for Nation Building https://www.iras.gov.sg/IRASHome/About-Us/Taxes-in-Singapore/The-Singapore-Tax-System/

Wu Soo Mee Partner, People Advisory [email protected]

Soo Mee has more than 30 years of experience in Singapore individual taxation. She provides employee tax consulting and compliance services to clients from diverse industries. She provides advice on the structuring of employment arrangements and compensation packages including long-term share-based and non-share based incentive schemes and pension plans. She also represents clients in obtaining rulings from the Inland Revenue Authority of Singapore and the Central Provident Fund Board.

Kerrie Chang Partner, People Advisory [email protected]

Kerrie has over 20 years of experience in providing tax consulting and global mobility tax services. She provides advice on individual taxation and tax planning opportunities, including structuring tax effective compensation packages, tax equalisation and protection arrangements, equity based remuneration schemes, as well as coordination for tax advisory and planning on cross-border global mobility situations.

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Singapore REITs: the next lap

Lim Gek Khim and Ang Sau Tze discuss how the tax framework for REITs can be further refined to ensure continued growth of

the REIT markets

Singapore listed its first real estate investment trust (REIT) on the Singapore Stock Exchange (SGX) in 2002. There are now 28 Singapore REITs (S-REITs) and six

stapled securities (REIT bundled with registered business trust) listed on the SGX with a total market capitalisation of close to S$70b. Singapore is one of the fastest-growing markets for REITs in Asia-Pacific and is also the largest REIT market in Asia ex-Japan.

What is perhaps unique about the Singapore REIT market, compared with developed REIT markets in the US, Australia and Japan, is that about two-thirds of the S-REITs have offshore property ownership and a handful are pure offshore property plays. This should, however, not be surprising.

Given the limited size of Singapore’s property market, it would not have been possible for S-REITs to achieve their remarkable growth had they been allowed to invest only in Singapore properties. The development of the S-REIT market thus reflects Singapore’s positioning as a listing hub for cross-border REITs.





The willingness of the Singapore regulators to work together with industry players to co-develop, as well as to continuously review and enhance the regulatory and taxation framework for S-REITs, has been instrumental to the success of the S-REIT market. This has helped to produce an environment that is relevant and conducive for the growth of a vibrant S-REIT market while safeguarding the interests of investors and unitholders.

Key elements of the S-REIT taxation framework

Tax transparency Undoubtedly, tax transparency is the “anchor” of the S-REIT taxation framework. Tax transparency allows investors to come together to invest in a pool of income-producing Singapore properties through a collective investment scheme, i.e., a unit trust, without being subject to tax at the trustee level.

This is what key REIT markets such as the US and Australia have offered to investors in their REITs. Without this “must have” tax design element, the listing of the first S-REIT in Singapore in 2002 would not have been possible. Fortunately, the authorities recognised this and “went on a journey” together with the sponsor and EY to co-create the first taxation framework for S-REITs.

Lower rate of taxation on S-REITs’ distributions To attract more foreign investors to participate in the S-REIT market, the withholding tax rate on S-REITs’ taxable income distributions to foreign non-individual investors was reduced to 10%. This concessionary tax treatment was

granted in 2005 for a five-year period and has since been renewed twice (each time for a five-year period). Unless further renewed, the concessionary tax treatment will lapse on 31 March 2020.

Individuals are generally exempt from tax on S-REITs’ distributions. This exemption is consequent to a broader government policy (made in 2004) to exempt from tax all Singapore-sourced investment income derived directly by individuals from financial instruments.

Tax exemption on foreign-sourced income Foreign-sourced dividends, interest income and trust distributions paid out of income and gains related to ownership of foreign properties are exempt from tax, subject to meeting conditions. This helps to promote Singapore as a listing hub for cross-border REITs and encourages S-REITs to expand beyond Singapore to achieve growth, given the limited size of the Singapore property market.

This tax exemption has a sunset clause. Unless it is further renewed, the tax exemption will not apply on foreign-sourced income derived from foreign properties acquired after 31 March 2020.

Goods and Services Tax (GST) concessions Various GST concessions have been granted to allow S-REITs to claim GST on their business expenses, irrespective of whether they hold underlying assets directly or indirectly through multi-tiered structures. This is regardless of whether the S-REITs make taxable supplies or are registered for GST purposes. These concessions apply to expenses incurred on or before 31 March 2020.

Stamp duty relief Although the stamp duty relief for transfer of Singapore immovable properties and shares of certain Singapore companies has lapsed after 31 March 2015, this was a significant relief for REITs, especially for those investing in Singapore properties. The government discontinued this relief as it felt that the purpose of this relief, which was to enable S-REITs to acquire a critical mass of local assets as a base for which they can expand abroad, had been achieved.

The next lap: the challenges ahead

Over the years, various refinements and adjustments have been made to both the regulatory and taxation framework for S-REITs to make it relevant and conducive and to enhance the robustness and strength of the S-REITs model.

The S-REIT market has strengthened and achieved significant growth over the last decade, despite Singapore’s small property market. It has braved and weathered the global financial crisis, though the crisis has also prompted many S-REITs to revisit their financing structures to create a more sustainable REIT model.

The S-REIT market achieved an average total return of 12.9% in 2014, beating the Straits Times Index’s 9.5% return. However, the next few years are likely to be challenging. The spectre of rising interest rates, stock market volatility, slowing global trade and sluggish economic growth could threaten to dampen the S-REIT market’s stellar performance to-date. Larger economic and market issues also loom.

“With foreign properties likely to play a greater role in the growth of the S-REIT market in the next lap, the case is strong for a removal of the sunset clause.”


In addition to these challenges, taxation will always remain an area that S-REITs or S-REIT aspirants have to navigate and manage carefully. The readiness of our regulators to adapt the existing taxation framework, as well as their willingness to adjust their mindsets, will be critical.

What are some of the key taxation areas that could be reviewed?

Relooking the sunset clause

The sunset clause was introduced as part of an overall policy to allow the government to evaluate the relevance and efficacy of tax incentives or concessions. Currently, the 10% concessionary tax rate, foreign-sourced income tax exemption and GST concessions granted to S-REITs have a sunset expiry date of 31 March 2020. It is clear from the sunset date that these tax breaks have a shelf life. But as these sunset clauses are subject to review with a possibility of extension, uncertainty always exists in the market especially given that a decision on renewal is usually announced in the government budget closest to the expiry date.

Last year, the government tweaked the sunset clause for foreign-sourced income exemption such that it is tied to the date of acquisition of the foreign properties. This was a significant improvement and much welcomed by the S-REIT market. There may, however, still be uncertainty when the expiry date of 31 March 2020 looms, especially for new cross-border S-REITs looking to list then.

This tax exemption is critical for S-REITs with foreign properties. And with foreign properties likely to play a greater role in the growth of the S-REIT market in the next lap, the case is strong for a removal of the sunset clause. After all, there is no real tax revenue loss to Singapore given that, in

most cases, the income generated from the foreign properties would have been subject to tax according to the tax rules in the foreign jurisdictions where the properties are located.

If a total removal of the sunset clause is not appropriate, the next best action to allay uncertainty is to tie the tax exemption to the life of the S-REITs. In other words, the tax exemption will apply so long as the S-REITs are listed on or before 31 March 2020 and continue to be listed on the SGX.

The GST concessions put S-REITs that invest in foreign properties on a level playing field with those that invest in Singapore properties, in terms of the costs of listing and operating a REIT in Singapore. The sunset clause is pegged to the date of incurrence of the expenses. This means that if the concessions are not renewed after 31 March 2020, the input GST incurred by the S-REITs which availed of the GST concessions after that date will not be recoverable and hence will be a cost to these S-REITs. Again, there is a case to remove or tweak the sunset clause to tie to the listing status.

As the fate of tax concessions with a sunset clause is usually made known in the government budget closest to the expiry date, speculation leading up to the expiry date results in unnecessary anxiety in the market. To give industry players and the market more time to adjust, it would help if the sunset clause can be calibrated by giving a one or two-year advance notice on the intent to (or not to) extend these concessions.

Embracing different holding structures

To-date, most S-REITs hold their Singapore properties directly. There are various reasons for this: flexibility to distribute cash flows to investors, being able to directly access tax transparency treatment and to benefit from stamp duty relief (i.e., on or before 31 March 2015).

A handful of S-REITs hold their Singapore properties indirectly through other types of vehicles such as through a company or limited liability partnership. As the S-REIT market matures, these holding structures will continue to evolve.

For example, it may be easier to isolate risks (such as financing risks) by using a separate vehicle to hold each or a few properties, rather than housing all the properties under the S-REIT. If the property is a joint venture with some joint venture partners not willing to dispose of their stake, then the S-REIT may only acquire a partial stake in the joint venture vehicle, which could be a company, a trust or a partnership. There could also be a scenario where the vendor may only want to dispose of the vehicle holding the property and not sell the property directly. These, as well as other circumstances, could lead to S-REITs acquiring a stake in the existing property holding vehicle instead of in the property directly.

For such indirect holding structures, S-REITs may need to restructure their holdings to achieve tax transparency. The restructuring may occur immediately upon acquisition. But it could also lead to various issues which may require the S-REITs to seek an advance ruling of the tax treatment. This advance ruling may have to be sought even before the acquisition is completed.

Regulators need to be flexible both in mindset and in practice in helping S-REITs deal with the challenges of different holding structures. For example, the withdrawal of the stamp duty relief for S-REITs (which lapsed after 31 March 2015), places S-REITs back on a level playing field with other property buyers. Accordingly, in a scenario where an acquisition or restructuring results in the S-REIT paying less or no stamp duty than would have otherwise been payable




on a direct acquisition of the property (within the parameters of the current tax legislation), this ought not to be viewed unfavourably by the regulators.

Could the authorities take the bolder step of making a fundamental shift in the tax transparency treatment? Extending the tax transparency treatment to wholly-owned Singapore subsidiaries of S-REITs will give S-REITs the flexibility to hold their Singapore properties through a corporate vehicle without compromising the tax transparency treatment.

It may also be timely for the government to widen the scope of the stamp duty relief for transfer of assets between associated permitted entities. We understand that S-REITs were not included in this stamp duty relief framework previously because they were already the subject of a specific remission for S-REITs. Now that that the stamp duty relief for S-REITs has lapsed, putting them on a level playing field with other forms of entities, S-REITs should also be included in the relief scheme for transfer of assets between associated permitted entities.

More upfront tax certainty

How the S-REIT market fares in the years ahead, in our view, will depend to a significant extent on how Singapore is able to attract more foreign sponsors to list their assets on the SGX. The listing of cross-border REITs is often more

challenging and involves both tax and non-tax roadblocks that have to be carefully navigated. Foreign sponsors may also not be familiar with the listing requirements and other regulatory prerequisites in Singapore. They will therefore need more guidance on these.

Some of these challenges may have to be dealt with through structures or arrangements that are not the norm and this may involve the S-REIT receiving non-typical payment forms, i.e., other than dividends and interest income. For example, the S-REIT may have income support arrangements for a period of time to be able to provide the level of distribution yield required by the market.

As S-REITs are a yield-based investment asset class, upfront certainty on the tax treatment of their receipts or revenue is critical as this would impact the distribution yield to investors. Any tax uncertainty may affect the marketability of the units. To achieve upfront tax certainty, S-REITs or sponsors of new S-REITs will invariably have to submit their issues for agreement via the advance ruling system — a system that was put in place to provide greater clarity and certainty to taxpayers. Some of these issues are likely to be new or specific to the transaction in question but will nonetheless require the regulators to take a quantum leap of faith to go on a journey with the sponsors or the S-REITs.

Perhaps the tax transparency treatment could also be extended to other Singapore-sourced income that does not currently enjoy tax transparency, so long as this is within a threshold of, say, not more than 10% of the total income of the S-REITs which have been granted tax transparency treatment. This will provide more upfront tax certainty to S-REITs. They can then proceed with an investment without having to go through the advance ruling application process, which could take up to five months, to confirm the tax treatment.

Conclusion

The S-REIT market owes its current success and strong growth to the strong collaboration between both the regulators and industry players. A consultative approach has helped the regulators to develop a strong regulatory and taxation framework for S-REITs in tune with market needs.

The journey ahead is going to be more challenging. To preserve and build on what we have created today, regulators will need to appreciate the challenges faced by S-REITs and S-REIT listing aspirants, and be open to adapting the existing taxation framework to deal with new structures and issues. Working with industry players to co-develop solutions is the key to retaining a thriving REIT market in Singapore.

Lim Gek Khim Partner, Tax [email protected]

Gek Khim is the Real Estate Sector Tax Leader in EY Singapore. She was instrumental in developing Singapore’s REITs tax framework in 2001. She has more than 25 years of corporate and international tax experience. She provides tax advisory services on capital market transactions relating to the listing of REITs/business trusts and structuring of real estate and infrastructure funds for both inbound and outbound investments.

Ang Sau Tze Associate Director, Tax [email protected]

Sau Tze has more than 12 years of corporate and international tax experience with significant focus in the real estate sector in the past five years. He provides tax compliance and advisory services to S-REITs, real estate sponsors and real estate/infrastructure funds undertaking both inbound and outbound investments.

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Singapore thrives as a fund

management hotspot

Desmond Teo and Rajesh Nathwani discuss the appeal of Singapore as a regional fund management hub and what more

could be done to entrench this position

For many years, Singapore has thrived as one of the region’s fund management hotspots. With Asian and global financial services identified as one of the five growth clusters

in Budget 2015, the fund management industry is set to play an even more pivotal role in driving Singapore’s economy forward.

Singapore has established itself a magnet for fund managers, with more than 590 fund managers registered and licensed with Monetary Authority of Singapore (MAS)1. Total assets under management (AUM) continues to grow at a blistering pace — Singapore-based asset managers managed assets worth S$2.4 trillion in 2014, a 30% leap from the year before1. From 2010 to 2014, the industry recorded an AUM growth of 14% compounded annually1. Over the last decade, Singapore has enjoyed increasing popularity as a domicile for fund vehicles.

The basics that make Singapore an appealing place for fund managers are its positive business environment, world-class infrastructure and a quality workforce. The attractive tax incentive regime has also been instrumental in positioning Singapore as a pre-eminent fund management centre.

Evolution of Singapore’s tax policiesEvolution of Singapore’s tax policies

1Source: 2014 Singapore Asset Management Industry Survey issued by the MAS.




Evolution of the tax incentive regime

Backdrop In the early 1980s, the government introduced a tax incentive regime for non-residents with funds managed by approved Singapore-based fund managers. Since then, the government has continually refined and enhanced the tax incentive regime to cater to the needs of the fund management industry. This pro-active approach has helped keep Singapore one step ahead of its competitors.

Exemption of income of non-residents arising from funds managed by fund managers in Singapore What first started all of this is the tax exemption introduced for certain foreign-incorporated fund vehicles which satisfied certain conditions. One of these conditions was that at least 95% of the value of the funds should be beneficially held directly or indirectly by foreign investors (i.e., non-Singapore citizens or non-residents of Singapore).

“As best practice, fund managers should conduct regular health checks to ensure adequate internal controls are in place to comply with the specific requirements of the tax incentive schemes.”

This percentage of foreign investor holding was later relaxed to 80%. This was commonly known as the “80:20 rule”. While this tax exemption was attractive and kick-started Singapore’s development as an asset management hub, this is not without some challenges in complying with the tax exemption, including the possible forfeiture of the tax exemption if the 80:20 threshold is breached. It also placed a cap on the quantum of AUM that may be raised from Singapore investors.

In 2007, the 80:20 rule was removed and replaced with the concepts of qualifying funds, qualifying investors and non-qualifying investors. This was to provide certainty of tax exemption at the fund level and also provides Singapore-based fund managers

with greater flexibility in sourcing for mandates from Singapore investors.

Following this change, the qualifying fund is granted a tax exemption on specified income derived in respect of designated investments regardless of its investors’ residency status as long as there is one foreign investor in the fund. Instead, non-qualifying investors face a potential financial penalty if they breach certain thresholds. A non-qualifying investor could be a Singapore-based non-individual investor holding (together with their associates) more than 30% of the fund (or 50% of the fund if the fund has 10 investors or more). This is commonly referred to as the “30/50 rule”.


Singapore resident tax incentive scheme In 2006, a new tax incentive was introduced to encourage fund domiciliation in Singapore. This incentive granted Singapore tax exemption on certain income derived by funds set up in the form of companies which are tax resident in Singapore and which satisfy certain conditions. Such funds could also enjoy the benefits under Singapore’s extensive tax treaty network. For example, Singapore emerged as springboard for investments into India given the substance requirements and capital gains exemption under the Singapore-India tax treaty, as well as investments into countries such as Australia, Indonesia, Thailand, etc.

Enhanced-tier tax incentive scheme In 2009, to further promote fund management in Singapore and enable fund managers to source local mandates, an enhanced-tier tax incentive scheme was introduced. Under this scheme, no restrictions were imposed on the residency status of the fund vehicles as well as that of investors. Unlike the other tax incentive scheme, eligible limited partnerships qualified for the tax incentive and were not treated as “look-through” vehicles.

The 30/50 rule which imposed an investment limit on Singapore-based non-individual investors did not apply to funds that were awarded the enhanced-tier tax incentive scheme. The enhanced-tier tax incentive scheme also discarded the requirement to issue annual statements to investors to ensure compliance with the 30/50 rule. This has helped in reducing the administrative burden on the fund managers, as well as creating further flexibility in sourcing for mandates.

To qualify for the enhanced-tier scheme, fund managers had to meet additional conditions. These included having a

minimum fund size of S$50m and employing at least three investment professionals, amongst others.

In 2015, the scope of this incentive was further expanded to cover special purpose vehicles under the master-feeder fund structure (umbrella type structures), subject to certain conditions.

Specified income and designated investments At the outset, this scheme provided exemption to non-residents from Singapore tax liability on “specified income” derived from “designated investments” arising from funds managed by approved fund managers.

The government has continually reviewed the prescribed “specified income” and “designated investments” lists to ensure they remain relevant and complete. Over the last decade, the government has widened the list of designated investments to include innovative financial products such as investments in structured products, emission derivatives and commodity derivatives. In 2012, the list of specified income was changed into an exclusion list. The list of designated investments has also been simplified to keep up with industry developments.

Incentive to fund managers The tax incentive scheme introduced in the 1980s provides a 10% concessionary tax rate to approved fund managers if certain conditions are met. In the 1990s, to attract large fund managers and to promote fund managers to expand their operations in Singapore, a total tax exemption or 5% concessionary tax rate on incremental income (in addition to the 10% concessionary tax) was extended to fund managers. This was subject to conditions such as the fund managers meeting minimum requirements for assets under management and investment professionals.

In 2002, it was announced that the financial sector incentives would be rationalised and consolidated. These incentives were merged into a single financial sector incentive (FSI) scheme in 2004. In 2007, the concessionary tax rate of 10% was extended to income from certain investment advisory services provided in relation to a foreign investor or to a foreign fund manager under a fund delegation arrangement.

Common pitfalls

The tax incentive regime has played a critical role in developing the fund management industry in Singapore. However, certain issues and risk areas remain. Fund managers need to ask themselves these questions:

• Is the income which is exempt from tax “specified income” derived from “designated investments”?

• Are the new investments made by the funds being reviewed to ensure that they fall within the list of “designated investments” and within the approved investment strategy?

• Are there measures and controls in place to determine the existence of “non-qualifying investors”?

• Do the funds meet the conditions or obligations of the respective tax incentives?

• Is the annual declaration or annual tax filing being submitted on time?

• Are there proper procedures in place to determine whether the income of the fund manager qualifies for the concessionary tax rate?

As best practice, fund managers should conduct regular health checks to ensure adequate internal controls are in place to comply with the specific requirements of the tax incentive schemes.




Looking ahead

Singapore has successfully built up a strong lead as a fund management centre. But there is no room for complacency. Singapore will need to continuously refine its schemes and pursue innovation to ensure it remains a relevant and attractive location for fund managers.

What could further strengthen Singapore’s position as a fund management hub?

While Singapore has encouraged fund domiciliation through a corporate fund structure, there have been concerns regarding the lack of privacy on the fund’s financials and investor details. Could restricting access to the financials and investor details of Singapore-domiciled funds help solve this? Also, the requirement to furnish a solvency declaration for redemption of shares is especially onerous for open-ended funds.

To overcome these challenges and further promote fund domiciliation, Singapore can perhaps explore the implementation of an Open Ended Investment Company (OEIC) fund structure. An OEIC is a company with variable capital. This concept has already been implemented by certain European countries.

Singapore-domiciled funds have to pay goods and services tax of 7% on fund management fees, fund administration fees, etc. While GST remission (currently at 88%) allows the refund of GST, this results in GST leakage (of 0.84%) and creates a negative cash flow. Perhaps tax authorities can consider treating services to Singapore-domiciled funds as zero-rated supplies for GST purposes.

Lastly, Singapore’s fund management community will need to keep an eye on global tax developments such as the Base Erosion and Profit Shifting (BEPS) Action Plan and the Automatic Exchange of Information (AEOI) requirement. These could change the funds paradigm.

Desmond Teo Partner, Financial Services [email protected]

Desmond provides international and corporate tax advisory services to clients with a focus on the financial services sector. Desmond is one of the leads in Asia-Pacific for FATCA and CRS. Armed with knowledge of transfer pricing, individual taxes, indirect taxes and transfer taxes, Desmond advises clients on cross-border structuring, tax due diligence, M&A structuring, feasibility and implementation of fund structures.

Rajesh Nathwani Manager, Financial Services [email protected]

Rajesh provides tax services to clients in the private equity, asset management and banking sectors. Rajesh has advised clients in areas such as international taxation, corporate taxation, general anti-avoidance rules, setting up of funds, tax incentives applications, structuring of investments, and entry and exit strategies.

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As one of the world’s leading financial centers, Singapore has established itself as an important insurance hub within Asia.

Currently, there are 181 licensed insurance players in Singapore, with 81 licensed direct insurers (underwriting life, general and composite insurance), 32 reinsurers and 68 captive insurers1.

Sound and targeted policies, including complementary tax rules and incentives, have been instrumental in creating a vibrant and fast-growing insurance sector in Singapore. These tax rules and incentives have evolved over the years in line with the needs of the insurance industry.

“While insurance entities can enjoy tax incentives due to the

additional value they bring to Singapore, they should also

have the assurance that they can apply general tax principles to evaluate the tax implications

of their business operations and transactions.”


1Source: MAS website as at 13 September 2015.


Keeping taxes competitive for the insurance industryAmy Ang and Leow Yuet Yong discuss the evolution of the Singapore taxation rules of the insurance industry and highlight the catalytic role of relevant tax incentives to the growth of the insurance industry in Singapore




Taxation of net premium income

Section 26 of the Singapore Income Tax Act (SITA) provides for the taxation of insurance (and reinsurance) companies on a net premium basis, with the exception of participating funds underwritten by life insurers. Effectively, insurers are considered to be deriving premium and investment income on their own account with tax deductions granted on claims paid to and policy liabilities due to policyholders.

Taxation of a participating fund

A life insurance fund which consists of participating policies is known as

a participating fund. A participating policy gives the policyholder a right to participate in allocations through bonuses from the fund.

Under the Singapore Insurance Act, the allocation of the participating fund surplus to shareholders cannot exceed 1/9th of the amount allocated to policyholders. In other words, the maximum allocation to shareholders is 10% of the participating fund’s surplus (resulting in a corresponding 90% to the policyholders).

Singapore tax rules do not look through the participating fund. In other words, the distributions from the fund are made to the policyholders after tax at the fund level. However,

policyholders are effectively accorded a concessionary tax treatment as the rate of 10% (instead of the higher normal corporate tax rate of 17%) is applied on the allocation of the participating fund’s surplus to policyholders. Further, an individual policyholder is exempt from Singapore tax on the receipt of such allocations2.

Introduced in 2005, the Risk-Based Capital framework for the insurance industry revamped the basis of taxation of participating funds after much consultation with the industry. The framework aimed to develop a more transparent and risk-focused basis for valuations to better reflect major financial risks. The Inland Revenue

2Section 13(1)(ze)(iv) exempts from Singapore tax any income from any life insurance policy derived by an individual.


Since then, the Singapore government has continued to refine this tax incentive. It has been granting the concessionary tax treatment to qualifying insurance players committed to underwriting offshore insurance business out of Singapore. To qualify for tax concession, an approved offshore insurer would have to commit to certain headcount and/or activities in Singapore which are considered to add value to the development of the Singapore offshore insurance business. In 2015, this tax incentive was extended for another five years. Known as the Insurance Business Development (IBD) scheme, this incentive is aimed at supporting the growth of both domestic and international insurance and reinsurance companies seeking to expand their businesses from Singapore.

Tax incentive for specialised insurance risks

Apart from traditional insurance coverage, Singapore has over the last decade seen an increased capacity in the underwriting of specialised risks. This development was, in part, helped by the tax exemption scheme introduced in 2006 to cover income derived from the underwriting of offshore qualifying specialised insurance risks. These specialised insurance risks include terrorism risks, political risks, aviation and aerospace risks, and energy risks. The tax exemption was further expanded in 2011 to include agriculture risks and in 2013 to include catastrophe excess of loss.

Separately, approved marine hull and liability insurers can enjoy tax exemption on qualifying income relating to both onshore and offshore marine hull and liability insurance business.

Growth of captive insurers

In 2006, the Singapore government announced a 10-year tax exemption for approved captive insurance companies on their qualifying income. Previously, captive insurance companies could rely on the 10% concessionary tax rate on their offshore risks.

Singapore is currently host to close to 70 captive insurers. This is still some way off locations with sizeable captive insurance markets such as Bermuda. Nevertherless, this is an area of potential growth for Singapore. Having a healthy pool of captive insurers would further strengthen Singapore’s position as a leading insurance centre.

Role of insurance intermediaries

While much focus has been placed on the growth of the insurance and reinsurance players, the Singapore government has also kept tabs on the development of the insurance intermediaries. Not only are insurance brokers important distributors for the insurance companies, they often play a key value-added roles in matching and placing insurance risks, as well as providing specialised risk advisory services.

Authority of Singapore has since continued to engage the industry to ensure the relevance of the tax rules.

Under the RBC framework, the participating fund needs to maintain policy assets which are at least equal to the policy liabilities. Effectively, the matching of policy assets with policy liabilities results in technically zero surplus under the RBC framework. While recognising regulatory requirements and changes, the IRAS kept to the concept of imposing the corporate income tax on the insurer before distributions are made. As a result, a basis of taxation unique to the insurance industry was introduced for participating funds with effect from the year of assessment (YA) 2006. Under this basis of taxation, distributions allocable to policyholders and the insurer are taken as proxy for the taxable net surplus of the participating fund to which tax adjustments are made.

Tax incentive providing concessionary tax rate on offshore risks

To develop Singapore as an insurance hub, the Singapore government recognised the importance of attracting insurers (in particular international insurance groups) to underwrite offshore risks out of Singapore. As early as YA 1978, a concessionary tax rate of 10% was introduced on incentive income derived from underwriting offshore risks.




Consolidation of Singapore’s position as a key insurance hub cannot be complete without attracting quality insurance brokers to set up operations in Singapore and to bring in more offshore insurance business from foreign clients for placement with Singapore insurers and reinsurers.

In 2008, a 10% concessionary tax rate was introduced to cover qualifying income derived by approved insurance and reinsurance brokers in respect of offshore insurance broking business. The incentive has since been enhanced and extended till 31 December 2018.

Outlook

The current comprehensive and well thought list of tax incentives is expected to continue to complement the growth of the insurance industry in Singapore. However, we do urge the authorities to apply general tax principles, especially on the topic of revenue versus capital, to insurance entities as they would to other taxpayers.

In a recent landmark case Comptroller of Income Tax v BBO3, the Court of Appeal dismissed the Comptroller’s argument that gains arising from all assets (even fixed assets) held in insurance funds would invariably be assessable income. In dismissing the

Comptroller’s position, the key decision hinged on the judge’s ruling that the usual badges of trade should still apply in determining whether disposal gains derived by an insurance entity can be considered capital in nature (and hence not taxable) instead of the default revenue treatment applied by the Comptroller.

When section 13Z of the SITA was enacted in 2012 to provide tax exemption on gains derived from the disposal of ordinary shares (subject to minimum 20% holding over a period of at least 24 months prior to the disposal), insurance entities were the only industry specifically excluded from the exemption. This was presumably due to the preconceived position taken by the authorities that insurance entities can only derive revenue gains. We do hope the authorities can eliminate such exclusion and treat insurance entities just like other taxpayers in relying on provisions such as section 13Z and the application of general tax principals like the badges of trade.

While insurance entities can enjoy tax incentives due to the additional value they bring to Singapore, they should also have the assurance that they can apply general tax principles to evaluate the tax implications of their business operations and transactions.

Amy Ang Partner, Financial Services [email protected]

Amy leads EY’s Financial Services Organization (FSO) in Singapore and is the FSO Asean Tax Market Segment Leader. Amy’s focuses on the insurance, asset management, banking and capital markets sectors. She regularly engages relevant authorities on industry focused tax issues, assists clients with tax incentive evaluations and applications and advises on the set up of tax efficient fund structures and fund management arrangements.

Leow Yuet Yong Manager, Financial Services [email protected]

Yuet Yong focuses on the financial services industry such as insurance, fund management, banking and capital markets. Her experience includes assisting clients with their corporate tax compliance and advisory matters in Singapore and liaising with the Inland Revenue Authority of Singapore to resolve various corporate tax issues.

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3Comptroller of Income Tax v BBO (2014) SGCA 10



The 2015 Singapore Transfer Pricing Guidelines (2015 TP Guidelines) were released in January 2015. From a practical

perspective, the 2015 TP Guidelines apply from Year of Assessment 2015, where appropriate transfer pricing documentation must be completed by the statutory tax filing date for that year. This means that Singapore transfer pricing documentation for the Year of Assessment 2015 will need to be completed by 30 November 20151.

Some taxpayers are exempt from preparing transfer pricing documentation.

