Geoffrey K Soh, Felicia Chia
An economic partnership now lies in shambles following the UK's unilateral decision to separate from the European Union. The impact of this split will be felt by Asian businesses that need to prepare for this unprecedented change. Lam Kok Shang, head of indirect tax, and Angelia Chew, Asia Pacific trade and customs leader, of KPMG in Singapore, explore what may lie ahead.
After the initial shock of the June 23 referendum, reality is setting in with the ripples from the divorce proceedings spreading far and wide, reaching Asia in the first wave of volatile market activity. Other impacts, like the possible tax implications for businesses with interests in the UK, are set to follow, although much uncertainty has clouded the horizon.
Some key questions include when the UK will officially start the process of leaving the EU and what types of alternative economic agreements/treaties it may have in place. Although Prime Minister Theresa May has confirmed that the UK will trigger the Article 50 notice required for leaving the EU by March 2017, at the time of writing no actual date has so far been announced.
Asian businesses that are beneficiaries of their countries' free trade agreements (FTAs) with the EU will have to plan ahead, whether in terms of their supply chain or business sourcing decisions.
All importing Asian countries like Singapore, Vietnam and South Korea will be affected by the future exclusion of the UK from the umbrella of FTAs that the EU has negotiated, or is still negotiating, with Asian partners.
For example, let us assume that the UK is officially not part of the EU and has not finalised new bilateral agreements with an EU FTA partner – such as South Korea.
If the last manufacturing country of cosmetics is the UK, and the finished product is exported to South Korea, the finished product will be subject to South Korea's full import duty at 8% instead of 0%. The cost of the cosmetics will increase by 8% immediately.
If the last manufacturing country is France and the finished product is exported to South Korea, but an ingredient is sourced from the UK, the UK ingredient will be regarded as "non-EU". The final product may fail the origin criteria under the EU-Korea FTA and no longer qualify for the tax benefits offered under that agreement. The finished product shipped to South Korea would then be subject to full import duty at 8% instead of 0%.
The reassessment of global supply chains is especially critical in price-sensitive industries and when utilisation of EU FTAs is a key strategy to minimise customs duty.
In the hypothetical example given, an 8% customs duty saving is absolutely critical for foreign companies looking to gain greater market access in the competitive South Korean cosmetics industry. Such FTA considerations could trigger potential migration of global or regional business functions (e.g. procurement, manufacturing, distribution hubs) out from the UK.
Asian businesses should adopt a more holistic approach in managing their global footprint to consider a wider corporate tax and indirect tax perspective.
From a corporate tax perspective, if a company is keen to relocate business functions, it may consider negotiating a more attractive corporate tax incentive package with certain jurisdictions.
From a VAT perspective, if business functions relocate to other countries, whether within or outside of the EU, businesses will need to reassess their VAT registration statuses and obligations. This is to ensure proper VAT treatment for the selected jurisdiction(s) as well as to re-configure their in-house system requirements to fulfil VAT compliance requirements.
For intra-EU trades, businesses will also need to take into account the potential inability for UK distribution hubs to use cross-border trade VAT simplifications.
From a trade and customs perspective, obtaining the appropriate customs bonded facilities, trade licenses and bandings are also important considerations for ensuring continued global supply chain efficiencies.
The UK being a part of the EU has meant simplified VAT treatment for the cross-border movement of goods between the UK and other EU member states, rather than being treated as exports and imports, which have additional compliance requirements and affect businesses' cash flows. As such, it has been possible to set up distribution hubs in the UK for products originating from Asia that desire open access to the rest of Europe.
With Brexit, Asian businesses looking to grow or expand into Europe may find the UK less attractive as a regional distribution hub. In addition, where companies provide B2C digital services and are VAT-registered through the UK, it will no longer be possible to use the simplified single VAT return scheme that covers all EU member states.
Though this impact may not be significant at this point in time, it is anticipated that with future increased utilisation of this VAT scheme for online sales of goods, the downside of operating through the UK will be accentuated. For businesses continuing to operate in the UK after Brexit, the additional challenges will likely arise from changes to enterprise resource planning systems to set up new VAT and duty treatments and related compliance requirements.
