Tax moods: Now you see me, now you don’t

Singapore has recently announced that it will be joining the inclusive framework for the global implementation of the Base Erosion and Profit-Shifting (BEPS) Project. The general idea behind BEPS is to shift profits away from high-tax jurisdictions to low-tax jurisdictions using mechanisms such as hybrid mismatches, special purpose entities (SPE), and transfer pricing. As such, the key principle underlying the BEPS Project is that profits should be taxed where the real economic activities generating the profits are performed and where value is created.

The Panama Papers scandal, as well as Rio Tinto and BHP Billiton’s use of the “Singapore Sling” has shone the spotlight on tax avoidance and aggressive minimisation of tax.

It has been acknowledged that taxation rules are unable to keep up with the pace of evolving business paradigms. Businesses today are increasingly digital and technology-based, which has given rise to intangibles (patents and intellectual property). Tax laws, which were designed in a non-digital age, are unable to govern issues that arise from this digital age. For example, it is easier to shuffle patent ownership, than a physical asset. BEPS parties have paid special interest to these intangibles. Presumably, each country would like ownership of these intangibles, as companies tend to gravitate to where their patent/intellectual property is registered.

The BEPS Action Plan attempts to bind international companies to a set of consistent global tax rules to prevent them from taking advantage of the loopholes in the differing tax laws. However, as each country will be looking out for its own interests, it could lead to the adoption of the law at differing degrees or even perhaps, independent action prevent tax revenue from being shifted to other countries. In any case, it does however, place tax in a place where it needs to be considered in corporate strategies, ie more proactive, then reactive, which hopefully means more exciting times for tax.