Demystifying the 2015 Singapore Transfer Pricing GuidelinesSenaka Senanayake discusses how companies should respond to the requirements of the 2015 Singapore Transfer Pricing Guidelines

“The 2015 Singapore Transfer Pricing Guidelines recognises that not all related party transactions of companies in Singapore will need transfer pricing documentation and that overall an assessment of the underlying transfer pricing risk should drive the level of Singapore transfer pricing documentation prepared by companies to address the requirements of the 2015 Singapore TP Guidelines.“

Exemption Taxpayers are exempt from preparing Singapore transfer pricing documentation for certain categories of related party transactions if they meet one of the following criteria:

• Have domestic transactions between related party companies that are subject to the same corporate tax rate

• Have domestic loans that are not obtained from a domestic related party that is in the business of providing loans

• Have cross border transactions that are below the following thresholds on a per entity per year basis:

• Purchases of goods or sales of goods less than S$15m

• Loans made or received less than S$15m

• Any other category of transactions (such as services and royalties) less than S$1m

1Singapore transfer pricing documentation must be prepared by this date, but is not submitted with the tax return. Singapore transfer pricing documentation should be provided to the Inland Revenue Authority of Singapore only when formally requested. The 2015 Singapore Transfer Pricing Guidelines indicate that a taxpayer has 30 days to respond when this request is made.




2Section 13(16) of the Singapore Income Tax Act states that “related party” in relation to a person, means any other person who, directly or indirectly, controls that person, or is controlled, directly or indirectly, by that person, or where he and that other person, directly or indirectly, are under the control of a common person. Control is not further defined in the Singapore Income Tax Act, but based on our experience, we believe the following factors should be taken into consideration when defining control in the context of the definition of related parties: control through board representation, such as significant decision making ability of director positions held by one party in the other entity’s board of directors or key decision making managerial groups; management decision making authority about key strategic business decisions, such as approach to market, level of business expenditure, type of business expenditure, types of clients and engagements; large control on supply of business (customers) or dependence on other company for revenue source; shareholding based on a broad indicator of shareholding at 50% or more common ownership. Counterparty country definitions of related party should also be considered when determining the relevance of counter parties in other countries as related parties and for overall assessment of transfer pricing risk.3Thresholds are applied on a transaction category basis per year, per company. Singapore transfer pricing documentation should be prepared if the following thresholds are exceeded for the following related part transaction types: purchases of goods or sale of good exceeding S$15m, loans made or received exceeding S$15m, any other category of transactions (such as services and royalties) exceeding S$1m.4A process available under certain tax treaties entered into between Singapore and other countries, which requires the respective tax authorities to try to relieve the impact of double taxation triggered by a transfer pricing adjustment made in one of the relevant jurisdictions.

The expectation

The 2015 Singapore TP Guidelines recognises that not all related party2 transactions of companies in Singapore will need transfer pricing documentation and that overall an assessment of the underlying transfer pricing risk should drive the level of Singapore transfer pricing documentation prepared by companies to address the requirements of the 2015 TP Guidelines. Some of the key indicators of transfer pricing risk that should lead companies to prepare appropriate Singapore transfer pricing documentation are:

• Related party transactions, exceeding specified thresholds in the 2015 Singapore Transfer Pricing Guidelines3

• Where there is likely to be exposure to double taxation in the counter-party jurisdiction, leading to a taxpayer request for relief under Mutual Agreement Procedure4

• If transfer pricing adjustments are made to the company’s related party transactions

So, if your company’s related party transactions fit within one of the above, appropriate Singapore transfer pricing documentation should be prepared for the relevant related

party transactions within the relevant completion date.

How can the process be streamlined?

Many companies have asked whether they can rely on existing transfer pricing documentation prepared either at a general level for their multinational group or for other similar related parties or their counterparties with the same type of related party transactions. Leveraging from existing transfer pricing documentation is not only contemplated in the 2015 TP Guidelines, but is a sensible approach to ensure consistency


of content across a multinational corporation about the way content such as description of business model, industry analysis and approach to transfer pricing methods are described in your company’s Singapore transfer pricing documentation. However, in order to address the Singapore specific content and have relevant financial data for the year under review, it is recommended that stand-alone Singapore transfer pricing documentation be prepared, albeit leveraging appropriately from existing transfer pricing documentation that may be available.

There are potentially many ways companies can streamline the process to prepare Singapore transfer pricing documentation. In our experience, there are many cases where there is existing transfer pricing documentation within a multinational corporation that can be leveraged efficiently to prepare Singapore transfer pricing documentation. Potential areas where leverage can be made include:

• Descriptions of the nature of the company’s products/services and business model

• ►Analysis of the industry relating to the related party transactions

• Explanation of the nature of the roles of the company and its related parties in the related party transactions

• Reasons why transfer pricing method was selected and appropriate benchmarking analysis to support the application of that transfer pricing method

However, there are certain aspects of the 2015 TP Guidelines that are currently relatively uncommon, where

there may not be opportunities to leverage from existing transfer pricing documentation or special attention should be paid to these aspects when preparing your company’s Singapore transfer pricing documentation. These unusual requirements are highlighted below:

• Value chain analysis: traditional transfer pricing documentation tended to focus on a single entity (the “tested party”) in a related party transaction, describing the functional profile of that entity in the related party transaction. The 2015 TP Guidelines expect a value chain approach to transfer pricing analysis, which means your company’s Singapore transfer pricing documentation needs to explain the role of all companies in the value chain in terms of the activities performed by each company (or company type) and the activities that drive the generation of revenues and profitability of the multinational group.

Interestingly, the 2015 TP Guidelines are amongst the first transfer pricing guidelines (or regulations) in the world to explicitly require a value chain approach to transfer pricing documentation. This approach towards value chain analysis is broadly in line with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action plan relating to content for transfer pricing documentation, which was finalised recently in October 2015. However, this aspect of the OECD’s BEPS action plan is new and has not been implemented

in local country transfer pricing documentation rules, so you will most likely find (for now), that such value chain analysis may not be present in existing transfer pricing documentation in your company’s multinational group.

The value chain analysis and approach to Singapore transfer pricing documentation needs to be prepared in order to meet the requirements of the 2015 TP Guidelines, but as this may be the first instance in your company’s multinational group where value chain analysis is prepared; it is strongly recommended that such analysis is prepared in consultation with your company’s group tax personnel.

• Existing Asia-Pacific benchmarking analysis will generally be appropriate for Singapore transfer pricing purposes. However, you should examine the nature of any Singapore companies that were selected or rejected in the search process to identify comparable to determine whether the Singapore companies should be included or excluded for Singapore transfer pricing benchmarking/documentation purposes. You should also ensure that the benchmarking analysis is relatively current; which in practical terms for Singapore transfer pricing documentation for the 2014 financial year means prepared at least within the last two to three years.




What about years of assessment after 2015?

Singapore companies need to prepare annual transfer pricing documentation, which must be completed by the statutory tax filing date for that year. However, importantly, the 2015 Singapore Transfer Pricing Guidelines describe a three-year cycle for preparation of Singapore transfer pricing documentation, where Singapore companies can perform simple updates for a two-year period following the year where the full preparation of their Singapore transfer pricing documentation occurred. The following is an example of this three-year cycle, where Singapore transfer pricing documentation is prepared for the first time in financial year (FY) 2014:

However, we suggest that Singapore companies verify that the following criteria are fulfilled before relying on simple updates for the subsequent two years after preparing your new Singapore transfer pricing documentation:

• Confirm that there are no significant changes in the business model or functional profile of the relevant entities

• Confirm that there are no new related party transactions in FY 2015 or FY 2016

• Have determined that updated range of benchmarking results is consistent with tested party results

The answers to the above need to be “yes” in order to be sure that a simple update over the subsequent two-year period is appropriate. To the extent that the answers to the above are “no”, additional transfer pricing analysis will likely need to be prepared to address new related party transactions in subsequent years or a lack of comparable data or issues with data that supports your company’s transfer pricing position. And in any case, the 2015 TP Guidelines require Singapore taxpayers to fully update their Singapore transfer pricing documentation at least once every three years.

Prepare

FY 2014 FY 2015 FY 2016

Update Update

First year of preparation of Singapore transfer pricing documentation

Update financial results of comparable data for searches conducted for FY 2014, and updatetested party data. Also suggested to perform a high level validation that key facts have not changed/no new related party transactions

Update financial results ofcomparable data for searches conducted for FY 2014, and update tested party data. Also suggested to perform a high level validation that key facts have not

changed/no new related party transactions

Senaka Senanayake Director, Transfer Pricing Services [email protected]

Senaka has more than 14 years of experience with transfer pricing, coordinating Asia-Pacific and Singapore specific transfer pricing projects involving transfer pricing planning, restructuring, transfer pricing documentation, audits and Advance Pricing Agreements.

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Future developments relating to transfer pricing

Transfer pricing requirements will continue to develop in Singapore and around the world. The implementation of the OECD’s BEPS action plans, experience in Singapore with the practical aspects of addressing transfer pricing documentation for FY 2014 and subsequent years, as well as the continued and increasing incidence of transfer pricing review and audits by foreign tax authorities will no doubt necessitate updates to

the 2015 Singapore Transfer Pricing Guidelines.

Some key areas to look out for in the future include:

• Country-by-country reporting for Singapore-based multinational companies, where certain financial and other data will need to be submitted annually to the Inland Revenue Authority of Singapore (IRAS) and might eventually be requested by foreign tax authorities through exchange of information provisions in Singapore tax treaties. Such financial and other data (in line with OECD recommendations on country-by-country reporting) will likely include the following regarding all companies in the Singapore-based multinational group:

• Profit (loss) before income tax of the companies

• Income tax paid (on cash basis)

• Stated capital

• Number of employees in the company

• Main business activity of the respective companies

• Potentially disclosure of the nature and quantum of Singapore taxpayers’ related party transactions.


You and the Taxman


Enhancing the renovation and refurbishment

deduction scheme Ang Lea Lea and Louise Phua suggest refinements to the

renovation and refurbishment deduction scheme

Retailers, F&B players and entertainment providers face stiff competition in attracting customers. They need to constantly come up with fresh concepts to set themselves apart

from the competition. To reinvent themselves, these players need to give their storefronts, restaurants and outlets a makeover every now and then.

But spending on renovation and refurbishment (R&R) can make up a large chunk of business expenses. The rules for the deduction of R&R expenses have evolved over the years. Is it easy to claim a tax deduction for R&R expenses? Could the rules be refreshed to make them more relevant in today’s context?

Addressing past challenges

As one of our four wishes for Budget 2008, we had urged the government to give deduction relief for integral fixtures to buildings.

Prior to Budget 2008, businesses could not claim spending on mechanical and engineering items in commercial and office buildings as deductions against taxable income unless they qualified as “plant and machinery”. But to decide, and indeed agree on, what is plant and machinery is not always so straightforward.





Our tax law does not define what “plant and machinery” is, so over the years the courts have stepped in to explain what it is. On these principles, most standard fittings integral to a modern building such as general electrical lighting and power systems, sanitary fittings, and hot and cold water systems, are considered a part of the building or the “setting in which the business is carried on”. The result is that unless the building qualified as an industrial building, no deduction was given on these integral fittings.

In this regard, we had therefore urged the government to amend the tax law to provide certainty to businesses, to level the playing field for different types of businesses and to reduce the compliance cost to both the Inland Revenue Authority of Singapore (IRAS) and the taxpayers. Our wish was promptly heard. The Minister for Finance announced in Budget 2008 that the government would introduce a “fixtures and fittings incentive” to help businesses, in particular small and medium-sized enterprises (SMEs) in the services industry, because they were unable to take advantage of the industrial building allowance scheme at that time. The Minister aptly used this example to describe the regular bugbear concerning expenses that companies incurred on fixtures: “If a restaurant wants its bar counter to qualify for capital allowances, the surest way is to put it on wheels”.

Before the “fixture and fittings incentive” was enacted in section 14Q of the Income Tax Act as a deduction for R&R costs, businesses had to prove that an R&R item qualified as “plant and machinery” when challenged by IRAS. The introduction of the fixture and fittings incentive removed much of this pain.

The journey to the present

The deduction for R&R costs was initially introduced for a five-year period from 16 February 2008 to 15 February 2013. Businesses were allowed a tax deduction on qualifying R&R costs of up to S$150,000 for every three-year period.

The deduction is given on claims made in the year in which the R&R costs were first incurred, over three consecutive years on a straight line basis. If the company ceases its business permanently in any of the three years, no deduction would be allowed on the remaining R&R costs not claimed.

Unutilised section 14Q deduction due to insufficient trade income in the year would not be available for transfer to a related company under the group relief system. Such unutilised deduction could instead be carried forward for set off against the business’ future taxable income. Alternatively, the unutilised deduction could be carried back to the immediate preceding year to be set off against the business’ assessable income.

In 2009, Singapore faced its deepest recession since independence. To save jobs and keep viable companies afloat, the government unveiled various measures to help businesses, especially SMEs, ease their cash flow. Accelerating tax deduction for R&R costs was one. For qualifying R&R costs incurred in the basis periods for the year of assessment (YA) 2010 and YA 2011, deduction was allowed over one year instead of over three years.

When Budget 2012 was announced, deduction for R&R costs was made a permanent feature of the Singapore tax system. The government also enhanced the scheme in two ways with effect from YA 2013. First, the expenditure cap was

doubled to S$300,000 for every three-year period. Second, unutilised section 14Q deduction could be transferred to a related company under the group relief system.

In December 2012, the scheme was tightened. From 18 December 2012, expenses relating to work done on accommodation provided to employees would not be eligible for section 14Q deduction.

Our wish for the future

Is there room to further refine the section 14Q scheme? The scheme is especially beneficial for businesses in the retail, food and beverage and entertainment sectors, where renovation at regular intervals plays an important role in attracting more customers.

In recent years, these sectors have faced rising business costs as they try to wean off their reliance on cheap foreign labour. Many smaller outfits have folded as they have been unable to keep up with bigger players.

To support SMEs, perhaps the government could fine-tune the section 14Q scheme by increasing the spending cap, allowing an accelerated claim over a one-year period for SMEs, or both. Such an enhancement could be modelled after the PIC+ scheme introduced in Budget 2014.

Since the introduction of the section 14Q deduction in 2008, much has been discussed about the type of R&R costs that qualify for the deduction. Currently, R&R costs that affect the structure of the building do not, generally, qualify for deduction. Given that the industrial building allowance has already been phased out and the land intensification allowance scheme only applies to certain industries, perhaps it’s time to consider including R&R costs that affect the structure of the building as qualifying R&R costs for purposes of the tax deduction.

“Perhaps it’s time to consider including R&R costs that affect the structure of the building as qualifying R&R costs for purposes of the tax deduction.”


Puzzlingly, designer and professional fees are specifically excluded from the list of qualifying R&R costs. These fees are applicable in most R&R projects and often form a large portion of total project costs.

The UK’s business premises renovation allowance (BPRA) bears the closest resemblance to Singapore’s section 14Q deduction. The BPRA is a 100% allowance given on qualifying expenditure incurred by a business on:

• Converting a qualifying building into a qualifying business premise

• Renovating a qualifying building that is, or will be, a qualifying business premise

Or

• Repairing a qualifying business premise

The list of qualifying costs in relation to the BPRA is largely similar to the list of qualifying costs for the section 14Q deduction, except for the inclusion of architectural and design service fees, and surveying or engineering service fees. The UK government recognises that such fees are incidental and integral to the conversion and renovation works. Therefore, these fees are accorded the same treatment as other qualifying expenditure. In Singapore, designer and professional fees attributable to plant and machinery also qualify for capital allowances.

We urge the government to consider expanding the qualifying R&R costs to include designer and professional fees. This will be in line with the tax treatment for the purpose of a capital allowance claim.

It’s been seven years since the section 14Q scheme was introduced. It’s time for the scheme to see a facelift. In Budget 2008, our wish was answered. Can the same be said for Budget 2016? We hope our wish for the enhancement to the R&R deduction scheme will be met.

The following items qualify for section 14Q deduction provided they do not affect the structure of the business premises:

• General electrical installation and wiring to supply electricity

• General lighting

• Hot/cold water system (pipes, water tanks etc)

• Gas system

• Kitchen fittings (sinks, pipes etc)

• Sanitary fittings (toilet bowls, urinals, plumbing, toilet cubicles, vanity tops, wash basins etc.)

• Doors, gates and roller shutters (manual or automated)

• Fixed partitions (glass or otherwise)

• Wall coverings (such as paint, wall-paper etc.)

• Floorings (marble, tiles, laminated wood, parquet etc.)

• False ceilings and cornices

• Ornamental features or decorations that are not fine art (mirrors, drawings, pictures, decorative columns etc.)

• Canopies or awnings (retractable or non-retractable)

• Windows (including the grilles etc.)

• Fitting rooms in retail outlets

The following items do not qualify:

• Any designer fees or professional fees

• Any antique

• Any type of fine art including painting, drawing, print, calligraphy, mosaic, sculpture, pottery or art installation

Or

• Any works carried out in relation to a place of residence provided or to be provided to the company’s employees (applies to expenditure incurred from 18 December 2012)

Source: IRAS website (www.iras.gov.sg)

Ang Lea Lea Partner, Tax Services [email protected]

Lea Lea is the Life Sciences Sector Tax Leader in EY Singapore. She has more than 20 years of experience in tax, both in the public accounting and the commercial environments. In EY, her focus has been tax advisory, including international tax planning relating to the global structuring of MNCs’ international activities, acquisition and restructuring planning.

Louise Phua Senior Manager, Tax [email protected]

Louise has more than 14 years of corporate tax experience. In recent years, her focus has been on private client services, advising high net-worth individuals and families on private trust structures for investments in Singapore and outside Singapore. She also provides tax compliance and advisory services to MNCs and local listed companies.

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Defining the status of an investment

holding companyHelen Bok and Jessica Tan explain what you need to know in

determining the tax treatment of an investment holding company

Singapore has long been a favoured regional headquarters and holding company location among multinational corporations (MNCs). It’s not hard to fathom why.

The city-state’s geographical location, stable government, attractive tax regime, skilled workers and excellent infrastructure have been instrumental in attracting international giants and home-grown companies to anchor and manage their business here.

A common business structure amongst companies operating Singapore is the investment holding company. Instead of earning income through the provision of goods or services, an investment holding company generates income through its investments in properties or shares.

How are investment holding companies taxed in Singapore and what are the issues that they face?



What is an investment holding company

In a press release dated 10 February 1989, the Inland Revenue Authority of Singapore (IRAS) described an investment holding company as one whose “activities are wholly or mainly in the making of investments and the principal part of whose income is derived therefrom”.

To determine the tax treatment of an investment holding company, it is important to distinguish whether it is a pure investment holding company or one that is in the “business of making investments”.

A pure investment holding company does not have active trade income and therefore its income is not taxable under section 10(1)(a) of the Income Tax Act. As a pure investment holding company generates passive income through its investments, this passive income is taxable under sections 10(1)(d) and (10)(1)(f) of the Act. Dividends, interest or discounts are subject to tax under section 10(1)(d), while rents, royalties, premiums and other profits arising from property are subject to tax under section (10)(1)(f).

On the other hand, section 10E of the Income Tax Act, which was enacted in 1995, applies to investment holding companies which are in the “business of making investments”. It clarifies how such companies must determine their taxable income and the circumstances under which their expenses are deductible.

“Given the different tax issues and positions of a pure investment company vis-à-vis a section 10E company, it is important to properly assess whether your investment holding company is deriving only passive income, trade income or both.”

Section 10E also enabled an investment holding company that is carrying on a business of making investments to be subject to tax under section 10(1)(a) with certain limitations. Prior to section 10E, all investment holding companies (whether or not carrying on a business of making investments) were subjected to tax under sections 10(1)(d) and 10(1)(f).

An investment holding company which “carries on a business of making investments”

How can you determine whether a company is subject to the provisions of 10E? First, you must determine if the company’s investment meets the definition of “securities, immovable properties and immovable property-related assets”.

If this definition is met, the next step is to determine whether the company is carrying on a business of making of investments. Section 10E does not contain a definition for “carrying on a business of making investments”. It does, however, stipulate that this “includes the business of letting immovable properties”.

The Act does not have a statutory definition of what constitutes a trade or business. Therefore, whether a company is carrying on a business is a question of fact. Some of the factors to consider include: the nature of activities, profit-making purpose, repetition and regularity of activities, organisation or activities and volume of operations.

In the 2009 Singapore tax case, Comptroller of Income Tax vs VJ, the High Court stated that there was no requirement in section 10E that the “business of letting immovable properties” must be the whole or main business of a company. This paved the way for companies (which had not already done so) to apply section 10E to only one component of the business despite other components falling outside of section 10E.

Tax treatment — a comparison

To recap, if an investment holding company is carrying on a business of making investments, its income is chargeable to tax under section 10(1)(a) as trade income, subject to the provisions of section 10E. A pure investment holding company, on the other hand, is subject to tax under sections 10(1)(d) or 10(1)(f) as the case may be. What are the similarities and differences between these two structures?

Similarities Under both structures, the Act provides that companies cannot claim:

• Expenses against income from investments that do not produce income

• The surplus of expenses from one investment against the income from another source of investment




In addition, unutilised losses cannot be:

• Carried forward to be deducted against income for a subsequent year of assessment

• Carried back to be set off against income from a previous year of assessment

• Transferred under the group relief scheme

However, group relief claims can be made to receive loss items from qualifying companies to be set off against assessable income.

Differences • A section 10E company’s trade income is liable to tax on an arising or accrual basis, regardless of when the income is actually received. On the other hand, a pure investment holding company’s passive income, if sourced outside of Singapore, is not liable to tax until it is received or deemed remitted into Singapore. This leads to a timing difference in the taxation impact.

• A section 10E company can generally claim all expenses incurred in the production of its business or trade income, subject to the normal deduction rules under the Act. However, a pure investment company can generally claim only limited expenses against its passive income. The expenses that qualify for tax deduction are direct expenses, statutory expenses and indirect expenses, of which the latter is capped to 5% of the assessable income.

• A section 10E company can claim capital allowance on expenditure incurred to acquire qualifying assets (for the purposes of its business or trade) against that business income whereas a pure investment holding company cannot claim capital allowances since it does not conduct a business or trade.

• A section 10E company can claim section 14Q deduction on renovation and refurbishment cost but a pure investment holding company cannot make such a claim.

Some investment holding companies may consider it too much trouble to adopt and subsequently defend a section 10E position (if challenged by the tax authorities). Therefore, they may choose from the onset to forgo the relevant claims and be taxed as a pure investment holding company.

However if your investment holding company has incurred significant expenses as well as costs to undertake renovation, refurbishment or acquire substantial fixed assets, the tax benefit of such claims may be substantial. It may be then worthwhile to take a closer look at the taxation basis. Otherwise, the company could jeopardise its future claims when it matters most — when it is in a net income position.

Disposal of investments

A plus point for investment holding companies (regardless of whether it is carrying on a business of making investments) is that they may find it easier to take a capital position on the future disposal of investments.Indeed, in the VJ case, the High Court (in the context of section 10E) stated that:

“Section 10E of the Act was intended to apply to an investment holding company and the emphasis was on the acquisition, holding and retention as opposed to the purchase for resale of the investment …… If such transaction truly was undertaken in the course of its business as an investment holding company, any gains derived therefrom would be capital in nature and not eligible to tax.”

Still, the specific facts of each case needs to be considered to determine whether the gain (or loss) is capital in nature. For disposals of ordinary shares from 1 June 2012 to 31 May 2017, a current concession under section 13Z provides certainty of the tax-free treatment of gains on disposals, where the relevant conditions are met.


Tax residence

Given the current environment where tax authorities globally are focusing on base erosion and profit shifting issues, investment holding companies have also come under intense scrutiny by the IRAS. This is particularly where investment holding companies based in Singapore are used to hold investments in overseas tax jurisdictions and which may need to tap on Singapore’s wide network of tax treaties.

Only Singapore tax residents are entitled to take benefit of Singapore’s treaty network. The Act also provides for certain tax exemptions which are available only to companies that are tax resident in Singapore, for example, section 13(8) tax exemption on foreign-sourced income.

In Singapore, a company is regarded as a tax resident if its control and management is exercised in Singapore. To determine this, the IRAS will generally look at where the company’s board of directors meets to discharge strategic decisions and important matters concerning the company, and whether the company has held physical board meetings in Singapore. Increasingly, the IRAS is also looking at other factors such as the tax residency of its board of directors, the presence of key management personnel in Singapore and where the actual operations are carried out.

Some pure investment holding companies may find it difficult to prove to the IRAS that they are tax resident in Singapore if their directors are based overseas and they have relatively few operations in Singapore. It is easier for a section 10E company to demonstrate control and management in Singapore, given that it is conducting a business.

Helen Bok Partner, Tax [email protected]

Helen has over 20 years of experience in local and international taxation. She is experienced with M&A, public listing transactions, rulings application and incentive negotiations. Helen is the Hospitality Sector Tax Leader. Helen’s portfolio includes Singapore-listed companies and MNCs.

Jessica Tan Senior Manager, Tax [email protected]

Jessica has over 15 years of experience in public accounting and corporate taxation, including six years at the EY London corporate tax practice. She manages a portfolio of multinational and Singapore clients and has experience in projects involving financing structures, amalgamations, M&A, tax incentives and negotiations with tax authorities.

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Final thoughts

Given the different tax issues and positions of a pure investment company vis-à-vis a section 10E company, it is important to properly assess whether your investment holding company is deriving only passive income, trade income or both. You should also consider the taxation upon disposal of investments, as well as tax residency requirements. An assessment should be made not only at the inception of the company’ operations but continuously and at each trigger point if and when circumstances change.

The introduction of section 10E a decade ago has opened a whole host of tax considerations in defining the status of your investment holding company. Businesses often go through restructurings and even reincarnations. It may be time for you to review your company’s structure if you have not done so recently.




Nailing withholding tax

complianceTan Ching Khee and Yeo Ying discuss developments in withholding tax and the challenges companies face in meeting their withholding tax compliance obligations

Globalisation has opened up the playing field for businesses and trade volume has increased exponentially over the last three decades. According to the World Trade

Report 2013 issued by the World Trade Organization, the value of merchandise exports increased from US$2.03 trillion in 1980 to US$18.26 trillion in 2011. In 2013, the value of merchandise exports further increased to US$18.8 trillion.

The increase in international trade flows has led to greater complexity in cross-border transactions. In particular, withholding tax is a key compliance concern.

Withholding tax explained

Most countries rely heavily on income-related taxes as a major source of tax revenue. Withholding tax has traditionally been an efficient mechanism for governments to collect tax revenue from non-resident companies.

As a transaction-based tax, withholding tax is usually deducted at the applicable tax rate before payment is remitted to the non-resident recipients. The compliance burden of withholding and accounting for the tax withheld usually lies with the payers who act as collecting agents for their tax authority.



In Singapore, certain payments (such as interest, royalties and rental of moveable property) made to non-tax residents attract Singapore withholding tax. The payer must file and forward the withholding tax to the Inland Revenue Authority of Singapore (IRAS) by the second month following the date of payment to the non-residents. The filing obligations apply even if the payment is exempt from withholding tax under certain tax treaties.

Understanding the complexity behind withholding tax

When it comes to withholding tax compliance, companies need to ask themselves two key questions:

1. Is there a need to withhold?

2. If withholding is required, what is the rate to be applied?

The answers to these questions may not be so straightforward.

To determine whether there is a need to withhold tax, companies need to have a good appreciation of both the domestic tax rules governing withholding taxes and whether the payment in question falls within those rules. This becomes less of an issue where the nature of the payment is clear, for example interest payments on a plain vanilla loan.

Determining the nature or character of a payment can be challenging, especially so when there is no specific guidance provided under domestic tax rules. For example, payments made in connection with a hybrid instrument such as a profit participating loan.

Withholding tax is not only a concern for payers, but also for income recipients. The duty to withhold and account for withholding tax generally lies with the payer as a tax collecting agent. Given this, payers may adopt a conservative approach and withhold taxes despite the absence of a requirement to do so under domestic tax rules or a relevant tax treaty. This practice may be more prevalent if harsh penalties are imposed on the payer for failure to account for withholding tax in a timely and appropriate manner.

If tax is erroneously withheld or if the withheld tax is not in accordance with the provisions of an existing tax treaty, the income recipient could face difficulties in claiming a foreign tax credit in its home country. To overcome this, the taxpayer could invoke the Mutual Agreement Procedure (MAP). But are companies willing to spend significant time and resources to embark on this potentially lengthy process? Where MAP is not available, the income recipient suffers double taxation.

Assuming the payer is able to successfully overcome the challenges to determine the applicability of withholding tax, what comes next? The payer then has to establish the rate that should apply and determine whether a tax treaty exists that provides for a reduced rate or exemption from withholding tax.

The benefits accorded under the tax treaties usually come with conditions that must be met before the benefits can be availed. Although provisions are unique to each treaty, common conditions include beneficial ownership and the requirement that the transaction is at arm’s length (in the case of related party transactions). Some treaties also include limitation of benefit clauses that restrict access to treaty benefits under certain circumstances.

Trends and developments

In the 2014 Tax risk and controversy survey conducted by EY, 68% of the largest companies report that they feel tax authorities globally have increased their focus on cross-border transactions in the last two years.

The increasing focus placed upon withholding tax compliance around the region is one reflection of this trend. In assessing the compliance effort of companies, the IRAS has a list of items that it plans to focus on. One of these is withholding tax obligations on payments made to non-residents.

Increasingly, tax authorities require taxpayers to provide more documentation before they grant the taxpayers access to treaty benefits. Treaty benefits are only granted to tax residents of the country involved. A certificate of residence issued by the tax authority forms an essential document in the withholding tax compliance procedure. In India, the Central Board of Direct Taxes requires taxpayers to provide certain information in addition to the tax residency certificate in order to claim relief under the respective tax treaties concluded by India.

On the flip side, tax authorities are also exercising more caution both in issuing the certificate of residence and in confirming whether taxpayers are considered resident in their country. Hong Kong has revised its application forms for the certificate of residence, introducing additional questions to assess the eligibility of taxpayers to tax treaty benefits.

Tax authorities are placing proper application of treaty benefits high on their radar. This is reflected in the rising number of dispute cases regarding tax treaty access. The increasing sophistication of tax authorities mean taxpayers need to be ready to demonstrate how the conditions under the tax treaties are met when applying the benefits under the tax treaties.




New forms of withholding tax

Businesses are now conducting activities at a greater scale and over longer distances, thanks to advances in information and communication technology. The number of firms carrying business transactions over the internet has swelled over the last decade with the growth in the digital economy. Given such trends as well as the new business models arising therefrom, is the current tax framework still relevant?

In the Addressing the Tax Challenges of the Digital Economy, Action 1 — 2015 Final Report issued by the Organisation for Economic Co-operation and Development (OECD) in October 2015, a withholding tax on certain types of digital transactions has been discussed. For the time being, the OECD has not made any recommendation for its immediate implementation. Some countries have already started to act unilaterally to impose a withholding tax on digital transactions. The Italian government, for example, is considering introducing a 25% withholding tax on the virtual presence of foreign multinationals selling into the Italian market without a physical structure presence that falls within the traditional definition of permanent establishment.