The cross-border physical trade between the UK and the rest of EU member countries would be classified as imports and exports. This could lead to potentially increased duty outlays depending on the specific goods traded, as well as the VAT cash flow impacts, which can be significant as a result of the 20% UK VAT rate. All these will translate to higher landed costs for imported products and higher operating expenses for businesses choosing to continue operating and investing in the UK.
With the political and economic uncertainties surrounding Brexit, the UK is expected to take some time to negotiate its bilateral economic and trade agreements with various countries.
It is important for businesses to closely monitor the developments and be ready to provide inputs to the authorities negotiating the various agreements.
To be well prepared, every business should evaluate the potential impact and put in place an appropriate response plan.
With every twist and turn, businesses should brace themselves for more volatility.
The biggest changes to come to the Singapore market are likely to be as a result of international political and economic upheaval. Advisers including Eric Roose, Withers KhattarWong Taxand Singapore's Asia Pacific head of international tax, have said a number of global trends in 2016, including falling international commodity prices, uncertainty surrounding Britain's exit from the European Union, the slowing down of China's growth rate and the US's cautious approach to monetary policy in light of mixed economic indicators, are expected to bring a major impact on the legal and tax advisory market in the region.
Countries around the globe have committed to protecting and expanding their tax bases under the OECD BEPS Project, and Singapore has committed to adopting four minimum standards on harmful tax practices, treaty abuse, CbCR and effective dispute resolution.
"Automatic exchange of information using the common reporting standards (CRS) and CbCR will lead to transparency unlike ever before. However, these policy responses have created tremendous uncertainty for global corporations and investors and there is a need to revisit conventional approaches to tax planning," said Joanna Yap of Withers KhattarWong, Taxand Singapore.
As part of a drive to protect its tax base the Singapore revenue authority has ramped up its audit activity, leading to a greater number of disputes for taxpayers. "We certainly see a lot more controversy, including controversies involving incentivised companies that have disputes with the authorities on the terms of their incentives, and the issues of not meeting certain technical requirements," said Allen Tan of Baker & McKenzie.Wong & Leow.
The audit activity has not targeted a specific industry, but there has been a rash of extra audits for financial services, manufacturing, electronics and e-commerce companies. Tan said that high-tech companies involved in manufacturing and research and development (R&D) have been scrutinised with regard to R&D deductions and cost sharing payments made with other companies.
The tax authorities also issued new guidelines on anti-avoidance matters, signalling that the scrutiny of multinationals remains high on the agenda and the audit trend will not subside soon. "Tax controversy work, in particular on issues involving tax treaties, transfer pricing and tax avoidance, looks set to rise in the coming years as Singapore joins the other countries to combat harmful tax practices. What remains unclear at this point of time is the effectiveness of Singapore's domestic law to deal with these harmful practices," said Yap.
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|Corporate Income Tax||17%||A|
|Capital Gains Tax||0%|
|Net Operating Losses (years)|
|Royalties from, for example, patents, know-how||10%||B|
|Branch Remittance Tax||0%|
Allen & Gledhill's tax practice is led by Sunit Chhabra and consists of three partners and four tax professionals including one senior consultant who is a former officer from the Singapore tax authorities.
The tax team offers services in all aspects of Singapore tax, particularly focusing on tax advisory, structuring and planning for major corporate clients and tax disputes with the Inland Revenue Authority of Singapore (IRAS).
The firm is experienced in a broad range of tax issues such as covering complex legal, commercial and financial arrangements. It provides comprehensive tax and legal services by working closely with partners from other practices within the firm such as the capital markets, corporate real estate and M&A practices.
The top three industries that the firm advises on are financial services, manufacturing and TMT.
Chhabra helped DBS Bank on the establishment of a $10 billion global covered bond programme in June 2015 and the issue of $1 billion covered bonds in August 2015. This covered bond programme and issue was the first by a Singapore-incorporated bank and the first in the Singapore market.
