Introduction
In recent years, international tax developments have taken centre stage. Singapore has certainly not been spared from having to adapt to the plethora of changes which have arisen from the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 project, announcements on the implementation of the BEPS Global Anti-Base Erosion Rules (GloBE Rules) by countries across the globe and updates to the EU’s Code of Conduct Guidance to promote fair tax competition. As tax authorities worldwide react to these developments, businesses face increasing complexities in navigating their tax affairs amidst new regulatory landscapes.
In this article, we hope to offer some insight into the potential areas of complexity and uncertainty for businesses, and comment on what may lie ahead for the Singapore and regional tax landscape. In particular, the importance of tax dispute resolution mechanisms in this new tax world order simply cannot be understated.
Staying nimble and adaptable in the face of international developments and the inevitable uncertainties
Singapore is no stranger to the ebbs and flows of international developments, having made changes and refreshed its tax framework in the past to accommodate international standards, and will have to continue to do so in light of ongoing and prospective developments.
A notable example is the proposed introduction of a new section 10L in the Singapore Income Tax Act 1947 (ITA) to tax gains from the sale of foreign assets on or after 1 January 2024 which are received in Singapore by businesses without economic substance. This new provision seeks to align with the EU’s Code of Conduct Group Guidance, an intergovernmental instrument which aims to promote fair tax competition. The EU updated its guidance in December 2022 on foreign sourced income exemption regimes to include capital gains as a category of income which should be subject to the economic substance requirement.
More changes lie on the horizon, with greater overhauls which will significantly affect the way taxpayers conduct their affairs: the upcoming implementation of the two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The global minimum tax under Pillar Two is designed to end the ‘race to the bottom’ on tax rates by ensuring that in-scope multinational enterprises pay a minimum effective corporate tax rate of 15%. While model GloBE Rules have been released by the OECD, the legal implementation of the rules will ultimately be left to each country for enactment under domestic law – this is done without any binding multilateral instrument. The invisible hand of game theory appears to be the ultimate driver in ensuring that countries will toe the line.
Singapore has already announced its plans to introduce the GloBE Rules (ie the Income Inclusion Rule and the Undertaxed Profits Rule) and the Domestic Top-up Tax (DTT) from businesses’ financial year starting on or after 1 January 2025. The ‘when’ may be known, but the ‘how’ remains a huge question mark, for instance, whether and how existing legislation will be modified, or whether a separate Act will be enacted. The devil is in the details, and whatever the means of implementation, consideration will have to be given to how the new laws interact with Singapore’s existing tax schemes which are governed not only by the ITA, but also by a separate legislation – the Economic Expansion Incentives (Relief from Income Tax) Act 1967, leaving room for potential interpretational issues.
Pillar Two poses other significant challenges for businesses within scope as they would certainly have to re-think how they do business. For one, compliance presents a huge practical issue as current systems that are used by businesses may not be equipped to capture all the data points required for basic compliance functions such as filing the GloBE information return required under Pillar Two.
Another woe that plagues businesses concerns the significant investments that have been sunk into countries pursuant to the terms of existing tax incentives which require substantial economic commitments to be met. Businesses will now have to map out the potential economic impact that Pillar Two may have on the benefits enjoyed under existing tax incentives, carefully navigate their engagements with the relevant countries’ economic agencies and, perhaps for some, take this opportunity to re-evaluate their global footprint, supply chain and commercial presence.
A caution in respect of anti-avoidance is also worth raising amidst prospective Pillar Two planning that taxpayers may be seeking to undertake. Although OECD guidance has been released on potential targeted anti-avoidance provisions, taxpayers have little visibility into what will be eventually legislated by individual countries or whether a broader
catch-all general anti-avoidance provision will also be enacted. Singapore has recently strengthened its domestic general
anti-avoidance provisions and introduced a substantial surcharge on income tax avoidance arrangements computed based on 50% of the tax or additional tax arising from the adjustment made, reflecting its robust position against tax avoidance. If we were to take a leaf out of the tax legislator’s book, this is a consideration that is deserving of more attention as businesses get caught up in trying to mitigate the impact of Pillar Two.
Existing tax frameworks will experience profound shifts
Singapore’s attempt to modify its ITA to comply with international developments on foreign-sourced income regimes also illustrates the friction that may arise from integration into domestic law provisions.
While section 10L (as discussed above) is still in its draft form, it is unclear that such a tax would sit well within Singapore’s income tax framework. Firstly, deeming the relevant gains as income under section 10(1)(g) of the ITA (which is a catch-all provision that covers residual gains or profits of an income nature not covered by the specific classes of income) causes one to question if this could lead to a further extension of the tax base in the future, such as capital gains from the sale of Singapore assets or investments. This does not appear to be currently contemplated nor is it the intent behind the proposed section 10L. However, such concerns might not be unfounded given that section 10L goes against the very grain of the capital-income divide that has been regarded as indefeasible truth under Singapore’s income tax framework.
