In this article, we briefly explore how the principal purpose test (PPT) and other tax changes are impacting the decision to use and construct holding companies. In the interest of brevity, we will restrict ourselves to consider these questions in the context of transactional cross-border investment.
The new tax landscape is not limited to a consideration of the PPT. Investors are also facing a refocus on beneficial ownership issues by some countries and the continued emergence of general anti-avoidance rules (GAAR) which is impacting the preferred holding company jurisdiction.
We are already seeing a range of responses from investors. Some are determined to do away with the use of holding companies in the context of transactional activity and invest directly. Others have decided to focus on building substance in a particular jurisdiction (for example, Luxembourg) for the purposes of their transactional activity and to set up in that jurisdiction even if it is not the optimal solution for all investments. A few have gone even further and started to develop solutions to the beneficial ownership issue to negate the need for holding companies to immediately repatriate monies received from investments to their parent entities.
These choices can be made by large standalone investors. It may be more challenging for small investors who invest in funds and the funds industry that serves them. None of this is helped by the fact that:
Overall, there is uncertainty as to how much of the test resolves itself to a substance issue (it is clear that some countries will continue to rely on receiving a certificate of residence (COR)) and, if so, what is an acceptable level of substance.
There are some countries, like the Netherlands, which have already proposed changes to the way they qualify foreign investment holding companies, which rely on mixture of purpose and increased substance requirements. We need to see the detail of these proposals in the third quarter of this year but on first read, they appear to be both a unilateral application of a PPT and the creation of a safe harbour.
While the substance requirements appear to be tougher than we have seen in the past, it is a positive move for the Dutch to set out the requirements. We would expect that a range of other 'holding jurisdictions' might follow suit and seek to clarify how these rules operate.
Europe remains the key centre of developments in this area. There are ongoing issues arising out of the European processes including the recent tax advice transparency proposals and the EC blacklist proposal with some 92 countries still being considered for inclusion on the blacklist which will impact on the ability to create holding structures.
On the tax advice front, we could ultimately end up with effective pre-approval of structures such as occurs under the Australian Foreign Investment Review Board rules. How inclusion on the blacklist will impact the willingness and ability of taxpayers to use listed countries for holding company purposes is still unclear.
The US stands in splendid isolation from most of these changes. Given that all of its significant tax treaties contain limitation on benefits provisions, and that there are a range of domestic protections like Foreign Investment in Real Property Tax Act (FIRPTA), investors do not get a lot of tax relief on investment. The combination of these outcomes make it difficult to effectively use holding companies for US investments.
The Asia Pacific region has a diversity of outcomes. China, India and Australia have all developed a range of measures which affect investors. At the other end of the scale, there are some significant countries which have yet to sign on to the MLI and continue to rely on COR-type measure as a basis for treaty reliance.
Hong Kong has committed to the core MLI outcomes and is aiming to build an onshore fund regime similar to that in Singapore. Singapore has also committed to the core MLI outcomes and continues to manage its global reputation by adopting a full set of TP outcomes, and other transparency measures such as the recently introduced requirement to identify nominee directors and a more rigorous approach to COR and other administrative processes.
In addition, the peer review exercise conducted under the BEPS Inclusive Framework concluded that most of Singapore's tax incentives to attract headquarter, finance and treasury activities were not harmful, likely due to the fact that these involve commitment by companies to anchor substantive activities, expenditure and significant headcount in Singapore.
In relation to the above, we see more focus on creating substantial holding companies rather than cherry-picking based on the best outcome for an individual case. We also see less tiers of holding companies being adopted in the future.
Beyond that, meaningful levels of substance, quality directors and front-office employees are likely to be required rather than a brass plate office space. We are less certain how funds will deal with the emergence of beneficial ownership as a meaningful requirement where investors still want returns passed-through immediately and the fund's return depends on investors not holding cash for any period of time.
The next few years will present an opportunity for innovation in the design of holding structures and require us to look back at many of the holding structures implemented in the past.
The government has been proactive in making it easier for taxpayers to pay their taxes, and this has borne fruits as tax compliance among Singapore's residents is high. More than 80% of individual and corporate taxpayers paid their taxes on time in the fiscal year of 2016/2017. This, combined with Singapore's growing economy and low unemployment levels, has contributed to the Singapore government collecting $35 billion in taxes this year – 5% more than in the previous year.
