MNCs park profit in Singapore, Hong Kong
Calcutta, July 5: Singapore and Hong Kong, with their low corporate tax rates, have started to hove into view on the radars of multinational companies that are looking to lower their tax burdens through profit shifting.
Profit shifting is a perfectly legal way of moving the earnings of an MNC to a low-tax destination to avoid the clutches of a high-tax regime.
Ideally, MNCs prefer tax havens with zero corporate tax rates such as Cayman Islands and British Virgin Islands for a profit-shifting operation. But with several countries, including India, looking to tighten tax laws with respect to these havens to prevent revenue leaks, Singapore and Hong Kong have emerged as new-found alternatives.
The corporate tax rate in Singapore is 17 per cent, while Hong Kong levies 16.5 per cent. Both are below the global average of around 23.6 per cent and significantly lower than India’s rate of around 30 per cent.
“MNCs generally plan their tax in a different manner and structure their operations in various ways to take full advantage of the tax treaties between countries to ensure that the least possible tax is deducted at source from income streams like dividend and royalties, thereby ensuring the funds reach the parent company in an efficient manner,” said Dinesh Agarwal, chairman of International Fiscal Association (eastern region).
Agarwal, who is also partner, tax and regulatory services, at Ernst & Young, added, “MNCs secure favourable tax treatment by accumulating reserves in low tax jurisdictions such as the Netherlands and Switzerland with an extensive range of double taxation treaties. Tax havens are also frequently used to set up conduit companies to avoid taxation. Profit shifting to such low tax/no-tax jurisdictions has been a major cause for (tax) base erosion globally as well as in India.”
In India, the government has started an initiative to prevent revenue loss from profit shifting to tax havens and low tax countries. In 2013, Cyprus was identified by the Central Board of Direct Taxes as a “notified jurisdictional area” under the provisions of Indian tax laws, which seeks to strengthen the Indian system of collection of information from foreign tax jurisdiction and avoid shifting of profits outside India.
“Because of such initiatives being undertaken globally, offshore locations such as BVI and Cayman are being avoided in favour of mid-shore jurisdictions such as Singapore and Hong Kong,” Agarwal said. These mid-shore jurisdictions offer the offshore traits of low tax rates and secrecy along with sophisticated and well-staffed financial centres.
“Unlike before, corporates consider taxation as one of the major areas while taking strategic business decisions relating to growth and expansion. This has become even more important because tax laws are evolving significantly with the increasing learning curve of the people in this field. Globally, organisations such as the OECD have been taking proactive steps to tackle aggressive tax planning by MNCs. In India, which is a fast developing country, this is even more evident with the advent of advanced pricing agreement, black money law and significant changes in tax laws relating to non-residents, overseas fund managers etc,” Agarwal said.
