Contents. Introduction. Good tax system - Canons of taxation. What is a competitive tax system? Post BEPS era New world order in tax?

Transcription

1 A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective Liew Li Mei, Partner, Deloitte & Touche LLP, 15 August 2017

2 Contents Introduction Good tax system - Canons of taxation What is a competitive tax system? Post BEPS era New world order in tax? Pitfalls Conclusion 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 2

3 Introduction

4 Introduction Competitiveness Creating a comparative advantage using tax policy Good tax system Foundation of generating sufficient revenue to fund public expenditure with minimum sacrifice 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 4

5 Good Tax Systems Canons of Taxation

6 Good Tax Systems Canons of Taxation Adam Smith, an economist, wrote in the Wealth of Nations, in 1776 on the characteristics of a good tax system. He propounded on the four canons of taxation. Equity Tax should be levied on citizens on the basis of equality. Certainty Tax, which an individual has to pay, should be certain and not arbitrary. Convenience or Ease Every tax should be levied in a manner and time that it affords the maximum convenience to the taxpayer. Economy Cost of collecting tax should be minimum Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 6

7 Good Tax Systems Canons of Taxation As the business environment evolved and became more complex, other economists began to expand and propound on other canons of taxation. Productivity Elasticity Tax should yield sufficient income to the Government to run the administration efficiently and to work for the welfare of the people Tax system should be elastic so that tax burden may be increased or reduced from time to time as and when the demand for revenue changes Simplicity Tax should not be complicated in its nature and be simple enough for taxpayer to understand. Variety Flexibility Government should collect taxes from different sources rather than concentrating on single source of tax Tax system must be flexible and not rigid such that authorities can revise the tax regime to suit the changing requirements of the economy 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 7

8 What is a Competitive Tax System?

9 Competitive Tax System On 30 June 2011, OECD published a report titled Challenges in designing competitive tax systems. What is competitive? In the 2016/2017 Global Competitiveness Report issued by World Economic Forum, competitiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 9

10 Competitive Tax System 12 pillars have been identified: Institutions Infrastructure Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Labour market efficiency Financial market development Technological readiness Market size Business sophistication Innovation 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 10

11 Competitive Tax System To measure the impact of tax on competitiveness consider how tax policy and administration impact on the various pillars and therefore, productivity. OECD in its 2011 report identified 9 pillars that are most likely to be directly affected by tax policy and/or administration Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 11

12 Competitive Tax System 1. Institutions Sound and fair legal and administrative framework Institutions Tax policy and administration: collect fair share of revenue and lower compliance costs to businesses. 2. Macroeconomic environment Raise sufficient tax revenues to finance public expenditure while maintaining sustainable budget deficits and public debt ratios Influence the extent to which the tax regime reduces market efficiency and growth prospects 3. Higher education and training Usually involves private sector choice and finance. Therefore, tax regime should not be designed to distort such choice Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 12

13 Competitive Tax System 4. Good market efficiency Growth-oriented tax regimes distort market signals as little as possible, and avoid discouraging the supply of entrepreneurship, investment and skills. Financial market development Generally less distortive if a broad base is sued. 5. Labour market efficiency Role of personal income tax 6. Financial market development A sound financial sector will provide adequate access to funds and that the investment opportunities that yield the highest expected returns are undertaken 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 13

14 Competitive Tax System 7. Market size Tax policies can support wider markets by removing tax obstacles to trade 8. Business sophistication Technological readiness and innovation Include quality of individual firms production, innovation and marketing strategies 9. Technological readiness & innovation Ability of economies to adapt existing technologies and innovation to the development and application of new technologies and products Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 14

15 Competitive Tax System Singapore - the 2016/2017 Global Competitiveness Report - key features in the income tax regime - tax incentives 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 15

16 Post BEPS era New world order in tax?

17 Post BEPS era New world order in tax? Competitiveness and harmful tax practices A competitive environment can promote greater efficiency in government expenditure. However, some tax and related practices may be anticompetitive, or even harmful, which can undercut the gains that tax competition generates Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 17