Other countries, including Singapore, have yet to act in response. Undoubtedly, businesses will face increasing tax complexity and a heavier compliance burden should more countries implement a withholding tax on digital transactions.

Key takeaways

Companies need to stay ahead of various withholding tax compliance requirements and developments in multiple jurisdictions. As withholding tax is a transaction-based tax, the intensity of compliance requirements and risk of oversight invariably increases with the volume of cross-border transactions.

As a good governance practice, companies should constantly review group transactions to ensure all compliance obligations are met. To do this, robust processes and strong internal controls need to be in place.

For a start, make it a point to constantly review your internal processes and controls to identify and resolve any deficiencies. This will leave you well-prepared to address any withholding tax compliance challenges which arise.

“Determining the nature or character of a payment can be challenging, especially so when there is no specific guidance provided under domestic tax rules.”

Tan Ching Khee Partner, International Tax [email protected]

Ching Khee advises clients on tax issues relating to corporate and operating structures in areas such as amalgamations, financing considerations, deductibility of expenses and availability of benefits from tax incentives. He works with multinationals, government-linked companies and local corporations in the life sciences, technology and telecommunications sectors.

Yeo Ying Manager, International Tax [email protected]

Yeo Ying advises on tax issues relating to cross-border transactions encompassing areas such as permanent establishment risk, access to tax treaties, group or supply chain restructuring, M&A, holding company location studies and migration of intellectual property. She serves clients in the real estate, shipping and resources sectors.

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In tax, the line between capital expenditure and revenue expenditure has never been an easy one to draw.

The distinction between the two was put to test in a Singapore High Court case in 2013. In BFH v Comptroller of Income Tax [2013] SGHC 161, the High Court ruled in favour of the Comptroller that an upfront lump sum payment by BFH (a mobile telecommunication provider) to the Infocomm Development Authority of Singapore (IDA) for a bundle of 3G Facilities Based Operator (FBO) licence and 3G spectrum rights for a period of 20 years was capital expenditure that could not qualify for a tax deduction under the provisions of the Income Tax Act. Further, as the Income Tax Act does not provide specifically for capital or writing down allowances for such spectrum licence payments, no tax depreciation could be claimed.

“Perhaps it is now an opportune time to review if there are any merits for Singapore to adopt a similar approach to some of the Commonwealth countries and specifically

allow payments for spectrum rights and licences by telecommunication providers to be deducted or amortised for tax purposes.”



Broadening deductions for intangible assetsLatha Mathew and Chionh Huay Kheng put forth the case for tax deductibility of payments for spectrum rights and licences by telecommunication companies




Interestingly, in the High Court’s judgement, a comparison was made to the tax treatment for similar payments adopted in other Commonwealth countries where the tax laws are similar to that of Singapore’s. It was noted that treating such payments as non-deductible capital expenditure in Singapore was consistent with the tax treatment that would have been adopted in Commonwealth jurisdictions such as the UK, Australia and Malaysia if not for the specific rules that had been crafted into the tax legislations of these jurisdictions to give a different tax outcome.

Take, for example, the UK. A particular section [Section 146(a)] of the Income Tax (Trading and Other Income) Act 2005 had to be specifically amended such that expenditure incurred for the acquisition of 3G licences was treated

as revenue in nature. Without a specific amendment of the tax legislation such as this, such a payment would not have qualified for a tax deduction.

In the case of Australia, Section 40.30(2)(f) of the income Tax Assessment Act 1997 had to be crafted into the tax legislation to provide that “spectrum licences” were depreciating assets. Instead of a tax deduction, the notional decline in value of the spectrum licences is allowable depreciation for tax purposes. Such a specific provision must mean that if the expenditure was deductible as revenue in nature, there would not have been a need to make such a provision in the tax laws.

Closer to home, in Malaysia, the Income Tax (Deduction for Cost of Spectrum Assignment) Rules 2007 had to

specifically provide that “the cost of spectrum assignment” was deductible in the form of a tax amortisation over a certain specified period of time.

Going by the judgement in the High Court, the spectrum rights and operator licences create a permanent enduring benefit for a mobile telecommunication provider. These spectrum rights and licences, together with the tangible telecommunication equipment, form the core assets with which the telecommunication provider carries on the business of providing mobile telecommunication services. So, shouldn’t the tax treatment between the two be aligned?

The Income Tax Act contains a Sixth Schedule that lists down different types of physical assets and their


Businesses employ both tangible and intangible assets in the course of their business, often paying substantial amounts to acquire intangibles such as valuable business information which is generally called goodwill. Some of these intangibles may be difficult to define and challenging to value. Hence, these intangibles may be regarded as potentially open to tax abuse if granted a deduction. Payments for FBO licences and spectrum payments, on the other hand, are intangibles which are clearly defined and can be accurately valued.

Two years have passed since the BFH case’s judgement in the High Court. With the advancement in technological developments, tax laws need to be updated to stay relevant and current. Perhaps it is now an opportune time to review if there are any merits for Singapore to adopt a similar approach to some of the Commonwealth countries and specifically allow payments for spectrum rights and licences by telecommunication providers to be deducted or amortised for tax purposes.

Latha Mathew Partner, Tax Services [email protected]

Latha has more than 30 years of experience in international and corporate taxation, working with local and multinational companies on cross-border transactions, M&A and restructuring exercises. Latha is a board member of the Singapore Institute of Accredited Tax Professionals (SIATP) and chairs the Taxes and Levies Committee of SIATP. Latha is the Telecommunications Sector Tax Leader.

Chionh Huay Kheng Associate Director, Tax Services [email protected]

Huay Kheng has more than 20 years of experience in Singapore corporate income tax compliance and tax advisory. She regularly advises clients on tax issues relating to structuring and cross-border transactions. Amongst others, she services clients in the telecommunication sector.

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respective tax useful lives for the purposes of a section 19 capital allowances claim. For intangible assets, writing down allowances are allowed under section 19B of the income Tax Act on the acquisition of certain specified categories of intangible assets (specifically intellectual property rights (IPR) such as trademarks, copyrights and patents) for use in the trade or business. Closer to the heart of the telecommunication companies, the current tax legislation also provides for section 19D writing down allowances on the acquisition of indefeasible right of use of any international telecommunications submarine cable system, or IRU in short. Section 19D in particular was operative from the year of assessment 2004.

Given that spectrum rights and telecommunication operator licences are viewed as assets that create a permanent enduring benefit, a tax deduction is prohibited under the Income Tax Act. Being intangible in nature, it also does not fall within the category “plant and machinery” and hence does not qualify for capital allowances claim. Yet, it is also not an IPR nor an IRU for which writing down

allowances have been specifically provided for. Thus, by default, payments for acquisition of spectrum rights and licences fall through the provisions of the current legislation without further statutory intervention.

Between the IRU and the spectrum rights, it would appear that one of the differences is the medium over which the rights are exploited. The IRU for which section 19D writing down allowances are claimable relates to a right to use some capacity on a physical submarine cable system whereas the spectrum rights relate to the right to use certain specified bandwidth of the radio frequency spectrum. But fundamentally, are there really any reasons to warrant a difference in tax treatment apart from the fact that one relates to the right to use a physical cable system whereas the other relates to a right to use a specified bandwidth on a non-physical spectrum? The IRU right is conferred on the buyer based on the contract with the owner of the submarine cable system. The right to transmit over a certain specified bandwidth is conferred on the buyer by the regulatory authority that controls the allocation of transmission over the radio frequency spectrum.


In the spirit of giving

Yeo Kai Eng and Monica Sum examine how the Goods and Services Tax can affect voluntary welfare

organisations in Singapore

The Goods and Services Tax (GST) has been around for more than two decades. On the occasion of our Jubilee Year, besides fostering a spirit of giving among

Singaporeans, it could not be more timely for our government to review the impact of GST on voluntary welfare organisations (VWOs) in Singapore.

VWOs provide a range of community services to the sick, the elderly and the disadvantaged. These services are usually provided free or at subsidised rates as they are funded by donations from the public and corporate bodies, as well as by government grants. Despite playing an important role, there is no special GST relief or status accorded to VWOs in Singapore.

The operating costs of VWOs that are not registered for GST include the non-recoverable GST incurred. The donations and grants are also used to fund the non-recoverable GST. But can VWOs that are registered for GST claim most of the GST incurred from their operations? The answer is not necessarily so. The reasons for this lie with the current GST legislation and the lack of relief for VWOs.



Currently, a GST-registered person is entitled to claim the GST (also known as input tax) in full if the GST is incurred on the purchase of goods and services that are used for business purposes and is attributable to the making of taxable supplies. Taxable supplies refer to the supply of goods and services that are subject to GST at either the standard rate (currently 7%) or at the zero rate. In principle, GST-registered businesses providing taxable supplies in Singapore should have no difficulty claiming the input tax incurred. However, the GST incurred for carrying on non-business activities cannot be claimed.

VWOs which provide free services (e.g., free medical services) financed by donations and grants are regarded as carrying on non-business activities. For subsidised services, the subsidised part of the fee not borne by the recipient of the services would be regarded as non-business in nature. As such, VWOs are not entitled to claim the input tax attributable to such non-business activities, even though they are registered for GST.

Based on the current input tax rules, VWOs would therefore have to identify and attribute the GST incurred into the following categories of activities:

• Wholly taxable activities

• Wholly non-business activities

• Exempt activities

• Subsidised activities that are partly for the making of taxable supplies and partly for non-business activities

The following table best illustrates this restriction. In this illustration, we consider a GST-registered nursing home offering long-term nursing care at subsidised rates.

Impact on VWOsExample of a GST-registered nursing homeA. Value of taxable supplies S$2,000,000*

B. Donations and government grants S$3,000,000**

C. Total value of supplies + donations and government grants (A) + (B)

S$5,000,000

D. Input tax recovery rate (A)/(C) 40%

E. Total GST incurred on expenses S$100,000

F. Allowable input tax claims (E) x 40% S$40,000

G. Disallowed input tax (E) – (F) S$60,000

*Fees charged by the nursing home. The nursing home would charge 7% GST.**Donations and grants, given to the nursing home, that are gratuitous in nature i.e., the nursing home does not give anything in return for the donations and grants. For this illustration, we have assumed that the nursing home:

1. Is unable to attribute the input tax to taxable and non-taxable activities

2. Does not make any exempt supplies

3. The GST incurred excludes disallowed input tax under Regulations 26 and 27 of the GST(General) Regulations

The illustration shows the GST impact, which is to reduce the funds available for the VWO’s activities (by S$60,000 in the example) due to the non-recoverable input tax arising from the input tax attribution and apportionment rule. This rule is generally applicable to all the VWOs in Singapore (e.g., charities, non-profit organisations).

With effect from prescribed accounting periods on or after 30 June 2015, charities are allowed to opt for an annual fixed rate to compute the claimable input tax. While this concession from the Inland Revenue Authority of Singapore (IRAS) helps to

ease the GST compliance, there would still be irrecoverable GST costs for the charities. This situation is further aggravated when they undertake building redevelopment programmes that are usually funded by capital grants from the government and by donations.

GST-registered VWOs are prone to over-claiming input tax in their GST returns because they tend to be unfamiliar with the GST rules. Besides having to repay the excess input tax claimed to the IRAS, these VWOs could also be penalised for the GST error.

“In the spirit of giving, it would certainly help if our GST legislation could be fine-tuned to provide special GST relief or status to VWOs in Singapore.”




Recognising the impact of GST on VWOs, the National Council of Social Services (NCSS) had, prior to the implementation of GST in 1993, made a representation to the Select Committee on the Goods and Services Tax Bill. One of its recommendations was to allow GST-registered VWOs to zero-rate all their supplies of goods and services (i.e., charge zero GST). Doing so would allow VWOs to fully recover the input tax incurred on the basis that the input tax would be directly attributable to the making of taxable supplies.

The select committee had difficulty agreeing with this recommendation due to the extensive range of activities performed by VWOs. In addition, VWOs could be engaged in competitive commercial activities, for example, a bookstore operated by a VWO. In this case the proposed GST treatment would confer an unfair competitive advantage. Since then, there has not been much discussion or development in this area.

Instead of adopting the zero-rating treatment on the supply of goods and services by VWOs, perhaps Singapore could consider the UK approach of offering relief to VWOs by reducing the GST rate or applying the zero-rating on purchases made by VWOs in connection with their charitable activities.

For example, instead of being charged the standard GST rate of 7%, a reduced GST rate of say, 1%, or even better, a zero rate, could apply on purchases made by qualifying VWOs in Singapore. This would certainly help reduce the amount of non-recoverable input tax incurred by a GST-registered VWO in relation to their charitable activities.

In addition, it would also greatly benefit VWOs that are not registered for GST. Unfortunately, this approach would deviate from and complicate the current system of maintaining a single GST rate of 7%. Proper planning would also be required to prevent abuse of the system. How do other countries deal with this issue? New Zealand has specifically amended its GST legislation to allow the input tax incurred by a non-profit body to be claimable. Although this does not address VWOs which are not able to register for GST, it at least simplifies the input tax claims of VWOs which are GST-registered and allows them to recover the input tax incurred in full. Malaysia, which recently introduced GST on 1 April 2015, grants relief to private charitable entities from the payment of GST on the acquisition of goods (excluding motor vehicles and petroleum).

The GST relief available in the UK, New Zealand and Malaysia helps minimise the non-recoverable GST for VWOs. It also simplifies the GST compliance for VWOs, which in turn lowers the risk of GST errors.

For non-GST registered VWOs, perhaps Singapore could consider granting a GST remission and allow VWOs to recover either in full or up to a certain percentage (based on a fixed rate) of the GST incurred on their operating costs. This treatment is not new as it has already been introduced for the fund industry as part of the government’s effort to promote Singapore as a centre for fund management.

It is heartening to see that Singaporeans and corporations have not forgotten to give to the less fortunate by making donations to VWOs. On the same note, as Singapore celebrates its Golden Jubilee, it is timely to re-visit the impact of GST on VWOs.

In view of the Singapore VWOs contribution to the community, shouldn’t they be treated differently for GST purposes? Certain countries have recognised that VWOs require special relief to help them with their input tax claims. In the spirit of giving, it would certainly help if our GST legislation could be fine-tuned to provide special GST relief or status to VWOs in Singapore.

Yeo Kai Eng Partner, GST Services [email protected]

Kai Eng leads the GST practice in Singapore. Kai Eng has more than 25 years of experience in the area of tax compliance, planning and consultancy work for local and multinational companies. He is actively involved in GST process and internal control reviews, ASK annual reviews, advisory and planning assignments including assisting clients in negotiations with and obtaining rulings from the IRAS on critical GST-specific transactions and refunds.

Monica Sum Senior Manager, GST [email protected]

Monica has more than 8 years of experience in GST compliance and consultancy work. Her experience covers a variety of engagements such as GST health checks, GST due diligence, GST advisory work for clients in various industries including manufacturing and trading, banks, automotive and real estate.

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You and the Taxman


Finding tax upside with accounting reclassification

Ivy Ng and Lee Poh Kwang examine the tax implications of reclassifying properties as trading stock or as long-term investment

Whenever a company realises a gain on the disposal of an investment or property, the question of whether the gain is taxable or otherwise always

arises. According to Singapore’s tax law, capital gains are clearly not taxable. However, the application of this tax rule is not always straightforward as the law does not offer any definition or guidance.

How can taxpayers determine whether a receipt is capital or revenue in nature and how can they establish whether or not a trade or business is being carried on? In practice, this would involve examining the facts and circumstances surrounding the transactions and considering these against guidance developed through case law.

This guidance is commonly referred to as the “badges of trade”. The six common “badges” are:

1. Subject matter of realisation: Depending on the business and principal activities of the taxpayer, some items will only be acquired with a view to resell in the course of trade.

2. Frequency of similar transactions: Systematic repetition of similar transactions gives rise to an inference of trading.

Evolution of Singapore’s tax policiesA fresh look at Singapore taxation




3. Supplementary work done on asset realised: Special efforts made to attract a purchaser, for example feasibility studies and improvements on a property to make it more marketable, are normally indications of intent to trade.

4. Circumstances responsible for the sale: Forced sale as a result of unforeseen change of circumstances is less likely to be indicative of trading.

5. Length of period of ownership: The longer the item is held, the more likely that it is being held as investment, and less likely that it is being held with a view to trade.

6. Motive at the time of acquisition: The existence of a motive in acquiring an asset for resale at a profit is likely to be indicative of an intention to trade.

This list is not exhaustive and not one of the “badges of trade” is conclusive.

“Proper documentation of the company’s intention in a business transaction is important. Without proper documentation, it is difficult for the tax authority or the courts to decipher the thought process behind the intention.”

Each “badge” has to be considered in each scenario and each “badge” carries a different weight in different situations.

What if there was no disposal of investment or property? Could taxpayers fall into tax traps without realising them in the first instance?

“Innocent actions could be costly”

Take this scenario. A property developer which engages in property development activities may not be able to sell all of its completed units. The unsold units are its trading stock. This is very common and generally any subsequent sale of those units is without doubt taxable.

However, what if these developed properties, which were initially treated as trading stock, are now reclassified as long-term investments?

In another scenario, what if existing properties which have being recognised as long-term investment are reclassified as trading stock following the demolition and redevelopment of these properties for resale?

This article discusses the tax implications of these two scenarios.


Properties initially treated as trading stock are reclassified as long-term investment

A company that decides to reclassify its properties from trading stock to long-term investment could end up with a tax liability even though there is no actual disposal of properties.

How is this possible? Let’s take a look at the tax principle established in Sharkey v Wernher (VOL 36TC 275) and the provisions in section 32 of the Singapore Income Tax Act (SITA).

In its basic form, the principle in Sharkey v Wernher requires taxpayers to credit a notional receipt in their account whenever some part of their trading stock is disposed of otherwise than in the course of trade. This notional receipt must be valued at the market value prevailing at the time of disposal and is treated to be a taxable trading receipt.

This tax principle is reflected in section 32(1)(b) of the SITA. In computing the gains or profits of a trade or business which has been discontinued or transferred, section 32 requires that “any trading stock belonging to the trade or business at the discontinuance or transfer thereof shall be valued as follows:

a. in the case of any such trading stock —

i. which is sold or transferred for valuable consideration to a person who carries on or intends to carry on a trade or business in Singapore; and

ii. The cost whereof may be deducted by the purchaser as an expense in computing for any such purpose the gains or profits of that trade or business,

the value thereof shall be taken to be the amount realised on the sale or the value of the consideration given for the transfer; and

b. in the case of any other such trading stock, the value thereof shall be taken to be the amount which it would have realised if it had been sold in the open market at the discontinuance or transfer of the trade or business.”

The critical issue is whether the accounting reclassification from trading stock to long-term investment is a result of a change of intention. In other words, it is important to establish whether the company has discontinued the property development activity and commenced perhaps a property investment activity. If this is indeed the case, by virtue of section 32(1)(b), the accounting reclassification could trigger a tax liability.

Properties initially recognised as long-term investment and subsequently treated as trading stock

It is common to find a company that has held a property for a very long time to consider at some point redeveloping the property for resale. For proper accountability, when a change in intention occurs, such a property should be reclassified from the long-term investment account to the inventory account of the company. The question is: should such a property, for tax purposes, be recognised at cost or prevailing market value in the inventory account?

The answer lies in the converse principle in Sharkey v Wernher (“Converse Principle”). Here, the argument is that the appropriation must be treated as a notional sale at market value so that any difference between this market value and the original cost of acquisition is treated as a realisation of capital. On the basis that such a property satisfies the “badges of trade” test to be considered as a long-term investment on capital account, any notional gains

arising from the appropriation of assets on capital account to trading stocks will not be taxable. At the same time, there is a stepped up value of the deductible cost in relation to trading stocks.

A direct authority on this Converse Principle is the decision in the UK tax case Bath and West Counties Property Trust Ltd v Thomas (H M Inspector of Taxes) — [1978] STC30. The taxpayer there was entitled to a right of pre-emption over some land which it sold to the War Department in 1939. In 1960, the taxpayer decided to exploit the right of pre-emption by repurchasing the land and selling it at a profit, which it did so in the following few years. The issue was whether the value of the right to pre-emption should be brought into account at the time the land was appropriated to trading stock. Finding for the taxpayer, Walton J. said:

“The cost to the taxpayer of acquiring the land was indubitably (i) the actual price paid to the War Office plus (ii) the value of the pre-emption rights, and I consider that for practical purposes the pre-emption rights must have been appropriated as trading stock at the time when the land was in fact purchased; and so appropriated at its then value, whatever that was.”

Walton J. continued to say: “…. as Pennycuick J. said in Ridge Securities Ltd v. Commissioners of Inland Revenue 44TC 373 at page 397: “If a trader starts a business with stock provided gratuitously, it would not be right to charge him with tax on the basis that the value of his opening stock was nil”, which is precisely what the Crown is attempting to do here. I can see no justice whatsoever in the Crown’s attempt to force the taxpayer to leave out what became part of its stock-in-trade from the computation of profit. Both logic and elementary justice, with both of which the law is, in this instance, fortunately closely associated, demand that the doctrine of Sharkey v Wernher should be applied in reverse.”




Further authority on this Converse Principle can be cited from Malaysia tax case Director-General of Inland Revenue v LCW — [1975] 1 MLJ 250 where a capital asset was appropriated to trading stock and for tax purposes it was held that it must be valued at the market value prevailing at the time of the appropriation. In the case, the taxpayer purchased a piece of land to construct some flats for letting out as an investment. When the taxpayer subsequently fell short of cash, the taxpayer borrowed money to complete the building and made arrangements to sell the flats. The land was purchased in 1953 at a cost of $20,000. In 1963 it was valued at $480,000. Until 1967, the land was shown as a fixed asset in the business accounts of the taxpayer. In 1967, the land was transferred from the fixed asset to the trading account at the 1963 valuation of $480,000 and not the original purchase cost of $20,000. The issue was whether the taxpayer was entitled to treat the $480,000 as deductible cost in arriving at the profit arising from the sale of flats. The Federal Court of Malaysia said:

“Any computation of profits which is contrary to accepted principles must be regarded as unreasonable. When the respondent converted his capital assets into stock in trade and started dealing in them the taxable profit on the sale must be determined by deducting from the sale proceeds the market value of the assets at the date of conversion into stock in trade since that is the cost to the business and not the original cost to him.”

The importance of documentation

In Simmons v Inland Revenue Commissioners [1980] 1 WLR 1196, Lord Wilberforce pointed out that:

“Intentions may be changed. What was first an investment may be put into the trading stock — and, I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company’s accounts, and possibly, a liability to tax …”

While there is an opportunity when a company appropriates an asset on the capital account to trading stock, there is a need to prove there has been a change in intention. Complications may arise when it comes to determining the exact timing of the change in intention as the determination of the market value of the asset on capital account is at the time they became trading stock.

Hence, proper documentation of the company’s intention in a business transaction is important. Without proper documentation, it is difficult for the tax authority or the courts to decipher the thought process behind the intention.

Ivy Ng Partner, Tax Services [email protected]

Ivy has over 20 years of experience in tax compliance and tax planning, working with various industries such as engineering, real estate, construction and propery development. Her sector focus is in real estate. She provides advice to companies engaged in cross border transactions and companies intending to raise funds in Singapore.

Lee Poh Kwang Senior Manager, Tax Services [email protected]

Poh Kwang has more than 10 years of experience in tax compliance and advisory with sector focus in real estate. He has worked closely with many clients in different industries such as financial institutions, real estate investment trusts, manufacturing and property developers to advise them on tax issues arising from mergers, acquisitions, restructuring and divestments.

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Impact of Base Erosion and Profit Shifting (BEPS)

“Companies should start assessing the potential impact that the

BEPS project may have on their businesses, and implement measures

to mitigate any negative impact. In particular, this assessment should

consider areas viewed as “high risk” by tax authorities, such as supply

chain planning, financing, intangibles and services.”

It’s been over two years since the Organisation for Economic Co-operation and Development (OECD) unveiled its ambitious plan to combat base erosion

and profit shifting (BEPS). Sceptics were initially doubtful that the OECD could meet the delivery deadlines from September 2014 to December 2015. But the OECD has proved them wrong by meeting the milestones, recently releasing the final reports for all Action Plans on 5 October 2015.

The OECD describes BEPS as the “[exploitation of] gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid”.

While BEPS is not new and multinational corporations (MNCs) have been structuring their tax affairs within the framework of accepted international tax rules, paying the right amount of taxes is no longer good enough. MNCs are now expected to pay their “fair share” of taxes.

The big deal about BEPSChester Wee and Goh Su Ling discuss the impact of BEPS on companies with overseas operations




Are international tax rules outdated? To ensure that international tax rules remain relevant in the current business climate, the OECD embarked on

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Action 2: Neutralising hybridmismatchAction 3: Strengthening CFC rulesAction 4: LImiting InterestdeductibilityAction 6: Preventing treaty abuse

Action 5: Harmful tax practicesActIon 11: Economic analysis ofBEPS activities and BEPSmeasuresAction 12: Disclosure ofaggressive tax planningAction 13: TP documentation

Action 8: IntangiblesAction 9: Risks and capitalActIon 10: High-risktransactions

Action 14: Dispute resolutionAction 15: Multilateral instrument

Action 1: Tax challenges of the digital economyAction 7: Permanentestablishment (PE) status

this groundbreaking project to refine and update international tax practices to counteract BEPS by minimising gaps and mismatches. As part of this project, 15 Action Plans were developed.


Highlight of country activities

Governments and tax authorities around the world are closely monitoring the BEPS developments. While some countries have opted to wait until the final recommendations are released to decide on their course of action, others have gone ahead and implemented BEPS-driven changes to their tax laws and administrative practices, particularly over the past year. With the final reports of the BEPS project published, such tax developments are likely to intensify in the months that follow.

The output from the BEPS project is largely in the form of recommendations to update and refine countries’ domestic laws, as well as proposed changes to tax treaties to minimise the gaps and mismatches which MNCs have, in the past, taken advantage of. The OECD has in essence provided tax authorities with a “menu” of possible actions to deal with BEPS. This allows some level of “cherry picking” by governments as to what make sense for their countries.

Action Plan

Area of focus Country trends

1 Addressing the tax challenges of the digital economy

• Require indirect tax registration for foreign providers of digital services in business-to-consumer transactions e.g., EU countries, Australia, Japan, South Korea

• Require withholding tax on payments for digital media e.g., city of Buenos Aires, Argentina

2 Neutralising the effects of hybrid mismatch arrangements

• Deny participation exemption on inbound hybrid payments e.g., Australia, EU countries

• Deny deductions in the case of hybrid arrangements and/or tax rate arbitrage transactions e.g., Austria, France, Mexico, Spain

3 Strengthening controlled foreign corporation (CFC) rules

• Introduce CFC rules e.g., Chile, Russia, Poland

• Tighten CFC rules e.g., Spain, US

4 Limiting interest deductibility • Reduce allowable debt-to-equity thresholds e.g., Australia, Poland, South Korea

• Extend scope of thin capitalisation rules e.g., Chile, Poland

• Adopt interest cap rules e.g., Finland, Germany, Italy, Norway, Japan, Slovakia, Spain

5 Countering harmful tax practices • Modify patent box regime — EU countries

• Enquiry into the ruling practices of EU Member States by EU Commission

6 Preventing treaty abuse • Introduce anti-abuse provisions in new treaties

• Introduce domestic anti-abuse provisions

• Introduce strict documentation requirements to apply for treaty benefits e.g., Hong Kong, India, Mexico, Russia, Vietnam

7 Permanent establishment • Broaden the definition of permanent establishment in new treaties

• Introduce domestic anti-avoidance rules targeted at MNCs which “artificially” avoid permanent establishments e.g., Australia, UK

8 Transfer pricing aspects of intangibles • Related transactions are heavily scrutinised by tax authorities

• Concept of location savings/market premium e.g., Canada, China, India, Mexico, Norway, Spain, Switzerland

• Introduce power to re-characterise transactions e.g., Australia, Finland, Thailand

• Introduce new rules on deductibility of outbound payments e.g., China

9 Transfer pricing aspects of risks and capital

10 Transfer pricing for other high risk transactions

11 Economic analysis of BEPS activity and BEPS measures

• No concrete actions taken yet

12 Disclosure of aggressive tax planning arrangements

• Certain countries have existing disclosure rules e.g., Canada, Israel, South Africa, UK, US

• New initiatives to introduce voluntary disclosure of high-risk transactions include:

• Pre-filing review of tax positions e.g., France, Italy, Netherlands

• Extension of interval between audits when companies disclose high-risk transactions e.g., Japan

13 Transfer pricing documentation and country-by-country reporting (CBCR)

• Introduce new transfer pricing filing and documentation requirements e.g., China, Czech Republic, France, Kenya, Malaysia, Mexico, Singapore, Thailand

• Introduce CBCR requirements e.g., Australia, China, Poland, Spain, UK

14 Improving effectiveness of dispute resolution mechanisms

• General consensus for mandatory binding arbitration to settle disputes

• No concrete actions taken yet

15 Develop multilateral instrument • Over 80 countries are participating in the development of the instrument




What can companies expect?

The impact of the BEPS project is not limited to OECD member countries, and is likely to continue affecting MNCs in the long-term.

The global focus on BEPS, together with the higher level of reporting and disclosure requirements being implemented worldwide, will result in greater and more complex tax controversy in the future.

As it is also becoming more common for countries to introduce anti-treaty abuse rules, MNCs can also expect increased scrutiny and more denial of treaty relief claims.

MNCs can no longer rely on the “legal form” to protect themselves as tax authorities start to look at “substance” to determine if taxes may be imposed.

What should companies be doing?

Companies should start assessing the potential impact that the BEPS project may have on their businesses, and implement measures to mitigate any negative impact. In particular, this assessment should consider areas viewed as “high risk” by tax authorities, such as supply chain planning, financing, intangibles and services.

That said, companies should not start arbitrarily restructuring their businesses to artificially avoid the effects of BEPS-driven changes. Rather, they should revisit their operations and ensure that their tax profiles are aligned to their commercial and business objectives.

It is now also important to proactively keep abreast of tax developments and start engaging with the tax authorities early, especially where there may be uncertainty of the tax treatment of a particular issue. Companies can also consider negotiating advance pricing arrangements for transfer pricing issues. With the upcoming changes to legislation and calls for greater tax transparency, voluntary disclosure and upfront discussion with the tax authorities may help to gain certainty and avoid or resolve potential disputes.

