This article by experts from EY, otherwise known as Ernst & Young, looks at what Singapore is doing about how multinationsl shift profits between jurisdictions to mitigate tax bills.

The following article is about the ever-evolving issue of how major industrialised nations seek to prevent multinational firms minimising tax bills by reshuffling their profits and revenues to low-tax jurisdictions. While such behaviour is not illegal it has caused anger and led to political pressure. There are lessons also to be learned by individuals because the kind of moves governments  make against firms find an echo in state moves to stamp out forms of tax avoidance. The article is by Chung-Sim Siew Moon & Jonathan Stuart-Smith. Chung-Sim Siew Moon is partner and head of tax, EY Singapore and Jonathan Stuart-Smith is global tax desk leader, Asia-Pacific and Japan tax desk. This article first appeared in The Business Times, Singapore on 8 January 2015. It is published with permission.

As always, the editors of this publication are grateful for such insights but do not necessarily endorse all the views expressed here and invite readers to respond.

With the Organisation for Economic Co-operation and Development's (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS) gaining momentum, the tax affairs of multinationals have been splashed across the media all over the world for various reasons.

Singapore has had its fair share of the spotlight too. Some commentators have described Singapore as a "tax haven", in the same breath as the Cayman Islands and British Virgin Islands. Although many would readily recognise that such comparisons are erroneous, unfortunately such labels often stick in the minds of readers. So it is important for Singapore to remain - and to be seen to remain - acting as a mature, sophisticated tax jurisdiction in these times.

The Singapore authorities have not been short on foresight and planning. It is thus no surprise that we are seeing several signs that the country's tax policy and administration are being upgraded, to align with the OECD's roadmap and ensure that multinational corporations and other companies operating in Singapore pay tax where the economic value is actually created.

Tax audits
Tax audits are becoming tougher in Singapore. A few years ago, a confirmation may have been sufficient to reassure the Inland Revenue Authority of Singapore (IRAS). That is no longer the case. Companies are receiving letters with detailed questions that extend over several pages, particularly in the area of transfer pricing for related party transactions and Productivity and Innovation Credit (PIC) claims for R&D costs. Disputes are taking longer to be resolved and more and more cases are expected to go before the tax courts. In the area of transfer pricing, we are seeing the IRAS proposing adjustments to taxpayers' tax returns.

Incentives
Singapore has a wide array of incentives, designed to attract new and cutting-edge businesses to Singapore, which is essential to developing the economy and enhancing the skills of the workforce.

In the context of one of the OECD's action plans - which is designed to prevent "harmful tax practices" through a requirement for tax incentives to have substance and be transparent so that tax authorities automatically exchange tax rulings with one another - we are now seeing a two-fold development in the administration of tax incentives in Singapore.

Firstly, qualifying for incentives, particularly at the lower rates of tax, has never been easy and the hurdles to qualify have now been made higher. The authorities are requiring more substance in the form of higher headcount, more senior executives, higher commitments to business spending in Singapore and also qualitative aspects such as commitments to R&D and training activities in Singapore.
Secondly, the Singapore authorities are monitoring whether the incentive conditions are being met with greater rigour. For example, the trend is for companies enjoying tax incentives to undergo "agreed upon procedures" by external auditors to attest to whether the incentive conditions have been met.

Transfer pricing documentation
The Singapore tax authorities have also reacted with changes to its transfer pricing guidelines, releasing the latest version this week on 6 January. The 2015 guidelines require taxpayers to prepare contemporaneous transfer pricing documentation, to include a "master file" and a "local file" explaining and justifying their transfer pricing positions. The adoption of such an approach is broadly in line with the OECD's proposals, although the IRAS has not gone so far as to require the completion of a "country-by-country reporting" (CBCR) template.

This CBCR template is one of the more contentious aspects of the OECD's approach to transfer pricing documentation. This requires a multinational to report - for each country in which it does business - data points including revenues, profits, corporate taxes paid and accrued, headcount, share capital, retained earnings and tangible assets. Revenues must be analysed between third party and related party. The OECD proposes that this information should be reported to tax authorities in all countries in which the multinational does business, although the mechanism for doing so is still being worked on.

While some countries such as the UK have already announced that they will be early adopters of CBCR, Singapore has not done so. It seems that Singapore is adopting a wait-and-see approach before joining the CBCR club.

Competitive neighbours
With intensifying competition for foreign direct investment (FDI) into the region, many countries are enhancing their own network of incentives. For example, Malaysia is keen to attract business in the trading, shared service centre, procurement and "principal hub" space. Other Asean neighbours such as Thailand, Vietnam and Indonesia have incentives to promote manufacturing activities.

While it is true that some companies are choosing to base certain activities in these countries rather than in Singapore, this is for economic and cost reasons, and not because of the OECD's BEPS initiative. The main aim of the BEPS action plan is to make sure that companies pay tax where the economic value is genuinely located, which may not necessarily be the same as the legal structure or contractual arrangements.

As such, regardless of competing incentives in the region, we believe that so long as a business has genuine economic substance, management and employees based in Singapore, it should face a lower risk of having their level of profits booked in Singapore being challenged by tax authorities around the world.

In closing, it is essential and timely that Singapore is adapting to position itself as having a robust tax regime that is based on real substance and where business value is created. This is well aligned with global thinking and will be instrumental in sustaining our attractiveness as an FDI destination.