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In brief

In a curated Roundtable session, hosted by the Singapore Economic Development Board (EDB) and Baker McKenzie Wong & Leow, representatives from large multinationals across a diverse range of sectors joined the EDB and the Inland Revenue Authority of Singapore (IRAS) to discuss global tax reforms led by the Organisation for Economic Co-operation and Development (OECD) and future differentiations in Singapore’s economic strategy.

Allen Tan, Principal at Baker McKenzie Wong & Leow, talks about what lies ahead for Singapore amid these major changes.


Contents

  1. Singapore’s traditional success as a hub economy
  2. The BEPS 2.0 project: shaking up the global tax landscape
  3. Changes to Singapore’s economic strategy
  4. Differentiation in a post-BEPS 2.0 world

Singapore’s traditional success as a hub economy

Often described as the “gateway to Asia”, Singapore’s traditional success as a hub economy is a product of our ability to attract the best global businesses in niche areas to anchor in Singapore, and build a strong ecosystem to support them here. That journey has brought Singapore through an evolution from a cost centre model in the 1980s, to an entrepreneurial and principal hub model today, for hosting headquarters (HQ) functions and innovative research and development activities, among others. On the back of its stable political and regulatory climate, Singapore has built a conducive business environment by investing in excellent infrastructure, access to quality talent, and connectivity to the fast-growing Asian market through a wide network of free trade agreements and comprehensive tax treaties.

Like many other economies, tax incentives are part of Singapore’s suite of fiscal tools. This encourages multinationals to conduct substantive new or expanded economic activities in Singapore that build capabilities and functions. Such value-creating activities cover the range from high-tech manufacturing to regional HQ functions, and offer win-win propositions for multinationals and Singapore alike. As an example, Tim McDonald of US consumer goods giant Procter & Gamble explains that the group’s ability to scale efficiently on a pre-tax basis requires centralisation and specialisation, via a centralised management and shared service center approach. In addition, placing regional HQs in countries like Singapore, which accept their fair share of regional and global costs as part of their role, helps to mitigate the risks of double taxation that would arise under a decentralised business model when such costs are disallowed in some countries.

The BEPS 2.0 project: shaking up the global tax landscape

With significant changes in the global tax landscape afoot, multinationals are set to face a challenging operating environment in the coming years, be it in Singapore or elsewhere.

Tasked with a mandate from the G20, the OECD leads the Base Erosion and Profit Shifting (BEPS) work to address tax challenges arising from the digitalisation of the economy, which is commonly referred to as the BEPS 2.0 project. Pillar One aims to reallocate taxing rights of residual profits of large multinationals to market jurisdictions, while Pillar Two will set a global minimum tax rate of 15%.

The impact on Singapore is two-fold: Singapore may lose tax revenue when a portion of Singapore-sourced profits of multinationals is reallocated to other countries under Pillar One; and Pillar Two will allow other countries to tax Singapore-sourced profits of large multinationals where such profits are taxed below the globally-agreed rate of 15%, effectively absorbing the benefits provided under a tax incentive.

Changes to Singapore’s economic strategy

Together with geopolitical shifts and disruptions brought by the COVID-19 pandemic, these developments could spell changes to Singapore’s economic strategy going forward.

With the Pillar One rules for reallocating profits to markets and the rise of remote work arrangements, multinationals could gravitate towards a more decentralised business model, or adopt a mixed approach where existing hubs could focus on close-to-market activities. At the same time, to vertically integrated groups, this fragmentation of labour, manufacturing and distribution activities could paradoxically require more centralisation and create demand for higher skilled talent who can strategically manage complex cross-border supply chains. To stay relevant, Singapore must review its economic strategy to capitalise on the new opportunities presented by these growing trends.

Multinationals are keen to know how Singapore will respond to the changes under the new international taxing framework, which will narrow opportunities for tax competition among countries. The Government has indicated in recent ministerial statements that it will abide by internationally agreed standards and may make adjustments to our corporate tax system to safeguard Singapore’s taxing rights, should the consensus materialise. This author surmises that the implied assumption here is that Singapore could introduce a new minimum tax regime.

The overarching objective of any prospective adjustments is to continue to ensure that tax outcomes rightfully reflect profits attributed to economic substance and value-creation activities in Singapore, explains EDB Executive Vice President Jillian Lim. Incentive programmes will remain for companies to benefit from. Taking this approach, as the Government refreshes its economic toolkit and measures to bolster Singapore’s value proposition, it is critical for Singapore to address with precision what will move global businesses in the new era.

Differentiation in a post-BEPS 2.0 world

In an increasingly fractured world with high geopolitical risks, global businesses will place a growing premium on competent and trusted governance in investment locations that can provide them with a degree of predictability in the operating environment. Singapore will have to amplify her hard-earned trust and continue to ensure business continuity, supply chain resilience, the flow of talent and long-term policy consistency. In that spirit, the Government is committed to delivering on its proven track record of minimising compliance efforts of businesses and will consult businesses through the policy and implementation process for BEPS 2.0, says IRAS Deputy Commissioner Chiam Yah Fang.