Of course, tax developments and issues should also be discussed frequently with executive management and other stakeholders to ensure that the shock of complex tax audits and substantial/assessments is minimised.

Conclusion

As international tax rules evolve to match the modern economy, it is clear that companies will have to adapt quickly to a changing global tax environment that demands greater substance and transparency. As such,

businesses may find themselves in “sticky situations” if they do not keep up with the changes and adapt to the new requirements.

The OECD’s BEPS project is definitely a prelude to interesting times ahead. Companies can minimise the extent of the potential impact if they have the foresight to identify their weaknesses and pressure points and build up adequate defences before BEPS actions are fully rolled out.

With the release of the final reports on 5 October 2015 and with certain countries likely to implement CBCR from financial year 2016, companies have a very narrow window of time to assess their current positions and close any gaps.

Once the changes take effect in 2016, any “corrective measures” companies may adopt to realign their tax positions to commercial substance are likely to be captured in new reporting requirements. This may expose them to prior year challenges.

Not all companies are aware of or appreciate the magnitude of the impact of the BEPS project. Start by reviewing your existing arrangements to assess whether there are any risks which need to be addressed.

Chester Wee Partner, International Tax [email protected]

Chester provides advice on cross-border transactions, permanent establishment risk, tax residency, application of tax treaties, corporate structuring and reorganisation, M&A, initial public offerings, tax controversy and dispute resolution. He serves clients from a wide range of industries including real estate, oil and gas, transportation and logistics.

Goh Su Ling Manager, International Tax [email protected]

Su Ling provides advice on tax structuring, tax residency issues, permanent establishment exposure, operating model effectiveness, migration of intellectual property, and other cross-border transactions across a diverse range of industries, including life sciences, media and entertainment, retail, manufacturing, trading and telecommunications.

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Going global: consider before

you leap Andy Baik and Aw Hwee Leng point out the pitfalls companies

may encounter as they widen their global footprint and the measures they should take to manage their exposure

For some Singapore companies, going global is not a matter of choice but one of strategic necessity. To grow further, these companies need to aim beyond the

confines of Singapore’s domestic economy.

In the context of recent tax developments around the globe, these are the top four tax issues Singapore companies need to consider before taking the leap abroad:

1. Holding and financing structure for new investments

Tax costs can significantly impact the bottom line. As such, many companies realise the importance of tax planning before entering into cross-border transactions.

In planning for a new investment, companies need to consider the tax-efficiency of the holding or financing structure for that investment. This is usually a structure that allows for some or all of the following:


“It is critical for companies to understand and monitor local tax

rules to identify opportunities and mitigate tax risks.”




• A tax exemption of the dividend or interest income derived

• Reduced withholding tax on dividend or interest payments

• A tax exemption of divestment gains

Amidst the current climate against tax avoidance, it is not uncommon for tax authorities to challenge a company’s holding or financing structure. This could ultimately derail the structure, erode tax savings or, in some cases, lead to double taxation. There are also broader repercussions — negative publicity, for instance, could impact the company’s reputation.

As early as 2009, countries such as China and Indonesia had issued circulars or regulations to address perceived tax treaty abuse. Recognising that more and more countries are acting individually to protect their tax bases, the OECD developed its Action Plan on BEPS to tackle BEPS issues comprehensively and in a more coordinated manner. The final reports on the 15 focus areas were issued on 5 October 2015.

Out of the 15 Actions in the BEPS Action Plan, the following have a direct impact on the planning of holding or financing structures:

• Action 2 — Neutralising the effects of hybrid mismatch arrangements

• Action 3 — Strengthening controlled foreign corporation (CFC) rules

• Action 4 — Limiting base erosion via interest deductions and other financial payments

• Action 5 — Countering harmful tax practices more effectively, taking into account transparency and substance

• Action 6 — Preventing treaty abuse

• Action 11 — Establishing methodologies to collect and analyse data on BEPS and the actions to address it

• Action12 — Requiring taxpayers to disclose their aggressive tax planning arrangements

On the surface, it appears that there may be little or no room for tax planning in the current tax landscape. Yet, at the heart of any challenge, the question is this: is there any economic substance or business purpose to the arrangement?

Structures that lack economic substance or business purpose are unlikely to withstand tax authority scrutiny. Therefore, tax planning needs to occur as early as possible and involve input from the business or operations team.

2. Local tax considerations in the foreign country

Companies that choose to venture abroad no longer have just their home country tax authority to contend with. There’s the likelihood of being caught within the income tax net of the foreign jurisdiction due to withholding tax mechanisms or tax rules that result in the creation of a taxable presence (also known as a permanent establishment or a PE).

In EY’s aHead of Tax event held in Zurich in May 2015, which was attended by more than 400 tax professionals from 35 countries, 91% of the attendees predicted that over the next three years, global tax disputes will either grow significantly or to some extent. This was partly attributed to the proposed revision to the PE definition under BEPS Action 7 (Prevent the artificial avoidance of PE status).

As tax authorities worldwide come under mounting pressure to protect their tax base, companies risk inadvertently creating a tax exposure elsewhere in the world. Companies which engage in e-commerce or which adopt online sales platforms are particularly vulnerable to challenges in the interpretation of existing rules.

Hence, it is critical for companies to understand and monitor local tax rules to identify opportunities and mitigate tax risks.

3. Transfer pricing and supply chain issues

On 6 January 2015, the Inland Revenue Authority of Singapore (IRAS) released the 2015 Singapore Transfer Pricing Guidelines. The revised guidelines introduced a requirement for taxpayers to prepare contemporaneous transfer pricing documentation, albeit with certain exceptions.

This was a marked change from the earlier Transfer Pricing Guidelines issued on 23 February 2006 which did not have any formal requirements to prepare transfer pricing documentation.

Nevertheless, it has always been the IRAS’ position that taxpayers should assess their transfer pricing risk and prepare transfer pricing documentation corresponding to that risk. Even if the IRAS had not specifically required contemporaneous transfer pricing documentation in the past, companies may still have had to prepare such documentation to meet requirements in the foreign jurisdictions where they operate.

The updated 2015 Transfer Pricing Guidelines was not a surprise to many tax practitioners given it’s been 10 years since the last set of guidelines was issued. In addition, four of the Actions1 in the BEPS Action Plan deal with transfer pricing, indicating that this is an area of increasing focus.

Perhaps the most controversial out of the four Actions is Action 13 which introduces country-by-country reporting (CBCR) requirements. Aimed at enhancing tax transparency, CBCR requires multinational companies to provide information on their global allocation of income, economic activity and taxes paid among countries to relevant governments.

The reality is CBCR creates a huge administrative and cost burden for both companies and tax administrators. Not only do companies have to implement appropriate systems to extract the

1Actions 8, 9 and 10 on “Assure that transfer pricing outcomes are in line with value creation” and Action 13 on “Re-examine transfer pricing documentation”


data, but tax administrators also have to devote valuable resources to process the data. The availability of such information to the tax authorities could also expose companies to increased controversy.

From a commercial perspective, disclosing the information could mean disclosing information on the company’s supply chain management strategies and this clearly can be sensitive from a market competition point of view. Depending on the picture painted by the information gathered, companies may need to consider tweaking their supply chain structures or face challenges by tax authorities.

Despite the issues and reservations surrounding CBCR, it is here to stay. Based on the OECD’s final report on Action 13, CBC reports would be required to be filed by multinational enterprises with financial statement revenue of EUR 750 million2 or greater and are to be implemented for fiscal years beginning on or after 1 January 2016.

Even before the release of the final report, certain countries such as Poland had published draft regulations introducing amendments to the scope of the mandatory transfer pricing documentation to include the CBCR report. Closer to home, Korea has included in its 2015 tax reform proposal, new documentation

requirements for certain multinational companies to submit information on international transactions which is in line with the OECD’s Guidance on Transfer Pricing Documentation and CBCR. Based on the proposal, the first report must be submitted by the corporate tax return due date for the taxable year beginning on or after 1 January 2016.

In Singapore, the Inland Revenue Authority of Singapore had originally indicated that it would not be implementing CBCR here. However, this stance appeared to have change. Taxpayers should therefore monitor this position and ensure that their internal systems and accounting software are capable of retrieving the required information if necessary.

4. Expatriate tax implications

Employees today are highly mobile. This in itself can create challenges for employers — from withholding tax compliance and social security obligations to the potential creation of a PE. Companies need to be mindful of these tax repercussions if they wish to send their employees overseas.

To mitigate the tax exposures to both the company and employees, companies are increasingly adopting secondment or dual employment arrangements. But these arrangements could also be subject to challenge.

2Australia has chosen A$1 billion as the revenue threshold

For example, the Authority of Advance Rulings (AAR) in India has issued a ruling that seconded personnel did not become employees of the company they are seconded to (i.e., host company) for purposes of determining the taxability of the payment made by the host company to the home company. Elsewhere, China’s State Administration of Taxation (SAT) has also released, in April 2013, guidance on PE issues related to secondment arrangements.

Companies that are keen to implement such arrangements need to drill down to the details. They need to coordinate closely with human resources to put in place appropriate contracts regarding the cross-border placements of employees. They should also regularly monitor employees’ roles and actual activities while on assignment to ensure they fall within the prescribed boundaries.

Conclusion

Globalisation has made it easier for companies to operate in more countries and access more markets.

At the same time, international tax issues have become more complex. Singapore companies need to navigate through these tax issues and consider the impact of evolving tax legislation on overseas ventures.

Andy Baik International Director, International Tax [email protected]

Andy leads the US Tax Desk and serves inbound and outbound clients into Asia, focusing on the private equity and sovereign wealth fund sectors. Andy has diverse work experience in US and Asia. He is involved in coordinating global restructuring projects and investment tax structuring for financing, M&A and local joint ventures in the region.

Aw Hwee Leng Director, International Tax [email protected]

Hwee Leng is with the International Tax Services practice, focusing on cross border tax advisory work, such as holding and financing structures, profit repatriation strategies and transaction structuring. She focuses on the real estate and sovereign wealth fund sectors.

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Preserving Singapore’s status as a

regional hub for business

Henry Syrett and Sharon Tan discuss the importance of substance for Singapore as a regional hub location in the

light of growing transfer pricing scrutiny

As Singapore celebrates its Golden Jubilee, the amazing growth story of the “red dot” has been the subject of much focus around the world. However, recent changes in the

international tax environment may challenge some of the Singapore government’s long-standing initiatives to promote this growth. How Singapore reacts to these challenges may have a large impact on its economic model as it develops over the next 50 years.

Amidst fiscal deficits in developed nations and increased public scrutiny on the tax avoidance strategies undertaken by multinational corporations (MNCs), the Organisation for Economic Co-operation and Development (OECD) in July 2013 announced its ambitious 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS). One of the key pillars of the BEPS initiative is to ensure that the taxation of profits is aligned to where economic activities are performed and value created, in other words matching taxation of profits to substance.

This has already started to have an impact on Singapore. Notably, in recent months, we have seen several high-profile cases whereby the Australian Tax Office (ATO) has singled out MNCs for channelling



profits through marketing hubs in Singapore. The ATO has asserted that the remuneration of these marketing hubs may not be at arm’s length, or what would be earned by independent entities under comparable conditions and circumstances. The ATO has even developed a name for such structures that it considers offensive; Singapore Sling is now being used to mean more than a sweet tasting cocktail. It remains to be seen whether the moniker becomes as ubiquitous and indeed as pejorative as the Dutch Sandwich and Double Irish which have attracted so much scrutiny in the West.

So how might BEPS change the way the Singapore government looks to attract business to the country in the future and will this be markedly different from its extremely successful historic model?

Use of tax incentives to attract investment

Given its small size and a lack of natural resources, Singapore adopts a policy of encouraging foreign investments to promote its economic development, focusing on attracting MNCs to establish their operations here. A suite of tax incentives is one out of the many tools deployed in its investment promotion strategy.

It is worthwhile to note that all incentive applications are subject to stringent evaluations by the administering agencies. The agencies seek to understand the companies’ economic contributions to Singapore in areas like total business spending, fixed asset investments and job creation before tax incentives are awarded. This approach ensures that only companies with substantive operations in Singapore

are eligible for incentives. Further, to be awarded the incentives, companies have to satisfy the condition that related party transactions are conducted on an arm’s length basis.

More than just tax incentives

For the majority of MNCs there is really no justification to think that Singapore is a conduit jurisdiction that lacks substance. These companies invest in Singapore for its strong value proposition; tax incentives are merely the icing on the cake.

Boasting of an attractive business environment including having a strong regulatory framework for the protection of intellectual property rights, a highly skilled workforce, world-class infrastructure, political and economic stability, and close proximity to the growing Asian markets, Singapore truly makes for a compelling investment destination. It is no coincidence that Singapore represents an extremely welcoming and comfortable place to live, further enhancing the attractiveness of the location for MNCs.

The European Union (EU), in June this year, published a list of 30 jurisdictions considered to be international tax havens. The blacklist comprises territories that appear on at least 10 EU member states’ national lists of tax havens. Widely accepted tax havens such as the British Virgin Islands and Cayman Islands appeared on the list. To the surprise of many including its own government, however, Hong Kong, another favourite hub location in Asia, was also included. The fact that the EU member states did not consider Singapore even alongside Hong Kong in this list was a ringing endorsement

that the Singapore incentives programme is not perceived as harmful tax practice.

Nonetheless, as tax jurisdictions take on a more aggressive stance towards profit shifting to protect their tax revenue base related to cross border activity, the onus is on Singapore to defend its stature as an international business hub to prove that incentivised corporations operating in Singapore do perform substantive economic activities and are not just here for the tax breaks.

Singapore’s stance towards transfer pricing

Singapore needs to demonstrate that it enforces the international standard on transfer pricing if it is to demonstrate to the world that it does not allow sheltering of profits here to avoid tax. The Inland Revenue Authority of Singapore (IRAS) is stepping up its scrutiny on intercompany transactions entered into by taxpayers with related parties. The Singapore Transfer Pricing Guidelines, first issued in 2006 by the IRAS, were revised in January this year. The revised guidelines are broadly in line with the OECD Transfer Pricing Guidelines and recent guidance by the OECD as a result of its BEPS initiative. With the revised guidelines, taxpayers are now expected to maintain contemporaneous transfer pricing documentation before they file their corporate income tax return. There are also increased disclosure and transparency expected from taxpayers with the inclusion of broader group information such as important drivers of business profits, group’s business models and strategies in the documentation.

“Whilst enforcing its sovereign right to determine taxation rules independently, the government must continue to project an image that Singapore is not only open for business but that it is also willing to adapt to the international tax environment.”




Alongside these revised requirements, the IRAS does seem to be stepping-up its Transfer Pricing Consultation process and is focusing more on transfer pricing in its review of company tax returns. This is key to demonstrating to the outside world that non-compliance will not be tolerated.

While the revised guidelines did not include any country-by-country reporting requirements which were developed under Action 13 of the BEPS Action Plan, the IRAS is now reconsidering whether to implement these new transfer pricing reporting provisions. The conclusions of this discussion are eagerly anticipated as other countries move to implement the recommendations of Action 13.

The increase in compliance and enforcement activities in relation to transfer pricing by the IRAS clearly demonstrates that the IRAS does not condone the shifting of profits to Singapore through related party transactions without real economic substance being performed here. In addition, the agencies responsible for administering the incentives are also stepping up incentive compliance to ensure that the incentivised companies are complying with the incentive conditions.

So what does the future look like?

As we move into the second 50 years of independence, it is inevitable that other countries will challenge the tools that Singapore uses to attract and retain foreign investment. If this is not managed effectively and Singapore becomes seen as a tax haven then MNCs may not be willing to risk being associated with Singapore.

The government needs to remain alert to the sentiment outside of Singapore. Whilst enforcing its sovereign right to determine taxation rules independently, the government must continue to project an image that Singapore is not only open for business but that it is also willing to adapt to the international tax environment. If this can be managed alongside an attractive tax environment and business-friendly authorities then there is much to be excited about over the next 50 years.

Henry Syrett Partner, Transfer Pricing [email protected]

Henry advises on transfer pricing, including transfer pricing documentation, transfer pricing planning and helping clients to operationalise their transfer pricing models. He also assists clients in transfer pricing controversy, covering transfer pricing audits as well as negotiations on Advanced Pricing Agreements (APAs) and Mutual Agreement Procedure (MAP). Henry is the Asean leader for Operating Model Effectiveness, supporting clients to implement the tax and transfer pricing aspects of operational change.

Sharon Tan Associate Director, Transfer Pricing [email protected]

Sharon advises clients on transfer pricing, including transfer pricing documentation, transfer pricing planning and transfer pricing controversy, covering transfer pricing audits as well as negotiations on APAs.

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A tax treaty, also known formally as an Avoidance of Double Taxation Agreement (DTA), is an agreement

between two contracting states to avoid double taxation on cross-border trade and investments, as well as to encourage international trade and the transfer of technology. DTAs offer an avenue for resolving disputes over taxing rights so that contracting states receive their fair share of tax revenue.

The world’s first “modern” tax treaty was concluded between Austria-Hungary and Prussia just before the turn of the 20th century in 1899. Today, more than 3,000 bilateral tax treaties exist.

The explosion of international trade and the proliferation of the digital economy


Recent trends in the application of tax treatiesJerome van Staden and Wong Hsin Yee share some insights on recent treaty developments in the international tax arena and how these may impact businesses today.

are transforming the way business is done globally. But tax laws have not kept up with global trade developments. The Organisation for Economic Co-operation and Development (OECD) has made it its mission to address this through its Base Erosion and Profit Shifting (BEPS) project and this has culminated in the publication of 13 Final BEPS Reports covering the 15 Action Plans on 5 October 2015.

The disparity between real-world business practices and outdated tax rules is further exacerbated by the fact that DTA negotiations take a long time. Businesses have taken advantage of this by relying on provisions under the relevant DTAs to restructure their operations so that certain profits are not taxed in either the source or home country. The practice of taking

advantage of loopholes in tax rules to avoid paying taxes completely is also known as “double non-taxation”. This has led to the OECD’s call-to-arms for tax administrations to take measures to prevent such treaty abuse. Suggestions of such measures are made in many of the Final BEPS Reports. These measures range from new minimum standards to reinforced international standards to common approaches and best practices.

Global trends surrounding tax treaties

As the spotlight on BEPS continues to shine with intensity, MNCs that have used tax planning to drive down their tax burden now find themselves under the increasing glare of the





“The disparity between real-world business practices and outdated tax rules is further exacerbated by the fact that DTA negotiations take a long time.”

media. To reduce double non-taxation and protect their revenue base, tax administrations around the world are revamping their domestic tax laws to widen the tax net and to introduce provisions when negotiating tax treaties.

Recent trends observed in the DTAs that are coming into force and also in the DTAs that are being negotiated or renegotiated demonstrate the tougher stance taken by tax authorities.

• Narrowing of permanent establishment (PE) exclusionsMany DTAs explicitly exclude certain activities from the definition of PE. To get around this, some businesses segregate their business activities carried on in a country into various entities such that each entity is not

considered a PE on a standalone basis. To target such fragmentation, recent tax treaties have adopted a more narrow PE exclusion. For example, the Hong Kong-Indonesia DTA includes the phrase “provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character”.

• Inclusion of anti-abuse provisions in the treaty to disallow treaty benefitsIn the past, countries seldom included anti-abuse provisions into their tax treaties. Instead, they relied on general or specific anti-avoidance rules in their domestic tax laws to tackle treaty abuse. The US’ Limitation of Benefits (LoB) provision, which has long been a unique feature in its tax treaties, is a notable exception.

Today, more countries are introducing explicit provisions aimed at restricting treaty benefits available in the DTAs. This is done either through a US-styled LoB provision or through a UK-styled principal purpose test. Under the principal purpose test, which is typically


attached to the treaty articles for dividend, interest and royalty payments, treaty benefits are denied if the main purpose or one of the main purposes of the arrangement is to take advantage of the treaty benefit. An example is the Australia-Switzerland DTA which includes specific as well as general purpose based anti-avoidance rules.

Interestingly, an increasing number of countries are attempting to apply anti-avoidance measures to tax treaties e.g., the tax treaty between Singapore and Israel. They may do this through pronouncements regarding the interpretation of their existing treaties or through the application of domestic general anti-avoidance rule (GAAR) provisions to treaty benefits.

Indonesia, for example, has stringent anti-treaty abuse rules that include an anti-treaty shopping test, a substance test, a subject-to-tax test and an anti-conduit test before the Indonesian tax authority grants treaty benefits. China has also introduced anti-treaty shopping guidance with strict beneficial ownership criteria that can be considered effectively as a treaty override.

Future trends

Governments face a fine balancing act between maintaining their ability to attract foreign direct investment and combating treaty abuse to protect their tax base. Given the current global tax climate, it is likely that tax administrations will adopt some or all of the following measures in future treaty negotiations or interpretation:

• The OECD’s suggestions per the Final Report for BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) dated 5 October 2015 include the following, amongst others:

• Explicitly stating in the preamble of DTAs that the intention of the Contracting States is to eliminate double taxation without creating opportunities for double non-taxation or reduced taxation through tax evasion or avoidance.

• Adopting (i) a combined approach of a principle purpose test rule (PPT) and an LOB rule; (ii) a PPT rule alone or (iii) an LOB rule supplemented by specific rules targeting conduit financing arrangements.

• Putting in place domestic anti-avoidance rules to counter abuse of domestic tax law using treaty benefits (e.g., hybrid arrangements which could result in deduction at payor level and no taxation at payee level).

• Tax policy considerations countries should take into consideration when entering into a tax treaty negotiation or renegotiation.

• OECD’s suggestions to the PE Article:

• Narrowing the coverage of specific activity exemptions

As discussed earlier, businesses may mitigate PE exposure by housing each activity they perform in a separate entity, with the individual activities falling within an explicit PE exclusion under the DTA. This is despite the fact that the activity may play a significant role in the value chain (e.g., the delivery element of on-line retail transactions).

The OECD has suggested in the Final Report for BEPS Action 7 that each of the specific activity exemptions (for PE purposes) should be subjected to a “preparatory or auxiliary” condition. This is consistent with the rationale of having the list of specific activity exemptions in the first place - that is, to exclude preparatory or auxiliary activities which should generally be considered as non-value adding activities with minimal profit attribution from being deemed a PE.

• Tightening the independence criteria and broadening the nature of activities (specifically in the area of concluding contracts) that may be caught under a dependent agency PE.

This is generally to target commissionaire structures and similar operating models which have mostly avoided PE exposure where the commissionaire acts in its own name but for the account of a principal for the sale of the principal’s goods. Actual conclusion of the contracts on behalf of the principal itself may no longer be the only trigger point for a PE. Habitual conclusion of contracts or taking on the main role leading to the conclusion of contracts that are routinely concluded without material modification under certain circumstances would also give rise to PE exposure for the principal if tax administrations are to adopt OECD’s suggestions. Another proposed option involves strengthening the requirement of “independence” to include an additional condition of non-exclusivity of clients. This is where the agent acts exclusively or almost exclusively on behalf of one enterprise or associated enterprises, the agent should not be considered as an independent agent. All these could significantly curtail how businesses run their operations.

• Explicit guidance on how hybrid instruments will be viewed for tax purposes:

More treaties may include explicit guidance on the classification of hybrid instruments (as debt or equity) in a bid to prevent hybrid mismatches.

For example, the protocol to the China-Chile DTA explicitly provides that under specific circumstances and for a fixed period of time, debt claims which have a profit sharing element would be viewed as loan. In addition, when the laws of Chile or China treat an income differently, the competent authorities shall consult one another to prevent mismatches.




• Skewed towards source country taxation rights:

We may expect a wider adoption of UN-styled provisions as the United Nations (UN) model tax convention (as opposed to the OECD model tax convention) preserves greater source country taxation rights.

• Multilateral instrument to modify bilateral tax treaties

As many as 90 countries are participating on an equal basis to finalise a multilateral instrument to achieve a fast and consistent implementation of the measures developed via the BEPS Reports instead of having the need to renegotiate existing bilateral tax treaties. The OECD has set an ambitious deadline of 31 December 2016 for the multilateral instrument to be ready for signature. It remains to be seen how this initiatives will play out and how this will impact treaty renegotiations or renegotiations in the meantime.

How will these trends impact businesses?

The evolving tax environment in light of accelerating BEPS developments is likely to expose businesses to more tax-related risks. These include:

• Tax models and transactions: Are a company’s tax model and related intercompany arrangements (where the company’s operating model centralises functions and risks and its related income) consistent with the latest developments in international income allocation as well as the managerial authority and staffing levels needed for those functions and risks? For example, if the suggestions by the OECD working group for BEPS Action 6 and 7 are adopted, businesses may have to assess the cost impact of such changes on existing structures and reassess their efficiencies.

• Financing: Should businesses revisit the financing strategies of the group to manage the deductibility of interest expenses incurred?

• Transfer pricing: Have businesses completed, legally documented and properly recorded all required transfer pricing calculations? This includes whether the design of existing arrangements is appropriate for the current environment and the actual operations are conducted as designed and reflected in documentation.

• Maintenance of internal controls: Have internal control procedures and processes been designed to remain effective in a constantly-changing tax risk environment? This includes whether the company’s operations have evolved over time such that the initial design of the above tax strategies remains applicable.

• Enhanced transparency: Will the enhanced disclosure of information to tax authorities — particularly through the mechanism of country by country reporting (CbCR) being introduced under BEPS Action 13 — lead to greater scrutiny of the global operations of multinationals by tax authorities? This could result in a corresponding increase in tax audit risk.

• PE: Has the exposure to taxes due to revenue generating activity in jurisdictions outside of the home country been appropriately identified and assessed?

• Reputational risk: Will there be any reputational damage as a result of public disclosure of a company’s tax situation?

In light of the changing tax landscape, companies need to adopt certain strategies in order to complement business growth and expansion. These include:

• Employing a sound tax strategy that is aligned to the business’ substance

• Implementing strong internal controls to assess and contain risks

• Preparing robust documentation to support the tax position

To achieve this, companies need to keep abreast of tax developments in order to stay at least one step ahead of tax administrations. Are you well-prepared?

Jerome van Staden International Director, International Tax Services [email protected]

Jerome relocated to Singapore in 2015 after 16 years with EY Brazil as an international tax advisor. He is experienced in international reorganisations, migrations, M&A, setting up of finance and trading company structures as well as intellectual property structures. Having worked in Brazil and the Netherlands, he is knowledgeable about Brazilian, Dutch and international tax laws.

Wong Hsin Yee Director, International Tax Services [email protected]

Hsin Yee has over 16 years of experience in international tax, focusing on M&A, post-acquisition restructuring and operating model effectiveness. While based in New York from 2006 to 2012, Hsin Yee assisted multinational companies with cross-border transactions, holding company planning and supply chain planning. She serves clients in the technology, retail and life sciences sectors.

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You and the Taxman



“With the onset of globalisation, tax reforms undertaken unilaterally by one country can

have far-ranging effects.”

Multinational enterprises (MNEs) have long been attracted to Singapore’s stable government, reliable legal system, well-

developed infrastructure, and competitive tax regime. However, with increased political and social pressure on MNEs to pay their “fair share of taxes, there is greater scrutiny now, more than ever, on how and where MNEs operate, and on the amount of taxes they pay. This is the new reality that MNEs need to start planning for.

Governments and tax administrations are increasingly keeping an eye on what their MNEs are doing outside of their home countries, and more importantly, pushing through legislation which could affect how these MNEs operate. One such driver of the evolution in the tax landscape is the Organisation for Economic Co-Operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan. As the world digests the OECD’s final BEPS recommendations, it is timely to examine how some of these developments may affect Singapore, and explore what these mean to the MNEs which have existing operations or are thinking of setting up operations in Singapore.

Staying competitive in an evolving global tax landscapeTan Lee Khoon and Randy Chung discuss how Singapore is responding to changes in the global tax environment




Risks posed by tax reforms undertaken by other countries

The BEPS Action Plan is not about harmonising domestic laws. Rather, it is about providing countries with tools to tackle common issues in a coordinated manner. However, there is a significant danger of fragmentation with countries taking unilateral action and making changes to protect their own domestic tax bases. This can result in the same activity and related income being brought to tax by two or more countries. The BEPS initiatives currently appear to have missed a binding arbitration mechanism to resolve such disputes. If BEPS includes such a mitigating agreement that all countries can sign up for, companies will have an avenue to avoid being taxed multiple times on the same activity.

As it is, many countries are not waiting for the OECD to finalise its BEPS recommendations and have begun embarking on tax reforms. Earlier

this year, the UK passed into law its diverted profits tax. The US has also released proposed revisions to its model income tax convention, including new clauses designed to counter US tax base erosion. Closer to home, Australia has released draft legislation designed to address tax avoidance by MNEs, and a recent Senate inquiry into corporate tax avoidance has also cast the spotlight on Australian MNEs with marketing or service hubs in Singapore. There are fears that the unilateral actions taken by these countries may spur others such as Brazil, India and China to follow their lead. This may lead to tax chaos never seen before.

With the onset of globalisation, tax reforms undertaken unilaterally by one country can have far-ranging effects. MNEs would not only have to consider how new domestic rules would affect their operations overseas and their overall tax burden, but also the potential reputational risks that may arise.

This represents a potential threat to Singapore, which has positioned itself to be an ideal location for MNEs to locate their business hubs, carry out R&D or hold their intellectual property (IP), among others. The growing pressures on MNEs in their home jurisdictions would no doubt influence their business decisions, thus potentially eroding the attractiveness of a location like Singapore.

For example, to avoid anticipated disputes with its home country tax authorities, an MNE may opt to sell goods directly to end customers, instead of through a centralised marketing hub in Singapore, notwithstanding the potential commercial benefits the Singapore hub could bring in terms of cost savings and proximity to Asian customers.

The fact that tax considerations may unduly influence commercial decisions is certainly of concern and one which a country should take note of in drawing the line between tax harmonisation and protectionism.


How Singapore is responding

On its part, the Singapore tax authority has taken steps to better position Singapore in the face of recent and anticipated developments.

Singapore’s transfer pricing guidelines were updated earlier this year, with requirements for certain groups of taxpayers to prepare and maintain contemporaneous transfer pricing documentation. While the guidelines currently do not require taxpayers to complete a “country-by-country reporting” (CBCR) template, they are broadly in line with the OECD’s approach to transfer pricing and would go some way in helping MNEs explain and justify their transfer pricing positions to both the Singapore tax authorities and their home country tax authorities. This move is seen as a strong endorsement by the Singapore tax authorities of the OECD’s approach of aligning profits to the place where substance resides and where the economic value is created.

