Business restructuring in Singapore
Issues in business restructuring
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.