Responsible taxation: The impact on Singapore's hub status

International taxation and taxation of multinational corporations (MNCs) is a topic that continues to attract growing interest within the business community, specifically the Base Erosion and Profit Shifting (Beps) project being carried out by the Organisation for Economic Co-operation and Development (OECD), which continues to push ahead at a rapid pace with the target completion date of December 2015.

Put simply, Beps refers to instances where the interaction of different international tax rules leads to some part of the profits of MNCs being shifted to locations where there is little physical activity combined with a low tax burden - meaning those profits are taxed at a low rate or, in some situations, not at all.

The reality is that this is rarely illegal, as it is often a matter of differences between the tax rules in different tax jurisdictions and because internationally developed standards have not kept pace with the "globalisation" of the economy and MNC business models.

As tax is a major business expense, Beps is a business problem and a global issue that requires global solutions.

In Deloitte's recent global survey of MNCs which studied nearly 600 clients' views on "responsible tax" and Beps and the resulting impact on their organisations (including respondents from Singapore), many important findings surfaced:

• Nearly 90 per cent of respondents anticipate that their income tax compliance burden will substantially increase as a result of the additional reporting from the Beps recommendations.
• Over 50 per cent of respondents anticipate significant unilateral legislative changes to protect the tax base that is not coordinated with what the other countries are doing, which will contribute to uncertainty, risk of double taxation, and other potential cross-border trade and investment barriers.
• Almost 50 per cent of respondents anticipate significant legislative and treaty changes as a result of the Beps initiative.

What does this mean for Singapore's competitive position in the global economy?

While Singapore is not an OECD member country, the government is paying close attention to developments at the OECD. There is a growing recognition that should the recommendations from the OECD be implemented, this could potentially make "hub" locations such as Singapore less viable for foreign investors. The issue is not necessarily what Beps measures Singapore itself may choose to implement, rather what tax measures other countries may implement which could negate the benefits of locating a hub in Singapore or create double taxation.

In addition, Singapore-headquartered groups that invest overseas need to pay closer attention to reactions to Beps in countries where they invest. We are already starting to see law changes being announced on a unilateral basis in countries including the UK, China and Australia.

REAL RISK

Singapore is widely recognised as being one of the easiest places in the world to do business, and receives regular accolades to this effect. Along with its highly competitive tax regime and deep pool of skilled labour, it is therefore logical that MNCs will want to continue to invest here. Although it does compete with other locations for investment including Hong Kong and Malaysia, Singapore often comes out on top.

Relatively speaking, as long as Singapore continues to seek to maintain its competitive edge and continues to evolve its tax framework and economy in line with or ahead of changes in global investment trends, there is no reason to think that Singapore cannot maintain its edge over its competitors.

However, is the real risk to Singapore that the age of the hub in MNC business models is coming under pressure and potentially to an end? A number of the Beps proposals could make having a hub in somewhere like Singapore less palatable if it means higher taxes on a global basis. For example, MNCs could end up paying more in taxes when paying dividends from profitable subsidiaries with a hub in Singapore than if they had just paid to the headquarters directly. In that case, would this negate the operational benefits of having the hub in Singapore?

In a more extreme scenario, MNCs could choose to just invest into territories directly rather than through a hub location such as Singapore. This could be bad news for Singapore.

What can the Singapore government do about this or is it out of their hands? Well, we know that Singapore has representation as an "observer" at the OECD so they are close to developments in the Beps project on a real-time basis. In reality as a small nation, Singapore's ability to influence the Beps project is limited but having an inside track on developments is surely the next best thing.

We also know that Singapore's Ministry of Finance, the Inland Revenue Authority of Singapore, the Monetary Authority of Singapore and others are consulting business and other stakeholders in Singapore on a regular basis to take input as to what they should be doing, if anything. They are also changing tax policy in certain areas such as transfer pricing documentation and the way that tax incentives are awarded and assessed to move more into line with the OECD's preferred approach.

Aside from trying to ensure their view is at least communicated at the OECD, the wait-and-see approach seems most appropriate for Singapore at the moment. The Beps project is still in development and it would not be wise for Singapore to take any proactive unilateral steps at this stage which would impact on its competitive position. In particular, we do not see any significant action being taken by other countries which promote themselves as hub locations in Asia (such as Hong Kong and Malaysia), so Singapore should be conscious to remain competitive. In addition, Singapore can continue to promote other activities which we are seeing, for example, as an offshore clearing house for Chinese renminbi and as a global gold trading hub.

Where the Beps process will end up is anyone's guess, but one thing is sure: Change is inevitable. We are seeing it already and Singapore needs to stay aware and on top of developments to ensure that its competitive position is not eroded.

The writer is tax director of Deloitte Singapore.