The base erosion and profit shifting project – a watershed moment in the making
The shake up of the global tax system is being closely monitored by low-tax countries in particular.
The OECD has announced an important series of developments regarding the base erosion and profit shifting initiative, which are of special interest to countries such as Singapore, whose business friendly environment is due in part to its competitive tax regime.
BEPS comes to fruition
On 5 October 2015, the OECD released its long-awaited final reports on all 15 focus areas under the BEPS initiative. BEPS is widely regarded as the most significant global tax overhaul in recent times, forcing multinational enterprises to rethink the way they invest and structure their operations globally. The 15 focus areas address the coherence of tax rules in order to remove loopholes at the same time as emphasising substance over form so that taxing rights are aligned with value-adding activities. BEPS also aims to address issues of transparency around tax reporting and disclosure requirements and shed light on sectors such as the digital economy which continue to challenge tax authorities around the world.
Before the final reports were released, another major milestone was reached with the signing of the Multilateral Competent Authority Agreement (MCAA) by 31 countries for the automatic exchange of Country-by-Country (CbC) reports, which is a significant component of the BEPS measures around transfer pricing. It will help tax authorities compare profits that are earned by multinational enterprises in the various countries where they operate against measures of real economic activity such as employment and sales. This could, possibly for the first time, start revealing to tax authorities the extent to which profits of multinationals are being booked in tax havens or low tax jurisdictions.
The impact on individual countries: Singapore
National tax authorities, local businesses and inward investors will be weighing up the potential impact of BEPS. Each country still has the sovereign right to set its own tax policies in response to its own domestic priorities. Singapore, for example, has been supportive of the BEPS initiative from the start. There is no doubt that Singapore’s role as one of the key locations in the Asia-Pacific region for the establishment of headquarter operations makes it acutely sensitive to developments on the BEPS front. While Singapore’s role in the BEPS initiative has thus far largely been that of a passive observer, it has already been taking some cautious steps in responding to these new rules. The assessment criteria for tax incentives, for instance, is being enhanced to provide the added assurance that profit levels are commensurate with the level of activities and functions being performed in Singapore from a transfer pricing standpoint.
The issue is not so much what reforms countries like Singapore will need to put forward but more so what measures they may need to consider in response to the reforms that other jurisdictions choose to implement in response to the final BEPS reports. While it’s questionable as to whether Singapore and others will continue adopting a ‘passive observer’ approach to the many unfolding developments on the BEPS front, the more pertinent test would be whether they can stay nimble enough to calibrate their responses such that they maintain their tax competitiveness while ensuring that they play their part in upholding a robust and fair international tax framework.
For more information, contact:
Lam Fong Kiew
Nexia TS, Singapore
T: +65 6534 5700