In the area of tax incentives, Singapore’s incentive programmes have always been benchmarked on value-driving and value-added activities in Singapore, coupled with real and substantive physical presence. These already high hurdles to qualify for a tax incentive have been constantly reviewed and raised. Tax incentives are awarded only if substantive economic activities are conducted in Singapore and

considerable value can be added to the Singapore economy. However, what is considered substantive is debatable and is an area where contention can easily arise when challenge by other tax authorities. That being said, we believe that Singapore’s incentive regime is robust enough to pass the “smell test” (where tax arrangements not only have to be legally correct, but also have to be justifiable from an ethical and moral standpoint in the eyes of the public). The other area of BEPS that may impact Singapore is the proposed Exchange Of Information on rulings related to tax incentives, Advance Rulings and concluded Advanced Pricing Arrangements. Currently, it is the Singapore tax authorities’ policy not to publish such rulings. However, it may eventually find itself obligated to exchange such information with its treaty countries on a spontaneous basis.

There is also a general consensus that the Singapore tax system is becoming more robust, as Singapore further develops into a mature and sophisticated tax jurisdiction. In recent years, there has been an increase in the number of queries raised and audits conducted by the Singapore tax authorities. Such queries and audits have become more regular and more in-depth with relevant specialist teams involved. Where simple confirmations may have been acceptable in the past, taxpayers are increasingly being asked for greater details and to

provide source documentation for verification. There have also been intensive queries relating to R&D claims and renewed focus on related party transactions.

These are all part of the Singapore tax authorities’ efforts to ensure that taxpayers maintain robust documentation and put in place measures to ensure that their tax positions taken in Singapore are defensible and can stand up to scrutiny by the tax authorities of other countries. This will become particularly critical when CBCR is implemented by more and more countries and tax authorities can request any information that is foreseeably relevant to the local country tax base and reasonably available to the taxpayer.

More change is likely to come and MNEs should keep themselves updated on any further tax policy shifts. Though this would invariably lead to increased compliance costs, it appears to be an inevitable consequence of the evolving global tax landscape amid calls for greater transparency.

At this stage, Singapore’s position appears to be sufficiently robust to face the new challenging tax landscape. If Singapore plays its cards right, it may end up as a winner when the dust settles on the BEPS project.

Tan Lee Khoon Partner, Tax Services [email protected]

Lee Khoon is EY’s Business Tax Services Leader for Singapore and Asean. She has over 30 years of experience providing tax advisory and planning services in Singapore. She provides advice on the taxation aspects of public listings, corporate mergers and restructuring, tax authority advance rulings and tax controversies. She is also the Shipping Sector Tax Leader in Singapore. She is particularly conversant in providing advice to clients in the hospitality and real estate, metal and mining and shipping industries.

Randy Chung Manager, Tax Services [email protected]

Randy is a manager with EY’s Business Tax Services team. He provides tax advisory and compliance services to clients across a range of industries, including those in the life sciences and technology sectors.

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Venturing abroad: five tax

issues SMEs need to consider

Chai Wai Fook and Teh Swee Thiam discuss the key tax considerations SMEs need to account for before going overseas

According to a report by SPRING Singapore, small and medium-sized enterprises (SMEs) account for over 90% of all enterprises in Singapore. They contribute to 60% of total

economic output and employ 70% of the country’s workforce. Forming the core of Singapore’s economy, SMEs are an important engine of growth.

For SMEs with means and ambition, plugging into the global economy is necessary given the small size of the domestic market. Once SMEs have established a critical size in Singapore, venturing overseas is the next natural step to take the business to the next level.

To this end, the government has implemented various schemes in the form of incentives and grants to help SMEs in their internationalisation efforts. As more SMEs spread their wings overseas, establishing a local presence in foreign markets may become necessary to gain access to new markets, tap cheaper sources of labour and get closer to customers.



But there are a whole host of tax issues to consider before going abroad. Failure to grasp these tax issues or failure to tap into the incentives or exemptions available can result in unexpected high tax costs. This can undermine the desired returns from internationalisation.

Here, we discuss the key tax considerations SMEs should take into account when expanding overseas.

1. Local tax implications of the entity structure

SMEs need to understand the local tax implications of the entity structure they plan to set up in the foreign country. This may take the form of a representative office, branch or subsidiary company.

In general, a representative office is not treated as a taxable entity. As it is established to conduct marketing, customer research and other non-operational activities, it is not allowed to engage in business activities. However, if the activities of the representative office exceed the permissible activities, this may create a taxable presence for the SME and the foreign jurisdiction may subject the SME to tax.

Unlike representative offices, branches and subsidiaries are regarded as taxable entities. However, each jurisdiction has its own tax rules and these may differ for a branch and a subsidiary company. SMEs should therefore find out the local taxes applicable to a branch and a subsidiary as well as the tax incentives or exemptions the branch or subsidiary is eligible for, if any.

2. Local tax impact of funding arrangements

The funding of the operations of the overseas entities is a key consideration for SMEs. For a subsidiary, funding could take the form of equity, debt or both. For debt funding, SMEs need to consider whether there are thin capitalisation rules and withholding tax implications in the overseas jurisdictions. Thin capitalisation rules limit the amount of debt that can be used to fund the operations in the overseas jurisdictions. As a result, the rules can disallow the tax deduction on the interest incurred on the debt when the debt used to fund the assets of the overseas entity’s operations exceeds certain limits.

Further, there is usually overseas withholding tax payable on interest payments to non-tax residents. It is therefore important to find out whether there is a tax treaty concluded between Singapore and the jurisdiction in which the overseas entity is located. Failure to do so could cost the SME the opportunity to claim any exemption relief or reduced withholding tax under the tax treaty.

3. Tax deductibility of borrowing costs

To speed up access to new markets, SMEs could acquire shares in an overseas entity. However, SMEs need to carefully consider how the acquisition should be financed. For example, if the SME is considering funding the acquisition through debt or a mixture of debt and internally generated funds, it should determine the impact of the tax deductibility of interest costs.

In Singapore, where the interest-bearing loan is used specifically to fund foreign investment in shares, the interest expense would typically not be deductible or would have no deduction value to the company. SMEs may instead consider using internally generated funds to invest in the foreign investment or try to push debt down to the country where the investment is made.

“At the point of making the investment, SMEs should already consider the tax implications of future profit repatriation.”




4. Future profit repatriation

At the point of making the investment, SMEs should already consider the tax implications of future profit repatriation. Failure to do so could result in the company structuring the investment in a non-tax efficient manner and this could lead to an unexpected lower level of return from the investment.

The possible profit repatriation would include dividend, interest, management fees and royalties. The tax implications would include withholding tax and deductibility of the income payments by the local entity in the overseas country. If the overseas country has a comprehensive tax treaty with Singapore, the SME may be able to lower the foreign withholding taxes suffered on the profit repatriation from the overseas investment.

In addition, SMEs should be aware of the transfer pricing requirements in both Singapore and the overseas countries that they operate in. It is important to comply with such rules. Certain countries require the submission of a transfer pricing report to the tax authorities while others require the maintenance of such a report to be submitted on request.

Some countries have already introduced changes to domestic tax legislation specifically related to base erosion and profit shifting (BEPS). SMEs with overseas operations should assess the impact of the BEPS Actions and keep abreast of the developments in the structuring of any new acquisition or financing arrangement.

5. Tax implications on disposal of investment

Companies need to consider the exit strategy in any investment. It is important to take into account the Singapore and overseas tax implications if SMEs are to exit from their overseas businesses through the sale of the investment stakes or possibly through an initial public offer. The tax implications would generally include the taxability or deductibility of the disposal gains or losses, the withholding tax on the sales proceeds or gains in the country in which the investment is located, value added tax, stamp duties and other transfer taxes.

Chai Wai Fook Partner, Tax [email protected]

Wai Fook leads the Tax Accounting and Risk Advisory Services for Asean and Singapore. Apart from advising clients on international and corporate tax planning for inbound and outbound investments, Wai Fook assists clients in resolving tax controversies with the tax authorities. Wai Fook conducts workshops on tax accounting and withholding tax. He is also a regular speaker at EY and external seminars and conferences.

Teh Swee Thiam Partner, Tax [email protected]

Swee Thiam has more than 16 years of experience in tax compliance and advisory in international and corporate taxation. His experience includes advising on the taxation aspects of restructuring and cross-border business transactions, obtaining tax rulings and dealing with tax controversies.

Contact us

Some of the tax treaties which Singapore has concluded with other countries provide for capital gains tax exemption on disposal of shares of the overseas entity if the stipulated conditions are met. In some jurisdictions, exemption relief available under the relevant tax treaty requires an application to be made to the local tax authorities on a timely basis. If the SME fails to make a timely application, it may miss out on the opportunity to enjoy the tax benefit.

Tax is an important part of the equation in any internationalisation strategy. It may not be cost-efficient to totally eliminate all the tax issues associated with venturing overseas. But with prior tax planning, SMEs can reduce the magnitude of tax risk and hence the overall tax costs from the overseas investments.


The “art” of investing

in ASEANSoh Pui Ming and David Ong discuss the regulatory and tax compliance issues foreign investors need to

take note of when investing into ASEAN

Investing in the ASEAN region can be challenging — not only does it host a collage of cultures and languages, but it is also marked by an economically diverse landscape. Yet, there are

compelling business reasons that make ASEAN an exciting investment destination for foreign investors.

According to research by Bank of America Merrill Lynch, the ASEAN-5 (Indonesia, Malaysia, Thailand, Philippines and Singapore) together received more foreign direct investment (FDI) than China in 2013.

ASEAN’s edge as a cheap production and manufacturing base is a major draw for foreign investors. According to a 2013 report by the Japan Export Trade Organisation (JETRO), wages in China were about three times higher than in Vietnam — the average worker in China’s southern Guangzhou province earns US$395 a month while a similar worker in Ho Chi Minh City earns only US$148.

With a population of 600m, the ASEAN region is home to a fast-growing middle class that is driving demand for goods and services. As a result, investment interest in ASEAN has increased, fuelled by the region’s rosy consumption-driven growth outlook.

Evolution of Singapore’s tax policiesGrowth strategies and going global




While ASEAN offers a plethora of opportunities for foreign investors, they should be aware of the diverse regulatory and tax compliance requirements in the region.

Overview of regulatory requirements in ASEAN

An overview of the regulatory requirements across the ASEAN member countries is set out in Appendix 1. Whilst the Appendix attempts to capture details such as requirements for local directors and minimum paid-up capital, it cannot adequately capture the difficulties or ease of registering an investment in some of these countries.

Many of the ASEAN countries have negative lists that set out the sectors which have restrictions on foreign investment (we have not set out the length of the negative list as well as the multiple license or permit requirements in the table as they vary from case to case depending on different factors).

In terms of foreign ownership restrictions, manufacturing is the most liberalised sector for FDI into ASEAN. In contrast, sectors such as wholesale or retail, business services, communications and transportation have more stringent restrictions placed on them. These FDI

Sectoral FDI restrictions in ASEAN and the OECD nations (Open = 0; Closed = 1)

0.6

0.5

0.4

0.3

0.2

0.1

0

Agriculture and forestry

Fisheries

Mining and quarrying (In

cl. oil e

xtr.)

Manufacturing

Electricity

Construction

Distribution

Transport

Hotels and restaurants

Media

Communications

Financial services

Business services

Real estate investm

ent

Total FDI index

OECD ASEAN 9

OECD FDI Regulatory Restrictiveness Index (Open=0; closed=1)

Source: OECD, Notes: ASEAN 9 scores are preliminary

restrictions apply mainly to businesses that target domestic markets, as well as controlled industries such as media. The chart below is an extract from the 2015 OECD report on the FDI restriction index for the ASEAN market.


“While ASEAN offers a plethora of opportunities for foreign investors, they should be aware of the diverse regulatory and tax compliance requirements in the region.”

The World Bank’s 2015 survey on the ease of doing business ranks Singapore first out of 189 countries, with Malaysia ranking 18th, Thailand 26th, Vietnam 78th, the Philippines 95th and Indonesia 114th respectively. This further reflects the complex “art” of investing in ASEAN.

Overview of tax requirements and updates in ASEAN

Appendix 2 summarises the corporate tax and withholding tax filing obligations in all the 10 ASEAN member states. Corporate tax filings range from annual filings to bi-annual or quarterly filings. Withholding tax obligations are even more cumbersome, not because it is a transactional tax, but also because the withholding tax rates vary from case to case, depending on whether the payment is made to a resident or non-resident recipient, the nature of the payment and application of a tax treaty. It is important to note that several ASEAN countries impose withholding tax on domestic transactions.

These are only the tip of the iceberg — there are many other tax filing obligations, included value-added taxes (VAT), customs, personal tax and employer withholding requirements that investors need to know.

Latest focus by the tax authorities

Foreign investors should also keep up-to-date on the latest focus areas by the tax authorities.

Indonesia As part of the Indonesian government initiatives to increase tax collection, the tax authorities have raised tax audit targets. The four key focus areas of tax audits in 2015 are on:

• Taxpayers who allegedly misuse tax treaties

• Taxpayers who are engaged in related party transactions with overseas parties

• Taxpayers in the coal mining and oil and gas industries

• Taxpayers who are engaged in significant trade

Malaysia Malaysia has stepped up enforcement of compliance through the following:

• Introduction of disclosure requirements in the annual tax form on the preparation of contemporaneous transfer pricing documentation

• Increased audit and enforcement activities by the tax authorities

With a hefty penalty regime in place, tax risk management and corporate governance are now important issues for businesses in Malaysia.

Philippines Under the strengthened Run After Tax Evaders (RATE) program, the Bureau of Internal Revenue (BIR) has filed many tax evasion cases against personalities and juridical entities nationwide which are alleged to have evaded or defeated tax.

The BIR has deepened its collaboration with other regulatory agencies to enhance enforcement. For example, it is joining forces with the Bureau of Customs to ensure that only legitimate importers are granted import accreditation and that correct taxes and dues are duly paid to the government. The BIR is also working together with the Securities and Exchange Commission to mandate the disclosure of certain tax information in the financial statements.

Singapore Compliance has always been a key focus of the Inland Revenue Authority of Singapore (IRAS). In the last two years, the IRAS became much more stringent in imposing penalties for errors and mistakes in the tax returns.

Based on our experience, the IRAS appears to have stepped up its routine compliance reviews. These are similar to desk audits where taxpayers are required to provide detailed supporting evidence such as general ledger listings, invoices, and other relevant supporting documents.




Thailand Thailand’s tax authority has recently been stepping up tax collection aggressively, in particular in the area of transfer pricing. Released in May 2015, the draft Transfer Pricing Act has provided the tax administration with full authority to assess companies on their revenue and expenses on inter-company transactions. The Act also requires taxpayers to file transfer pricing documentation within the same time frame as corporate income tax return filings. Failure to do so will result in penalties being imposed.

Vietnam Tax authorities in Vietnam have been turning their attention to auditing the tax compliance status of taxpayers who declare and pay tax on a self-assessment basis. Non-compliant taxpayers face heavy administrative fines and penalties. The tax authorities are also carrying out desk reviews of the submitted tax declarations and tax inspections with more regularity.

Conclusion

A good understanding of the regulatory and tax requirements enables investors to better manage stakeholders’ expectation and resource needs as well as avoid “landmines” which may result in penalties and reputational issues.

Foreign investors need to stay on top of the regulatory and tax changes given the fast changing governance and international tax landscape. This is by no means an easy task, but something that all businesses with investments in ASEAN cannot afford to lose sight of.

Soh Pui Ming Partner, Tax Services [email protected]

Pui Ming has over 20 years of experience in managing Singapore tax matters and coordinating regional projects, including group reorganisations and post-acquisition tax health checks. As Asean Leader for Global Compliance and Reporting, Pui Ming heads the region’s record to report (R2R) services, including accounting compliance, corporate secretarial as well as corporate compliance services.

David Ong Asean Corporate Services Leader, Global Compliance and [email protected]

David leads the Corporate Services practice that provides corporate secretarial, accounting, payroll and other administration services to clients. He advises companies on the setting up of business and investments in Asean and on cross-border business issues. He serves both local and multinational businesses.

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ASEAN regulatory requirementsBrunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

Regulatory environment

Governing ministry Registrar of Companies

(i) Ministry of Commerce (MOC) (ii) Council for the Development of Cambodia (CDC)

Investment Coordinating (Badan Koordinasi Penanaman Medal, BKPM)

(i) General business: Ministry of Industry and Commerce (ii) Concession business: Ministry of Planning and Investment

Companies Commission of Malaysia (CCM)

Directorate of Investment and Company Administration (DICA) (Ministry of National Planning and Economic Development)

Securities and Exchange Commission

Accounting & Corporate Regulatory Authority of Singapore (ACRA)

Ministry of Commerce (MOC)

Ministry of Planning & Investment (but can also be other industry specific ministry or authorities)

Applicable laws Companies Act (Chapter 39)

Law on Investment & Law on Commercial Enterprise

Law 25 Year 2007 regarding Investment; Law 40 Year 2007 regarding Limited Liability Company

(i) Investment Promotion Law (ii) Enterprise Law (iii) Other related laws for specific activity if applicable

Companies Act 1965, Malaysia

Myanmar Companies Act or in conjunction with the Union of Myanmar Foreign Investment Law (MFIL) and Special Economic Zone Law (SEZ)

Corporation Code of the Philippines; Omnibus Investments Code; Foreign Investment Act (1991)

Companies Act, Chapter 50 of Singapore

Civil and Commercial Code, the Act Determining Offences relating to the Registered Partnership, Limited Partnership, Limited Company, Association and Foundation B.E. 2499

Law on Investment 2014, Law on Enterprises 2014

Business/commercial licence

Certificate of incorporation or registration

Certificate of Incorporation

Foreign capital investment principle license (Izin Prinsip Penanaman Modal Asing, IPPM) and business license (Izin Usaha)

Exception on certain business sectors apply

(i) General business: Enterprise License (ii) Concession business: Concession license


(i) Permit-to-trade (ii) Incorporation certificate

Certificate of Incorporation (corporation); License to transact business in the Philippines (branch)



Investment Certificate and Business Registration Certificate (Article 22.4 (c),Article 23.4 (c ), Law on Enterprises 2014)

Expiry date of business licence

No expiry date Maximum 3 years and can request for renewal for every 3 years

IPPM serves as a temporary document and Izin Usaha has no expiry date

Based on investment period granted per enterprise license or concession license

No expiry date No expiry date (Renewal permit on 5-year basis)

Maximum 50 years but may be extended by amendment to the corporations articles of incorporation

No expiry date No expiry date (i) Projects in economic zones: Not exceeding 70 years (ii) Projects outside of economic zones: not exceeding 50 years (exception cases maybe extended to 70 years) Article 43 Law on Investment 2014

Foreign ownership restrictions

Generally allowed except for certain activities

No restrictions on foreign ownership, except for ownership of land

Generally allowed in all areas except those specified in negative list under Presidential Regulation No. 39/2014 and permitted with conditions for certain industries

Generally allowed except for concession business and business list reserved for Lao nationals

Generally liberalised for new investments, expansions or diversification except for certain specific activities and products

Most activities are open to foreign investment with the exception of those reserved for the State under the State-owned Economic Enterprises Law, governed under Foreign Investment Law

Generally allowed subject to restrictions found in the Foreign Investments List (FINL); List A — areas of activities reserved to the Philippine nationals by mandate of the Constitution and other specific laws List B — areas of activities and enterprises where foreign ownership is limited pursuant to law. Among these are defence or law enforcement related activities

Generally no restriction except for national security and in certain industries

Must obtain Foreign Business License for operating business under the lists as prescribed in the Foreign Business Act 1999

Generally unlimited, except listed companies, public companies, securities trading organisations, securities investment funds in accordance with the law on securities; equitised State enterprises, State enterprises converting their ownership into another form; other limits are set for certain cases in accordance with other laws and international treaties of which Vietnam is a member (Article 22.3, Law on Investment 2014)

Appendix 1:




ASEAN regulatory requirementsBrunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

Regulatory environment

Governing ministry Registrar of Companies

(i) Ministry of Commerce (MOC) (ii) Council for the Development of Cambodia (CDC)

Investment Coordinating (Badan Koordinasi Penanaman Medal, BKPM)

(i) General business: Ministry of Industry and Commerce (ii) Concession business: Ministry of Planning and Investment

Companies Commission of Malaysia (CCM)

Directorate of Investment and Company Administration (DICA) (Ministry of National Planning and Economic Development)

Securities and Exchange Commission

Accounting & Corporate Regulatory Authority of Singapore (ACRA)

Ministry of Commerce (MOC)

Ministry of Planning & Investment (but can also be other industry specific ministry or authorities)

Applicable laws Companies Act (Chapter 39)

Law on Investment & Law on Commercial Enterprise

Law 25 Year 2007 regarding Investment; Law 40 Year 2007 regarding Limited Liability Company

(i) Investment Promotion Law (ii) Enterprise Law (iii) Other related laws for specific activity if applicable

Companies Act 1965, Malaysia

Myanmar Companies Act or in conjunction with the Union of Myanmar Foreign Investment Law (MFIL) and Special Economic Zone Law (SEZ)

Corporation Code of the Philippines; Omnibus Investments Code; Foreign Investment Act (1991)

Companies Act, Chapter 50 of Singapore

Civil and Commercial Code, the Act Determining Offences relating to the Registered Partnership, Limited Partnership, Limited Company, Association and Foundation B.E. 2499

Law on Investment 2014, Law on Enterprises 2014

Business/commercial licence

Certificate of incorporation or registration


Foreign capital investment principle license (Izin Prinsip Penanaman Modal Asing, IPPM) and business license (Izin Usaha)

Exception on certain business sectors apply

(i) General business: Enterprise License (ii) Concession business: Concession license


(i) Permit-to-trade (ii) Incorporation certificate

Certificate of Incorporation (corporation); License to transact business in the Philippines (branch)



Investment Certificate and Business Registration Certificate (Article 22.4 (c),Article 23.4 (c ), Law on Enterprises 2014)

Expiry date of business licence

No expiry date Maximum 3 years and can request for renewal for every 3 years

IPPM serves as a temporary document and Izin Usaha has no expiry date

Based on investment period granted per enterprise license or concession license

No expiry date No expiry date (Renewal permit on 5-year basis)

Maximum 50 years but may be extended by amendment to the corporations articles of incorporation

No expiry date No expiry date (i) Projects in economic zones: Not exceeding 70 years (ii) Projects outside of economic zones: not exceeding 50 years (exception cases maybe extended to 70 years) Article 43 Law on Investment 2014

Foreign ownership restrictions

Generally allowed except for certain activities

No restrictions on foreign ownership, except for ownership of land

Generally allowed in all areas except those specified in negative list under Presidential Regulation No. 39/2014 and permitted with conditions for certain industries

Generally allowed except for concession business and business list reserved for Lao nationals

Generally liberalised for new investments, expansions or diversification except for certain specific activities and products

Most activities are open to foreign investment with the exception of those reserved for the State under the State-owned Economic Enterprises Law, governed under Foreign Investment Law

Generally allowed subject to restrictions found in the Foreign Investments List (FINL); List A — areas of activities reserved to the Philippine nationals by mandate of the Constitution and other specific laws List B — areas of activities and enterprises where foreign ownership is limited pursuant to law. Among these are defence or law enforcement related activities

Generally no restriction except for national security and in certain industries

Must obtain Foreign Business License for operating business under the lists as prescribed in the Foreign Business Act 1999

Generally unlimited, except listed companies, public companies, securities trading organisations, securities investment funds in accordance with the law on securities; equitised State enterprises, State enterprises converting their ownership into another form; other limits are set for certain cases in accordance with other laws and international treaties of which Vietnam is a member (Article 22.3, Law on Investment 2014)


Appendix 1:

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

Other licenses Special licenses for certain industries

(i) Special licenses for certain industries (ii) Final registration certificate for qualified investment project

Import license and registration with custom office

Depending on the nature of business activities, there are other required technical licenses/recommendations

Operational license to applicable business activity (governed by related ministries e.g., hospital business will be under the Ministry of Public Health)

Special licenses for certain industries such as importation of cars, insurance companies, domestic and investment banks, telecommunications

Permit from Myanmar Investment Commission (MIC) Export and Import license and Investment permit from Special Economic Zone

Special licenses for certain industries


Special licenses for certain industries and Foreign Business License for Foreign majority owned company


Type of entities

Common business structures for foreign investors

(i) Company (ii) Branch

(i) Branch (ii) Subsidiary

A limited liability entity (Perseroan terbatas, PT) in the form of foreign capital investment

(i) Company (ii) Branch (for certain industries such as banks and insurance) (iii) Partnership

(i) Company Limited by shares (ii) Branches

(i) Limited Liability Company (ii) Branch

(i) Domestic Corporation or subsidiary (ii) Branch



(i) Limited liability company (LLC) (ii) Joint-stock company (JSC)

Comparison for company (most common entity)

A. Corporate/statutory requirements

1. Shareholder

Minimum requirement 2 shareholders (individual or corporate)

(i) 1 shareholder (individuals or corporate) for single member private limited company (ii) 2 shareholders for private or public limited company

2 shareholders (individuals and/or corporate), depending on the nature of business

(i) Minimum 2 shareholders for Partnership and Company Limited (ii) 1 shareholder for Sole Limited Company

2 shareholders (individuals or corporate)

Minimum 2 shareholders (individual or corporate)

Minimum 5 individual shareholders

1 shareholder (individuals or corporate)

3 shareholders (individual or corporate), but when setup 3 shareholders must be individuals

(i) LLC — Minimum 1 member (ii) JSC — Minimum 3 shareholders (individual or corporate)

Must be citizen or local resident

No restriction No restriction Depending on nature of business, the second shareholder must be Indonesian citizen/company

No restriction No restriction No restriction Majority must be local residents

No restriction No restriction No restriction

Corporate shareholder Permitted Permitted Permitted Permitted Permitted Permitted Permitted but must be with at least 5 individual shareholders

Permitted Permitted, but when setup 3 shareholders must be individuals

Permitted

2. Officers of the company

(a) Director

Corporate director Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited

Minimum requirement At least 2 directors, of which one shall be ordinarily resident in Brunei Darussalam

Where there are more than 2 directors, at least 2 of them shall be ordinarily resident of Brunei Darussalam

Minimum 1, except for public limited company (minimum 3)

1 1 2 At least 2 individual directors are required

5 1 1 1

Resident status Yes (see minimum requirement)

No restriction At least 1 director is a resident

No restriction Minimum 2 local resident directors

No restriction Majority must be local resident

Minimum 1 ordinarily resident director

Generally no restriction except for certain industries

Generally no restriction, however if the director is the sole legal representative of a company, he/she must be resident in Vietnam (Article 13.3, Law on Enterprises 2014)

Legal representative Not required Required Not required Required Not required Not required Not required Not required Not required Required

ASEAN regulatory requirements





Other licenses Special licenses for certain industries

(i) Special licenses for certain industries (ii) Final registration certificate for qualified investment project

Import license and registration with custom office

Depending on the nature of business activities, there are other required technical licenses/recommendations

Operational license to applicable business activity (governed by related ministries e.g., hospital business will be under the Ministry of Public Health)

Special licenses for certain industries such as importation of cars, insurance companies, domestic and investment banks, telecommunications

Permit from Myanmar Investment Commission (MIC) Export and Import license and Investment permit from Special Economic Zone



Special licenses for certain industries and Foreign Business License for Foreign majority owned company


Type of entities

Common business structures for foreign investors

(i) Company (ii) Branch

(i) Branch (ii) Subsidiary

A limited liability entity (Perseroan terbatas, PT) in the form of foreign capital investment

(i) Company (ii) Branch (for certain industries such as banks and insurance) (iii) Partnership


(i) Limited Liability Company (ii) Branch

(i) Domestic Corporation or subsidiary (ii) Branch



(i) Limited liability company (LLC) (ii) Joint-stock company (JSC)

Comparison for company (most common entity)

A. Corporate/statutory requirements

1. Shareholder

Minimum requirement 2 shareholders (individual or corporate)

(i) 1 shareholder (individuals or corporate) for single member private limited company (ii) 2 shareholders for private or public limited company

2 shareholders (individuals and/or corporate), depending on the nature of business

(i) Minimum 2 shareholders for Partnership and Company Limited (ii) 1 shareholder for Sole Limited Company

2 shareholders (individuals or corporate)

Minimum 2 shareholders (individual or corporate)

Minimum 5 individual shareholders

1 shareholder (individuals or corporate)

3 shareholders (individual or corporate), but when setup 3 shareholders must be individuals

(i) LLC — Minimum 1 member (ii) JSC — Minimum 3 shareholders (individual or corporate)

Must be citizen or local resident

No restriction No restriction Depending on nature of business, the second shareholder must be Indonesian citizen/company

No restriction No restriction No restriction Majority must be local residents

No restriction No restriction No restriction

Corporate shareholder Permitted Permitted Permitted Permitted Permitted Permitted Permitted but must be with at least 5 individual shareholders

Permitted Permitted, but when setup 3 shareholders must be individuals

Permitted

2. Officers of the company

(a) Director

Corporate director Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited Prohibited

Minimum requirement At least 2 directors, of which one shall be ordinarily resident in Brunei Darussalam

Where there are more than 2 directors, at least 2 of them shall be ordinarily resident of Brunei Darussalam

Minimum 1, except for public limited company (minimum 3)

1 1 2 At least 2 individual directors are required

5 1 1 1

Resident status Yes (see minimum requirement)

No restriction At least 1 director is a resident

No restriction Minimum 2 local resident directors

No restriction Majority must be local resident

Minimum 1 ordinarily resident director

Generally no restriction except for certain industries

Generally no restriction, however if the director is the sole legal representative of a company, he/she must be resident in Vietnam (Article 13.3, Law on Enterprises 2014)

Legal representative Not required Required Not required Required Not required Not required Not required Not required Not required Required




(b) Company secretary

Corporate secretary Not applicable Not applicable Not applicable Not applicable Must be an individual

Not applicable Must be an individual Must be an individual Not applicable Not applicable

Resident status Not applicable Not applicable Not applicable Not applicable Local resident Not applicable Philippine citizen and resident

Ordinarily resident Not applicable Not applicable

Minimum requirement Not applicable Not applicable Not applicable Not applicable 1 Not applicable 1 1 Not applicable Not applicable

3. Capital requirement

(a) Types of capital

Authorised capital (maximum amount allowed to be issued, can be revised any time).