Secondly, other domestic interpretation issues also rear their head. The section 10L tax is triggered upon receipt and in this regard, the draft provision’s rules for determining receipt mirrors the existing rules on deemed receipt. Hence, difficulties surrounding what amounts to receipt for the purposes of the section may arise – where the consideration for the sale or disposal of the foreign assets are payments in-kind (eg, shares, receivables etc.) and whether such payments can, in fact, be received, have already historically not been straightforward issues.
Further, from an international law perspective, the characterisation of such gains for tax treaty purposes remains uncertain, and raises questions of how double tax relief may be granted in Singapore if the relevant gains from the disposal of foreign assets are already subject to taxation in the country where such assets are located. Hence, it is clear that even international tax frameworks that taxpayers have long relied on also stand susceptible to material uncertainty and change.
New problems require new strategies – the role of alternative tax dispute resolution mechanisms
In light of the complexities faced, we think that this lends towards a significantly increased risk of tax disputes, in particular cross-border disputes. Taxpayers may have to adopt different strategies tailored to the domestic environments in which they operate, as well as factor in the overarching international tax considerations brought by the various upcoming changes. For instance, taxpayers may have to revisit their audit defence strategies and potentially seek more certainty by adopting an approach focused on dispute prevention (eg by pre-emptively engaging with the relevant tax authorities). A consultation document on Tax Certainty for the GloBE Rules issued by the OECD in December 2022 attempts to explore both the dispute prevention and dispute resolution mechanisms.
As cross-border disputes take centre stage, alternative dispute resolution mechanisms become increasingly important tools for taxpayers and states alike. While much academic ink has been spilt on the issue of whether the tax dispute resolution mechanisms under existing treaty frameworks can be used to resolve, say, a double taxation issue arising in respect of the Pillar Two changes, we are hopeful that taxpayers will be able to get more clarity on their options of redress under these frameworks. In particular, we see a potential for a greater role to be played by treaty-based arbitration in regulating the international tax ecosystem. Some initial progress has been made in respect of the mandatory binding arbitration mechanism in the Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit shifting (MLI) which jurisdictions can apply to their Covered Tax Agreements (CTAs). From a certainty perspective, there are material advantages to this process as compared to existing mutual agreement procedure (MAP) provisions under tax treaties, given that taxpayers will be able to obtain finality on the issue under dispute where the MAP dispute remains unsolved for a prescribed time period. Singapore is no exception, as we have adopted and strengthened arbitration provisions in many of our tax treaties, notably in Canada, Japan, UK, France and Australia.
Nonetheless, further steps will have to be taken to ensure the applicability of existing treaty-based/MLI dispute resolution mechanisms to a broadened scope of disputes. Modifications to the existing MLI to clearly expand beyond the ambit of tax treaties, or implementation of common provisions in respective countries’ legislation on a reciprocal basis are just some of the possibilities that are under review.
In any case, while the MLI sounds promising, a jurisdiction and its treaty partner must expressly choose to adopt the mandatory binding arbitration provisions for them to apply. Jurisdictions may also reserve the right not to apply the mandatory binding arbitration provisions of the MLI to some or all of its CTAs that already have an arbitration process. All in all, while the concept is theoretically attractive, it remains to be seen how prolific or effective the use of treaty-based arbitration is or will be.
Conclusion
Waves of change are coming and taxpayers and states alike may have to take steps to ensure they stay afloat. There are numerous challenges that can arise, from having to navigate new domestic and international tax frameworks, the increased risk of domestic and cross-border disputes as a result, not to mention inherent practical difficulties arising from the complexities in compliance in the absence of a multilateral instrument, to name a few.
In undertaking reviews of their global footprint in light of Pillar Two, taxpayers may favour jurisdictions with greater tax transparency and seek opportunities to foster cooperative relationships with tax authorities. In this regard, the Singapore government’s efforts towards transparency is apparent from their proactive public consultations and announcements of proposed tax changes in advance to provide taxpayers with sufficient lead time to prepare. While it is true that Singapore’s tax landscape becomes increasingly complex, the same can be said for every other compliant country as the world grapples with these new international standards. Ultimately, with its robust administration and the jurisdiction’s strong rule of law, Singapore remains a destination of choice for businesses despite these ‘taxing’ developments.
In closing, timely knowledge pays off in these unchartered waters – keeping abreast with recent international trends in taxation and understanding the macro trends driving political or tax authority agendas will be helpful in navigating both local risks and also wider international concerns. Importantly, dispute resolution strategies may well have to evolve as tax disputes become foreseeably more cross-border and complex, and alternative dispute resolution mechanisms such as treaty-based arbitration present potential opportunities for unique solutions.
The team
The team is recognised as the leading full-service tax practice in Singapore, and have been consistently recognised by The Legal 500 for consecutively 13 years in a row. The team accounts for more than 20 fee earners, which includes tax lawyers, economists, accountants and consultants. They continue to provide high quality service to multinationals and major Singaporean enterprise clients from various industries. Given the team’s multi-disciplinary capabilities cutting across legal, accounting and transfer pricing, they continue to engage in a broad spectrum of contentious and non-contentious tax work on top of the comprehensive range of tax expertise offered.