Taxing times for SMEs
Globalisation of the economy has resulted in a shift in the way Singapore corporations operate – from local country-specific business models, to global integrated supply chains which centralise functions at a regional or global level.
Singapore, in particular is a popular location to house regional and global operations, due to political stability and ease of doing business here. As the ubiquity of business models increases, so does the possibility of tax arbitrage opportunities.
Transfer pricing (the setting of price for assets, services, and funds transferred within a group of related companies) is a concern, as multinational groups with entities located in high-tax jurisdictions may act on the incentive to transfer price their cross-border transactions so as to artificially shift taxable profits to lower-tax jurisdictions.
With a series of high profile tax cases involving giants such as Apple and Amazon, there is a growing realisation that the international tax system is not fit for today’s business world. This has led to the Organisation for Economic Co-operation and Development’s (OECD’s) work on the Base Erosion and Profit Shifting (BEPS) project which includes some of the most significant changes in the international tax rules for decades.
Singapore is not a member of the OECD but it joined the BEPS project as an associate in 2016 and has implemented some of the BEPS project recommendations domestically, including international exchange of information.
From a practice-based transfer pricing regime, the Inland Revenue Authority of Singapore (IRAS) moved to a more formalised regime in February 2018, where transfer pricing requirements and penalties are now codified in tax legislation. Not only is transfer pricing documentation mandatory, taxpayers also have to file additional related party transaction disclosure forms, and for larger Singapore-headquartered groups, a country-by-country (CbC) report .
What does this mean for Singapore Small and Mid-size Entities (SMEs)?
Unfortunately for the small guy, whilst the BEPS project refers to Small and Mid-size Entities (SMEs) and Multi-National Entities (MNEs) it seldom differentiates the rules between them. In fact, the definitions themselves are not clear because many SMEs operate internationally and are, therefore, in essence, MNEs.
In Singapore, there is some concession for smaller taxpayers. Taxpayers with revenue below a threshold of $10m, with minimal related party transactions and those who meet other specified criteria are exempted from preparing transfer pricing documentation. The requirement for CbC reports also only extends to larger Singapore-based MNEs with group turnover exceeding $1.125b.
But the respite stops short here. Despite the fact that cross-border structures typically employed by SMEs do not have the same characteristics of the ones by large MNEs, the same BEPS tax rules and IRAS scrutiny apply for both SMEs and MNEs. As Singapore adopts the lengthy and complex BEPS recommendations into our tax legislation, the impact of many changes being suggested will be felt in increased governance, compliance costs and in some cases taxing authority audits.
How Singapore SMEs should manage the new tax landscape
Internationalisation makes Singapore SMEs more robust and potentially more successful, with a far greater client base and more scope to expand. However, internationalisation will also bring heavier tax compliance burdens, tax authority scrutiny and potential financial, even reputational risks. The new tax landscape does not, for the most part, differentiate SMEs from MNEs in terms of the issues and the obligations. SMEs will have to manage risks on a smarter basis as they typically have less resources.
To note, regardless of what product or service, Singapore SMEs are likely to be regularly using and maybe creating a great deal of intellectual property (IP) internally. In Singapore, there particular focus on transfer pricing for intangibles and Singapore SMEs should systematically consider the steps required for protecting, managing and enforcing their IP, so as to not only get the best possible commercial results from its ownership, but also to satisfy the tax police.
Singapore SMEs need to play their cards right and ensure that their global tax footprint is commensurate with group operations and value creation across tax jurisdictions. Design will be important and any planning will need improved focus on substance.