Minimum B$25,000 Minimum amount of 4,000,000 Riel (approximately US$1,000)

Minimum total investment is above Rp10 billion (or its USD equivalent)

Generally no Minimum amount RM100,000 (registration fee payable is based on RM400,000)

(i) USD150,000 for manufacturing activity (ii) USD50,000 for service activity

No minimum authorised capital stock

Concept of authorised capital abolished in 2005

Minimum amount THB15

Generally none unless specifically provided by special law

(b) Paid up capital

Shares Minimum 2 shares Minimum 1,000 shares

Minimum 2 ordinary shares

Minimum share value is 2,000 Lao kip per share

Minimum 2 ordinary shares of RM1 per share

Minimum 2 shares Minimum 25% of the authorised capital must be subscribed at time of registration

Minimum 1 ordinary share

Minimum 3 shares Only applicable to JSC: minimum 1 ordinary share for each of the 3 founding shareholders

Forms of contribution into capital

Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash Cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash

Capital must be in local currency

Local currency and foreign currency (uncommon)

Local currency Can be in USD or local currency

Local currency Local currency Capital must be made in USD

Local currency Not mandatory Local currency Local currency or freely convertible foreign currency (Article 35.1, Law on Enterprises 2014)

Minimum paid-up capital/capital contribution

Minimum $1 per share

Minimum 4,000 Riel (approximately $1) per share

IDR2.5 billion (or its USD equivalent)

Certain business sectors require more than the amount of paid up capital

(i) General business: LAK 1 billion (equivalent to USD140,000) (ii) Concession business: Depending on type of activities

RM2 (unless specifically required for certain industries)


Generally, corporation engaged in domestic market enterprises with more than 40% foreign equity — minimum paid-up is $200,000

Those engaged in export enterprises (exports 60% or more of their outputs) is PHP5,000

Determined by the promoters of Company (or unless specifically required for certain industries)

Minimum THB5 per share (unless specifically required for certain industries)

Generally no minimum unless specifically provided by laws for certain industries such as real estate and banking

Appendix 1:






(b) Company secretary

Corporate secretary Not applicable Not applicable Not applicable Not applicable Must be an individual

Not applicable Must be an individual Must be an individual Not applicable Not applicable

Resident status Not applicable Not applicable Not applicable Not applicable Local resident Not applicable Philippine citizen and resident

Ordinarily resident Not applicable Not applicable

Minimum requirement Not applicable Not applicable Not applicable Not applicable 1 Not applicable 1 1 Not applicable Not applicable

3. Capital requirement

(a) Types of capital

Authorised capital (maximum amount allowed to be issued, can be revised any time).

Minimum B$25,000 Minimum amount of 4,000,000 Riel (approximately US$1,000)

Minimum total investment is above Rp10 billion (or its USD equivalent)

Generally no Minimum amount RM100,000 (registration fee payable is based on RM400,000)


No minimum authorised capital stock

Concept of authorised capital abolished in 2005

Minimum amount THB15

Generally none unless specifically provided by special law

(b) Paid up capital

Shares Minimum 2 shares Minimum 1,000 shares

Minimum 2 ordinary shares

Minimum share value is 2,000 Lao kip per share

Minimum 2 ordinary shares of RM1 per share

Minimum 2 shares Minimum 25% of the authorised capital must be subscribed at time of registration

Minimum 1 ordinary share

Minimum 3 shares Only applicable to JSC: minimum 1 ordinary share for each of the 3 founding shareholders

Forms of contribution into capital

Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash Cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash Cash and/or non-cash

Capital must be in local currency

Local currency and foreign currency (uncommon)

Local currency Can be in USD or local currency

Local currency Local currency Capital must be made in USD

Local currency Not mandatory Local currency Local currency or freely convertible foreign currency (Article 35.1, Law on Enterprises 2014)

Minimum paid-up capital/capital contribution

Minimum $1 per share

Minimum 4,000 Riel (approximately $1) per share

IDR2.5 billion (or its USD equivalent)

Certain business sectors require more than the amount of paid up capital

(i) General business: LAK 1 billion (equivalent to USD140,000) (ii) Concession business: Depending on type of activities

RM2 (unless specifically required for certain industries)


Generally, corporation engaged in domestic market enterprises with more than 40% foreign equity — minimum paid-up is $200,000

Those engaged in export enterprises (exports 60% or more of their outputs) is PHP5,000

Determined by the promoters of Company (or unless specifically required for certain industries)

Minimum THB5 per share (unless specifically required for certain industries)

Generally no minimum unless specifically provided by laws for certain industries such as real estate and banking



Appendix 1:


Prescribed contribution schedule

Not required Shares must be paid-up before registration

Shares must be paid-up before legal incorporation

(i) General business activity: Contribution schedule varies based on the type of activity, starting from 40% of paid-up capital within 90 days after enterprise license is granted and the rest of paid-up must be within 1 year (ii) Concession business: 20% of paid-up capital and within 90 days after concession license is granted and the 80% within 2 years

Not required 50% is to be remitted before company registration certificate issue and next 50% is within one year or before company renewal

Minimum 25% of total subscription must be paid-up provided that it is not less than PHP5,000

Not required Shares must be paid-up before registration (In case of registered capital more than THB 5 million, a document certifying receipt of the payment of paid-up capital from the bank is required when lodging incorporation application or in certain case of exemption, the bank certification shall be lodged with the MOC within 15 days from incorporation date)

Required

4. Constitutions/bye-laws

Documentation Memorandum and Articles of Association

Memorandum and Articles of Association

Articles of Association in the form of Akta Notaris




Articles of Incorporation and by laws



Charter

5. Execution of required documentation for registration

Procedures All documents must be notarised in the country where document is executed and translated into English or local language

All documents must be notarised, translated into local language and authenticated by Cambodian Embassy or the Consulate in the country where document is executed

All documents must be notarised in the country where document is executed and translated into local language

All documents must be notarised, translated into local language and authenticated by Lao PDR Embassy or the Consulate in the country where document is executed

All documents must be translated into English or local language and notarised or certified by the Registry of Companies in the country of incorporation

All documents are not required to be translated into local language if the original document is in English and only business activities must be translated into local language

All documents must be notarised, translated into English language and local language (for business activities and authenticated by Myanmar Embassy or the Consulate in the country where document is executed

All documents executed outside of the Philippines must be notarised, translated into English and authenticated by Philippines Embassy or the Consulate in the country where document is executed

All documents must be translated into English and notarised or certified by the Registry of Companies in the country of incorporation


All documents must be notarised, translated into local language and authenticated by Vietnam Embassy or the Consulate in the country where document is executed

6. Language requirement

Language requirement English (most common language used for official documents) and local language

Local language Local language Local language English/Bahasa Malaysia Local language and English

English English Local language Local language






Prescribed contribution schedule

Not required Shares must be paid-up before registration

Shares must be paid-up before legal incorporation

(i) General business activity: Contribution schedule varies based on the type of activity, starting from 40% of paid-up capital within 90 days after enterprise license is granted and the rest of paid-up must be within 1 year (ii) Concession business: 20% of paid-up capital and within 90 days after concession license is granted and the 80% within 2 years

Not required 50% is to be remitted before company registration certificate issue and next 50% is within one year or before company renewal

Minimum 25% of total subscription must be paid-up provided that it is not less than PHP5,000

Not required Shares must be paid-up before registration (In case of registered capital more than THB 5 million, a document certifying receipt of the payment of paid-up capital from the bank is required when lodging incorporation application or in certain case of exemption, the bank certification shall be lodged with the MOC within 15 days from incorporation date)

Required

4. Constitutions/bye-laws

Documentation Memorandum and Articles of Association


Articles of Association in the form of Akta Notaris




Articles of Incorporation and by laws



Charter

5. Execution of required documentation for registration

Procedures All documents must be notarised in the country where document is executed and translated into English or local language

All documents must be notarised, translated into local language and authenticated by Cambodian Embassy or the Consulate in the country where document is executed


All documents must be notarised, translated into local language and authenticated by Lao PDR Embassy or the Consulate in the country where document is executed

All documents must be translated into English or local language and notarised or certified by the Registry of Companies in the country of incorporation

All documents are not required to be translated into local language if the original document is in English and only business activities must be translated into local language

All documents must be notarised, translated into English language and local language (for business activities and authenticated by Myanmar Embassy or the Consulate in the country where document is executed

All documents executed outside of the Philippines must be notarised, translated into English and authenticated by Philippines Embassy or the Consulate in the country where document is executed

All documents must be translated into English and notarised or certified by the Registry of Companies in the country of incorporation


All documents must be notarised, translated into local language and authenticated by Vietnam Embassy or the Consulate in the country where document is executed

6. Language requirement

Language requirement English (most common language used for official documents) and local language

Local language Local language Local language English/Bahasa Malaysia Local language and English

English English Local language Local language




Corporate income tax return

(i) Frequency Annual Annual Annual Annual and quarterly Annual Annual Annual and quarterly Annual Annual and interim Annual

(ii) Statutory due date 30 June 31 March of the following year or 3 months after the company's fiscal year-end

4 months after the company's fiscal year-end

Quarterly filings by 10 April, 10 July and 10 October, and final filing by 10 March of the following year


3 months after the company's fiscal year-end i.e. by end June (Myanmar fiscal year runs from 1 April to 31 March)

Annual filing: 15th day of the fourth month after the company's fiscal year-end Quarterly filing: 60 days after the end of each of the first 3 quarters of the taxable year

Form C: 30 November of the following year Form C-S:15 December of the following year

Annual filing: 150 days after the company’s fiscal year-end Interim filing: 2 months after the end of the first six-months period

90 days after the company's fiscal year-end

(iii) Extension of time allowed?

No No Yes, can be extended up to 2 months

A formal notification (in prescribed format) is required to be submitted to the tax office

A formal pre-approval from the Tax Department is required

Yes, can be extended for 1 month for YA2014 tax returns due in year 2015, if return is furnished via e-filing

No No No No Only allowed in cases of natural disaster, conflagration, or accident

(iv) Assessment method Self-assessment Self-assessment Self-assessment Assessment Notice will be issued by the tax office

Self-assessment Assessment Notice will be issued by the tax office

Self-assessment, but the Philippine tax authority can make their tax assessment within the statute of limitations

Assessment Notice will be issued by the tax office

Self-assessment Self-assessment

(v) Filing method Electronic filing Paper filing Paper or electronic filing

Paper filing Electronic filing for filing by due date

For late or backlog cases, only paper filing is allowed

Paper or electronic filing Paper or electronic filing Paper or electronic filing Paper or electronic filing

Paper or electronic filing

(vi) Filing language English Khmer Indonesian Lao Malay (but English can be allowed)

English English English Thai Vietnamese

Corporate income tax — provisional/estimated tax payment

(i) Estimated tax filing requirement and due date

Estimated Chargeable Income (ECI) return, to be filed within 3 months after the company's fiscal year-end

No separate estimated tax filing requirement



Estimate of tax payable, to be filed no later than 30 days before the beginning of the tax basis period (and may be revised in the sixth and ninth months of the basis period)






(ii) Tax payment frequency and due date

Tax payment to be made with the ECI return filing

Monthly tax instalments, to be paid by the 15th day of of each month

Monthly tax instalments, to be paid by the 15th on the following month

Quarterly tax payments, to be made with the quarterly income tax return filing

12 monthly tax instalments, to be paid by the 15th day of each month beginning from the second month of the tax basis period

Quarterly tax instalments


Tax payment for the annual tax return coincides with the annual income tax return filing

Tax payment to be made within one month from the date of the Notice of Assessment, unless the company is paying via GIRO instalments

Interim tax payment, to be made with the interim income tax return filing

Quarterly tax payments, to be made within 30 days after the last day of the quarter

Appendix 2:

ASEAN tax filing requirements





Corporate income tax return

(i) Frequency Annual Annual Annual Annual and quarterly Annual Annual Annual and quarterly Annual Annual and interim Annual

(ii) Statutory due date 30 June 31 March of the following year or 3 months after the company's fiscal year-end


Quarterly filings by 10 April, 10 July and 10 October, and final filing by 10 March of the following year


3 months after the company's fiscal year-end i.e. by end June (Myanmar fiscal year runs from 1 April to 31 March)

Annual filing: 15th day of the fourth month after the company's fiscal year-end Quarterly filing: 60 days after the end of each of the first 3 quarters of the taxable year

Form C: 30 November of the following year Form C-S:15 December of the following year

Annual filing: 150 days after the company’s fiscal year-end Interim filing: 2 months after the end of the first six-months period

90 days after the company's fiscal year-end

(iii) Extension of time allowed?

No No Yes, can be extended up to 2 months

A formal notification (in prescribed format) is required to be submitted to the tax office

A formal pre-approval from the Tax Department is required

Yes, can be extended for 1 month for YA2014 tax returns due in year 2015, if return is furnished via e-filing

No No No No Only allowed in cases of natural disaster, conflagration, or accident

(iv) Assessment method Self-assessment Self-assessment Self-assessment Assessment Notice will be issued by the tax office

Self-assessment Assessment Notice will be issued by the tax office

Self-assessment, but the Philippine tax authority can make their tax assessment within the statute of limitations

Assessment Notice will be issued by the tax office

Self-assessment Self-assessment

(v) Filing method Electronic filing Paper filing Paper or electronic filing

Paper filing Electronic filing for filing by due date

For late or backlog cases, only paper filing is allowed

Paper or electronic filing Paper or electronic filing Paper or electronic filing Paper or electronic filing

Paper or electronic filing

(vi) Filing language English Khmer Indonesian Lao Malay (but English can be allowed)

English English English Thai Vietnamese

Corporate income tax — provisional/estimated tax payment

(i) Estimated tax filing requirement and due date





Estimate of tax payable, to be filed no later than 30 days before the beginning of the tax basis period (and may be revised in the sixth and ninth months of the basis period)






(ii) Tax payment frequency and due date

Tax payment to be made with the ECI return filing

Monthly tax instalments, to be paid by the 15th day of of each month

Monthly tax instalments, to be paid by the 15th on the following month


12 monthly tax instalments, to be paid by the 15th day of each month beginning from the second month of the tax basis period

Quarterly tax instalments


Tax payment for the annual tax return coincides with the annual income tax return filing

Tax payment to be made within one month from the date of the Notice of Assessment, unless the company is paying via GIRO instalments

Interim tax payment, to be made with the interim income tax return filing

Quarterly tax payments, to be made within 30 days after the last day of the quarter




Audited financial statements

(i) Obligation to prepare and file audited financial statements?

Yes, filing of audited financial statements are only required for public companies and branches of foreign companies

No, unless qualifies for audit requirement

Yes (in principle, companies with more than IDR25 billion in assets or revenues are obliged to have an audited financial statements)

Yes Yes Yes Yes Yes, unless qualifies for audit exemption

Yes Yes

(ii) Statutory due date — same due date as corporate income tax return?

No No No Yes No No Yes No The audited financial statements must be filed within 1 month from the date of the Annual General Meeting (AGM) which the AGM must be held within four months of the fiscal year ended

Yes

(iii) To be submitted together with corporate income tax return?

Yes No Yes Yes No Yes Yes Yes Yes Yes

Withholding tax return

(i) Filing requirement On payments made to non-residents

On payments made to residents and non-residents taxpayer

On occurrence of withholding tax transactions

On payments made to non-residents


On payments made to non-residents and domestic vendors

On payments made to non-residents and local vendors



On payments to non-residents

(ii) Statutory due date Within 14 days from date of payment or deemed payment

Monthly filing by 15th of the following month

Payment by the 10th of the following month and monthly filing by 20th of the following month

Within 10 days from date of payment

Within 1 month from date of payment


Monthly filing by 10th of the following month (if paper/manual filing) Monthly filing by 10th to 15th of the following month (depending on the group classification under the Electronic Filing and Payment System staggered filing classification, if electronic filing)

By 15th of the second month from the date of payment



Transfer pricing documentation

(i) Need to prepare and maintain transfer pricing documentation?

No Not applicable Yes No Yes No Yes Yes Yes Yes

(ii) To be submitted with corporate income tax return?

Not applicable Not applicable No, but to be submitted upon request

Not applicable No, but to be submitted upon request


No, but to be submitted upon request



Also, a declaration of related-party transactions must be filed with the annual corporate income tax return

Appendix 2:






Audited financial statements

(i) Obligation to prepare and file audited financial statements?

Yes, filing of audited financial statements are only required for public companies and branches of foreign companies

No, unless qualifies for audit requirement

Yes (in principle, companies with more than IDR25 billion in assets or revenues are obliged to have an audited financial statements)

Yes Yes Yes Yes Yes, unless qualifies for audit exemption

Yes Yes

(ii) Statutory due date — same due date as corporate income tax return?

No No No Yes No No Yes No The audited financial statements must be filed within 1 month from the date of the Annual General Meeting (AGM) which the AGM must be held within four months of the fiscal year ended

Yes

(iii) To be submitted together with corporate income tax return?

Yes No Yes Yes No Yes Yes Yes Yes Yes

Withholding tax return

(i) Filing requirement On payments made to non-residents

On payments made to residents and non-residents taxpayer

On occurrence of withholding tax transactions




On payments made to non-residents and local vendors



On payments to non-residents

(ii) Statutory due date Within 14 days from date of payment or deemed payment


Payment by the 10th of the following month and monthly filing by 20th of the following month


Within 1 month from date of payment


Monthly filing by 10th of the following month (if paper/manual filing) Monthly filing by 10th to 15th of the following month (depending on the group classification under the Electronic Filing and Payment System staggered filing classification, if electronic filing)

By 15th of the second month from the date of payment



Transfer pricing documentation

(i) Need to prepare and maintain transfer pricing documentation?

No Not applicable Yes No Yes No Yes Yes Yes Yes

(ii) To be submitted with corporate income tax return?

Not applicable Not applicable No, but to be submitted upon request






Also, a declaration of related-party transactions must be filed with the annual corporate income tax return



You and the Taxman


Divestments: the new black? Darryl Kinneally and Sandie Wun discuss the increasing

use of divestments as a growth strategy and the benefits of tax optimisation to companies as they prepare for a

potential divestment

Much has been said about acquisitions as a strategy to increase shareholder value. On the flip side, the positive impact of divestments should not be

underestimated. Are divestments, as a growth strategy, the new black?

Divesting is a viable strategy to fuel growth, according to EY’s Global Corporate Divestment Study 2015. The study reveals that 74% of global respondents surveyed are using funds from their most recent divestments to drive growth. The results are even more pronounced amongst Asia-Pacific respondents: 86% of them reported reinvesting the funds from their divestments in their core businesses, acquiring new ones or exploring new products, markets or geographies.

While there is generally a concurrence that divesting can catalyse growth, global and Asia-Pacific companies diverge when it comes to what they value in that strategy. Half of the global respondents in EY’s survey revealed that executing deals quickly is preferred over maximising the sale price. Companies in Asia-Pacific, however tread more carefully, with 59% favouring value over speed in a divestment.





Perhaps the backdrop against which Asia-Pacific companies operate can explain this divergence. By nature, Asia-Pacific companies are more cautious in executing a disposal. As the sale of assets may be culturally seen as a failure, a decision on carving out any part of the company is only reached after much deliberation.

In Asia, there is increasingly a changing of the guard as the next generation of family members takes over the helm or, in some instances, professional managers are being brought in to run previously tightly-controlled family firms. This change in stewardship may result in an increased willingness to create value by divesting non-core assets. For example, a listed vendor might be trading at a certain multiple whereas a buyer with greater scale in the same industry may be willing to make a strategic acquisition and pay a higher multiple for the asset.

With 47% of companies in the Asia-Pacific region surveyed expecting an increase in the number of unsolicited approaches next year, non-Asia-Pacific buyers will need to find a balance between value and speed when dealing with sellers in the region.

Tax considerations

Tax can impact the value achieved on divestment. It is important to sort out the business’ tax affairs prior to commencing the sale process by ensuring that the tax structure is efficient from the seller’s perspective and attractive to a potential buyer.

In considering the acquisition structure in a transaction, the implications on exit need to be taken into account — from both the perspectives of the current buyer and potential future buyers (in the event of a future divestment). Whilst it may not be possible to consider the particular requirements of all potential buyers, it is important to be flexible with respect to a future exit. Given their typical time horizon for investments, this is something which private equity investors do particularly well and corporates are increasingly adopting a similar approach.

As foreign direct investment into the Asia-Pacific region increases and changes over time, tax authorities in the region have also stepped up their level of scrutiny resulting in evolving tax trends, tax risks and tax costs.

Multinational companies from the west are usually more familiar with tax and regulatory concepts such as fiscal unity, hook stock, cross-border mergers, changing registered seat of companies, compared to their Asian counterparts. The diverse business landscape in Asia — in terms of language, culture, legal systems, tax legislation and business environment — poses challenges for companies operating across the region. Knowledge gained in one country — such as on statutory registration procedures, financing and holding acquisition structures and tax rules — may not be able to be applied to another country. This complicates the sale of a business within Asia as

the same pre-sale tax optimising strategies cannot be replicated. Both global and Asia-Pacific companies believe the form of a transaction and whether the sale should proceed pivot on tax structuring and tax planning. Sixty-four percent of global companies (and 63% of Asia-Pacific companies) in our survey undertook pre-sale tax optimisation strategies, with 20% of the global companies (and 23% of Asia-Pacific companies) believing this was the most important initiative for adding value (see Chart 1). Of the total companies surveyed, 16% and 19% of global and Asia-Pacific companies respectively did not optimise the tax structure pre-sale but said they would have benefitted most from having done so. For example, an inability to achieve a tax deduction for funding costs related to an acquisition under an existing structure may result in an unattractive after-tax return to the buyer.

Source: EY Global Corporate Divestment Study 2015

64%

20%16%

63%

23%19%

0%

10%

20%

30%

40%

50%

60%

70%

Optimised the taxstructure pre-sale

Said it was the mostimportant initiative for

additing value

Did not do it but saidthey would have

benefited most fromhaving done so

Global respondents Asia-Pacific respondents

Chart 1

“It is important to sort out the business’ tax affairs prior to commencing the sale process by ensuring that the tax structure is efficient from the seller’s perspective and attractive to a potential buyer.”


Legal optimisation also has related tax consequences. In recent divestments, 66% of Asia-Pacific companies surveyed carved out assets into a new legal entity prior to the sale with 21% adding that it was the most important initiative for adding value to the sale (see Chart 2). In an asset carve-out, the tax implications extend not only to corporate income tax but also to indirect taxes and potentially stamp duty. These could be mitigated through careful planning. In some countries, the implications of transferring employees also have to be considered carefully from both a tax and legal perspective.

What next?

Companies considering a divesture in the next 12 to 24 months should anticipate transitional service needs such as transitional IT support to avoid IT separation issues; consider global tax synergies; resolve open tax controversies prior to closing; develop an efficient transaction structure; and anticipate changes in the future effective tax rate resulting from these structure changes, amongst others. These would not only enhance the value of the carve-out business to prospective buyers, but also preserve the value of the deal and maximise the global after tax sales proceeds.

Source: EY Global Corporate Divestment Study 2015

25%

20%

41%

23%

38%

21%

35%

57%

62%

63%

64%

66%

0% 20% 40% 60% 80%

Extracting working capital

Operationally separating the businesspartially or fully

Enhancing revenue (e.g., productimprovement or distribution expansion)

Optimising tax structure

Operational improvements to reducecosts/improve margin

Optimising legal structure (e.g., puttingcarved out assets into a new legal

structure)

Which of the following pre-sale value-creation initiativesdid you undertake?

Undertook during last divesment

Percentage of respondents that undertook initiative that said it was most important for enhancing sale value

Chart 2

Undertaking a vendor due diligence and planning a value creation road map is essential to identifying areas for tax optimisation. This pre-sale health check helps to identify areas of improvement the company could make pre-sale to preserve or increase the value of the potential sale. Once the opportunities are identified, the company should undertake proper tax optimisation and structuring. This process is akin to inspecting a house and performing minor renovations before the sale to increase the price it can fetch.

Growth strategies that worked in the past may no longer be the most efficient way to extract maximum value for shareholders in a new economy where businesses are pressured to improve portfolio performance and shareholder returns. Divestments can allow a group to not only realise value, but also create further value by deploying that capital into more exciting opportunities. Breaking up may not be such a hard thing to do after all.

Darryl Kinneally Partner, Transaction [email protected]

Darryl has over 25 years of tax experience in both the corporate and professional services environments in Asia-Pacific. In the area of transaction tax, he is experienced in due diligence, cross-border structures, M&A, private equity and the taxation of infrastructure projects.

Sandie Wun Director, Transaction Tax [email protected]

Sandie has more than 15 years of tax experience, including an assignment with the EY London office where she set up the inaugural Singapore Tax Desk as part of EMEIA’s International Tax Services practice. In the area of transaction tax, she advises companies on the tax implications of corporate restructuring, investment decisions and M&A.

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You and the Taxman


Business models

“The combination of a central approach, with a regional or local customisation

component, is an approach that combines efficiency and consistency with the

appropriate transfer pricing documentation compliance and tailor-made

risk management.”

Singapore has long been seen as a preferential gateway into the lucrative ASEAN markets and the wider Asia-Pacific region. It has

seen significant inbound investment, thanks to its attractive tax regime, tax incentive schemes, a stable government, well-educated workforce, strong infrastructure and easily-accessible location. Indeed, multinational enterprises (MNEs) in Singapore have benefited from preferential tax rates, free trade agreements and access to readily available funding.

However, the potential for misuse of the incentive schemes and the low corporate tax rates in Singapore has led to concerns around the substance of business structures that create new Singapore entities.

In response, the Inland Revenue Authority of Singapore (IRAS) is closely analysing these business models, along with other government bodies such as the Economic Development Board (EDB) and the International Enterprise Singapore (IES), to jointly ensure that incentive compliance is being observed by determining that the

Singapore centralised business models and transfer pricing documentationStephen Lam discusses the centralised approach to preparing transfer pricing documentation especially in light of developments in transfer pricing documentation requirements




appropriate level of “substance” is held in the Singapore entity from both a quantitative and qualitative standpoint. An enabler of this enforcement has been the use of transfer pricing documentation to justify the arm’s length nature of intercompany transactions that typically facilitate these models.

The revision of the Singapore transfer pricing guidelines in January 2015 can partly be attributed to this enforcement and follows the trend for contemporaneous transfer pricing documentation compliance in jurisdictions across the Asia-Pacific region. Furthermore, the revised documentation requirements from the Organisation for Economic Co-operation and Development (OECD) under Action 13 of its Base Erosion and Profit Shifting (BEPS) project will increase disclosure of information within the transfer pricing documentation. While many jurisdictions broadly follow the OECD transfer pricing guidelines, there are often additional local requirements that will differ between countries. This

has given rise to many challenges for Singapore-based multinationals to ensure compliance across all the jurisdictions that they operate. Hence, a holistic and consistent approach is beneficial to mitigate potential risk, manage cost and maintain consistency.

Increased importance of transfer pricing

Put simply, due to different corporate tax rates between tax jurisdictions, multinational businesses can divert taxable profits to jurisdictions with lower corporate tax rates through the use of transfer pricing. This has brought transfer pricing to media attention, with accusations toward MNEs of not paying their “fair share” of taxes in various locations. This has resulted in public backlash towards certain companies.

As a result of certain business restructuring undertaken by certain MNEs, the OECD was tasked to report back to the G20 group of countries on how to resolve this situation. The result was the BEPS initiative whereby 15

specific actions are being developed to help bridge the perceived gap between changing global business models (like those within the digital economy) and outdated national tax laws that are used to govern them. These gaps in tax laws have been exploited to generate double non-taxation, undermining the fairness and integrity of local tax systems.

Action 13 of the BEPS project is of particular interest given its discussion on transfer pricing documentation. It contains revised standards for transfer pricing documentation which will be included in the OECD Transfer Pricing Guidelines. The transfer pricing documentation (“the Report”) requires MNEs to include a high-level overview of their global business operations and transfer pricing policies in a “master file” to be made available to all relevant country tax administrations. Moreover, the transfer pricing guidance requires that detailed information on all relevant material intercompany transactions are to be included in a “local file” for each operating entity which will be provided to that local country’s tax administration.


The country-by-country reporting (CBCR) template requires MNEs to report the amount of revenue (related and unrelated party), profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets annually for each tax jurisdiction in which they do business. In addition, MNEs are also required to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity conducts. This information is to be made available to the tax authorities in all jurisdictions in which the MNE operates.

The new guidance provided in the Report with respect to the master and local files has differences with the current documentation requirements prescribed under the OECD Transfer Pricing Guidelines. The CBCR template introduced in the guidance is an entirely new reporting requirement.

The OECD believes transfer pricing documentation will allow the taxpayer to:

• Articulate consistent transfer pricing positions

• Provide tax administrations with useful information to assess transfer pricing risks

• Make determinations about where audit resources can most effectively be deployed

• Provide information to commence and target audit enquiries

The ultimate goal is to allow “tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments”.

Contemporaneous documentation

In response to the OECD, the IRAS released a revised version of its 2006 transfer pricing guidelines, i.e., the 2015 Singapore TP guidelines on 6 January 2015. The most striking aspect of the 2015 Singapore TP

guidelines is that the IRAS requires contemporaneous transfer pricing documentation (”the Report”) to be maintained by the taxpayer. Specifically the IRAS has included dollar value thresholds for related party transactions, which provide further clarification to the 2006 Singapore guidelines, and will warrant the preparation of the Report when these thresholds are exceeded.

The 2015 Singapore TP guidelines are broadly in line with the 2010 OECD guidelines. The 2015 Singapore TP guidelines have a similar two-tiered approach towards documentation to BEPS Action 13 with requirements for group level documentation and entity level documentation. However, there is no requirement for CBCR at this point in time in Singapore. Nevertheless, the secondary mechanism for filing of CBCR, as contemplated in the OECD’s CBCR implementation package, requires taxpayers that are “ultimate parent entities of an MNE” to make their CBCR submission in a different jurisdiction.

Contemporaneous requirements for documentation have become the norm in the region. Countries such as China, Korea, Indonesia, Malaysia, Philippines and Vietnam have all released documentation requirements over the past five years. Other countries, such as Thailand, are also following this direction.

Typically the requirements for each of these countries follow the OECD transfer pricing guidelines and BEPS requirements, with the addition of certain local information to be included within the report structure. Moreover, certain countries are also evaluating the implementation of the CBCR requirements or a version of the OECD approach.

Against these mounting requirements for transfer pricing disclosure and compliance, Singapore headquartered companies will need to deal with local Singaporean documentation requirements as well as documentation requirements from the other countries that they operate in. In discussions with clients, we see these common concerns emerging in order to manage transfer pricing compliance requirements:

• Cost: Compliance with documentation rules across many countries can be cost prohibitive unless structured and managed properly; risk weighting the local requirements is highly important.