The Inland Revenue Authority of Singapore (IRAS) is harsh on non-compliant taxpayers, and through audits and investigations it identified non-compliant cases and collected $244 million in unpaid taxes this year.
The country has made the expansion of its tax base an important priority for government expenditure to be sustained. In his budget speech in February 2017, Minister for Finance Heng Swee Keat said Singapore needs to strengthen its revenue base in a pro-growth and progressive manner.
The budget has enhanced and extended the country's corporate income tax rebate to help businesses. For the assessment year 2017, the corporate income tax rebate cap was raised from SG$20,000 ($14,700) to SG$25,000. The rebate rate remains unchanged from last year at 50% of corporate tax payable. The corporate income tax rebate will be extended for another year, to assessment year 2018, but at a reduced rate of 20% for tax payable and capped at SG$10,000.
Other announcements in the budget included the introduction of a new intellectual property (IP) regime called the IP Development Incentive (IDI). The IDI aims to encourage businesses to capitalise on use of IPs which flow from the research and development activities of taxpayers, and has adopted a BEPS-compliant approach. This was to take effect on July 1 2017, however, the Economic Development Board has delayed the introduction of the IDI and will announce a new introduction date by the end of 2017. The decision to delay the regime's introduction was based on the feedback of companies which stated that they needed more time to review their positions on this matter.
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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%|
Sunit Chhabra is a partner and the head of the tax practice at Allen & Gledhill. Chhabra is supported by another partner, Lim Pek Bur. Both partners specialise in tax advisory and dispute resolution matters. The other fee earners in the practice are three tax associates and one tax manager. Cheong Swee Ying is a senior (non-legal practitioner) consultant with the practice and has previously worked as a senior officer with the Ministry of Finance (MOF) and the IRAS. The services provided by the practice include tax advisory, structure and planning, and dispute resolution. The tax practice works closely with other practices in the firm. This enables it to provide clients with comprehensive tax and legal services.
The practice advises domestic companies and MNEs including financial institutions and real estate companies. In 2016, the practice advised Oversea-Chinese Banking Corporation Limited on the establishment of its $10 billion global covered bond programme. The practice assisted the client with obtaining tax remissions and approvals from the MOF.
Eugene Lim is the head of the tax practice at Baker McKenzie.Wong & Leow. The practice comprises eight partners and 21 other fee earners.
Since August 2016, the tax professionals that have joined the practice are Tan Wei Hann, Zenzel Chew, Junwei Han and Wenyu Wu. The practice offers clients a range of services including international tax planning, tax controversies and indirect tax.
It advises MNEs and Singaporean companies on multijurisdictional tax planning strategies. In 2016, the practice handled a number of tax disputes that were complex and had significant monetary value and cross-border elements. The firm assists clients in tax disputes with comprehensive legal research and analytical skills. It also provides advocacy skills and the ability to use different dispute resolution methods for tax matters. These methods include engagement with tax authorities and government stakeholders, refund applications and representation in court proceedings. The Singapore tax authorities frequently engage with practice members in regard to tax reform. The firm has hosted the Asia Pacific Tax Conference for 30 years.
Evelyn Lim is the head of the tax practice at BDO Tax Advisory. Lim has more than 20 years of experience in Singapore and international tax. The practice comprises four partners and 48 other fee earners. Mayu Niguchi Kasai joined the practice in 2016. In 2017, the following tax professionals joined the practice: Teo Yi Lun, Gary Foo and Kwok Wei Liang.
The practice has nine specialists in indirect tax and the rest of the staff works across corporate tax, tax disputes and compliance and accounting. The firm's experience covers both domestic and international taxation and offers a variety of integrated tax services. These include business tax, M&A, financial services industry and GST.
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The practice is part of Deloitte's global network of member forms. This network comprises more than 41,000 tax and legal professionals in nearly 150 countries. The practice's affiliation with this network enables its clients to choose the appropriate level of support that they need. It can provide clients with services using approaches that could either be local, international, regionally coordinated or centralised. The practice is also part of Deloitte Southeast Asia Ltd (DSA). DSA has 290 partners and more than 7,400 professionals in 25 locations across Southeast Asia.
