Considerations for a Singapore regional/global headquarters has been saved
Considerations for a Singapore regional/global headquarters
Written by Avik Bose and Anh Pham from Deloitte Singapore
Fund managers are facing new challenges as tax authorities seek to establish increasingly stringent transfer pricing compliance requirements.
It has been a practice for multinational companies (MNCs) to consider Singapore as a location for their global or Asia Pacific (APAC) headquarters (HQ). Singapore stands out as a preferred location for an APAC regional HQ primarily due to the country’s strategic location, highly qualified human capital pool, efficient business and stable political environment, strong financial infrastructure, extensive participant network, and an effective legal, regulatory and tax framework.
One of the advantages of selecting Singapore as a HQ location is the flexibility of having a centralised operating model with accompanying benefits - this works best for MNCs with minimal financial and operational limitations. For instance, centralisation of functions under a Singapore-based HQ structure, apart from including certain usual regional functions (such as treasury, regional management and back office), may also be structured as a regional or global principal hub to have significant value-creating activities, including ownership and development of intellectual properties, legally entitling the HQ to residual profits.
Also, Singapore’s easy access to a highly skilled multinational workforce, significant and fast growing APAC markets, a pool of reliable and cheap labour sourced from neighbouring countries and well-established logistics infrastructure can facilitate MNCs in achieving the substance required for the principal’s role, which is especially critical in the post-Base Erosion and Profit Shifting (BEPS) world.
Additionally, generous and accessible incentives programmes offered by the Singapore government for certain types of operations – most of which relate to HQ operations – are also available for MNCs to take advantage of to further reduce operating costs. These programmes include the International Headquarters Award, IP Development Incentive, Research Incentive Scheme for Companies, Finance & Treasury Centre, and Development & Expansion Incentive. Exit tax costs are generally low-to-none as well – depending on the fact pattern of the relevant MNCs operating in Singapore.
Another notable advantage is the high possibility of negotiating and successfully concluding Advanced Pricing Arrangements (APAs) or invoking Mutual Agreement Procedures (MAPs) for MNCs to secure tax certainty, resolve tax disputes and eliminate double taxation. Cross-border related party transactions undertaken by the HQ could be complex and significant in terms of value, which could potentially invite queries from tax authorities. A prudent and proactive tax management exercise would be to minimise this exposure through APAs.
Singapore has transparent tax systems and policies with a wide network of tax treaty partners. The processing time for APAs and MAPs is relatively short - generally one-to-two years for APAs, and was less than one year for MAPs in the period 2017-2018. Therefore, the potential to successfully conclude APAs or reach settlement on MAPs is very high.
While transacting with overseas associated entities, the Singapore-based HQ might come across situations where tax authorities in those overseas jurisdictions have different regulations/treatments regarding particular aspects of the related-party arrangements, which might lead to tax disputes and double taxation. With the wide tax treaty network and participation in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), the Inland Revenue Authority of Singapore (IRAS) could facilitate the HQ in discussing/negotiating with corresponding tax authorities via the MAPs mechanism. This has been normally the case when the concerned arrangements are not part of the APAs concluded or the HQ did not consider APAs initially.
Although there are quite a few advantages of having Singapore as the location for their HQ, there are TP compliances that MNCs would need to adhere to. One of them is the need to have robust TP documentation, which should considerably help in managing/reducing TP risks and potential TP disputes, especially in the absence of APAs. Singapore, in parallel with building her capacity as a financial and economic hub, has been developing her tax and TP systems and policies, aligning them with international developments. Some examples include:
- The commitment to implement the minimum standard on preventing treaty abuse – which led to the participation in the MLI framework with 94 countries
- The commitment to spontaneously exchange information, such as unilateral APAs or other cross-border rulings regarding TP and related party conduit rulings, for example, in response to BEPS Action 5 “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”
- Adapting the BEPS Action 8-10 “Aligning TP Outcomes with Value Creation” within local regulations
- Adapting BEPS Action 13 “TP Documentation and Country-by-Country Reporting”
- Signing of the Multilateral Competent Authority Agreement on the exchange of Country-by-Country (CbC) Reports (or MCAA CbCR) to efficiently establish a wide network of exchange relationships for the automatic exchange of CbC Reports
For MNCs, efficiently and appropriately balancing compliance with all the TP requirements in Singapore, while keeping in mind potential TP/tax exposures in other countries with which the Singapore-based HQ have transactions, requires sophisticated and tech-enabled tax and TP management, strategies and solutions.
Blessed with its strategic location and proximity to the fastest growing markets in the world, Singapore has constantly upgraded its ecosystem to enhance its role as a financial and economic hub and it is a suitable candidate for a global/regional HQ location. For all the flexibility, convenience and reliability that Singapore offers as a HQ location, MNCs still need to adhere to local TP requirements, manage their TP policies and put in place robust TP documentation(s) to manage potential TP risks and disputes. Given the significant number of HQ entities operating in Singapore, specific TP guidelines addressing TP issues of HQ entities might soon be expected from the revenue authorities here.