• Complexity: Companies have increasing complex intercompany relationships with a myriad of intercompany flows in highly integrated patterns. Companies will need to manage these relationships and ensure coherence across the group.

• Coordination: It may be difficult to coordinate a company’s local teams, with each team driving its own agendas and what it feels is important for documentation.

• Multiple jurisdictions: Understanding the disparate and evolving documentation requirements across several jurisdictions is a complex task, for example the nine comprehensive “Related party Transaction Annual Reporting Forms” in China or the International Dealing Schedule in Australia. Soon, companies will also have to deal with the requirements under BEPS Action 13.

• Maintenance: Devising an updated strategy for transfer pricing documentation is a critical component of any global documentation effort. Lack of a multi-year maintenance strategy typically reduces the potential long-term benefit that documentation can provide.

• Efficiency: Given an increasing number of deadlines for local transfer pricing documentation in a particular calendar year, an efficient approach is required to ensure all deadlines are met.

• Consistency: As there is an increase in information sharing between tax authorities, it is important to have a coherent approach to avoid potential double tax situations from occurring.

As a result, there has been a need for a more coordinated effort to managing transfer pricing documentation across an MNE group.




Centralised documentation approach

In order to manage the issues described above, global or regional headquartered companies in Singapore should consider a regional or global centralised approach to their transfer pricing documentation. The centralised approach is geared towards preparing a transfer pricing report on a global or regional (e.g., Americas, European or Asian) basis; or with reference to a particular business unit or division that will be drafted in line with the OECD transfer pricing documentation requirements.

Module 1:Global/regionalindustryanalysis

Module 2:Global company analysis and group strategy

Module 3:Inter-company transactions and TP policies

Sub-modules: Per transaction type including arm’slength conclusions

Repository: Underlying supporting documents such as intercompanyagreements, operational procedures, invoices, etc.

Module 4:Functionalanalysis/process orvalue chainanalysis

Module 5:Economicanalysis(selection ofappropriatemethods)

Module 5:Regionalcomparables/bechmarkinganalysis

CoreReport

Such an approach may have already been adopted by many MNEs. Loosely termed as a “group” or “Master” file, this approach may follow requirements such as those in the EU Joint Transfer Pricing Forum. However, such documents would have to be rethought on the basis of the OECD’s revised approach under BEPS Action 13 since the new requirements would increase the level of information at both the central and local files. This will require headquarters to adopt greater consistency in its coordination.

1However, for local Singapore requirements, only transactions with the Singapore entity will need to be included.

As a result, the regional or global transfer pricing documentation report will need to be customised based on specific local rules and requirements. We believe that the combination of a central approach, with a regional or local customisation component, is an approach that combines efficiency and consistency with the appropriate transfer pricing documentation compliance and tailor-made risk management.

Such an approach also assists with potential limited resources that a group has across the region by centralising transfer pricing expertise at a central

location, the headquarters. On a regional basis, local resources could play an administrative role in managing the local transfer pricing documentation in order to meet the local filing or disclosure requirements.

The core report (see diagram) can be provided to all tax authorities when requested and would be in line with both the OECD’s BEPS requirements and the IRAS’ local documentation requirements for Singapore. This would be equivalent to the “Masterfile”. The description of the group should reflect

the responsibility of the Singapore operation, i.e. if Singapore is a global or regional headquarters, a business unit or division. The intercompany transactions and transfer pricing policies covered within this report should reflect the majority of intercompany transactions within the group or business unit1. Where practical, the benchmarking analyses should reflect a regional or global approach for the intercompany transactions tested. The core report should be drafted as separate modules as shown above, such that

it can be leveraged for local transfer pricing documentation where the group requires it. Submodules should also be drafted which will focus on a particular type of transaction i.e. a management service fee or a loan. Finally, a repository of underlying documents should be kept in order to support the core report and to demonstrate that the transfer pricing policies described within the report have been implemented consistently. This should include documents such as intercompany agreements, procedure manuals, invoices, etc.


Stephen Lam Partner, Transfer Pricing [email protected]

Stephen’s experience includes designing, implementing and supporting tax and transfer pricing models in a variety of industries including apparel, e-commerce, fast moving consumer goods, financial services, hi-tech, logistics, pharmaceutical and shipping. Stephen has also worked in London where he spent over nine years advising European MNCs on their transactions with their Asian operations.

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The core report should provide the flexibility to satisfy the transfer pricing requirements for each local entity, whereby each local entity will broadly fall within two following approaches. Where a country has minimal or no transfer pricing documentation requirements certain modules of the core report may be relied upon (i.e., group/division analysis, industry analysis and certain modules that reflect the local intercompany transactions undertaken by that entity). Where countries have defined transfer pricing guidelines the core report would form the basis for local documentation with additional localisation. Such localisation may include local company information, functional analysis, benchmarking or financial information.

Further considerations should also be evaluated with the implementation of any local documentation:

• Preparation of local transfer pricing documentation should be evaluated in conjunction with potential penalty protection that this documentation could offer if an adjustment is levied against the local entity.

• Certain countries specify the requirement for local comparables to be conducted, while other countries allow the use of regional comparables.

• Consideration for the language of the local document should also be evaluated based upon the local documentation requirements.

• Certain countries will require the completion of transfer pricing disclosure forms that will accompany completed tax returns, these may need further certification by tax return preparer.

• Local company information• Functional analysis• Local benchmarks• Financial information• Local compliance requirements

Core Report

Local Report

Local documentation

• It should also be considered whether certain transactions can be aggregated when performing benchmarking analyses, i.e., if the local entity undertakes a number of intercompany transactions (such as manufacturing, research and development and may license intellectual property), could these transactions be aggregated under one analysis or will separate analyses be required for each transaction?

Conclusion

It has been eight years since Singapore first introduced transfer pricing guidelines and almost five years since the last transfer pricing circular has been issued. During this eight-year period there have been many international transfer pricing developments and the noted expansion to the original OECD transfer pricing guidelines in areas such as documentation for CBCR and intangibles. In addition, there are five action items on the OECD BEPS Action Plan which are specific to transfer pricing. The IRAS has also reacted to these changes with its own increased focus on transfer pricing.

The approach outlined in this article will assist groups to manage their documentation from a central location, while ensuring that each affiliate meets their local requirements. Centralising the management of documentation ensures coherent and consistent messaging across the group which is increasingly important given the incoming BEPS requirements. Consistency is also important given that tax authorities are increasingly sharing information across borders and may become an issue where a double tax issue exists. Centralisation of documentation will also assist in the operationalisation of a company’s transfer pricing. In this respect, having a systematic approach to transfer pricing documentation can ensure that a company is held accountable for the policies that they have documented. Not only should companies monitor updates by the OECD on its recommendations for anticipated new reporting requirements, but they should also keep abreast of updates on the reporting requirements in the countries in which they operate.




Top four customs implications of

cross-border structuring

Shubhendu Misra and Donald Thomson highlight the customs issues that need to be considered in

redesigning operating models in the region, with a focus on Singapore

The term “operating model” refers to those processes and policies that enable a business to organise resources and structure the flow of goods and services from start to finish. To

achieve profitable growth, an operating model must be efficient.

Implementing new operating models in Asia-Pacific can be challenging due to the region’s complex tax landscape. As such, companies do focus on the practical indirect tax and customs impact of changes in their physical and financial supply chain. However, Singapore is often not given sufficient consideration from a customs and indirect tax perspective. What are the key customs implications when changes are made to an operating model in Singapore?

Singapore does not impose customs or excise duty on most goods, though there are exceptions. Singapore’s status as an entrepot, however, has led it to be mistakenly viewed as having a low-risk customs environment for implementing alternate transactional models as part of broader regional or global restructuring exercises.

The reality is Singapore’s customs environment can be just as complex as other countries in Asia-Pacific.

Business models


Therefore, redesigning transactional models with a Singapore element requires careful planning.

The top four Singapore customs issues encountered in changing transactional models and flows of products and services are:

• Importer and Exporter of Record considerations

• Customs valuation challenges in transfer pricing design

• Risk of losing Free Trade Agreement benefits

• Customs duty relief and programmes

1. Importer and Exporter of Record considerations

National customs legislations usually define the entities that are permitted to import or export goods. These are commonly known as the Importer of Record (IOR) and the Exporter of Record (EOR). In several instances, only the owner of goods can act as the IOR or EOR.

In Singapore, importers and exporters need to register with the Accounting and Corporate Regulatory Authority (ACRA), have a Unique Entity Number and activate their account with the Singapore Customs in order to make a customs declaration using the TradeNet platform.

While it is not necessary for importers to own the goods, this creates challenges for business restructuring models where the principal is required to hold the title to the goods for as long as possible, for example in tolling models. Further, importers have to hold registrations or licences in their name for regulated goods such as food products and pharmaceuticals.

To address these issues, local agents can act as the IOR or EOR. But businesses must ensure that they do not lose the input credit of import Goods and Services Tax (GST) in the process. In these situations, the transactional model may have to be modified by transferring the title before importation to a local entity such as the contract manufacturer or the limited risk distributor. Alternatively, businesses can utilise other available facilitations like the section 33(2) agent process.

2. Customs valuation challenges in transfer pricing design

The transfer pricing design of a centralised business model is critical to its success. Not only must it deliver benefits, but it must also be consistent across borders and defensible if challenged by tax authorities.

Business restructuring can significantly impact the transfer pricing profile of local entities as the principal entity takes on additional functions, assets and risks. This can change the transfer price used for intercompany purchases and sales, ultimately affecting the customs value.

Customs and excise duties are generally calculated by applying the product-specific duty rate on the “customs value” of the imported goods. Customs value is also relevant for calculating other indirect taxes applied on imports.

The World Trade Organization Customs Valuation Agreement (WTO CVA) sets out the legal framework for determining the customs value of imported goods including for transactions between related parties. Most countries,

including Singapore, have adopted the WTO CVA as the principal basis for their national legislation relating to customs valuation. The WTO CVA outlines six different methods of determining customs value and their order of application or preference. Most cross-border transactions across the world use the Transaction Value Method of customs valuation which is based on the “price paid or payable”. In most cases, this is the sale price of the imported product, subject to certain adjustments.

Although most imported products do not attract customs or excise duty in Singapore, they still attract import GST which is based on the Cost Insurance and Freight (CIF) value of the goods. Therefore, significant price changes usually attract attention of Singapore Customs.

The incorrect or under-declaration of value is an offence, which is subjected to the recovery of the duty, short-paid GST or both. Penalties could also be imposed, especially when the offence is discovered during post-importation audits.

Under a business restructuring project, it is necessary to consider if the relationship between the parties has influenced the “price paid or payable” of the goods. As a general rule, a 5% increase or decrease in cross-border product pricing could trigger an enquiry from Singapore Customs. If the price of goods has changed significantly, businesses should engage with Singapore Customs to explain the new structure and basis of the pricing change.

“Singapore’s customs environment retains complexity and risk consistent with many other customs jurisdictions in Asia Pacific. Careful planning is required when making changes to transactional models relating to Singapore.”




Deferred title transfer arrangements under a new transfer pricing design could also spark the need to adopt an alternative customs valuation methodology. This methodology should generally be agreed in advance with Singapore Customs.

A transfer pricing design can also involve the implementation of a royalty, service fee or other form of non-goods payment between the Singapore entity and the overseas principal company. Article 4 of the Singapore Customs (Valuation) Regulation provides for additions or inclusions to the price actually paid or payable for the imported goods under the provisions of the Transaction Value Method (Method 1).

Even where there may be no duty or revenue implications, Singapore Customs has indicated that it would still prefer to analyse the facts to arrive at the correct technical treatment. Accordingly, non-goods payments should be underpinned by careful contractual planning to ensure that the payment does not relate to imported goods. If it does, then appropriate treatment should be determined and declared to Singapore Customs.

Finally, use of a transfer pricing method that assigns a target operating margin to manufacturing and sale entities very often requires year-end adjustments to align the return for such entities to the targeted range. Should corresponding adjustments then need to be made to the customs value declared for imports through the year?

If a Customs audit establishes that the importer has under-declared the value of its import, the importer will have to pay the short-paid duty and import GST. It may also be fined and imposed with penalties. Although the short-paid duty and import GST could affect the

company’s cash flow, it can generally claim input GST credits against its output GST via its GST returns. The fine is not recoverable even though it can be mitigated under a voluntary disclosure.

In general, companies can take up a GST short payment permit with Singapore Customs and pay back the GST undercharged for the affected shipment. Where the post-importation transfer pricing adjustment could affect the shipments within the year, companies can write to Singapore Customs formally to explain the reason, and apply for a GST short payment permit to cover each shipment affected in the previous year. However, this can be administratively cumbersome. Alternatively, the Singapore Customs’ Voluntary Disclosure Programme (VDP) allows individuals or companies to voluntarily disclose, in good faith, errors and omissions in the declaration for past importations in exchange for a reduction or waiver of penalties.

If companies foresee that such post-importation transfer pricing adjustments will recur every year, affecting large volume of imports, they should proactively seek Singapore Customs’ opinion on how to appropriately determine the value of the goods going forward. They may also want to seek Singapore Customs’ instructions on the documentation required to support the value.

3. Risk of losing Free Trade Agreement benefits

Free Trade Agreements (FTAs) have become a central feature of trade competitiveness, with ASEAN leading the Asia-Pacific region in negotiating and implementing FTAs over the last two decades. Singapore has also signed a number of bilateral FTAs

which supplement, or in some cases duplicate, the ASEAN multilateral FTAs, for example the China-Singapore FTA or the India-Singapore Comprehensive Economic Cooperation Agreement.

FTAs offer duty reductions and increased market access, providing significant opportunities to companies looking to restructure their supply chains. At the same time, companies which are already utilising FTAs need to ensure that the modified financial and physical transaction flows do not result in a loss of the FTA privileges in the importing FTA partner country.

Eligibility to FTA benefits broadly depends on two main factors:

• Local content

• Appropriate certification or documentation and direct physical shipments

Local content refers to the value of materials, labour and production expenses incurred in producing finished goods and which originate from within FTA partner countries. Most FTAs require a minimum local content for the products to be eligible for duty reductions in destination countries.

Once a product has the minimum prescribed local content, the exporter needs to apply for and obtain a certificate of origin from Singapore Customs, which the importer in the destination country can use to claim duty reductions.

Third-party invoicing is a common approach under most FTAs where goods are shipped directly from one member country to another, but invoiced through a third country (the intermediary in the transaction). Although most FTAs do not prohibit third-party invoicing, there is still a risk that the goods may be prevented from enjoying preferential treatment.


To avoid confusion, certain FTAs have provisions specifically allowing third country invoicing. Whether the third country invoicing entity is another member country or not may also impact qualification status.

Companies should provide clear documentation and sufficient explanation to assist port officials in understanding the new arrangements to allow continuation of FTA benefits. In designing revised financial and transaction flows under a business restructuring, companies need to ensure that the products flowing across borders continue to qualify under minimum local content requirements.

Business restructuring often results in a change of transfer prices which may impact the profit levels used for the local content qualification purposes. It is not uncommon for companies to erroneously obtain certificates of origin when they no longer qualify for the certificate issuance.

4. Customs duty reliefs and programmes

Countries across the world offer several forms of import duty and tax relief especially for export oriented manufacturing and processing. In Singapore, these regimes consist of the following:

• Free Trade Zones

• Zero-GST warehouses

• Licensed warehouses and factories

• Major Exporter Scheme

The choice of which regime to use depends upon the specific activities to be undertaken and the nature of processing, location considerations, quantum of investment, and sourcing and distribution footprint whether domestic or foreign. In restructuring, companies need to factor in the continuity of such beneficial regimes under the transformed business, as well as other transitional matters.

Conclusion

Singapore’s customs environment retains complexity and risk consistent with many other customs jurisdictions in Asia Pacific. Careful planning is required when making changes to transactional models relating to Singapore.

Shubhendu Misra Partner, Indirect Tax — Global [email protected]

Shubhendu has over 20 years of experience in providing indirect tax and customs advisory services, covering areas such as excise taxes, customs valuation, classification, preferential and non-preferential origins, and trade programmes. He serves clients in a diverse range of industries including the consumer goods, pharmaceuticals, chemicals and automotive sectors across Asia-Pacific.

Donald Thomson Director, Indirect Tax — Global [email protected]

Donald has more than 20 years of experience in providing indirect tax, customs advisory and business restructuring services. He serves clients in a broad range of industries including the consumer goods, pharmaceuticals, chemicals and automotive sectors.

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Embracing a data driven era

Tan Lee Khoon and Michele Chen discuss the challenge tax departments face in mining and managing data for

better decision making

As big data explodes across the corporate world, tax departments now have access to a greater amount of information. How can they harness the use of big data to make

better decisions?

IT research firm Gartner classifies big data as “high-volume, high-velocity and high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making”. For tax departments, the challenge is to sieve out the right data and make sense of it. This is especially critical to tax compliance.

Tax departments today are often inundated with a staggering amount of data as information floods in from different sources such as third parties, internal departments and business partners. Often, these parties collect their own data based on what is relevant to them.

However, these data may not be packaged or organised in the right way to meet their tax compliance needs. More often than not, it is laborious to reconcile the data across the various functions and businesses and is almost impossible to validate the data because every function uses a different basis to capture the data.

Business models


The availability of big data and information is therefore both a blessing and a curse. The more data there is, the more accurate the analysis that can be done, leading to new knowledge and better assessments and decisions. But wading through the influx of data to extract the correct and meaningful data is the challenge.

As a result, tax teams may struggle to put together the correct and critical tax-relevant data for decision-makers and/or tax authorities.

Presently, tax departments are most concerned with the growing compliance burden and increasing reporting requirements laid down by tax authorities. There is also an increase in focus on data quality and tax risk management. Harnessing big data will provide opportunities to add value to the tax function through planning and trend analysis and will help to minimise risk and inefficiency. This will require a transformation in what the tax function does and how it does it. Tax teams can no longer work in silos and will have to collaborate with the technology teams to resolve the challenges presented by big data.

Unfortunately, many organisations are guilty of mismanaging their data and information.

There are three key success factors to help realise the potential of tax data management and for the tax function to give a correct picture of tax risks and deliver value. These are:

1. A robust information strategy aligning business partners and internal functions with what information is needed to meet tax compliance.

2. A coherent architecture to reorganise the tangled web of legacy systems to enable data to flow more freely across the organisation and ensure that the correct data is being reported to the tax authorities.

3. Defined processes outlining the activities required to capture accurate data for tax reporting and compliance and to establish ownership for those activities.

These three elements are critical to turn raw data into results that are valuable for decision-makers to make the right judgments and assessments around their tax risks and tax positions.

A robust information strategy

Data management cuts across many areas, including finance, operations, sales and marketing. No single function can effectively manage the wealth of data available and drive strategic decision-making alone. Organisations have to coordinate data requirements from both existing and potential users, including the tax function. In other words, information management should follow a multidisciplinary approach.

Various functions capture different facets of the same information. For example, in the customer database, sales personnel are interested in sales figures and trends while finance are more interested in the cost of goods and accounts receivables. All these functions capture data that is relevant to tax in one way or another. But because the data has not been structured specifically for tax compliance, a lot of data cleansing and manipulation is required before it can be used in a tax return.

Tax teams need clarity around the level of data accuracy which is needed for tax compliance purposes, and understand which data is more unstructured and directional for tax risk quantification. In contrast, a marketing director who needs customer’s information for behavioral analysis, does not face the same degree of data integrity or accuracy as his report simply needs to be “directionally (and not absolutely) correct”.

A step towards alignment to build high performance and create shared priorities, is for the tax, finance and technology departments to understand one another’s needs and views. A balance between functional requirements and sensitised tax data is required so as to achieve operational efficiency.

Tax teams must clearly define and communicate their data requirements to all impacted stakeholders to enable relevant and accurate tax data to be incorporated into the various parties’ data collection.

A coherent architecture

Frequently data is stored differently across multiple systems on varying platforms. Consolidating tax data into a common source is a critical strategy towards meaningful data management. Tax departments struggle to marry the multiple databases from a range of data sources across multiple system platforms to create a useable report before they can begin any meaningful tax analysis.

A single centralised data architecture will provide the ability to maintain a single version of the data which in turn enable better end-to-end decision making, thus lowering cost of ownership

“Tax teams need clarity around the level of data accuracy which is needed for tax compliance purposes, and understand which data is more unstructured and directional for tax risk quantification.”




and increasing data accuracy. For example, successfully sensitising and integrating tax data from multiple systems, applications or spreadsheets into a common solution for the tax function can reduce significant time, enabling tax to refocus its efforts on analysis, forecasting, and other high-priority activities.

Extract-transform-load (ETL) tools, which work hand-in-hand with a centralised database, provide the ability to collect data from disparate sources and transform the data into a standard format for analysis and reporting. These tools are sufficient to accommodate the needs of the tax department by automating retrieval of critical information into downstream databases or tools for use in tax-oriented analysis and reports.

Defined processes

Many organisations suffer from siloed data structures with multiple pockets of data across the organisation and no single version of the truth. Consequently, critical information required to drive more effective decision-making resides in multiple spreadsheets, databases and other sources. For example, the same customer could be recorded as a different name across departments — such as ABC Int’l, ABC Intl vs ABC International. This small data variance complicates the data reconciliation

process when doing tax analysis. Different definitions for data are often applied and insufficient governance is established around how data is entered and stored. When data resides across multiple regions and business units, it makes it difficult to form a “tax-centric” view.

Lack of ownership and poor data governance will impact the accuracy of the tax returns filed. Data accountability is critical to gain visibility across datasets and to perform meaningful data extraction.

Tax departments should be able to answer these questions about data governance policies:

1. Do we have visibility over status of all tax compliance and reporting obligations?

2. Are our data access policies limiting the usage of information by the tax function?

3. Is there consistency across various tax processes regarding how data is collected, tracked and retained?

4. What is our policy for data completeness? Is there a single source of truth?

5. Is data aligned with tax department and broader organisation’s strategic outcomes?

As the data-driven economy continues to evolve, organisations need to embrace the opportunities presented by an effective data management strategy so that they can better manage tax risks and compliance. Today’s tax departments face increasing demands for tax disclosures from both tax authorities and the relevant stakeholders. Tax sensitised data, a single version of the truth and data accountability are required to help tax functions meet increasing demands for transparency, quality and to reduce tax risk. This will enable the tax function to become a more integrated and influential stakeholder in the organisation.

Tan Lee Khoon Partner, Tax Services [email protected]

Lee Khoon is EY’s Business Tax Services Leader for Singapore and Asean. She has over 30 years of experience providing tax advisory and planning services in Singapore. She provides advice on the taxation aspects of public listings, corporate mergers and restructuring, tax authority advance rulings and tax controversies. She is particularly conversant in providing advice to clients in the hospitality and real estate, metal and mining and shipping industries. She is also the Shipping Sector Tax Leader in Singapore.

Michele Chen Director, Tax Performance [email protected]

Michele has 20 years of experience in corporate and operational taxes, tax governance and tax risk management. She helps clients establish tax risk management frameworks and develop tax function policies to preserve the integrity of tax compliance and reporting processes. She has experience establishing end-to-end operational tax governance frameworks to drive robust compliance within organisations.

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In a competitive talent landscape, the ability to attract talent can be a key differentiator for successful businesses. Simply put, the best

organisations attract the best talent who produce the best results. It’s a virtuous circle.

The employer brand of an organisation coupled with its mission and values are key attraction drivers for existing and potential new employees. It’s no coincidence that the most successful organisations also have a strong employer brand.

Today’s high tech world has made connectivity easily available and instantaneous across geographical boundaries. With this in mind,


Managing the talent and reward agendaGrahame Wright and Samir Bedi discuss why companies need to change their strategies to attract and retain talent

organisations are looking to transform themselves with a brand that extends far beyond their country of origin. For organisations, not only does this open up the world for business, but it also unlocks access to a truly global talent pool.

Just as these organisations are connecting with their customers through a set of universal emotions, the employer brand is also built on these same emotions. Truly global companies are shifting away from the philosophy of “Think Global Act Local” to “Think Human Act Humane”.

Any such change in company philosophy needs to be a strategic question each organisation must answer as a transformation may mean giving

up things that they were previously proud of. This change would also have an impact on the entire employee lifecycle — the way to recruit, set goals, promote, reward, and develop their people.

Transforming performance management

Performance management has been cited as one of the most disliked human resource (HR) processes by employees leading organisations to rethink this process. The days of traditional appraisals by a manager, evaluations and forced distributions appear to be numbered with major global organisations abandoning long-standing appraisal systems for a fresh approach.

Business models




The practice of measuring employee engagement is rising across organisations as a key metric of their people processes. This shift in focus has managers zoomed in on efforts to improve employee engagement scores. Engagement drivers are inextricably linked to performance management as it is this process that provides the back bone to all other processes — hiring, rewarding, promoting or developing people.

Changes to performance management include stronger links to business results and a change of focus towards the future to optimise skills and abilities. This shift changes the role of managers and requires them to be actively involved in the performance of their team or employees by providing regular feedback, coaching and development.

Goal setting has been one of the most neglected components of traditional performance management. However organisations are now starting to incorporate more agile and responsive forms of goal setting that can change based on market needs. These goals are now visibly aligned to the organisation’s strategy.

Self-evaluation is becoming more common as an input along with soliciting multiple forms of feedback from peers, subordinates, and customers, rather than the traditional top-down performance appraisal of a manager. The focus or weightage on key performance indicators is now being shared with competencies that are a

predictor of sustainable performance. Last but not least, the performance management process is developing into a more open and visible process with employees having access to the goals and achievements of their teams.

The bell curve in its strictest form is on its way out and organisations are adopting a more relaxed form or even abandoning it completely. Finally, career conversations are now taking a more developmental approach which focuses on the needs of the future for both the organisation and the individual.


Managing key talent

Nearly all companies now have programmes designed to identify and develop their talented employees. These employees are critical to business results and their retention is of exponential importance. The reward for this top talent is often provided in the form of stretch assignments, experiential job rotations, special projects and leadership development activities. The ability to engage, grow and retain this group of talent will determine the future of the organisation.

An important component of growing talent is to engage them in activities that will emphasise their future competencies more heavily than current performance measures. This needs to be managed through an individualised communication process on the organisation’s strategy aligning their development with the business plans rather than a generic set of goals applied to the larger group of employees.

The assumption that this group of talent is highly engaged can be fatal — efforts to continuously engage this group must be maintained through their line managers and leadership.

Managing rewards

As organisations aim to optimise their investment in rewards, they need to ensure reward programmes are customised and aligned to the business strategy and employee needs. The starting point for this would be the development of a rewards strategy covering the following aspects:

• Strategic perspective: how do rewards support the business strategy?

• Overarching objectives: what are the main things we are trying to achieve with reward programs?

• Prominence of rewards: Where do rewards fit in the broader employment value proposition and which programmes are the most or least important?

• Performance measures: what are the key performance measures and which reward programmes do they relate to?

• Competitive market: Who are we competing with for talent?

• Competitive reference: How should our reward programmes compare to the market, in aggregate and by programme?

• Degree of internal equity: How consistent should programmes be up, down, and across the organisation?

• Internal equity and external consistency: What do we do when these are in conflict?

• Purpose of each program: Why do we offer the rewards that we do?

• Communication: How much do we share about our programs? What role does employee input play in the design?

• Governance: How do we ensure proper governance, review, and management? Who is accountable for what?

“As organisations aim to optimise their investment in rewards, they need to ensure reward programmes are customised and aligned to the business strategy and employee needs.”




Continuousimprovement in

reward

Control via monitoringand reporting of

outcomes

Implementand improvethe reward

offering

Analyse toidentify optimal

outcomes

Measurethrough

a survey tool

Define yourtotal

rewardobjectives

Grahame Wright Partner, People Advisory Services — Mobility [email protected]

Grahame leads the People Advisory Services — Mobility practice in Asean and Singapore. He has over 22 years of experience in providing expatriate tax, immigration and mobility advisory services to clients throughout the Asia-Pacific area.

Samir Bedi Partner, People Advisory Services — Talent and [email protected]

Samir is a member of the Asia-Pacific People Advisory Services executive leadership team. He has over 15 years of experience in organisation structuring, manpower planning and optimisation, talent and reward programme development and high performance culture development.

Contact us

Communication of reward programmes and involvement of employee inputs are what will differentiate organisations in getting the best returns — engagement and productivity — from the investment.

Managing rewards requires a continuous improvement cycle with high performing organisations taking a process view to continuous improvement of reward.

Conclusion

In today’s new marketplace, a strong employer brand is vital to attracting and retaining the best talent pool. The traditional performance management model is being phased out in favour of a model which recognises the incremental value of key talent and maximises impact with strong developmental strategies. Therefore, organisations need to customise their reward strategies to align business strategy with employee needs.


You and the Taxman


Industry trends

“For shippers, evolving tax rules concerning bareboat charter

payments in some countries could lead to adverse tax consequences if

existing structures remain.”

Singapore’s thriving port is one of the world’s busiest, situated on an enviable location at the crossroads of east and west. More than 130

of the world’s top shipping groups have anchored their ship owning and operating activities in Singapore.

In 2014, the cargo-carrying capacity of ships registered under the Singapore flag climbed to 82.2m gross tonnes (GT), from 73.6m GT in 2013, entrenching Singapore as one of the top 10 ship registries in the world1.

Part of Singapore’s appeal as a base for ships lies in its attractive tax incentive regime. Under the Maritime Sector Incentive (MSI) schemes, income derived by ship owners and operators are eligible for tax exemptions. But in today’s climate, the availability of tax incentives brings with it certain challenges.

Navigating new tax headwinds in the shipping industryGoh Siow Hui and Cedric Tan discuss the tax challenges facing the shipping industry

1Source: 2014 Maritime Performance press release issued by the Maritime and Port Authority on 16 January 2015




Spearheaded by the Organisation for Economic Co-operation and Development (OECD), the base erosion and profit shifting (BEPS) project is redefining the international tax landscape. The impact of BEPS is being felt by most countries and industries and as a global industry, shipping is not immune.

For shippers, evolving tax rules concerning bareboat charter payments in some countries could lead to adverse tax consequences if existing structures remain. In Singapore, the tax authority is also stepping up scrutiny on the tax affairs of shipping companies.

International challenges — bareboat charter arrangements

To contain risks, many shipping groups tend to separate vessel ownership from operation of their vessels (see illustration).

by companies providing drilling or accommodation services on the UK Continental Shelf. This cap is equal to 7.5% of the capital expenditure on the asset.

