Business restructuring in Singapore

Issues in business restructuring

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Business restructuring naturally receives greater scrutiny from regional tax authorities who are increasingly aggressive and sophisticated in their approach to protecting their existing tax base.

Double taxation and transfer pricing issues

Whilst we have not seen the authorities in Singapore formally challenge business restructuring, it is an issue in Asia as a whole with commensurate implications for double taxation on the profits made within a principal company, dependent on the views of the competing authorities in any business restructuring arrangement.

Recognising the issue of potential double taxation, as well as the broader uncertainty of the tax treatment of business restructuring, the OECD published specific guidance during 2010 on the Transfer Pricing aspects of business restructuring, incorporating this into Chapter IX of the OECD Guidelines.

There is still considerable divergence in the tax treatment of business restructuring in Asia due to legacy precedent and policies, as well as varying interpretation of the guidance available.

A common focus of tax authorities when reviewing cross-border business restructuring is whether there is a transfer of value from one territory to another between related parties as a result of the restructuring.

To the extent that a transfer of value exists, the transferee may receive or be deemed to receive an appropriate compensation that, in turn, may be deemed taxable by the relevant tax authority.

We are increasingly seeing audit activity in Asia focus on whether gains on conversion exist and whether exit charges should be applied.

More commonly, case law and audit activity in Asia show challenges being levied principally in post-restructuring transfer pricing – from a methodological level and on the returns to the restructured entities – as well as deeming permanent establishments of the principal in the locations of the restructured entities.

For a Singapore-based centralised entity, potentially a principal, each of these issues must be carefully considered in order to mitigate the risks of double taxation from a deemed permanent establishment or challenges on post-conversion transfer pricing, or alternatively the group must carefully consider the impact of potential exit taxes on conversion.

Risk mitigation checklist

  • Ensure proper documentation of the allocation of functions, assets and risks between trading/ manufacturing entities and the principal/CLP, entailing a robust transfer pricing analysis, in order to support the transfer pricing model, and/or value based service fee

  • In the case of the redeployment of functions and risks or renegotiation or termination of contracts within an existing supply chain structure, assess whether the redeployment is likely to trigger a conversion charge, a challenge to the transfer pricing arrangements or potential permanent establishment risks

  • Make a careful review of withholding tax implications and treaty planning opportunities to mitigate any withholding tax impact on the model change

  • Analyse value-added tax and goods and services tax issues relating to cross-border payments, including service fees, to mitigate any potential risks and impact on the benefits derived under the model, together with potential customs duty impacts where transactional flows are altered or under a CLP model where the services are linked to product sales

  • Evaluate permanent establishment risks and the deductibility of payments or fee-constructive or deemed dividend-under local law and treaty provisions where relevant