Within the BEPS 2.0 rules, it will be paramount in the tax piece of the puzzle for Singapore to enhance tax certainty and strengthen competent authority functions for resolving cross-border tax controversies. A proliferation of multilateral disputes is expected in the new global tax environment, and these attributes will be a key differentiating factor to multinationals seeking to place functions and operations in market locations.

Importantly, even without tax competition as part of the equation, Singapore has strong and differentiating economic fundamentals that will continue to attract multinationals to our shores. In particular, Singapore is able to punch above its weight on the digital front, notes Lilian Rogers from Stripe, a technology company that builds economic infrastructure for the internet. In many ways, Singapore has cultivated a “digital hinterland” that feeds into the tech and innovation ecosystem across Southeast Asia and the broader region.

Such efforts are well underway, with Singapore having recently concluded several Digital Economy Agreements (DEAs) to establish rules on digital trade and digital economy collaborations, and providing innovators with stepped-down legal and regulatory sandboxes to test new technology. Multinationals in the digital space see further opportunities for businesses in Singapore to harness the growth in connectivity and innovation enabled by the free flow of data and information across borders, and for the Government to invest in robust digital infrastructure to power high-value technology functions.

The road ahead may seem to be fraught with uncertainty, as tax administrations and businesses alike prepare to grapple with the complexities of the new international taxing rules. In the future state, businesses may find that Singapore could look somewhat different from before. Regardless, Singapore is here to play the long game and her fundamental proposition to investors remains unchanged — assurance of competent and consultative governance, a stable political and business environment, world-class infrastructure and connectivity, access to talent, and an open offer to partner with global businesses on their growth journey.

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This article was first published by the Singapore Economic Development Board (EDB). The Singapore Economic Development Board (EDB), a government agency under the Ministry of Trade and Industry, is responsible for strategies that enhance Singapore’s position as a global centre for business, innovation, and talent. Have the latest insights, stories and analyses on how companies are growing in Asia delivered to your inbox here.

Author

Allen Tan is the head of the Tax, Trade and Wealth Management practice in Baker McKenzie Wong & Leow. He has extensive experience working on both international and local tax issues, with a special focus on the regional tax aspects of the transactions that he is involved in. Allen’s clients include Global Fortune 500 multinational corporations and major Singapore conglomerates. He is recognised as a leading lawyer for his tax controversy and corporate tax work in many leading legal and tax directories including International Tax Review, Chambers Asia Pacific and Legal 500 Asia Pacific. Allen was also named the Asia Tax Practice Leader of the Year 2018 by International Tax Review.

Author

Dawn Quek is a leading tax and private client lawyer in Singapore with many years of experience in corporate tax and international tax planning. She is the Head of the Wealth Management practice in Singapore and is the Asia Pacific representative on the Firm's Global Wealth Management Steering Committee. Dawn is consistently ranked as a leading tax and private client/wealth lawyer by various legal publications including Chambers High Net Worth (HNW) Guide, International Tax Review Women in Tax Leaders Guide and the Legal 500 Asia Pacific. She was named "Private Client Lawyer of the Year" at the 2018 Asia Legal Awards by The Asian Lawyer, and named "Women in Wealth Management" at the 2018 WealthBriefingAsia Awards. Dawn is a key player in the local wealth management and financial services scene. She frequently participates in formal and informal consultations with government authorities on law reform on issues relating to the wealth management and financial services industry from a tax and legal perspective. She has also co-written articles on international tax planning issues in various tax and legal journals published by CCH and BNA. In addition, Dawn has been quoted extensively in publications such as the New York Times, the International Herald Tribune, Reuters, the Financial Times, the Straits Times, the Business Times and Asian Private Banker on issues and developments affecting the wealth management industry in Singapore.

Author

Shih Hui Lee has advised on both regional and Singapore tax issues, with focus on advising MNCs on international tax aspects of cross-border transactions. Her practice includes advising clients on tax issues arising from mergers and acquisitions, indirect taxes, transfer taxes, foreign direct investment and cross-border tax planning issues. Prior to joining Baker McKenzie, Shih Hui worked in one of the Big Four accounting firms in Singapore. She has experienced being an in-house regional tax advisor in one of the multinational cable and satellite television channel.

Author

Jaclyn has over 10 years of experience and specialises in solving the tax needs of multinational corporations and Singapore-headquartered companies across various industries globally and regionally. She is adept at complex tax transformations to help clients unlock and maximise long term value, and achieve sustainable and tangible benefits, in tandem with business current and target operating models. Jaclyn has extensive and deep experience in unlocking corporate synergies across the spectrum of tax-related services that Baker & McKenzie offers. Whether it is an international tax issue, restructuring strategies and implementation, intellectual property planning, M&A, or tax incentive negotiations with the relevant authorities, Jaclyn is a trusted advisor to her clients with her practical, sophisticated, innovative, and tailored solutions.

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