THE PACE of change in the tax landscape has been unrelenting and the changes are fundamentally and permanently altering the way businesses and individuals deal with taxation.
Singapore is not spared from this. Globalisation, international tax reforms and digitalisation are disrupting the tax world. The transformative influence of big data and technology will have a direct impact not just on the tax function alone, but also on the finance function. Governments too are going digital, accessing information closer to the source and changing the dynamics of the reporting and auditing process.
Among the slew of changes, three key themes stand out.
Complexities in tax reforms
When the Organisation for Economic Co-operation and Development (OECD) and G20 started the BEPS project in July 2013, many did not expect the takeoff to be so far-reaching so quickly.
Notably, since its implementation, there have been changes pertaining to transfer pricing documentation, with country-by-country reporting already being implemented, giving tax authorities a far higher degree of visibility of an MNC's profile, including tax, around the world.
The multilateral instrument (MLI) developed under Action 15 of the OECD BEPS project, which is signed by around 70 countries and incorporates certain minimum standards that countries should adopt, also enables countries to quickly and consistently update thousands of bilateral tax treaties to incorporate the BEPS changes. This in turn will help to close gaps in existing international tax law and force reviews of business structures, supply chains and operations.
As well, tax incentives of tax jurisdictions are being scrutinised against international standards on countering corporate tax avoidance through peer-to-peer reviews. Furthermore, automatic exchange of information by tax authorities is being adopted by more and more countries, which greatly increases cross-border transparency between tax jurisdictions.
US tax reform legislation became law on Dec 22, 2017, bringing with it a comprehensive overhaul of the US tax system. These new tax changes and requirements are likely to have an impact across not just for tax, but also treasury, supply chain, global transfer pricing and liquidity. All the more, companies with a US tax presence in their group will now need to review and respond to these new requirements and understand the consequences of the new legislation.
Challenges of digitalisation
Digitalisation presents considerable risks and opportunities for businesses today. Traditional tax rules are struggling to keep up with the pace of digitalisation, resulting in much uncertainty.
Still, the OECD does not support carve-outs or separate tax regimes for the digital economy, given that the rest of the economy will invariably have certain elements or features of the digital economy.
Whilst a public consultation on tax challenges raised by digitalisation and the potential options to address these challenges has taken place in San Francisco in November 2017, an interim report will only follow in April 2018. It is not yet clear how substantive this interim report will be.
In the meantime, the lack of clarity and international consensus on how to deal with the taxation of digital economy income means that different countries may choose different solutions. Emerging issues include adjustments of value-added tax or goods and services tax (VAT/GST) systems in different ways to restore a level playing field between local businesses that are VAT/GST-registered and foreign-based businesses that are not; imposing withholding tax on payments to digital businesses; and introducing an equalisation levy based on revenues from digital activities or on other services provided by digital firms even if the firm does not otherwise have a taxable presence.
These tax changes do not merely impact pure e-commerce businesses. Traditional businesses that are developing digital products and services can also be affected. Businesses need to monitor these changes. Whilst there is currently no clear consensus on the taxation of the digital economy, businesses may be at risk of double taxation.
Power of tax administrations
The rapidly changing international tax landscape combined with digitalisation is bringing greater power to tax administrations. This comes at a time when many countries are looking at raising more tax revenue.
Digital technology is transforming the way tax administrations interact with taxpayers and other tax authorities. To cope with the unprecedented amount of taxpayer data that is flowing between governments and businesses, tax administrations are increasingly relying on data analytics to increase tax collections and target tax audits. Some countries are leading the digital revolution by introducing real-time data collection from taxpayers with machine-based tax assessment and collection.
With changing tax rules, massively increased transparency and digitalisation, the abilities of tax authorities can only grow. Companies will be left behind if they do not start working on their own data analytics capabilities. More importantly, businesses need to make their accounting and data systems tax-friendly to support machine-based data extraction that is useful to their tax function locally and globally.
More than ever, companies will need to shift their mindsets around how they collect, store and analyse tax and financial data. Businesses must consider the investments that are needed in their tax and information technology functions to meet digital tax requirements across the jurisdictions that they operate in. To that end, they should implement digital solutions that can work within and across countries, and respond to evolving compliance, controversy and audit requirements.
Transparently complying with tax laws, maintaining a reasonable effective tax rate while having few "surprises" is now the gold standard. As tax policy becomes more complex with heightened demands, tax matters should become part of an enterprise-wide strategic concern that warrants attention and leadership from the top.
- The writers are from Ernst & Young Solutions LLP. Chung-Sim Siew Moon is Head of Tax and Partner, and Russell Aubrey is Tax Partner.
- The views here are the writers' and do not necessarily reflect the views of the global EY organisation or its member firms.