Allen & Gledhill worked and corresponded with the government and regulatory authorities, namely the Monetary Authority of Singapore (MAS), the Central Provident Fund Board (CPF) and the IRAS, to resolve the insolvency, regulatory, tax and other structural matters and concerns elevated by the officials.
Comprising eight partners and more than 20 other professionals, Baker & McKenzie.Wong & Leow's tax practice is headed by Eugene Lim. Lim has more than 15 years of experience in international tax planning, tax controversy, indirect tax, customs and excise, international trade, export controls and trade sanctions issues within Singapore, China and the Asia Pacific region. His core experience includes assisting a diverse range of clients with strategic tax restructurings and value chain transformations.
New partner Sanjiv Malhotra joined the firm in September 2015 from BMR Advisors. Malhotra is in charge of the global tax and transfer pricing practice of the firm, focusing on inbound and outbound tax matters in India and the Asia Pacific region. He has vast knowledge of tax structuring, transfer pricing, valuation and cross-border dispute resolution.
The firm provides specialised tax advice in international tax planning, Singapore taxes, tax controversy, indirect tax, trade and diagnostics, transfer pricing and wealth management. It has, over the years, developed expertise in the industries of online and digital, TMT, healthcare and pharmaceuticals, FMCG and financial services.
Deloitte Singapore's head of tax is Low Hwee Chua, who is also the regional managing partner for Southeast Asia tax and legal. He has more than 20 years of tax experience and specialises in corporate tax and international tax, specifically group restructuring, M&A and structuring of inbound and outbound investments.
The firm specialises in the industries of consumer and industrial products, energy and resources, financial services, life sciences and health care, public sector and technology, media and telecommunications (TMT). Each industry has dedicated partners and teams to serve it, many of whom have spent a long time in senior positions at Deloitte.
The firm has strengthened its partnership with the addition of three new partners in 2016: James Lenaghan joined in January to closely support the firm's customs centre of excellence, Lisa Alton joined in March briefed with further developing the offerings of the firm's global employer services team, and Shantini Ramachandra joined in May to assist in the area of business tax.
Deloitte provides comprehensive training and functional technology to both clients and non-clients, as well as technical support, which includes a mobile app devised to give fast access to international tax information and news for multi-jurisdictions.
Ong Ken Loon heads the tax practice of Drew & Napier. The tax practice comprises one other partner and two additional professionals. Ong advises on corporate transactions, income tax, GST, stamp duty and property tax. She is experienced in assisting private clients by providing solutions to complex tax, succession and private wealth management issues.
The firm's tax team covers four key areas of tax services: tax litigation, corporate tax advisory, enterprise tax risk management and private wealth planning.
In February 2016, the team advised on a dispute with the Comptroller of Income Tax over the deductibility of certain payments made by the Singapore subsidiary of a multinational financial services corporation (listed on the NYSE for more than $700 million) to its parent company for the use of certain intellectual property. This matter is notable as the amount tax saving secured was significant.
EY has one of the largest tax practices in Singapore. Head of tax Chung-Sim Siew Moon leads the team of nearly 500 professionals, including more than 30 partners. She has more than 30 years of experience in serving multinationals and local clients on various tax matters, particularly regarding tax compliance, controversy and advisory services.
The large size of the practice allows high concentration in a number of tax disciplines and industries. There are committed professionals for corporate taxes, personal taxes, indirect taxes, transaction tax including M&A, international tax services, transfer pricing and business incentives advisory.
KPMG's new head of tax is Chiu Wu Hong, who succeeded Tay Hong Beng on October 1 2016. Wu Hong has more than 20 years of tax experience in tax incentive application, cross-border transactions and M&A. He has a wealth of expertise in tax compliance, consulting and planning for local and multinational companies, as well as in consulting work for the public sector.
The tax practice houses 20 partners and nearly 400 other dedicated professionals who provide wide-ranging tax services throughout diverse industries including real estate, private equity, financial services, energy and natural resources, technology and fast-moving consumer goods (FMCG).
In April 2016, KPMG was appointed by a leading global e-commerce group as its M&A advisor to perform multi-functional M&A advisory work in relation to its proposed acquisition of an e-commerce group with operations across the ASEAN region, including Indonesia, Malaysia, Singapore, Thailand and Vietnam.