18 Post BEPS era New world order in tax? BEPS Actions Minimum standards Action 5: Harmful tax practices Action 6: Prevent treaty abuse Action 13: CbC reporting only Action 14: Dispute resolution Strengthening existing international standards Action 7: Permanent Establishment (PE) Actions 8-10: Transfer Pricing Action 13: Non-CbC reporting elements Common approach Action 1: Digital economy Action 2: Hybrid mismatch arrangements Action 4: Interest deductions Best practices Action 3: Controlled foreign company (CFC) rules Action 12: Aggressive tax planning arrangements 0 Action 15: Multilateral instrument 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 18

19 Post BEPS era New world order in tax? Action 5: Harmful tax practices - Overview Requiring substantial activity for preferential regimes benefits [should be granted] only to qualifying taxpayers to the extent those taxpayers [undertake] the core income generating activities required to produce the type of business income covered by the preferential regime For IP: core income generating activity is the taxpayer s performance of R&D Patents ( broadly defined ), copyrighted software and other IP assets that are non-obvious, useful, and novel Marketing-related IP assets such as trademarks can never qualify for tax benefits under an IP regime. Tracking and tracing exercise needs to link three items: expenditure, IP asset, and income. Product-based approach for multiple IP assets Grandfathering: No new entrants to existing IP regime after 30 June 2016, and all existing IP regimes are to be abolished by 30 June 2021 Improving transparency Compulsory, spontaneous exchange of information, between tax authorities, on taxpayer-specific rulings 6 types of taxpayer-specific rulings: preferential regimes, unilateral APAs, unilateral downward adjustment of taxable profits, permanent establishment, related party conduit arrangements, and others (to be identified in the future) Ongoing review of preferential regimes Total of 125 preferential regimes reviewed so far: 31 IP regimes, 6 HQ regimes, 11 financing and leasing, 15 banking and insurance, 22 service and distribution center, 13 other categories (e.g. shipping, holding) and 27 dual categories Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 19

20 Post BEPS era New world order in tax? Peer review - Action 5 Minimum Standard Terms of reference issued Review carried out by Focus of review Methodology and approach Action 5: Harmful Tax Practices Feb 2017 Forum on Harmful Tax Practices (FHTP) Information gathering process Exchange of information Confidentiality of information received Statistics Procedures set out Data collection Preparation and approval of reports, review outputs and follow up process Standardized questionnaires BEPS Inclusive Framework Past rulings Future rulings OECD and G20 New members of Inclusive Framework Non-G20 non-financial centers developing countries 1 Jan 2010 to 31 Dec 2013 [three years], and still in effect as at 1 Jan Jan 2014 to 31 Mar 2016 [two years] 1 Jan 2012 to 31 Dec 2014 [two years], and still in effect as at 1 Jan Jan 2015 to 31 Mar 2017 [two years] 1 Jan 2014 to 31 Dec 2015 [one year], and still in effect as at 1 Jan Jan 2016 to 31 Mar 2018 [two years] By Dec 2016 By Dec 2017 (if joined during 2016), otherwise also Dec 2016 By Dec 2018 From 1 Apr 2016 From 1 Apr 2017 From 1 Apr 2018 As soon as possible, but no later than three months after tax ruling becomes available to the competent authority Exchange of tax rulings within the EU started 1 January Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 20

21 Post BEPS era New world order in tax? Peer review - BEPS: OECD s Tax Talks webcast Achim Pross on spontaneous exchange of tax rulings: Information on thousands of tax rulings exchanged Spontaneous exchange is exchange of information concerning the ruling Tax authorities interested in obtaining a ruling can request it under the exchange of information article January 2017: 1st round of peer reviews, covering OECD and G20 members, commenced Early 2018: OECD will publish results of 1st round January 2018: Peer reviews for other Inclusive Framework members will commence January 2019: Peer reviews for developing countries will commence 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 21