Ong Ken Loon is the leader of the tax practice at Drew & Napier. The practice comprises two partners and two other fee earners. The services offered by the practice cover four main areas: tax litigation, corporate tax advisory, enterprise tax risk management and private wealth planning. The practice's main area of expertise is tax litigation. It represents clients before tax tribunals and the Supreme Court. The practice assists clients in all areas of litigation including GST, property tax and stamp duties.
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The firm has a number of global desks which enables clients to have access to foreign tax advice. These desks include India, Japan, South Korea and the UK. EY has a regional team that specialises in operational model effectiveness and tax performance advisory. It helps clients with reviewing and structuring their business models.
Wu Hong Chiu is the head of the tax practice at KPMG. The practice comprises 20 partners and 405 other fee earners. Andrew Lee joined the practice in July 2016.
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Ong Sim Ho is the head of the tax practice at ONG SIM HO Advocates & Solicitors. The practice comprises three partners and three other fee earners. Guo Jiawen joined the firm in April 2017.
The practice advises clients on complex legal tax issues, particularly in relation to tax disputes. The firm also assists clients with tax matters concerning transactional advisory, investigation and audit, trusts and private clients. The practice's core strength is that it has a multi-disciplinary approach to solving complex tax issues. The firm provides a masterclass series which offers technical exposure for clients and market partners.
In 2016, the practice advised a national oil and gas company on the tax implications of a certain structure for the sale and supply of crude oil to the government of an emerging market. The practice is also representing a Swiss bank in a tax dispute concerning the treatment of tax losses.
Chris Woo is the head of the tax department at PwC. The practice advises clients on a range of tax issues which include corporate tax, GST and M&A. The firm has a variety of experienced tax professionals. Woo has more than 20 years of tax experience. He assists clients with M&A and tax structuring and planning for acquisitions. He has advised clients from Asia, the US and Europe. Sunil Agarwal is a partner who has more than 17 years of experience, which includes international tax and tax consulting services. Agarwal advises clients on tax structuring issues. Thomas Tham is a tax director and he has more than 15 years of income tax experience. He advises clients on tax issues regarding corporate reorganisations, tax incentives applications and M&A. He has helped MNEs in setting up their operations in Singapore. He has also helped domestic businesses with their outbound investments in Asia. He is experienced in liaising with the tax authorities in relation to negotiating or resolving tax issues. Koh Soo How is a tax partner who leads PwC's Indirect Taxes network in Asia Pacific. Ketan Madia is an international tax partner. He has more than 23 years of tax experience.
Vikna Rajah is the head of the tax practice at Rajah & Tann. The practice comprises one partner and a team of associates. The practice has been engaged by sovereign wealth funds, MNEs and the Big 4 firms. The firm has experience in handling multi-million dollar disputes with the IRAS and has succeeded on several occasions in a reversal of the tax authority's position. Rajah & Tann help clients find solutions to their tax matters. The practice works with the firm's M&A and banking and finance departments in cross-border transactions. It also works with the firm's funds practice group to advise clients on tax efficient structures. In 2016, the practice represented a property and land developer in a tax dispute regarding payments being treated as expenses that could be set-off against income.
Paul Lee is the head of the tax practice at RSM. The practice comprises four partners and 68 other fee earners. RSM was established in 1985 and is a member firm of RSM International, a global network of accounting firms. This network has more than 800 offices across 120 countries.
The practice assists clients in international operations. This is especially the case in cross-border expansion activities in Asia, Europe and the US. The tax services provided by the practice include, inbound investments, corporate group restructuring, tax due diligence and corporate tax compliance. The tax professionals at the practice come from a range of backgrounds, including the Big 4 firms and IRAS. In 2017, the practice provided structuring advice to a client with headquarters in Singapore on the acquisition of business assets in the US.
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Kay Kheng Tan is the head of the tax practice at WongPartnership. The practice has legally qualified tax professionals with experience in accounting and valuation matters. They also advise clients in transactions and contentious tax matters.
The other services provided by the practice include tax planning and advice, corporate tax, international tax and GST. WongPartnership represents clients in their submissions to the IRAS and the Ministry of Finance. Tan handles contentious and advisory work concerning income tax, stamp duty, property tax and GST. He also represents clients in court cases in relation to tax matters.