The M&A advisory work the firm provides includes financial due diligence, tax due diligence, tax structuring, internal control review, deal contract assistance and other M&A advisory work in relation to the business and operational aspects of the target firm.
Ong Sim Ho, founder of ONG SIM HO Advocates & Solicitors, leads the tax-focused boutique firm. The firm has two partners and four professionals.
Ong is a well-regarded tax adviser in the country focusing on corporate income tax, GST and tax treaty negotiations. He also has substantial skills in tax litigation and dispute resolution, which have been honed during 18 years of professional experience.
In June 2015, the team advised and represented a client in a matter concerning the taxability of certain payments received by a trustee under a trust. The team successfully persuaded the Comptroller of Income Tax that despite the payments being labelled "Compensation", the legal reality was that there was no underlying liability to compensate. As such, the payments were akin to capital call payments and capital in nature.
PwC's Singapore tax practice is led by Chris Woo, who specialises in tax matters relating to M&A, tax structuring and planning, and divestments across the globe.
Supported by the PwC global network, the firm is able to provide consistent and stable services for organisations in Singapore as well as across the border in Malaysia. The team of professionals understands the business ideas and concerns and is competent at offering advice on areas such as corporate tax and compliance, GST, international tax, M&A, research and development, tax accounting, transfer pricing and value chain transformation.
The firm focuses on the fields of energy and mining, conglomerates and industrial products, financial services, pharmaceuticals and healthcare, retail and consumer goods, real estate, technology and transport.
Paul Lee, managing partner, heads the tax practice of RSM in Singapore which comprises four partners and nearly 70 other tax professionals. The tax team offers a full range of tax services including international tax services, transfer pricing, tax incentive advisory, GST, corporate tax compliance and personal taxes.
Cindy Lim is responsible for international tax services and has more than 30 years of experience in all aspects of corporate tax compliance and tax planning. Her core experience includes investments and fund structuring, group restructuring, tax due diligence, and tax risk management.
The firm's clients come from a wide spectrum of industries such as real estate and construction, non-profit organisations, retail, food and beverages, financial institutions and private equity. RSM has built up a strong reputation for successfully helping Chinese companies set up operations in Singapore to further expand in the region.
With the advent of BEPS, the firm has an increasing focus on advising clients to restructure to meet the Project's requirements.
Eric Roose is the Asia tax leader at Withers KhattarWong, Taxand Singapore, having joined the firm in June 2015. He specialises in advising clients on international tax and corporate tax issues, namely cross-border M&A, investments and private equity investment structures.
The firm composes eight partners and 10 professionals focusing on all areas of tax. Mahesh Kumar, Stephen Banfield, and Jonathan Blaine joined the firm over the past year as head of corporate tax, senior manager, and senior legal associate respectively.
The team provided tax advice on the establishment of a SG$300 million ($220 million) multicurrency medium-term note (MTN) programme. Singapore has a significant regional corporate debt market centre with attractive tax incentives. A publicly-listed property developer group wanted to raise funds in Singapore and established the MTN programme and the Withers team provided multi-jurisdictional advice focused on the Singapore tax regulations and laws.
WongPartnership's tax practice led by Tan Kay Kheng and the team comprises two partners and two professionals focusing on corporate tax, indirect taxes and tax disputes.
The team advises clients through the entire spectrum of tax-related issues including tax planning and advice, corporate and international tax, stamp duties, GST, property tax and financial services-related taxation like debt financing, restructuring, swaps, funds and securitisations.
WongPartnership, in February 2016, acted for Broadcom Corporation in relation to the Singapore tax aspects of its acquisition by Avago Technologies Limited for $37 billion. This deal is the largest merger of chipmakers in history, with the post-merger entity expected to have an enterprise value of $77 billion.
The tax team advised Broadcom Corporation on the Singapore tax considerations for its shareholders arising from the acquisition. From a tax perspective, the acquisition was complex in that instead of a cash payout to the Broadcom shareholders, it involved the issuance of cash, shares and exchangeable units by a foreign partnership.