In Mexico, interest, royalties and technical assistance fees paid to a related foreign entity which does not consider the payment to be taxable income, are not tax deductible there. Bareboat charter payments made to related foreign entities are also caught within this net.

Norway is also setting up committees to look into various tax measures surrounding bareboat charters such as restricting tax deductions, denying inclusion under the tonnage tax system and imposing withholding taxes on bareboat charter payments on inbound bareboat arrangements.

Due to these changes, shipping groups need to evaluate their shipping arrangements and assess whether it is still tax efficient to have a Singapore ship owner. Before more countries adopt similar restricting rules, perhaps

Ship owner

Ship operator

Third partycustomer

Bareboat charter

Time charter/Ship operations

As the BEPS project gets underway, tax authorities around the world are introducing or proposing new legislation and tax rules to protect their revenue turf. In the shipping industry, this has, in some countries, extended to challenges on bareboat charter arrangements (as seen in the depicted illustration).

The UK, for one, has decided to cap tax deduction on intra-group lease payments on bareboat charters


the Maritime and Port Authority of Singapore (MPA) should look into and address this area to preserve Singapore’s position as an attractive shipping hub.

Domestic challenges — increased tax controversies

In Singapore, we have seen certain trends in the way queries are being raised by the Inland Revenue Authority of Singapore, especially in the following areas:

1. Confirmation that ships are not under the suspension of the Singapore Registry of Ships (SRS)

2. Nature of income

3. Ship pooling arrangements

4. Sale of vessels

5. Withholding tax requirements

1. Confirmation that ships are not under the suspension of the SRS Section 13A of the Singapore Income Tax Act (SITA) covers the tax exemption for Singapore ships. A Singapore ship, as defined under section 13A, means a ship in respect of which a certificate of registry, other than provisionally, has been issued under the Merchant Shipping Act and its registry is not closed, deemed to be closed or suspended.

The IRAS routinely asks for certificates of registration as well as confirmation that the registry has not been suspended, especially from companies enjoying the section 13A tax exemption.

In certain circumstances, where a vessel is bareboat chartered out, the bareboat charterer may be required to register the vessel outside Singapore in its name. If such a situation exists, the Singapore ship-owner will be required, under the Merchant Shipping Act, to apply for a suspension of the vessel from the Singapore Registry of Ships (SRS). During the period of suspension, section 13A will cease to apply to the income derived from the vessel as

the vessel is not considered to be a Singapore ship for that period of time.

Some companies may not realise the pitfalls of ignoring this temporary suspension from the SRS — in the minds of these ship owners, the ship is still a Singapore ship. However, for tax purposes, the ship would not satisfy the definition of a Singapore ship under section 13A.

Companies in these situations need to track their suspension periods carefully by keeping separate accounts as the income and expenses during the suspension period will not qualify for tax exemption under section 13A. This tax impact should also be factored into contract negotiations for the bareboat charter.

2. Nature of income Under the MSI schemes, only certain categories of income qualify for the tax exemption. The tax authority usually raises a query if the description of the income does not fall squarely into the qualifying income categories.

Receipts received from demurrage income, liquidation damages or compensation (such as for breach of charter agreement), insurance claims, mobilisation and demobilisation2 are commonly seen in the shipping industry. However, these are currently not explicitly spelled out, under the SITA, as income that qualifies for tax exemption under the various MSI schemes. Intuitively, could the taxpayer argue that all these receipts are derived in the course of qualifying shipping operations and the receipt derived is incidental to such operations? Or could they be part of the risk management activities undertaken for the shipping business which may also qualify for tax exemption under the various MSI schemes?

Although players in the shipping industry may consider these types of income as automatically qualifying for tax exemption, the IRAS may not share the same view.

Given the uncertainty surrounding such types or categories of income, taxpayers should pay attention to how such income is itemised or separately provided for in the contracts, invoices, and profit and loss statement. They also need to consider the impact of the wordings on the contract.

If the sums are big enough, taxpayers should consider seeking upfront tax certainty with the IRAS on the tax treatment of their income.

3. Ship pooling arrangements Many ship owners and operators are turning to ship pooling arrangements to achieve cost savings by better utilising ships. The earnings of the group are pooled and distributed to the vessel owners according to a preaaranged agreement.

IRAS has raised frequent queries on such arrangements to better understand how the pool works. These include the mechanics of the pool (e.g., how earnings or expenses are attributed to each pool member) and details of the types of income and expenses that go into the pool (e.g., does the pool income include interest income derived through the pooling of the earnings).

Can the pool income be considered as freight or charter income given that the underlying contracts of the pool are either charter or freight contracts? If so, then pool income should qualify for tax exemption under the various MSI schemes.

But what if the pool income also consists of the sharing of financial income such as interest income or share of partnership profits? And what if the pool income is an aggregate of income derived by vessels which are both Singapore as well as non-Singapore flagged and includes ship owners or operators which do not enjoy any of the MSI schemes? How will these affect the assessment of whether the income qualifies for tax exemption under the MSI schemes?

2In Budget 2015, it was announced that tax exemption under section 13A and section 13F will now cover mobilisation fees, demobilisation fees, holding fees and incidental container rental income that are derived in the course of qualifying shipping operations. These are included in the draft Income Tax (Amendment) Bill 2015 which has been released for public consultation.




What if the pool manager is based outside of Singapore? Will the pool manager be seen as creating a permanent establishment exposure for the pool participants in the country it is operating from?

The answers to these questions depend on the facts and wordings of the ship pooling arrangements. Taxpayers should consider if upfront tax certainty is required in the form of an advance income tax ruling with the IRAS. Alternatively, they should adopt certain pre-determined strategies so that they are well-placed to respond to tax queries if and when they arise. As ship pooling arrangements become more common, Singapore’s tax legislation may need to be updated to reflect new developments. Given the increasing collaboration in the industry, more tax certainty will be welcomed to further anchor Singapore as a leading international maritime centre. 4. Sale of vessels Tax certainty with respect to the non-taxability of gains (“tax certainty”) on disposal of vessels under the MSI schemes is provided in the SITA. However, this is still an area that has been queried extensively by the IRAS because the tax certainty comes with conditions.

Firstly, the tax certainty applies to shipping enterprises, defined as any company owning or operating ships. Secondly, it does not apply to a shipping enterprise engaged in the trading of ships or construction of ships for sale.

Ambiguities may arise in some situations. If the company is incorporated for the purpose of owning and operating a ship, and the ship was disposed while it was still under construction, the company would need to demonstrate that it is still a shipping enterprise. In another situation, where there are several vessel sale transactions, the taxpayer will need to substantiate that it is not in the business of trading of ships.

In these scenarios, the taxpayer would need to document the key points supporting the tax exemption, in anticipation of any queries. In addition, if the gain is substantial, it may be better for the taxpayer to obtain an advance tax ruling to achieve greater tax certainty.

5. Withholding tax Withholding tax exemption has been granted on payments made to non-residents, excluding permanent establishments in Singapore, for bareboat, voyage and time charters of ships on or after 17 February 2012. However, there may be situations where the charter agreement is recorded as a finance lease for accounting purposes. If so, is the payment made a charter or a finance lease payment? If it is a finance lease payment, then withholding tax should apply on the finance charges. At times, the answer is not straightforward and the treatment under accounting standards and for tax purposes may not be aligned.

The good news is that Budget 2015 has proposed that the automatic withholding tax exemption under the MSI schemes covers finance leases (this differs from the withholding tax exemption on charter payment). The automatic withholding tax exemption under the MSI schemes is based on self-assessment. Here, the taxpayer has to self-assess that it satisfies the conditions of the automatic withholding tax exemption before submitting the self-declaration form. There is an element of risk involved in self-assessment. Taxpayers may not comply with the requirements or the IRAS may not agree to their self-assessment. Taxpayers need to exercise due care in the self-assessment process as interest payments are typically significant and the withholding tax liability may be borne by the payor. Sufficient internal controls within the finance function should also be put in place to ensure such payments are duly considered for withholding tax requirements.

Conclusion

Shipping tax regimes around the world are adjusting to an evolving international tax landscape. Players in the shipping industry should anticipate and proactively manage tax risks. To be prepared for tax controversy, taxpayers need to take a critical look at their business models and ensure that they can support their adopted tax positions.

Goh Siow Hui Partner, Tax Services [email protected]

Siow Hui has over 20 years of experience in corporate income tax advisory and compliance. She works with clients in various industries, particularly shipping and retail. She provides tax advice on structuring transactions, profit repatriation, cross-border transactions and tax incentive application. As Private Client Services Leader, Siow Hui works extensively with entrepreneurs and family businesses.

Cedric Tan Senior Manager, Tax Services [email protected]

Cedric has over 10 years of experience in corporate income tax advisory and compliance. He works with clients in various industries, particularly shipping and resources. He provides tax advice on structuring transactions, profit repatriation, cross-border transactions and tax incentive application.

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You and the Taxman


Oil and gas sector facing

structural shift Angela Tan and Toh Shu Hui discuss the tax implications of

consolidation in the oil and gas sector

Over the past year, a rout in crude oil prices has plunged the oil and gas (O&G) industry into turmoil. After more than three years of record prices at US$100 per barrel, oil

prices have plummeted by half, hitting below US$50 per barrel this year as supply outstrips demand. Despite this, the Organization of the Petroleum Exporting Countries (OPEC) is not cutting back on production to prop up prices.

The oil price fallout has shifted the dynamics of the industry from a “resource-scarce” to “resource-abundance” model. This means a low-price environment is no longer able to sustain rising exploration, development and production costs.

To survive, O&G players need to embrace a leaner, more efficient business model. Cost cutting is no longer a short-term exercise. Instead, long-term structural changes must be made — strategies must produce real value and sustainable cost management. To succeed in this new paradigm, O&G companies need to focus on the integral drivers to sustainable growth: operational excellence and innovation.

Industry trends




To rein in spending, the industry has slashed capital budgets and escalated layoffs this year. Indeed, an energy cost management survey conducted by EY across the Canadian energy industry in February 2015 revealed the primary levers companies are pulling are expense management, capital allocation and headcount reductions.

The collapsing oil prices have also spurred a wave of consolidations as companies with strong balance sheets seek to snap up assets of weaker rivals. With companies trading at significant discounts to book value, the decline in asset valuations has triggered increased merger and acquisition (M&A) activity across the value chain.

In Southeast Asia, slumping oil prices have dented the bottom line of national oil companies. As key industrial players in the region revise their capital budgets, billions of investments in oil and petrochemical projects may be scrapped or put on hold. The waning appetite for investments has made capital raising more challenging.

Singapore’s role in the oil and gas industry

The O&G industry is a vital part of Singapore’s economy. The nation’s geographical advantage, technological capabilities, strong infrastructure and connectivity, political stability and skilled workforce have entrenched Singapore as Asia’s leading oil trading hub and one of the world’s top three exporting refining centres. Leading petrochemical companies use Singapore as a regional logistics hub and as a base to conduct marketing, sales and R&D activities.

Singapore’s business-friendly tax framework has helped to foster the growth of the O&G sector — an attractive package of tax incentives has encouraged the set-up of refineries and facilitated energy and chemical trading here.

However, the recent battering of oil prices has affected valuations, operating costs and profitability. As regional and global developments take their toll, O&G players need to grasp the tax implications.

Tax considerations

Tax incentives and deductions Many O&G trading companies in Singapore enjoy concessionary tax rates on qualifying trading income under the Global Trader Programme (GTP) administered by the International Enterprise Singapore (IE Singapore). This comes with strings attached — specific thresholds on physical turnover, local business spending and trading professional headcounts must be fulfilled. The tax incentive can be revoked or tax benefits clawed back if these conditions are not met. For Singapore companies that rely on the GTP status to trade with other GTP counterparties, withdrawal of the incentive could also affect the manner in which existing trading transactions are carried out.

Trading turnover has suffered a setback, given the recent oil price collapse. This, coupled with cost cutting measures and headcount reduction, means that GTP companies may have to evaluate their business plan projections and engage IE Singapore on a timely basis to review and renegotiate the incentive conditions.

Given the challenging market conditions, many industry players are also under pressure to account for valuation loss on existing inventory. Whether the loss is tax deductible in the year of provision depends on the circumstance and basis and needs to be supported with relevant evidence.

Financing In light of the current climate, O&G companies are seeking to raise capital through equity and loans, including the refinancing of existing loans. Here, possible tax costs need to be considered carefully.

In debt financing, interest expenses are generally tax deductible, if they are incurred on loans used for trade purposes. On the other hand, interest expenses on refinanced loans are not deductible unless there are genuine commercial reasons for the refinancing. Companies may also incur other borrowing costs, such as commitment fees, front-end and back-end services fees. Borrowing costs are generally not deductible unless they fall within a prescribed list. While this list has been expanded in 2014, certain costs such as commitment fees and services fees remain excluded.

Some O&G companies also use trade receivables discount as a form of short-term borrowing. This practice may intensify due to cashflow pressures, but the tax implications of such arrangements need to be considered.

Given the current despondent market conditions for the O&G industry, O&G companies need to evaluate the tax implications of various financing alternatives and weigh the benefits and costs of each option. Failure to do so could lead to a heavier financial burden.

Corporate restructuring Corporate restructuring is likely on the agenda for many O&G players as industry sentiment weakens. Tax issues need to be taken into account in these restructuring exercises.

“The recent battering of oil prices has affected valuations, operating costs and profitability. As regional and global developments take their toll, O&G players need to grasp the tax implications.”


For example, a consolidation of businesses through the acquisition or sale of assets or shares involves different sets of tax implications. This includes the tax deductibility of financing costs, tax treatment on the assets transferred, indirect taxes and stamp duty implications.

Transaction costs associated with restructurings are generally not deductible. However, the Mergers and Acquisitions (M&A) Scheme offers a deduction for certain transaction costs for qualifying share acquisitions. The scheme also grants acquiring companies an allowance of up to S$5m on qualifying share acquisitions made during the relevant basis period, helping to defray part of the restructuring costs. Companies will need to analyse the conditions and assess their eligibility for the scheme.

Given the unfavourable market conditions, many companies may also have significant unabsorbed capital allowances and tax losses. These cannot be transferred and will be forgone if the existing company is liquidated. Unabsorbed capital allowances and tax losses will be forfeited if there is a substantial change in ultimate shareholding unless a waiver is granted by the Inland Revenue Authority of Singapore on a case-by-case basis upon application.

Depending on how these restructuring exercises are carried out, the nature and complexity of the tax issues may differ. Failure to address these tax issues could lead to adverse tax consequences during the restructuring process, during the operational phase or when structures are unwound in the future.

Opportunities remainDeclining asset prices could lower the barriers to exit in certain jurisdictions. It would thus be opportune for O&G companies to review their group holding structure, including whether operating companies should be held under a regional holding company.

With several thriving O&G exploration and production projects in the region, such as in Vietnam and Myanmar, Singapore can still capitalise on its position as a preferred location for regional holding companies given its close proximity to these projects. Singapore’s favourable tax regime — which includes tax exemption on foreign-sourced dividend income, an extensive treaty network and zero capital gains tax — is a huge plus point.

The O&G sector is ripe for consolidation. As industry players respond to external challenges, whether through short-term budget cuts and headcount reductions, or long-term retuning of strategy such as changes to portfolio and capital structures, tax issues will need to be carefully considered.

Angela Tan Partner, Tax [email protected]

Angela has over 25 years of experience in tax advisory and compliance. She provides advice on withholding taxes, intercompany charges, tax incentives M&A tax issues, holding company locations, structuring of overseas investments and financing arrangements. Angela is the Resources Sector Tax Leader.

Toh Shu Hui Associate Director, Tax [email protected]

Shu Hui has over 10 years of experience providing tax compliance and tax advisory services to clients in varied industries, with a key focus on the resources sector. She has experience in advising local and multinational clients on local and cross-border issues arising from group reorganisations as well as on issues covering withholding taxes, financing structures.

Contact us




Top five considerations

in entering transactions

in the financial services sector

Stephen Bruce and Ben Mudd discuss what financial institutions need to consider before entering into a transaction

Tax planning — the practice of arranging one’s tax affairs to reduce or minimise taxes — is generally considered acceptable as long as it is done within the letter and

spirit of the law. Overstepping that mark could lead to unwanted attention.

Avoiding taxes overtly is a frowned-upon pursuit, not least because it deprives governments of their fair share of taxes. The Organisation for Economic Co-operation and Development (OECD), through its ambitious Base Erosion and Profit Shifting (BEPS) project, is leading the charge to put this right. As a leading financial centre, Singapore is the headquarters for many global banks, insurers, funds and other financial institutions. Many, if not all, of the transactions entered into by these financial services institutions have tax implications.

Transactions should be entered into with a good commercial purpose, and not be seen to be solely tax-driven. Here are the top five tax considerations that financial institutions need to consider before proceeding with a transaction.

Industry trends


1. Reputational considerations and internal governance It is now rare for banks or the capital arm of insurance companies to enter into the aggressive tax-driven structured finance transactions or investment structures of the past, primarily for reputational reasons. The media has generally taken a dim view of tax avoidance and the resulting bad press could dent brand equity and share prices.

This has led banks to downsize or terminate their structured finance groups, while creating their own internal tax policies and governance as to what is acceptable tax planning.

Chief financial offers, rather than group heads of tax, have been the decision makers on whether or not to proceed with a transaction, based on a general “smell test” or commercial perception. This, even before the group tax department has been brought in to provide detailed guidance on the application to the transaction steps of any anti-avoidance rules (general or targeted) in the relevant jurisdictions. 2. Overarching codes of conduct Licensed banking groups operating in Singapore could face limitations on tax planning due to home country legal restrictions. The UK’s banking code of conduct — UK Code of Practice on Taxation of Banks — comes to mind.

According to the Code, banks should not enter into tax planning other than transactions which support genuine commercial activity. This has led to a change in attitude towards avoidance and a paradigm shift in the types of transactions UK banking groups are willing to enter into.

While the Code covers UK tax planning, in practice, group tax departments seem to have adopted the Code principles when it comes to reviewing and approving the types of transactions entered into by group subsidiaries or branches operating in other jurisdictions (including material Singapore subsidiaries or branches). 3. BEPS considerations Although Singapore is not a formal member of the OECD, the BEPS project to arrest tax avoidance will still have an impact on certain financing transactions.

BEPS Action Plan 2 to neutralise the effects of hybrid mismatch arrangements aims to counter mismatches from hybrid entities — a transparent entity in one country but an opaque tax resident in another. Action Plan 2 also aims to tackle the arbitrage in hybrid instruments — financial securities which are treated as tax-deductible interest bearing debt instruments in one country but an equity-like instrument receiving a tax exempt distribution in another. Australian redeemable preference shares, IFRS-accounted convertibles, German genussscheins and Brazilian return on net equity are examples of such instruments.

Like other countries, Singapore has provided much needed guidance on the tax treatment of hybrid instruments. But without absolute clarity, detailed consideration is still needed prior to entering into a transaction.

More recently, there have also been non-tax motivated hybrid challenges arising from Basel 3 compliant regulatory capital instruments that qualify as Additional Tier 1 capital. Singapore has provided tax certainty on this in Budget 2014 by treating such instruments as debt for tax purposes.

It is worth noting that treaty arbitrage by taking advantage of tax sparing credits on payments from Singapore (such as on a qualifying debt security issued by a Singapore company) is gradually being phased out through treaty renegotiations. Recent new treaties with France (signed on 15 January 2015 but not yet in force) and Poland have removed sparing provisions.

Other BEPS Action Points are also going to affect financing structures. The proposed changes to combat “treaty abuse” (Action Point 6) will increase scrutiny of conduit structures involving treaty shopping with a more rigorous review of beneficial ownership. More purpose tests and limitation of benefit clauses in treaties may deny treaty relief from withholding tax on interest payments in financing structures. This will undoubtedly require a careful review of a number of Singapore fund structures where there are layers of foreign interests above and beneath a fund. In response to BEPS, the UK and now likely Australia’s introduction of “diverted profits taxes” will mean that Singapore financial institutions entering into financing transactions with those jurisdictions should be aware of the potential impact of the new tax on their counterparty.

“Transactions should be entered into with a good commercial purpose, and not be seen to be solely tax-driven.”




Finally, in relation to “harmful tax practices” (Action Point 5), Singapore also awaits the OECD’s general observations on its tax system in 2015 (which should be published by the time of reading this). Would Singapore taxpayers be considered to have sufficient economic substance in Singapore and are its list of incentives considered too preferential? This could lead to further changes in the landscape for financial services businesses.

By the time this article is printed a whole raft of other BEPS considerations will be announced by the OECD which will require further consideration (such as Action Point 4 on interest deductibility, which explores interest limitation rules to clamp down on groups over-gearing with tax deductible debt).

4. Transfer pricing For intra-group financing, transfer pricing is increasingly being used as a potential extra line of attack to recharacterise a transaction into a more palatable “arm’s length” transaction that should have taken place, invariably to deny all or part of an interest or other financing deduction.

5. The GAAR in section 33 and TAARs Financial services institutions also need to consider whether the general anti-avoidance rule (GAAR) in section 33 of the Income Tax Act — or a specific targeted anti-avoidance rule (TAAR) elsewhere in specific legislation — applies to any financing transactions, investments or other transactions that could have a tax efficient outcome (so as to counteract any tax advantage). An interpretation of section 33 can be found in the landmark AQQ1 case. The decision in this case sheds light on how a transaction could be construed to have crossed the line into unacceptable tax avoidance and provides taxpayers with of an indication of the principles to consider in any tax efficient proposal (see discussion in Issue 3, 2015). Important lessons can be distilled from the AQQ case. Financial institutions need to ensure that any transaction entered into is for bona fide commercial reasons. The avoidance or reduction of tax should not be one of the main purposes for the transaction. They also need to maintain adequate documentation to demonstrate and support that the subjective intention was indeed to enter into the transaction in question for commercial objectives.

Stephen Bruce Partner, Financial Services [email protected]

Stephen has 20 years of tax advisory experience in multiple jurisdictions including Hong Kong, the UK and New Zealand. He focuses on Singapore tax, transfer pricing and regional tax compliance. His clients include global and Asia-Pacific financial institutions. He advises on international and Asia-Pacific aspects of various tax-related activities, such as global compliance and reporting, tax function effectiveness and advising on the tax implications of transactions, cross-border arrangements and access structures.

Ben Mudd Executive Director, Financial Services [email protected]

Ben focuses on Singapore and UK tax. He provides tax structuring advice on cross-border transactions for financial services institutions, in particular US and European companies with an Asia-Pacific presence. His experience also includes fund structuring, intra-group financing and structured financing, regulatory capital and hybrid financing, general banking and capital markets transactions, private company share acquisitions, business sales, mergers, public takeovers, demergers, private equity and securitisations.

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1Comptroller of Income Tax v AQQ and another appeal [2014] SGCA 15


Tax and the cloud: is the

sky clearing?Chia Seng Chye and Chua Xiu Mei discuss the issues

surrounding the taxation of cloud computing in Singapore

Billed as a megatrend that has taken the commercial world by storm, cloud computing is today a multi-billion dollar industry offering quicker and easier access

to content, tools and applications. More and more technology companies are offering cloud services, while brick-and-mortar companies are using the cloud to manage their IT infrastructure and operations.

In cloud computing, commercial transactions are conducted over a virtual network, such as the internet. Users can access cloud services from various devices anywhere as long as they have access to a stable internet connection.

The borderless and instantaneous nature of cloud computing has created a new paradigm of challenges for tax authorities, especially in the cross-border arena. This is because the usual principles of taxation, built upon traditional brick-and-mortar business models, are difficult to apply to the digital sphere. Indeed, the taxation of cloud computing is stacked with challenges: there are intangibles to consider, users and business functions are extremely mobile; the choice of server locations is flexible; there is high volatility due to low barriers to entry; and the technology is rapidly evolving.

Industry trends

“The usual principles of taxation, built upon traditional brick-and-mortar business models, are difficult to apply

to the digital sphere.”




Lawmakers have much catching up to do as cloud computing technologies and commercial delivery models move at rapid-fire pace. Governments are keen to keep pace and stake their rights to the huge revenue potential lying in the digital realm.

The tax authorities’ stance

The key tax issues related to cloud computing are the sourcing of income and the characterisation of payments (e.g., whether they payments should be considered as royalties, sale of products or services, or bundled transactions, etc.). These impact both direct and indirect taxation, including withholding tax. The availability of a local tax ruling, or specific local tax incentives, also affects the taxation of cloud computing.

With a reach that extends beyond its member nations, the Organisation for Economic Co-operation and Development (OECD) has been an influential voice on tax issues

surrounding the digital economy. While Singapore is not an OECD member, the Inland Revenue Authority of Singapore (IRAS) has traditionally taken into account the OECD’s recommendations when shaping its tax policies. It is likely that the IRAS will consider the OECD’s views if and when it refines the taxation of the digital economy and cloud computing in Singapore.

Like most of the international community, Singapore currently does not have a separate tax regime for the digital economy. The IRAS has, however, provided guidance on how it views certain electronic transactions.

In line with the OECD’s interpretations, the IRAS has viewed that the mere presence of a server in Singapore does not automatically mean a taxable presence in Singapore. It has also clarified that the purchase of cloud computing “services” will qualify for enhanced deduction under the Productivity and Innovation Credit scheme.

It would thus seem that the IRAS views cloud computing payments as payments for services. If so, taxes should generally not be withheld in Singapore for cloud computing payments as long as the services are performed outside Singapore. On the other hand, if such payments are regarded to include certain royalty elements, Singapore withholding tax will generally apply.

A separate tax regime for digital economy and cloud computing?

The OECD has highlighted in its report on Base Erosion and Profit Shifting (BEPS) Action Plan 1 “Addressing the Tax Challenges of the Digital Economy” that it does not support a separate tax regime for the digital economy, given that other sectors would have certain elements or features of the digital economy. The report has no specific recommendations to address the taxation of the digital economy. In doing so, the OECD acknowledges


that specific rules designed exclusively for the digital economy would not work because the digital economy is inextricably interwoven with other economies and sectors. If adopted, a separate digital tax regime will pose challenges including difficulty in defining the profile of taxpayers to be covered.

Instead, critical tax issues for the digital economy are addressed by the other BEPS Action Plans. Overall, the OECD appears to prefer “taking a holistic approach and considering both direct and indirect taxation” in addressing the tax challenges of the digital economy. By the same token, it’s probably not wise for Singapore to have a separate digital economy tax regime. Given the rapidly-moving digital economy and ever-evolving cloud computing technology, having a prescriptive list or specific local laws may lead to increased complexity or less flexibility.

Instead, the IRAS could perhaps consider providing guidelines or key principles on how cloud computing should be treated for tax purposes. These could include illustrative scenarios for cloud computing arrangements and their related tax implications. Here, the tax considerations under separate income characterisation scenarios such as from a lease, rent or licence, sale and service standpoint could be examined.

It may also be apt to revisit the current view on the tax treatment for servers, especially since digital goods and services can be partly or wholly fulfilled without physical or tangible means. The server itself may even be the most critical component of a digital entity’s business revenue model!

State of play

Some countries have taken the initiative to introduce national policy reforms that they say will be consistent with the OECD’s output. But Singapore, like many other countries, will still likely wait until all the BEPS Action Plans are completed and issued before deciding whether to adopt those Plans and to modify its existing tax rules.

Could Singapore perhaps take a leaf from Japan? Japan recently announced new consumption tax rules on cross-border digital services provided by overseas businesses to the Japanese market.

These indirect tax changes, which apply from 1 October 2015, include the introduction of a reverse charge mechanism on the provision of digital services by foreign (non-Japanese) suppliers. The reverse charge mechanism shifts the obligation of paying consumption taxes to the local consumer receiving the services. This, in turn, levels the playing field for local Japanese service providers vis-à-vis foreign providers.

Will Singapore adopt the “reverse charge” approach on goods and services tax? While there is a reverse charge provision in the GST legislation, there is currently no prescribed service that is subject to reverse charge in Singapore.

Hazy or clear skies ahead?

Cloud computing is clearly here to stay. Yet, complexity and uncertainty in the tax treatment for cloud-related issues remain. These include whether tax laws will be updated to cover “smart servers” and whether there will be new rules around intellectual property ownership. Clearer skies are ahead for cloud computing. But grey clouds still lurk in the horizon. Tax needs to be brought into the equation early, not only to mitigate uncertainty but also to realise the opportunities, efficiencies and growth inherent in the cloud.

Chia Seng Chye Partner, Tax Services [email protected]

Seng Chye has more than 20 years of experience in advising clients from various industries, in particular the technology and digital sectors, on tax issues relating to structuring and financing transactions including intellectual property planning, profit repatriation strategies, restructuring of group entities and cross-border transactions. He is the Technology Sector Tax Leader in EY Singapore.

Chua Xiu Mei Manager, Tax Services [email protected]

Xiu Mei has more than six years of experience in corporate tax compliance and advisory. Her practical experience includes liaising regularly with the Inland Revenue Authority of Singapore on tax queries, issues and rulings. She also advises clients on tax issues relating to corporate restructuring, financing transactions and withholding taxes.

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149You and the Taxman Issue 4, 2015 |14910th anniversary commemorative edition You and the Taxman Issue 4, 2015 |


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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Financial Services TaxOur Financial Services Tax team is dedicated to delivering value to our clients in the financial services industry who are facing a constantly evolving tax landscape. Whether you are in Banking and Capital Markets, Asset Management, or the Insurance sector, we will be able to assist you in issues including managing your direct and indirect tax obligations and tax risks, navigating the complex tax rules across jurisdictions, pursuing tax incentives or concessions, dealing with transfer pricing issues, handling tax authority queries, assessing your tax provisions, and analysing your uncertain tax positions.

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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. Our local teams employ a consistent approach globally to provide you with a coordinated understanding of the relevant jurisdictional and multi-disciplinary tax issues. We can suggest structuring alternatives to balance investor sensitivities, promote exit readiness and help improve prospective earnings or cash flows — raising opportunities for improved returns on your investment.


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Global TradeAdrian Ball+65 6309 [email protected]

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International TaxChung-Sim Siew Moon +65 6309 8807 [email protected]

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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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You and the Taxman Issue 3, 2015

You and the Taxman Insights on tax issues that matter Issue 3, 2013

The battle against BEPS

The impact on Singapore of the OECD’s new tax roadmap

Permanent establishments: now you see them, now you don’t

Up in the air: taxing the cloud

Reining in withholding tax risks

Indirect share transfers in Asia cast under the spotlight

Managing above the line: how customs planning can save costs

Know your entity classification

You and the Taxman

Issue 3, 2013

Ernst & Young Solutions LLP









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