Singapore has deposited the instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) with the OECD's Secretary-General.
The MLI will enter into force in Singapore from April 1, 2019.
Key features of Singapore's MLI positions
The MLI will come into effect with respect to a covered tax agreement/treaty only when the other treaty partner has also deposited its instrument of ratification. Currently, 16 other countries have done so (Australia, Austria, France, Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, New Zealand, Poland, Serbia, Slovak Republic, Slovenia, Sweden, United Kingdom). Others are in the process of doing so in the coming months. The effects of Singapore's ratification will be felt more fully as more treaty partners deposit their instruments.
Covered tax agreements
Ultimately, the MLI is expected to affect 86 existing Singaporean tax treaties that have been listed as covered tax agreements. Among those that will be affected are some of Singapore's most important tax treaties such as with Australia, China, India, Indonesia, Japan, Malaysia, New Zealand and Pakistan. These treaties will be amended in different ways depending on the choices that Singapore and the treaty partners make with respect to the provisions in the MLI.
The MLI is seen as a way for countries to implement the minimum standards agreed to internationally under the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. The minimum standards that have been adopted by Singapore in the MLI, and that are expected to be applicable to all of the covered tax agreements, are:
(i) Modification of the preambles: the MLI prescribes the modification of the preamble language in covered tax agreements to make it clear that tax treaties are not intended to create opportunities for non-taxation or reduced taxation through treaty shopping arrangements;
(ii) Adoption of a principal purpose test (PPT): insertion of a PPT into covered tax agreements means that taxpayers need to examine whether the principal purpose or one of the principal purposes for entering into a transaction or arrangement is to benefit from the provisions of the relevant tax treaty; and
(iii) Improved tax dispute resolution through mutual agreement procedures (MAPs): countries have committed to strengthening the effectiveness of MAPs under the covered tax agreements. Although Singapore's positions on MAPs have already been clarified in a separate e-Tax Guide, the adoption of MLI makes this commitment a bilateral legal obligation for all the covered tax agreements.
Our earlier alert on this topic can be found here.
In addition to the minimum standards, Singapore has also adopted a limited number of optional provisions:
(i) to clarify the scope of "preparatory and auxiliary activities" within the definition of "permanent establishment" and
(ii) to adopt the provision on "corresponding adjustments" and
(iii) to require mandatory arbitration as a method for resolving tax disputes under a covered tax agreement.
A large number of covered tax agreements will be affected by the provisions of the MLI. Attention must be paid in particular to those where Singapore's treaty partners have already deposited their instrument of ratification (eg, Australia and New Zealand) because the MLI is expected to have an impact almost immediately in respect of these treaties. As these treaties have been amended in different ways (depending on the choices that are made by the countries involved), multinationals that have relied on these treaties should examine the changes and assess their impact carefully.
On the other hand, it would be a mistake to assume that changes will not be required under bilateral tax treaties that are not covered tax agreements. For treaties that are not covered by the MLI (most notably the treaty between Singapore and Korea), it is anticipated that the minimum standards, such as the preamble, PPT and MAPs, will be adopted through bilateral negotiations. In that regard, Korea has already signalled (in a press release of July 12, 2018) that negotiations for a revision to the bilateral treaty between Korea and Singapore are already underway. This is most likely the reason why neither Singapore nor Korea included their treaty as a covered tax agreement.
The most significant amendment to all the covered tax agreements is expected to be the introduction of the PPT. Under the PPT, if the principal purpose (or one of the principal purposes) of the transaction or arrangement is to secure a tax treaty benefit, such treaty benefit will be denied where the granting of such benefit would not be in accordance with the object and purpose of the tax treaty.
Multinationals that have a holding, financing, or intangible property company in Singapore (either as a global hub or as a regional hub) are advised to (re)examine the substance in their Singaporean structure in light of the PPT. This is particularly the case where Singapore is being used to invest/finance/license into countries that have also signed up to the MLI (eg, Australia, China, India, Indonesia, Japan, Malaysia and New Zealand). As a general rule, it is not only the level of substance that is important, but also the kind of substance, as well as other factors (such as whether shareholders of the taxpayer seeking treaty benefit are able to access a similar benefit under another tax treaty).
Another change that is likely to have a significant impact is the improved dispute resolution mechanism. This change is expected to provide taxpayers with more access to the MAPs in cases where they are "subject to taxation that is not in accordance with the provisions of the relevant tax treaty." The legal obligation created by the provisions in the MLI is further supplemented by an OECD peer review and monitoring process, which puts pressure on countries to resolve MAP cases.
Under the treaties with countries that have also signed up for the arbitration provisions in the MLI, any failure to reach an agreement under MAPs will trigger mandatory arbitration proceedings going forward. The added pressure of mandatory arbitration provides another impetus for countries to resolve their MAP cases. This added pressure is particularly relevant under tax treaties that Singapore has entered into with other OECD countries in the Asia Pacific region, such as Australia, Japan and New Zealand. Taxpayers that have unresolved MAP cases or current tax disputes that can be presented as a case for MAP under the Singaporean treaties with Australia, Japan and New Zealand should see this as an opportunity to resolve their cases/disputes, as these countries have already deposited their instrument of ratification.
Another notable change introduced by the MLI is Singapore's position on corresponding adjustments, which may impact taxpayers' ability to claim corresponding adjustments in Singapore where the other countries have made transfer pricing adjustments to reflect the arm's length principle. Under Article 17 of the MLI, where one country makes an adjustment to conform with the arm's length principle, the other country has the obligation to provide a corresponding adjustment so that double taxation is eliminated. This obligation is often less stringent under existing Singaporean tax treaties (eg, the treaty with Japan, where consultation with the other country seems to be a prerequisite for any corresponding adjustment), or does not exist separately from a MAP (eg, the treaties with Indonesia, Italy, Mexico and Pakistan). The MLI will amend the treaty with Japan in this regard, but the treaty with Indonesia will not be affected as Indonesia has not expressed an intention to adopt this particular optional provision. The corresponding adjustment provision has been inserted in the treaties with Pakistan, Italy and Mexico. If these positions are eventually ratified, Singapore will provide a corresponding adjustment for any transfer pricing adjustment made in Pakistan, Italy or Mexico which reflects the arm's length principle without a MAP process.