Settling the (tax) score after the fall
In a post-pandemic world where losses (rather than profits) for many businesses could be pervasive, the time may not be ripe now to bulldoze through BEPS 2.0 measures.
During the violent Hong Kong protests, a Financial Times article (assertively titled "Beijing will have its revenge on Hong Kong") referenced the Chinese phrase qiu hou suan zhang, in concluding that vengeance by the Chinese government will be forthcoming even if the questions of when and how remain unclear.
With the literal translation of the phrase being "to balance the books after the autumn harvest", that article highlights this Chinese aphorism that can be used in many situations, particularly where the vengeance aspect is almost certain but an element of patience is required in the circumstances.
THE MESSAGE FOR RELEVANT AUTHORITIES AND TAXPAYERS
As the world at large grapples with the Covid-19 pandemic, priorities of some regulatory bodies have had to take a back seat as broader economic and health concerns (rightly) take centre stage. In the taxation field, leading multilateral organisationsinfluential in this space, such as the United Nations (UN), the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) , have been quick to provide guidance materials and recommendations that can help frame the way forward for tax authorities in implementing interim policies and measures. For instance, the IMF suggested a temporary reduction of tax-audit actions, as well as setting up simplified procedures associated with relaxed tax obligations with a view to applying enforcement actions post-crisis where warranted.
Closer to home, the Australian Taxation Office (ATO) appears to have converged towards this suggestion by reportedly indicating that - with respect to audits - it will in most cases pause any new audit activity.
While there is currently no similar messaging in Singapore relating to the pausing of new tax audit by the authorities, the Covid-19 (Temporary Measures) Act passed by Parliament on April 7 could provide some useful parallels for the relevant authorities to consider.
According to the Ministry of Law, this new legislation is meant to impose a moratorium on certain legal actions, so that parties have time to negotiate and work out their differences without the threat or uncertainty of legal proceedings. The prescribed period of relief under this legislation will be six months in the first instance. This is a timeframe which could prompt questions as to whether the recently announced automatic three-month deferment of certain income tax payments could be doubled for general alignment and, importantly, provide stronger relief to taxpayers.
Furthermore, the legislation in its current form is unlikely to statutorily preclude the Inland Revenue Authority of Singapore (IRAS) from initiating legal action on a taxpayer deep in arrears. In the interest of broadening relief for taxpayers, there may be a case for the scope of the Covid-19 (Temporary Measures) Act to be expanded to include IRAS-taxpayer interactions and accord a moratorium to some degree. Such a move could foster certainty, even if over the years the IRAS has often been regarded as a reasonable body by many taxpayers and one which is unlikely to embark on vexatious litigation.
For taxpayers, it will be important to realise that even as tax compliance and tax payment deadlines get deferred, the hard truth is that the need to focus resources and attention towards taxation matters should remain largely unabated.
For example, in a corporate context, the concepts of tax residency status and permanent establishment (PE) typically cannot be de-linked from some sort of in-country presence. Recent IRAS guidance acknowledges this, but proposes to allow a "look-back" kind of approach. Put simply, in the context of tax residency status, if a company was regarded as a Singapore tax resident with reference to its 2019 financial year, it can potentially still be so for its 2020 financial year, even if, due to travel restrictions, it is not able to hold its board of directors' meeting in Singapore - often an important determinant in residency status discussions.
The same "look-back" spirit applies in the context of foreign companies seeking to prevent PEs from being created because of unplanned presence of their employees in Singapore.
While the "look-back" kind of approach is definitely part of useful measures introduced that can alleviate businesses' Singapore tax concerns - and avoid unwanted tax consequences such as losing tax residency status and the attendant tax benefits - in return, the IRAS expects documentary support to be prepared and maintained. In other words, a future tax audit could very well potentially focus on a corporate's self-asserted tax residency status, where tardyrequisite documentation - or worse, a lack thereof - can trigger difficult disputes with the IRAS.
And not least, taxpayers - particularly businesses with cross-border activities - who unwisely choose to underestimate the importance of managing their tax risks during the difficult pandemic situation may face the wrath of numerous tax authorities down the road. This is especially so since globally, tax administrations have, in recent years, been ramping up their abilities to collate and exchange information automatically under internationally agreed protocols such as the Common Reporting Standards (CRS).
MESSAGE FOR A SUPRANATIONAL
In the decade or so preceding the current pandemic, the OECD has been especially exemplary in shaping international tax developments. Under the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), over 135 countries have been collaborating to put an end to tax avoidance strategies that exploit gaps in tax rules to avoid paying tax.
In framing that "BEPS due to multinational enterprises exploiting gaps and mismatches between different countries' tax systems affects all countries", action plans have been developed and implemented at an unprecedented rate, to foster international collaboration to end tax avoidance. With a view towards ensuring everybody pays their fair share of taxes, the BEPS-related initiatives were set to result in the most fundamental change to the international tax rules since the 1920s.
The latest incarnation of these initiatives (widely labelled BEPS 2.0) has been the potential introduction of various new concepts such as a new taxing right (Amount A, in OECD vernacular) focused on profits allocable to market jurisdictions; a fixed return for certain distribution and marketing activities (Amount B, again in OECD lingo) which aims to standardise the remuneration of distributors, etc.
In the context of this article, these OECD initiatives could collectively culminate in the settling of scores after years and decades of perceived low tax incidence of many large multinationals. As a learned commentator posits, "BEPS is the revenge of source countries (recast as 'market' jurisdictions)".
Singapore, as an international business hub location without a large domestic market, stood to become a "net" loser in the face of such fundamental international tax reform. As minister Indranee Rajah puts it (in her address at a digital tax conference on Oct 4, 2019), "if BEPS 2.0 focuses excessively on allocating profits towards where the market is . . . governments that have previously invested in building a conducive business environment might find less motivation to continue doing so". There can be considerable disincentive for our nation if this eventuates.
Beyond the economic interests of hub locations like Singapore, the Covid-19 pandemic should however prompt a rethink of the BEPS 2.0 measures. At the very least, the question ought to be whether the OECD's openly stated aim of finalising these "by the end of 2020" still resonates, or that this timing is somehow not ripe, with the potential to distract some member countries of the Inclusive Framework in safeguarding lives and livelihoods.
One reason is that thus far, the BEPS-related initiatives have largely been conceived to deal with corporate profits. In a post-pandemic world where losses (rather than profits) for many businesses could be pervasive, it remains to be seen whether an Amount A approach that allocates large losses (which in theory, defer taxes) to market jurisdictions will be viewed enthusiastically by these same countries.
A final reason for why the time may not be ripe to introduce these BEPS 2.0 measures is one that is neither economic nor tax-related, but a linguistic one - if the erudite tax minds at the OECD have not quite found a way to describe these novel BEPS 2.0 concepts using more intuitive commercial lingo (and having to use somewhat awkward nomenclature like Amount A and Amount B), it is quite possible that the broader business world is just not ready.
The writer is tax practice leader at Baker Tilly Singapore.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.