22 Post BEPS era New world order in tax? BEPS Action 5 and Singapore s response BEPS Action 5: minimum standard Phase-out the operation of the existing Pioneer-Services/Headquarters and DEI-Services/Headquarters incentives in regard to IP income Introduction of the Intellectual Property Development Incentive (IDI) in the 2017 Budget Pending release of further details Expectation that the IDI will o comply with the requirements set out in the Action 5 Report o be in the form of a lower corporate income tax rate, which could be zero (the rate has not yet been indicated) 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 22

23 Post BEPS era New world order in tax? OECD Secretary-General Report to G20 leaders, July 2017 The OECD released its annual report to the G20 leaders on the status of a number of tax projects, including the BEPS project. Included in the report is an update on the Action 5 peer review of preferential tax regimes, to determine whether or not they are considered harmful. A number of Singapore s tax incentives have been mentioned in the update Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 23

24 Post BEPS era New world order in tax? OECD Secretary-General Report to G20 leaders, July Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 24

25 Post BEPS era New world order in tax? Deloitte s 2017 Asia Pacific Tax Complexity Survey: Responses generally reflect the escalating complexity in the tax environment in Asia Pacific jurisdictions due to the BEPS reform. Some observations from the survey: Governments are under pressure to secure their tax base Predictability and consistency in tax regimes, while desired, remains elusive BEPS is top priority for governments and companies Tax strategy is increasingly conservative Operating across multiple Asia Pacific jurisdictions can be a balancing act due to vastly different tax environments 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 25

26 Post BEPS era New world order in tax? Companies - Investment decision - Tax strategies - Compliance External Environment Change is a constant Country specific development - Market competitiveness/ Economic priorities - BEPS implementation - Tax law - Tax administration International Developments - OECD s BEPS 15- point action plan 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 26

27 Post BEPS era New world order in tax? Deloitte conducted its third Asia Pacific Tax Complexity Survey in 2017 where more than 300 executives were asked for their opinion on various tax jurisdictions in the Asia Pacific region on the following issues: Complexity Consistency Predictability 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 27

28 Post BEPS era New world order in tax? Complexity refers to the level of difficulty in interpreting and understanding the tax law and rules in the jurisdiction Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 28

29 Post BEPS era New world order in tax? Consistency refers to the perceived uniformity and transparency of enforcement of prevailing tax laws Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 29

30 Post BEPS era New world order in tax? Predictability refers to the availability of information and resources that allow taxpayers to foresee the direction and potential changes in tax law Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 30

31 Post BEPS era New world order in tax? Singapore has performed well in all three areas within the Asia Pacific region. Among the three topics that we have discussed, predictability has been ranked as the most important factor in business decision-making, followed by consistency. Complexity appears to be the least important factor Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 31

32 Post BEPS era New world order in tax? 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 32

33 Post BEPS era New world order in tax? There is significant concern about the BEPS initiative and the resulting impact on how multinationals are taxed. Most of the respondents think that the BEPS initiative will result in a significant change in how multinationals are taxed around the world Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 33

34 Post BEPS era New world order in tax? Concern such as increased administrative burdens to businesses through added disclosure requirements and documentation. Singapore will be proactive in designing BEPS compliant regimes to continue attracting foreign investment and uphold their reputation as investment hub in Asia Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 34

35 Post BEPS era New world order in tax? 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 35

36 Pitfalls

37 Pitfalls Lower taxes do not necessarily increase competitiveness. There is a limit to this approach. Tax incentives offered in Singapore Notwithstanding that our tax incentives require substantive business activities, the key issue is to improve the transparency of such requirements Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 37

38 Pitfalls In the new economy where technology is changing the way traditional businesses are carried out, the challenge is to design an effective tax regime without onerous compliance requirements Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 38

39 Conclusion

40 Conclusion A competitive tax system should not be seen as a race to the bottom in terms of tax rates, especially if opportunities for tax arbitrage shrink Existing tax rules may need tweaking to keep pace with developments in doing business 2017 Deloitte & Touche LLP A More Competitive Income Tax System Getting There and the Pitfalls A Tax Consultant s Perspective 40

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