Tax, Trade and Wealth Management Singapore Client Alert June 2017 For more information, please contact: Eugene Lim +65 6434 2633 email@example.com Allen Tan +65 6434 2681 firstname.lastname@example.org Dawn Quek +65 6434 2599 email@example.com Peter Tan +65 6434 2669 firstname.lastname@example.org Wei Hann Tan +65 6434 2311 email@example.com Michael Nixon +65 6434 2535 firstname.lastname@example.org Shih Hui Lee +65 6434 2532 email@example.com James Choo +65 6434 2603 firstname.lastname@example.org Singapore Signs the BEPS MLI - the Key Changes and What They Mean for You On 7 June 2017, Singapore joined 67 other countries in becoming a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("BEPS") (the "MLI"). The MLI enables participating countries to modify their existing double tax agreements (“DTAs”) in order to implement BEPS measures. The MLI provides a framework for signatories to implement the BEPS minimum standards and other tax treaty measures which countries can selectively adopt into their DTAs. In this regard, Singapore has provisionally adopted provisions relating to treaty abuse, dispute resolution and mandatory binding arbitration. Singapore has, however, reserved the right not to apply to its DTAs provisions relating to hybrid mismatches, as well as the majority of the provisions relating to Permanent Establishment (“PE”) status avoidance. Upon ratification of the MLI, Singapore’s DTAs will be amended insofar as its treaty partners are also MLI signatories and have adopted the same positions on the MLI's provisions. We discuss these changes below. 1. Minimum Standards for Protection Against Treaty Abuse Singapore has chosen to introduce the Principal Purpose Test (the "PPT") into its DTAs to protect against treaty abuse. Under the PPT, a taxpayer will be denied treaty benefits if one of the principal purposes of a transaction is to obtain the said treaty benefits. The PPT is presented as the default measure to protect against treaty abuse in the MLI, and will be introduced into all DTAs covered by the MLI. As the PPT is an inherently subjective test, it may create uncertainty for taxpayers seeking to rely on a DTA to secure a particular tax outcome. Where a potential challenge under a considered interpretation of the PPT would seem likely, taxpayers should consider whether the substance of their cross-border transactions is sufficient and if any preventative measures may be necessary to protect treaty benefits. 2. Enhancing Tax Dispute Resolution A. Improving the effectiveness of Singapore’s Mutual Agreement Procedure IRAS currently negotiates with foreign tax authorities to resolve disputes regarding the proper application of tax treaties under the Mutual Agreement Procedure (“MAP”); however, the MAP process is in general is seen to be Client Alert June 2017 somewhat ineffective in resolving cross-border disputes and mitigating double taxation, resulting in few MAPs being concluded. In order to improve the effectiveness of MAP, Singapore has adopted the following measures under the MLI: (a) Taking steps to enhance availability and access by, for example, extending time limits to ensure that taxpayers would have at least three years to submit a MAP request under applicable treaties; (b) Making MAP more effective in resolving disputes by implementing MAP agreements regardless of statutory time limits; and (c) Providing for corresponding adjustments unilaterally where they find that the taxpayer’s objection is justified. B. Mandatory binding MAP arbitration Singapore is one of 25 signatories which have committed to mandatory binding MAP arbitration (“MBA”). Developed as a complementary mechanism to MAP, the MBA provides a mechanism, through state-to-state arbitration, to resolve issues in MAP where tax authorities disagree, to eliminate double taxation. In general, a case may be submitted to arbitration where no agreement is reached within 2 years. The MBA route is only available where the other treaty country has also committed to MBA. Further, Singapore has reserved the right not to submit to arbitration issues relating to its domestic general anti-avoidance rules. On top of providing assurance to taxpayers that its case would be resolved by arbitration (should tax authorities fail to do so at the MAP), the introduction of MBA may also incentivize early MAP resolution by authorities who do not wish to outsource their decision-making to arbitrators. Singapore’s adoption of MBA would thus increase the attractiveness of its MAP program and is thus a welcome development. 3. Preventing the Artificial Avoidance of PE Status Singapore has reserved its rights not to implement the majority of the measures to prevent the artificial avoidance of PE status under BEPS Action 7. These consist of: (a) The amended definition of commissionaire and reduced threshold of dependent agent PE ("DAPE") applicable to such arrangements; (b) The amended 'independent agent' exception, which increases the likelihood of parties being classified as DAPE's; (c) The anti-fragmentation rules designed to prevent exploitation of the specific activity exemptions; and (d) The rules addressing the splitting-up of contracts to circumvent the time periods that determine the PE status of building sites, construction and installation projects. Client Alert June 2017 Singapore has decided to preserve the specific activity exemptions from PE status under all its existing DTAs, irrespective of whether or not such activities are deemed preparatory or auxiliary in nature. This provides certainty to taxpayers that rely on the specific activity exemptions to avoid establishing a PE in the countries they operate in. 4. How these changes will affect you While Singapore has made provisional commitments to the MLI (subject to ratification), the actual impact on a specific DTA would depend on the positions taken by Singapore’s treaty partners. The potential divergences in interpretation and potential for further negotiation may make the analysis of whether or not certain provisions apply in a given situation quite complex. Given the infancy of the MLI, one can also expect changes to countries’ provisional choices and uncertainty as to how certain provisions will be applied in practice, making its application equally complex. The modifications to Singapore’s DTAs may result in different tax outcomes for MNEs, depending on their business model, industry and operating/holding structure. It is thus vital for MNEs to consider the viability and efficiency of their current structures in light of the incoming changes. Please feel free to contact us to discuss the impact of Singapore’s signing of the MLI to your business. www.bakermckenzie.com Baker McKenzie Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 Tel: +65 6338 1888 Fax: +65 6337 5100 ©2017 Baker & McKenzie. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. 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